15th Edition - Association of Corporate Counsel · favouring domestic businesses (or inward/outward investment more generally). But in the past few years the Commission has shown

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Blackwood & Stone LPBoga & AssociatesBraekhus Advokatfirm DACareyEric Silwamba, Jalasi and Linyama Legal PractitionersGibson, Dunn & Crutcher LLPGreenwoods & Herbert Smith FreehillsGSK StockmannHouthoffLenz & StaehelinLEX Law OfficesMaples and CalderMarval, O’Farrell & MairalMul & CoNagashima Ohno & TsunematsuNithya PartnersNoerr LLP

Puri Bracco Lenzi e AssociatiRui Bai Law FirmSametaSchindler AttorneysSele Frommelt & Partners Attorneys at Law Ltd.Slaughter and MaySMPS LegalStavropoulos & Partners Law OfficeT. P. Ostwal & Associates LLP, Chartered AccountantsTirard, NaudinTotalserve Management LimitedUtumi AdvogadosVivien Teu & Co LLPWachtell, Lipton, Rosen & KatzWaselius & WistWH PartnersWong & Partners

15th Edition

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General Chapters:

Country Question and Answer Chapters: 3 Albania Boga & Associates: Genc Boga & Alketa Uruçi 15

4 Argentina Marval, O’Farrell & Mairal: Walter C. Keiniger & María Inés Brandt 21

5 Australia Greenwoods & Herbert Smith Freehills: Richard Hendriks & Cameron Blackwood 28

6 Austria Schindler Attorneys: Clemens Philipp Schindler & Martina Gatterer 37

7 Brazil Utumi Advogados: Ana Claudia Akie Utumi 46

8 Chile Carey: Jessica Power & Ximena Silberman 52

9 China Rui Bai Law Firm: Wen Qin 58

10 Cyprus Totalserve Management Limited: Petros Rialas & Marios Yenagrites 64

11 Finland Waselius & Wist: Niklas Thibblin & Mona Numminen 71

12 France Tirard, Naudin: Maryse Naudin 77

13 Germany Noerr LLP: Dr. Martin Haisch & Dr. Carsten Heinz 86

14 Greece Stavropoulos & Partners Law Office: Ioannis Stavropoulos & Aimilia Stavropoulou 92

15 Hong Kong Vivien Teu & Co LLP : Vivien Teu & Kenneth Yim 99

16 Iceland LEX Law Offices: Garðar Víðir Gunnarsson & Guðrún Lilja Sigurðardóttir 106

17 India T. P. Ostwal & Associates LLP, Chartered Accountants: T. P. Ostwal & Siddharth Banwat 112

18 Indonesia Mul & Co: Mulyono 120

19 Ireland Maples and Calder: Andrew Quinn & David Burke 128

20 Italy Puri Bracco Lenzi e Associati: Guido Lenzi & Pietro Bracco, Ph.D. 135

21 Japan Nagashima Ohno & Tsunematsu: Shigeki Minami 142

22 Kosovo Boga & Associates: Genc Boga & Alketa Uruçi 151

23 Liechtenstein Sele Frommelt & Partners Attorneys at Law Ltd.: Heinz Frommelt 156

24 Luxembourg GSK Stockmann: Mathilde Ostertag & Katarzyna Chmiel 163

25 Malaysia Wong & Partners: Yvonne Beh 171

26 Malta WH Partners: Ramona Azzopardi & Sonia Brahmi 177

27 Mexico SMPS Legal: Ana Paula Pardo Lelo de Larrea & Alexis Michel 183

28 Netherlands Houthoff: Paulus Merks & Wieger Kop 190

29 Nigeria Blackwood & Stone LP: Kelechi Ugbeva 196

30 Norway Braekhus Advokatfirm DA: Toralv Follestad & Charlotte Holmedal Gjelstad 201

31 Russia Sameta: Sofia Kriulina 207

32 Sri Lanka Nithya Partners: Naomal Goonewardena & Savini Tissera 213

33 Switzerland Lenz & Staehelin: Pascal Hinny & Jean-Blaise Eckert 219

34 United Kingdom Slaughter and May: Zoe Andrews & William Watson 229

35 USA Wachtell, Lipton, Rosen & Katz: Jodi J. Schwartz & Swift S.O. Edgar 238

36 Zambia Eric Silwamba, Jalasi and Linyama Legal Practitioners: Joseph Alexander Jalasi & Mailesi Undi 247

1 Fiscal State Aid – Some Limits Emerging at Last? – William Watson, Slaughter and May 1

2 Taxing the Digital Economy – Sandy Bhogal & Panayiota Burquier, Gibson, Dunn & Crutcher LLP 9

Contributing EditorWilliam Watson,Slaughter and May

Sales DirectorFlorjan Osmani

Account DirectorOliver Smith

Sales Support ManagerToni Hayward

Sub EditorJenna Feasey

Senior EditorsSuzie LevyCaroline Collingwood

CEODror Levy

Group Consulting EditorAlan Falach

PublisherRory Smith

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ISBN 978-1-912509-43-0ISSN 1743-3371

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The International Comparative Legal Guide to: Corporate Tax 2019

EDITORIAL

Welcome to the fifteenth edition of The International Comparative Legal Guide to: Corporate Tax.This guide provides corporate counsel and international practitioners with a comprehensive worldwide legal analysis of the laws and regulations of corporate taxIt is divided into two main sections:Two general chapters, offering an insight into tax and state aid, and tax in relation to the digital economy.Country question and answer chapters. These provide a broad overview of common issues in corporate tax laws and regulations in 34 jurisdictions.All chapters are written by leading corporate tax lawyers and industry specialists and we are extremely grateful for their excellent contributions.Special thanks are reserved for the contributing editor William Watson of Slaughter and May for his invaluable assistance.Global Legal Group hopes that you find this guide practical and interesting.The International Comparative Legal Guide series is also available online at www.iclg.com.

Alan Falach LL.M. Group Consulting Editor Global Legal Group [email protected]

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Chapter 1

Slaughter and May William Watson

Fiscal State Aid –Some Limits Emerging at Last?

For those impatient to know what form the incipient resistance is taking, I have three developments in mind. They are all discussed in detail below but could be summarised as follows: (i) a reversal by the CJEU of the General Court’s decision in the Heitkamp case, which concerns a perfectly inoffensive German rule intended to help companies in financial distress; (ii) an acknowledgment from the Commission that a ruling given to McDonald’s by the Luxembourg fisc did not constitute State Aid merely because it produced a surprisingly good result for the taxpayer; and (iii) in a case called A-Brauerei, trenchant criticism from an Advocate General of the Commission’s whole approach when challenging tax legislation.The CJEU judgment came out at the end of June 2018 and the other two developments date to September 2018. Is it too much to hope that the tide is finally turning?

Why is State Aid Relevant to Tax?

The EU does not have competence with regards to direct tax matters; Member States are supposed to have full sovereignty over the design of their direct taxation systems. However, it has long been recognised that the prohibition on State Aid could, in principle, catch discriminatory tax measures and there were a few instances in past years where particular legislative features fell foul of it.The prohibition was previously set out in Article 87 of the EC Treaty and now appears in Article 107(1) of the Treaty on the Functioning of the European Union (“TFEU”). This is worded as follows: “Save as otherwise provided in the Treaties, any aid granted

by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.”

Cash subsidies are an obvious example, but aid can also involve the state foregoing revenue to which it would otherwise be entitled, for example, through tax exemptions and reliefs. A Member State’s tax practices can breach the State Aid regime in a number of ways, most commonly through (a) legislative measures that favour particular economic sectors, categories of undertakings or regions, or (b) discretionary tax rulings that favour individual undertakings. Recent decisions and trends relating to these two forms of fiscal aid are discussed separately below.Case law of the EU courts has broken down the Treaty rule into the following four elements:

In my introductory chapter last year (“Fiscal State Aid: the Kraken Wakes?”), I wrote about a slumbering monster whose existence had barely been detected for many years but was now threatening to wreak havoc on well-established tax practices and principles. The threat is becoming ever more apparent, especially in Germany and the UK, but the monster is also beginning to encounter real resistance. Here, then, is “Fiscal State Aid: Part II”.Although the UK’s Brexiteers have shown no interest in the subject, this is one imposition that can definitely be sourced to the EU, and specifically the European Commission. The prohibition on State Aid is contained in the main EU Treaty and is an understandable adjunct to the single market, designed to prevent Member States favouring domestic businesses (or inward/outward investment more generally). But in the past few years the Commission has shown that legislation and rulings in the tax sphere may be vulnerable in a way that would once have been unimaginable.Nor in fact can Brexit be relied upon to provide an answer, even for UK corporates. The UK government has said that it will replicate the EU’s State Aid rules after Brexit − though it would be a considerable constitutional novelty for any court or independent body to have a specific remit to strike down legislation, given the sovereignty of Parliament.As I noted last year, the Commission’s activism has led to criticism that its investigations have become a tax policy tool – part of a coordinated EU wide response to perceived corporate tax avoidance – and are straying a long way from the original purpose of the Treaty prohibition. Moreover, there is a significant transatlantic dimension: where the Commission has targeted tax rulings, the taxpayers have more often than not been US multinationals. To American eyes the more aggressive approach can look very much like a tax grab by the EU and Margrethe Vestager, the energetic EU Commissioner in charge of competition policy, was recently dubbed the “tax lady” by US President Trump.As I also noted, fiscal State Aid presents new challenges for advisers too. They must have expertise in both big-ticket tax litigation and, of course, in the principles of State Aid – usually the province of a competition lawyer. By contrast, detailed knowledge of the relevant domestic tax system is rather less important. Thus, while Slaughter and May has acted for a global financial services company on a State Aid dispute before the High Court in the UK and is advising several UK groups on the Commission’s potential challenge to the UK’s CFC rules (discussed below), we are also advising a multinational on a Commission investigation into alleged State Aid granted by the Luxembourg tax authority.

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Slaughter and May Fiscal State Aid – Some Limits Emerging at Last?

2018, Apple paid €14.3bn into an escrow account established by Ireland even though conclusion of the appeal is doubtless some way off. The Apple case is discussed briefly below.This example illustrates an unusual feature of State Aid challenges more generally. The Member State in question will be the immediate target of the challenge and will in most cases lead the appeal. Yet if the appeal fails, the Member State will also be the immediate beneficiary as it will receive any payment then required from the relevant taxpayer(s).

Tax Legislation as a Form of State Aid

As noted, investigations which concern legislative measures usually turn on whether the advantage granted by such legislation is “selective” in favour of any sufficiently clear and definable category of undertakings.

The Standard Approach

In determining whether a particular legislative measure is “selective”, the Commission generally applies a three-step test:■ First, it identifies the “system of reference”. This is the

“normal” tax position in the relevant Member State.■ Second, it determines whether the relevant measure

“derogates” from the system of reference in favour of a certain category of undertakings or goods as compared to other undertakings or goods that are in a similar factual and legal situation. If a derogation exists, the Commission will draw the conclusion that the measure is prima facie selective.

■ Third, it determines whether the derogation is nevertheless justified by the nature or general scheme of the system of reference. Only objectives inherent to the tax system (such as preventing fraud, tax evasion or double taxation) can be relied upon to justify a prima facie selective tax measure. Extrinsic objectives (such as maintaining employment) cannot form a basis for possible justification.

Another perspective: AG’s opinion in A-Brauerei

Pausing here for a moment, an Advocate General has very recently delivered an opinion which questions whether this is in fact the right approach at all. In A-Brauerei (Case C-374/17), a German court has requested a ruling on an exemption from land transfer tax (RETT) where the “transfer” occurs on the merger of the “transferor” into the “transferee” and the two companies are part of the same group. The Commission of course takes the view that the exemption constitutes unlawful State Aid. It argues that the “reference system” is the German rule which, in principle, imposes a transfer tax on any transaction which results in a transfer of ownership of German real estate (including, it seems, on a straight intra-group transfer with no merger). On that basis, the exemption is a derogation and, says the Commission, selectivity is established.This does seem an extreme position and the Danish Advocate General (Saugmandsgaard Øe) clearly has no sympathy for it whatsoever, even on the “reference system” approach. The specifics of the case are, however, less interesting than the wider observations made by the AG, expressed in notably forthright terms.“Reference framework” method or “general availability” test?Right at the start of his opinion, the AG makes the following claim: “the case-law of the Court on the issue of material selectivity is

■ Is an economic advantage is provided to an undertaking?■ Is it provided by a Member State and financed through state

resources?■ Is it “selective” in favour of a particular undertaking or

category of undertakings or in favour of a particular category of goods?

■ Does it distort or threaten to distort competition and affect trade between Member States?

In cases of alleged State Aid concerning legislative measures or rulings in the tax sphere, the second and fourth elements are usually uncontroversial. Legislative measures and tax rulings are, by definition, provided by the state and financed out of state resources (whether at national or local level); if they are selective, they will invariably strengthen the position of one category over another with the potential to distort competition.Thus the focus is on “economic advantage” and “selectivity”. More particularly, for cases involving discretionary rulings, the pertinent issue is often whether tax authorities have provided an individual undertaking with an advantage that diverges from the “normal” practice of the Member State, thereby providing an “economic advantage”. In cases involving legislative measures such as tax reliefs, the measure clearly exists to convey some sort of economic advantage and the case typically turns on whether that advantage is “selective” in favour of any sufficiently clear and definable category of undertakings.

Investigations and Appeals Process

Member States are required to notify the Commission of any proposal to grant aid that may be incompatible with EU State Aid rules, and to wait for the Commission’s approval before putting any such proposal into effect. Notification triggers a preliminary investigation period during which the Commission has two months to determine whether the proposal constitutes State Aid, and if so, whether the aid is nonetheless compatible with EU rules because its positive effects outweigh the distortion of competition. If serious doubts remain as to the compatibility of the measure, the Commission must open an in-depth investigation.If the Commission becomes aware of aid having been granted without its prior approval, it will follow a similar investigation procedure and may issue a “negative decision” ordering the Member State to recover the unpaid amount, plus interest, from the beneficiaries of the aid. State Aid can be recovered up to 10 years after it has been given, and this clock can be “paused” by certain acts taken by the Commission, such as requests for information.A negative decision can be appealed by the Member State to which it is addressed or any interested person (such as a taxpayer in receipt of the aid) by application to the EU courts for “annulment”. An application can be made, for example, on grounds of error of law or manifest error of facts, and will be considered by the General Court (the court of first instance) and/or the Court of Justice (“CJEU”, the highest EU court). (Decisions of the General Court are denoted with the prefix “T-” and decisions of the CJEU are denoted with the prefix “C-”, with the suffix “P” if they are appeals from the General Court.)The financial consequences of a negative Commission decision are potentially severe for the company said to have received the aid. Indeed, applying for annulment of a Commission decision does not automatically release the relevant Member State from its obligation to implement the recovery order; thus following a challenge from the Commission to a tax ruling issued by Ireland, in September



UK CFC rules

The UK is another enthusiastic tax competitor. It too has amended its most obviously competitive offering – its version of the “patent box” concept – in the face of a potential challenge. But it may not have anticipated the attack which is now causing consternation for many UK multinationals.In October 2017, the Commission announced that it was launching an in-depth investigation into certain aspects of the UK’s regime for taxing controlled foreign companies (“CFCs”); a month later it released its preliminary decision to the effect that the rules are defective.Some context will be helpful here. Around 10 years ago, the UK moved from a system of taxing the worldwide profits of UK companies to a “territorial” regime which can, in principle, exclude non-UK profits. Then in 2012/13 the CFC rules were completely overhauled, in a manner consistent with that fundamental switch; the general idea is that profits earned by offshore subsidiaries should be caught only if they have been artificially diverted from the UK.Non-trading (passive) income is of course a target for many CFC regimes because it can so easily be shifted from one jurisdiction to another. The UK’s rules catch non-trading finance profits for this reason; the relevant legislation is in Chapter 5 of Part 9A of the Taxation (International and Other Provisions) Act 2010 (“TIOPA”). However, Chapter 5 is subject to a number of exemptions that are set out in Chapter 9 of Part 9A.Exemptions for “non-trading finance profits”First, Chapter 5 does not apply at all if the UK parent can show that the CFC is funded entirely from an external issue of equity capital by the group or from profits generated by members of the group in the same jurisdiction as the CFC (the “qualifying resources” exemption), or that the group does not have net interest expense in the UK (the “matched interest” exemption and together, the “full exemptions”). Second, in the event that neither of the full exemptions is available, 75% of the CFC’s non-trading finance income is exempt so long as the group borrowers are themselves outside of the UK too (the “partial exemption”). The UK’s justification for the partial exemption is that UK funding for a CFC is likely to be provided wholly in the form of equity – a phenomenon sometimes called “fat capitalisation”, as it is the reverse of the more familiar “thin capitalisation” – whereas for a UK multinational the typical mix of equity to debt would be in the region of 3:1. To give a simple illustration: UK parentco raises funding of 100, comprising 75 of equity and 25 of debt; parentco puts the 100 into a CFC subsidiary as equity; and CFC then lends the 100 to a non-UK opco in the group. The idea is that there should be a CFC charge to cancel out interest deductions on the 25 that is indirectly financing the opco’s non-UK activity.Are the exemptions selective?As usual where legislation is under attack, selectivity is the critical issue. Pursuing the three-step approach outlined above, the Commission has taken the view that (i) the relevant “reference system” here is the CFC regime (or possibly just “the specific provisions within the CFC regime determining artificial diversion for (deemed) non-trading finance profits” – a formulation that the UK would be happy with if the Commission did not then exclude Chapter 9), (ii) the exemptions in Chapter 9 represent a derogation from them, and (iii) the derogation cannot be justified.

characterised by the co-existence of two methods of analysis, in particular in tax matters”. Those are, he says, the “reference framework” method and what he calls “the traditional method of analysis … based on the general availability test”.The crucial distinction is that under the latter, there is no selectivity if any undertaking could avail itself of the relevant rule, subject to satisfying some basic criteria; putting this another way, a measure is only selective if the criteria “irrevocably exclude certain undertakings or the production of certain goods from the benefit of the advantage concerned”. By contrast, the AG believes that the reference framework method “tends to turn the rules on State Aid into a general discrimination test, covering any criterion of discrimination” (his emphasis).I will not attempt here to determine the correctness or otherwise of the AG’s assertions in A-Brauerei. There is definitely merit in focusing on the nature of any conditions to the availability of the relevant advantage, though one cannot simply target any condition that is discriminatory on grounds of nationality, residence or jurisdiction as that is of course policed by a quite different set of EU principles, viz the “four freedoms”. Nor am I convinced that the AG’s approach would solve the problems posed by the application of State Aid principles in the tax sphere.That said, his criticisms of the way in which these principles are being applied are certainly well made. He considers that the Commission’s efforts should be “refocused on the measures which are the most damaging to competition within the internal market, namely individual aid and sectoral aid”; the Commission should not have “the power to ‘smooth out’ the national tax systems by requiring the removal of those differentiations legitimately established for social, economic, environmental or other reasons”. He also detects unhappiness in the opinions of other Advocates General, citing Advocate General Wahl’s – clearly correct − observations in the Heitkamp case (discussed below) to the effect that the identification of the reference framework is a major source of legal uncertainty, as well as comments from Advocate General Kokott in ANGED (2017).

Special Tax Regimes

Returning to the wider picture, one obvious target for challenges based on fiscal State Aid would be a tax regime which encourages corporate taxpayers to establish themselves, or to carry on some specified activity, in a particular EU jurisdiction. Many Member States have introduced such regimes over the years in the name of tax competition.Belgium is a notable example. It gave favourable treatment to “Belgian Coordination Centres” until a State Aid challenge forced it to scrap the regime. It then brought in the “notional interest deduction”, but that has been of limited value in an era of very low interest rates, and it also has an “excess profit” exemption. The last of these could be seen as favouring (and designed to favour) Belgian companies that are part of multinational groups.The Commission announced in January 2016 that it regarded the exemption as providing a selective tax advantage that amounted to unlawful State Aid. Belgium has therefore been told to recover the exempted tax from the groups concerned. In response, it introduced retrospective legislation aimed at doing just that and this is being challenged by the taxpayers affected.



Heitkamp – an Important Defeat for the Commission?

Competitive tax regimes may be the obvious target but it has become clear that the Commission believes the State Aid principle has an even broader remit in the tax sphere. Cases such as Heitkamp (C 203/16 P, heard together with an appeal on similar facts by a company called GFKL) suggest that, in the Commission’s view at least, it has the potential to catch legislative measures that are commonplace in many Member States. Heitkamp concerns a State Aid challenge to a provision of German law that is designed to support companies in financial difficulty. Losses incurred in previous tax years can be carried forward to future tax years (the “Carry Forward Rule”). To discourage loss-buying (the purchasing of loss-making companies to access their historic losses), German law also states that a lossmaking company will automatically forfeit its ability to carry forward fiscal losses if it is subject to a significant change in control (the “Forfeiture Rule”). However, there is an exception to the Forfeiture Rule to permit the acquisition and rescue of companies in financial difficulty. Losses can be carried forward in spite of a significant change of control if the company in question is in financial distress (the “Restructuring Clause”).In applying the three-stage test, the General Court identified the Forfeiture Rule as the correct system of reference to the exclusion of the Carry Forward Rule. It found that all companies which have undergone a change of control, whether in financial distress or not, are in a comparable factual and legal situation, but that the Restructuring Clause derogated from the system of reference in favour only of those companies in financial distress. The General Court also confirmed that supporting companies in financial difficulty was not an objective intrinsic to the relevant tax system (it sought to achieve a different policy objective from that of merely ensuring the implementation of the tax system itself) and therefore did not justify the derogation.Another critical Advocate GeneralWhen Advocate General Wahl delivered his opinion in Heitkamp in December 2017, he agreed with much of what the General Court had said. However, he disagreed with its identification of the system of reference.The AG began his discussion of this crucial issue with some entertainingly direct remarks. He observed that in cases such as World Duty Free (considered below), the CJEU had said the reference system is the common or “normal” tax regime applicable in the Member State concerned. However: “As a criterion of assessment that statement is remarkably unhelpful”.Mindful perhaps of lèse-majesté, the AG then made it clear that he did not blame the CJEU for failing to give useful guidance. In the case of positive benefits of the sort primarily targeted by the State Aid regime (for example a straight subsidy), it is usually easy enough to identify the “normal situation”. That is not so in the tax sphere and, according to the AG, even the Commission struggles to produce a coherent rationale; apparently “the Commission was unable to explain on what basis it determines the reference system”.The AG did however detect in the case law a principle of sorts: “a broad approach is to be favoured in determining the reference system”, indeed the approach should be one which “takes into account all relevant legislative provisions as a whole, or the

It is true that Chapters 5 and 9 of Part 9A TIOPA protect only the UK tax base, leaving a UK-headed multinational free to use debt funding from subsidiaries in low-tax jurisdictions to finance non-UK members of the group. However, this is a natural concomitant of a territorial tax system which aims to tax offshore profits only where they have been artificially diverted from the parent jurisdiction. Indeed, the UK would say – with considerable justification – that the whole purpose of the two chapters taken together is to identify non-trading finance profits of this kind. So the reference system should be looked at more broadly, rather as the CJEU has done in the Heitkamp case considered below: in principle non-UK profits are outside the UK tax net, Chapters 5 and 9 taken together set certain limits on the principle (to catch profits which as a matter of economic reality have been shifted out of the UK) but there is no “derogation” and therefore no selectivity.The Commission’s preliminary decision makes much of the fact that Chapters 5 and 9 do not identify with scientific precision which profits have or have not been artificially diverted out of the UK. But this seems an unreasonable demand, especially in an area (cross-border taxation) where it is notoriously difficult to produce the perfect system. There will inevitably be rough edges, partly (as the UK has argued) for reasons of clarity and practicality for taxpayers and tax authority alike. To expect otherwise is, one might well say, another form of the “smoothing out” decried by Advocate General Saugmandsgaard Øe in A-Brauerei, discussed above. Freedom of establishment Another surprising feature of the Commission’s investigation is that it pays no heed whatsoever to the CJEU’s case law on freedom of establishment for CFCs, notably the seminal Cadbury Schweppes judgment from 2006. The CJEU has been very clear that companies can be set up in particular European jurisdictions merely to take advantage of lower tax rates and in Cadbury Schweppes, it held that CFC rules can only be justified to the extent that they target “wholly artificial arrangements” that do not reflect economic reality. By that measure, far from being too liberal as the State Aid challenge might suggest, the UK’s regime is (still) too restrictive. (One might say this encapsulates a basic difference between State Aid and the four freedoms: State Aid focuses on positive discrimination – the Commission is presumably saying that the specified non-trading finance profits of CFCs are given favourable treatment and instead should always trigger a full CFC charge − whereas the freedoms focus target negative discrimination, so UK multinationals would say that even taxing just 25% of relevant profits is a restriction on freedom of establishment.) This makes the State Aid/CFC issue unusually complex – and awkward for both taxpayers and HMRC.It is to be hoped that the Commission will row back when it releases its final decision late this year or early next, perhaps citing the CJEU’s reversal of the General Court in Heitkamp (see, again, the discussion below). It really does not seem appropriate to use the blunt tool of State Aid to undermine a set of rules which make sense in the context of the UK’s wider regime for levying tax on company profits. To the extent these could be said to favour one set of undertakings over another, they do so by supporting the UK’s territorial system. One reason for adopting this system may indeed have been to encourage major corporate groups to establish themselves (or, at least, to remain) in the UK. But that is a species of “tax competition” which is surely outside the ambit of State Aid.



The relevant measure was “selective” simply by virtue of discriminating between undertakings which hold 5% of a foreign company and undertakings which hold 5% of a Spanish company, when those undertakings are otherwise in a comparable factual and legal situation. Then in July 2018, in the “Spanish tax lease system” case (C-128/16 P, concerning a tax benefit available when buying ships constructed by Spanish shipyards), the CJEU again sided with the Commission and against the General Court, which it said had (inter alia) repeated its error from the earlier cases.It has been observed that Santander and World Duty Free essentially merged the three-step analysis into one question: does the measure place the recipient in a more favourable position than entities in a comparable factual and legal situation in light of the general goals of the reference system? This in turn raises another important question: to what extent are different situations factually and legally “comparable”? The question is not easily answered but on one point the Commission and the CJEU leave little room for doubt: this is always a matter for the EU rather than individual Member States.

Regulatory Capital

The Commission has now opened another front in its State Aid campaign. In January 2018, it sent a letter to the Netherlands querying the special tax treatment of “contingent convertibles” designed to constitute capital for regulatory purposes while preserving the issuer’s ability to deduct the coupons. The argument is that this provides State Aid to Dutch banks and insurers, because ordinary corporates cannot get the same treatment.The challenge was not made public at the time, but could be divined from the subsequent reaction of the Dutch government when, in late June, it put forward a proposal to abolish deductibility on these “AT1” and “RT1” instruments with effect from 1 January 2019. Publication of the 2019 Finance Bill three months later confirmed the proposal and made it quite clear that there would be no grandfathering for existing instruments.This development has caused dismay in other Member States, such as the UK, which have similar rules. Banks and insurers would no doubt say that if it were not for regulatory capital requirements that do not apply to any other sector, they would issue normal debt and so be entitled to the deductions anyway. Are they then in a “comparable legal and factual situation”?Of course the Dutch response is not the only possible one for governments that do not want to litigate. Member States could take the view that – with interest deductibility now heavily constrained by various BEPS-related rules anyway – the ability to issue hybrid instruments carrying deductible interest could be extended to all corporates.

Tax Rulings as a Form of State Aid

While these challenges to tax legislation are perhaps the most concerning, at least from a UK perspective, it is the Commission’s pursuit of tax rulings given by Member State tax authorities that has captured the headlines.

broadest possible reference point”; and in support of this he cited again the CJEU’s judgment in World Duty Free, where “the relevant benchmark was not the rules governing investments abroad, but rather the Spanish corporate tax system as a whole”.Pursuing this approach, the AG concluded that the Commission and the General Court had been wrong to exclude the Carry Forward Rule from the system of reference and once that error is rectified, the Restructuring Clause “becomes an intrinsic part of the reference system itself” rather than “an obvious derogation from it” – it puts the taxpayer back in the position of being able to carry forward losses, notwithstanding the change in its ownership. Confirmation from the CJEUThe CJEU endorsed the AG’s conclusion: the Commission and the General Court had erred in their analysis of selectivity by choosing the wrong system of reference. That system could not consist of “provisions that have been artificially taken from a broader legislative framework”. In focusing solely on the Forfeiture Rule as the reference system and excluding the Carry Forward Rule, “manifestly the General Court defined [the framework] too narrowly”. It would be wrong, though, to give the impression that Heitkamp contains nothing but good news. Thus the Advocate General seemed content that a strict approach should be taken to justification, the last step in the standard three-step method of determining selectivity; indeed he noted that “to my knowledge, the Court has yet to accept the reasons relied upon by Member States under the third step of the assessment of selectivity”. And it would have been more reassuring if – in line with the “general availability” test favoured by the Advocate General in A-Brauerei − the AG and the CJEU had been able to say simply that the Restructuring Clause was a “general” measure, not a “selective” one, because any company could find itself in financial distress. Many Member States have tax measures in place designed to assist companies facing insolvency; the UK, for example, gives preferential treatment under its “loan relationship” (corporate debt) rules to companies in distress.

Santander/World Duty Free

Certainly, the CJEU does not like beneficial tax regimes which, while arguably open to any undertaking in the relevant jurisdiction, are available only if another party is or is not based in the same jurisdiction. This is clear from a few cases involving Spanish legislation.At the end of 2016, the CJEU delivered judgment in Santander (C-20/15 P) and World Duty Free (C-21/15 P). These concerned a tax provision which gave Spanish companies acquiring a shareholding of at least 5% of a non-Spanish company a tax deduction for amortisation of goodwill. No such tax relief was available for a Spanish company acquiring a shareholding in a local company. The General Court had found that the tax relief was not selective, and not therefore, State Aid, because it was not restricted to a particular category of business or the production of any particular category of goods, but was potentially available to all Spanish companies that wanted to acquire shareholdings of at least 5% in foreign companies.The CJEU overturned this decision and referred the cases back to the General Court. In demonstrating the selectivity of a legislative measure, it was not necessary for the Commission to identify a particular category of undertakings that exclusively benefited from that measure.



Tax rulings are common practice throughout the EU. They are effectively comfort letters which give the requesting companies clarity on how their tax liabilities will be calculated. Although not problematic in themselves, tax rulings can constitute unlawful State Aid when they confer an economic advantage and are not approved by the Commission prior to being issued.

The “Luxleaks”

Tax rulings granted to major multinationals have been attracting considerable public and political attention in recent years, especially against the backdrop of tight public budgets. The controversy was amplified by the leaking, on 5 November 2014, of several hundred tax rulings issued by the Luxembourg tax authorities in respect of over 300 companies. Since then the Commission has concluded several in-depth investigations, targeting inter alia tax rulings issued by Ireland (to Apple), the Netherlands (to Starbucks) and Luxembourg (to Fiat and Amazon), and it has recently opened a new investigation targeting another ruling given by the Netherlands (to IKEA).The most eye-watering claim relates to Apple; in August 2016, the Commission ordered Ireland to recover around €13bn, plus interest. In October 2017, the Commission referred Ireland to the CJEU for failing to do so and Ireland has now collected €14.3bn from Apple which is to be held in an escrow account pending the outcome of the appeal.

Rulings on Transfer Pricing

The main focus of these investigations has been the transfer pricing endorsed by the rulings. Thus the Commission contends that they allowed for intra-group pricing that departed from the conditions that would have prevailed between independent operators; in other words, the pricing does not comply with the arm’s-length principle.One of Apple’s arguments is that, in its case at least, this is not a relevant question; it says that the arm’s-length principle as developed by the OECD was not part of Irish law and therefore Ireland’s ruling could not have provided a selective advantage. In response, the Commission claims that the arm’s-length principle is inherently part of Article 107(1) of the Treaty. The Commission’s approach to this principle also features in the Fiat and Starbucks cases and since these were heard by the CJEU in late June 2018, we could, before long, have substantive judicial guidance. Of course, national tax administrations have for many years taken an interest in multinationals’ cross-border pricing arrangements, and in this respect there is an intriguing angle to the Amazon case. The Commission has told Luxembourg to reclaim €250m relating to what it says was an unlawful tax ruling given in 2003 (then confirmed in 2011) which concerned a royalty payable by a Luxembourg subsidiary; Amazon is appealing against this decision, seeking to have it annulled on the basis of flawed selectivity analysis and citing the principles of legal certainty and sound administration. Meanwhile, the Internal Revenue Service launched a conventional inquiry into the US end of the same arrangements; it lost at first instance but in September 2017 it filed an appeal. The IRS is claiming more than four times as much as the Commission has said should be repaid by Amazon to Luxembourg.

Tax Mismatches

Two other noteworthy investigations concern rulings given by the Luxembourg fisc to McDonald’s and ENGIE (previously GDF Suez). Each of them could be seen as an attempt by the Commission to broaden its attack on tax rulings, though one has now been abandoned.McDonald’sThe Commission opened a formal investigation in December 2015 into two tax rulings given by Luxembourg to McDonald’s. It considered that one of them constituted unlawful State Aid because it exempted the US branch of McDonald’s Luxembourg subsidiary from local tax under the US/Luxembourg double tax treaty, despite such profits also being exempt from US tax under US law. The profits were derived from royalties paid by European franchisee restaurants to the Luxembourg subsidiary for the right to use the McDonald’s brand and associated services and were then transferred internally to Luxco’s US branch.However, on 19 September 2018 the Commission announced that it would end the investigation. It accepted that the double non-taxation resulted from a mismatch between the national laws of Luxembourg and the US, as applied by the Luxembourg/US tax treaty; Luxembourg was not giving McDonald’s special treatment – any company could have taken advantage of the tax treaty in the same way − and therefore there was no State Aid.A week later, in a wide-ranging speech on competition policy at Georgetown Law School in Washington DC, Commissioner Vestager confirmed the thinking. The Commission did not like the tax result, but could not formally challenge it: “That doesn’t mean that nothing was wrong. But competition enforcers can’t intervene just because something’s not right. We act if – and only if – it turns out that a company or government has broken the rules.” And the pressure has not been in vain: Luxembourg has said it will change underlying domestic law in a way that prevents a similar arrangement in future.ENGIEMeanwhile, the ENGIE dispute rumbles on. The Commission launched its investigation in September 2016, targeting tax rulings given by Luxembourg to ENGIE in respect of certain intercompany zero-interest convertible loans. It claimed that the rulings treated the convertible loans inconsistently, as both debt and equity, which gave rise to double non-taxation and hence an economic advantage that was not available to other groups subject to the same tax rules in Luxembourg. The rulings allowed the borrowers to make claim deductions for interest that accrued but was not paid, while the conversion feature meant the lenders treated the loans as equity and (as in many other jurisdictions) equity returns were exempt from taxation under Luxembourg law. The Commission has said that the Luxembourg fisc “failed to invoke established accounting principles”, though there seems little doubt that the accounting used by debtor and creditor complied fully with the applicable principles; and it claimed that the fisc could be providing State Aid merely by failing to challenge the relevant transactions under its general anti-abuse rule – unabashed by the fact that, at the time, Luxembourg had only invoked its GAAR once in the 60 or more years since its introduction.


Moreover, it is not clear why the Commission should be intervening in the allocation of multinationals’ profits between countries when the countries themselves are not. For example, neither Ireland nor the US welcomed the Apple investigation. The US government has made no secret of its opposition to the decision and, despite the prospect of a €14bn windfall, Ireland has appealed the Commission’s recovery order. The Irish government recognises that Ireland’s allure for foreign investors is based to a significant extent on a tax system that is both competitive and predictable and, to quote the then Irish Finance Minister, “to do anything else [but appeal] would be like eating the seed potatoes”.Challenges to tax legislation are bedevilled by another sort of uncertainty. They revolve around the question of “selectivity” and, within that, the determination of the appropriate “reference system”. Yet in a tax context that determination can seem, at best, an exercise in arcane distinctions worthy of a scholastic philosopher and at worst, little better than a lottery: the opinions given in the Heitkamp case and, most recently, A-Brauerei make remarkable reading and it is striking how often the General Court has been reversed by the CJEU.It is also unsatisfactory that selectivity can never in practice be justified; we need a change in judicial approach comparable to the CJEU’s belated recognition of the “balanced allocation of taxing powers” as a justification for tax rules that restrict the four freedoms. As I noted at the start of this piece, the first signs of a rethink may be beginning to appear. It cannot come soon enough.

Then, in June 2018, the Commission released its conclusion: the rulings artificially lowered ENGIE’s tax burden without valid justification, so Luxembourg must recover tax of €120m.The McDonald’s and ENGIE investigations are a reminder that State Aid enquiries into tax rulings are not limited to transfer pricing. Affected areas could include, for example, rulings on the qualification of hybrid entities (transparent or opaque), hybrid instruments (debt or equity, as in ENGIE) and other perceived “mismatch” arrangements. Rulings are more likely to be challenged if they involve some sort of factual determination by the tax authorities and especially if they concern structures with potential for what the tax world now knows as base erosion and profit shifting.

Conclusion

The application of the EU State Aid regime to tax rulings and legislation is making waves as never before. Where these are simply subsidies in disguise, they are a legitimate target. But the European Commission appears to be on a crusade to introduce a degree of tax harmonisation that is at odds with the preservation of direct tax as a matter within the competence of Member States. There are obvious, and in my view well-founded, objections to the way in which State Aid principles are being applied in the tax sphere.Seeking retroactive recovery of unpaid taxes strikes a serious blow to the principle of certainty in law. This is perhaps particularly acute in the case of the Commission’s investigations into tax rulings. All nine of these commenced in the last five years, so it is unlikely that the risk of a State Aid challenge was evaluated when relevant transactions were entered into.




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Chapter 2

Gibson, Dunn & Crutcher LLP Panayiota Burquier

Taxing the Digital Economy

1. scale without mass; 2. heavy reliance on intangible assets; and 3. the role of data and user participation, including network

effects. See Box 1 below for details.

Box 1Cross-jurisdictional scale without massDigitalisation has allowed businesses in many sectors to locate various stages of their production processes across different countries, and at the same time access a greater number of customers around the globe. Digitalisation also allows some highly digitalised companies to be heavily involved in the economic life of a jurisdiction without any, or any significant, physical presence, thus achieving operational local scale without local mass (referred to as “scale without mass”).Reliance on intangible assets, including IPThe analysis also shows that digitalised companies are characterised by the growing importance of investment in intangibles, especially IP assets which could either be owned by the business or leased from a third party. For many digitalised companies, the intense use of IP assets such as software and algorithms supporting their platforms, websites and many other crucial functions are central to their business models.Data, user participation and their synergies with IPData, user participation, network effects and the provision of user-generated content are commonly observed in the business models of more highly digitalised businesses. The benefits from data analysis are also likely to increase with the amount of collected information linked to a specific user or customer. The important role that user participation can play is seen in the case of social networks, where without data, network effects and user-generated content, the businesses would not exist as we know them today. In addition, the degree of user participation can be broadly divided into two categories: active and passive user participation. However, the degree of user participation does not necessarily correlate with the degree of digitalisation. For example, cloud computing can be considered a highly digitalised business that involves only limited user participation.

Introduction

As part of the OECD/G20 BEPS project, and in the context of Action 1, the Task Force on the Digital Economy (“TFDE”) considered the tax challenges raised by the digital economy. The 2015 Action 1 BEPS final report (the “2015 report”) and the 2018 Action 1 BEPS interim report (the “2018 interim report”) (together, with the 2015 report, the “reports”) note that the digital economy is characterised by an unparalleled reliance on intangibles, the massive use of data (notably personal data) and the widespread adoption of multi-sided business models.The reports also highlight ways in which digitalisation has exacerbated BEPS issues and note that measures proposed under the other BEPS Actions are likely to have a significant impact in this regard. The most relevant BEPS direct tax measures for highly digitalised businesses include amendments to the permanent establishment definition in Article 5 of the OECD Model Tax Convention (Action 7), revisions to the OECD Transfer Pricing Guidelines related to Article 9 of the OECD Model Tax Convention (Actions 8–10) and guidance based on best practices for jurisdictions intending to limit BEPS through CFC rules (Action 3).These topics are explored in more detail below.The position described in this chapter is accurate as at 31 August 2018.

Digitalisation of the Economy, not the Digital Economy

One key message from both reports is that the digital economy is becoming the economy itself. The 2015 report concluded that it is extremely difficult – if not impossible – to ring-fence the digital economy from the rest of the economy for tax purposes. What is also clear from both reports is that a robust understanding of how digitalisation is changing the way businesses operate and how they create value is fundamental to understanding the challenges of taxing the digital economy.It is clear that the structure of businesses and the process of value creation have significantly changed and evolved, becoming technically very complex. A detailed explanation of business models shaping the digital economy can be found in the 2015 report. The 2018 report focuses on three characteristics that the TFDE identified as frequently being observed in certain highly digitalised business models. These are:

Sandy Bhogal


conclusion of contracts in the name of the parent company (or for the transfer of property or provision of services by the parent company), and these contracts are routinely concluded without material modification by the parent company.Action 7 also recommended an update of the specific activity exemptions found in Article 5(4) of the OECD Model, according to which a permanent establishment is deemed not to exist where a place of business is used solely for activities that are listed in that paragraph (e.g. the use of facilities solely for the purpose of storage, display or delivery of goods, or for collecting information). The proposed amendment prevents the automatic application of these exemptions by restricting their application to activities of a “preparatory or auxiliary” character. This change is particularly relevant for some digitalised activities, such as those involved in business-to-consumer online transactions and where certain local warehousing activities that were previously considered to be merely preparatory or auxiliary in nature may in fact be core business activities. Under the revised language of Article 5(4), these types of local warehousing activities carried out by a non-resident no longer benefit from the specific activity exemptions usually found in the permanent establishment definition if they are not preparatory and auxiliary in nature. This would be the case, for example, for a large warehouse maintained by a non-resident company in a market jurisdiction in which a significant number of employees work for the main purpose of storing and delivering goods owned and sold by the non-resident company and that a warehouse constitutes an essential part of the non-resident company’s sales/distribution business.

What are jurisdictions doing about Action 7?

Italy has introduced legislation to replace the domestic definition of permanent establishment with the one provided by BEPS Action 7. Under the new permanent establishment definition, a significant and continuous economic presence in Italy set up in a way that does not result in a substantial physical presence in Italy may constitute a permanent establishment. Other examples of countries that have followed Action 7 recommendations and moved forward with the adoption of the significant economic presence test are Israel, the Slovak Republic and India. Saudi Arabia has also officially endorsed what is being called the “virtual service PE”. Turkey has published legislation revealing an “electronic permanent establishment” and Japan has also said it will amend the definition of permanent establishment in its domestic legislation in line with Action 7 recommendations. The BEPS package is designed to be implemented via changes in domestic law and practices, and via treaty provisions. To this end, the multilateral instrument (“MLI”) is intended to facilitate the implementation of the treaty-related BEPS measures, but the adoption rate of the permanent establishment-related provisions through the MLI have been reported to be low. Some jurisdictions may have reserved their position on the permanent establishment-related provisions of the MLI until seeing the Inclusive Framework’s work on “Attribution of Profits to Permanent Establishments” – published in March 2018. However, the adoption rate of the new permanent establishment definition may increase over time in any case, as governments base future treaty negotiations on the 2017 OECD Model incorporating those changes.

Unilateral UK action prompts further measures elsewhere

As part of the 2015 Finance Act, the United Kingdom introduced the Diverted Profits Tax (“DPT”). The DPT operates through two basic rules:

Relevant Measures of the BEPS Package

Permanent Establishments (Action 7)

The possibility to reach and interact with customers remotely through the Internet, together with the automation of some business functions, has significantly reduced the need for local infrastructure and personnel to perform sales activities in a specific jurisdiction (i.e. scale without mass). The same factors create an incentive for multinationals to remotely serve customers in multiple market jurisdictions from a single, centralised hub. In certain cases, however, the multinational group will continue to maintain a degree of presence in countries that are significant markets for its products, for instance by establishing a local subsidiary responsible for supporting and facilitating sales (so-called “trade structures”). The latter is typically remunerated for the services it provides on a cost-plus basis.These traditional structures can present some BEPS concerns. This is the case when the functions allocated to the staff of the local subsidiary under contractual arrangements (e.g. technical support, marketing and promotion) do not correspond to the substantive functions performed. For example, the staff of the local subsidiary may carry out substantial negotiation with customers, effectively leading to the conclusion of sales. Provided the local subsidiary is not formally involved in the sales of the particular products or services of the multinational group, these trade structures generally avoid the constitution of a dependent agent permanent establishment in the market jurisdiction.In response to these BEPS risks, Action 7 resulted in the amendment of key provisions of Article 5 of the OECD Model Tax Convention and its Commentary. The changes aim to prevent the artificial avoidance of permanent establishment status which is the main treaty threshold below which the market jurisdiction is not entitled to tax the business income of a non-resident. In addition, the 2015 report noted that these changes could help mitigate some aspects of the broader direct tax challenges regarding nexus, if widely implemented. These expectations were primarily relevant for situations where businesses have some degree of physical presence in a market (e.g. to ensure that core resources are placed as close as possible to customers) but would otherwise avoid the permanent establishment threshold.More specifically, Action 7 provided for the amendment of the dependent agent permanent establishment definition through changes to Articles 5(5) and 5(6) of the OECD Model Tax Convention. The amendments address the artificial use of commissionaire structures and offshore rubber stamping arrangements. Some structures common to all sectors of the economy involved replacing local subsidiaries traditionally acting as distributors with commissionaire arrangements. The result was a shift of profits out of a certain jurisdiction but without a substantive change in the functions performed there. Other structures more specific to highly digitalised businesses, such as the online provision of advertising services, involved contracts substantially negotiated in a market jurisdiction through a local subsidiary, but not formally concluded in that jurisdiction. Instead, an automated system managed overseas by the parent company could be responsible for the finalisation of these contracts. Such arrangements allowed a business to avoid a dependent agent permanent establishment under Article 5(5). Where the recommendations of Action 7 are implemented, these structures and arrangements would result in a permanent establishment for the foreign parent company if the local sales force habitually plays the principal role leading to the

Gibson, Dunn & Crutcher LLP Taxing the Digital Economy


does not exercise control over the investment risks that may give rise to premium returns, that associated company should expect no more than a risk-free return.

■ Guidance on transactions that involve the use or transfer of intangibles which ensures that legal ownership of an intangible by an associated company alone does not determine entitlement to returns from the exploitation of this intangible.

Controlled Foreign Company Rules (Action 3)

The 2015 BEPS Report on Action 3 provided recommendations in the form of six building blocks, including a definition of Controlled Foreign Company (“CFC”) income which sets out a non-exhaustive list of approaches or combination of approaches on which CFC rules could be based. Specific consideration is given to a number of measures that would target income typically earned in the digital economy, such as income from intangible property and income earned from the remote sale of digital goods and services to which the CFC has added little or no value. These approaches include categorical, substance, and excess profits analyses that could be applied on their own or in combination with each other. With these approaches to CFC rules, mobile income typically earned by highly digitalised businesses would be subject to taxes in the jurisdiction of the ultimate parent company. This would counter offshore structures that result in exemption from taxation, or indefinite deferral of taxation in the residence jurisdiction.

What are jurisdictions doing about Action 3?

The European Commission’s (the “Commission”) 2016 Anti-Tax Avoidance Directive requires all 28 EU Member States to introduce CFC rules that draw heavily on the recommendations of Action 3. Article 7 of that Directive provides two alternative methods to define the income earned by a CFC. One is based on formal classifications and covers a broad range of income categories, including “royalties and any other income generated from Intellectual Property” and “income from invoicing companies that earn sales and services income from goods and services purchased from and sold to associated enterprises”. This method may in some cases cover sales income generated primarily from the use of underlying intangible property (i.e. “embedded royalties”) but is limited by a substance carve-out rule available to a CFC that “carries on a substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances”. The other method is based on a standalone substance test which captures income “arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage”. In accordance with the best practices outlined in the 2015 BEPS Action 3 Report, this method looks at the significant people functions within the group to determine whether the CFC is conducting non-genuine arrangements. However, this method may not always reach income from online services, where the CFC may typically be established with the necessary substance to comply with transfer pricing rules.

Other Tax Developments Around the World

Use of withholding taxes

The UK introduced changes to UK royalty withholding tax where royalty payments are deemed to have a UK source. For royalty

1. First, a rule that counteracts arrangements that exploit permanent establishment rules. Very broadly, the DPT applies in cases where a person is carrying on activities in the UK in connection with the supply of goods and services by a non-UK resident company to customers in the UK. Detailed conditions must be met for this “avoided PE” measure to apply.

2. Second, a rule to prevent tax advantages obtained through the use of transactions or entities that lack economic substance. This is essentially a “sideways CFC” measure whose primary function is to counteract arrangements that exploit tax differentials and will apply where the detailed conditions, including those on an “effective tax mismatch outcome”, are met.

Following the UK example, Australia introduced its own DPT in July 2017. France attempted to legislate for a DPT in 2017 but its Constitutional Council ruled that the legislation was insufficiently detailed, giving the tax authorities too much discretion. However, France is expected to resubmit the legislation to the Constitutional Council in an amended form for inclusion in its 2018 Finance Bill.

Transfer Pricing (Actions 8–10)

Business models where intangible assets are central to the firm’s profitability, such as those of highly digitalised businesses, have in some cases involved the transfer of intangible assets or their associated rights to entities in low-tax jurisdictions that may have lacked the capacity to control the assets or the associated risks. To benefit from a lower effective tax rate at the group level, affiliates in low-tax jurisdictions have an incentive to undervalue the intangibles (or other hard-to-value income-producing assets) transferred to them. At the same time, they could claim to be entitled to a large share of the multinational group’s income on the basis of their legal ownership of the intangibles, as well as on the basis of the risks assumed and the financing provided (i.e. cash boxes). In contrast, affiliates operating in high-tax jurisdictions could be contractually stripped of risk, and avoid claiming ownership of other valuable assets.Actions 8–10 of the BEPS Action Plan developed guidance to minimise the instances in which BEPS would occur as a result of these structures. In particular, the guidance seeks to address the prevention of BEPS by moving intangibles among group members (Action 8), the allocation of risks or excessive capital among members of a multinational group (Action 9) and transactions which would not occur between third parties (Action 10).The guidance developed under BEPS Actions 8–10 was incorporated into the OECD Transfer Pricing Guidelines in 2016 to ensure that transfer pricing outcomes are aligned with value creation. While the Transfer Pricing Guidelines play a major role in shaping the transfer pricing systems of OECD and many non-OECD jurisdictions, the effective implementation of these changes depends on the domestic legislation and/or published administrative practices of the relevant countries. Overall, tax administrations may feel better equipped to address profit shifting by multinational groups through mechanisms such as:■ Identification of actual business transactions between the

associated companies by supplementing, where necessary, the terms of any contract with evidence of the actual conduct of the parties.

■ An analytical framework to determine which associated company assumes risk for transfer pricing purposes, with contractual allocations of risk being respected only when they are supported by actual decision-making.

■ Guidance to accurately determine the actual contributions made by an associated company that solely provides capital without functionality. Specifically, if the capital provider



Interim measures

The EU Commission also published a second legislative proposal in the form of an interim 3% tax on certain revenue from digital activities. This interim measure is only intended to apply until comprehensive international reform has been implemented and is intended to focus on scenarios where revenues are escaping the current tax framework altogether. The 3% interim tax is characterised as a basic indirect levy on gross revenues (with no deduction of costs) where users play a major role in value creation that leads to those revenues, e.g. revenues created from: ■ selling online advertising space; ■ digital intermediary activities which allow users to interact

with other users and which can facilitate the sale of goods and services between them; and

■ the sale of data generated from user-provided information.This will capture, for example, revenues raised from social media platforms or search engines, and services of supplying digital platforms that facilitate interaction between users, who can then exchange goods and services via the platform (such as peer-to-peer sales platforms).

Broader picture – US tax reform

The USA has made no secret of its scepticism for the digital economy project, not least because a number of the “case studies” used in this area are US-headquartered multinationals, and a number of these entities are already facing scrutiny as a result of domestic measures in EU jurisdictions or EU state aid proceedings. The Trump administration have also repeatedly warned of the potential dangers of inhibiting growth in this area and are clearly not afraid to enact unilateral measures to deal with what they perceive as deliberate targeting of US businesses. Following the various amendments made to US federal tax laws in December 2017 under the Tax Cuts and Jobs Act, the USA also maintains that US multinationals do not erode tax unfairly because the companies in question pay tax where the “value” is created. A comprehensive summary of the changes is beyond the scope of this chapter, but the following changes should be highlighted:■ the base erosion anti-abuse tax (“BEAT”), which is

essentially a corporate minimum tax arising from so-called “base erosion” payments;

■ the global intangible low-taxed income (“GILTI”) regime, whereby a 10% or more US corporate shareholder of a controlled foreign company must include the relevant share of net-income of that foreign company in its gross income. Such net income is an amount above a deemed fixed return to that foreign company on its tangible assets (subject to certain exceptions); and

■ the foreign-derived intangible income (“FDII”) regime, which provides for corporate tax deductions against such income which is earned directly by a US corporate. This is intended to provide an incentive against the transfer of intangibles outside the USA to low tax jurisdictions.

The UK’s Position on the Digital Economy

On 13 March 2018, the UK government issued an update (the “update”) on its position paper entitled Corporate Tax and the Digital Economy and contains the UK government’s updated thinking on the digital economy.

payments made by a foreign company on or after June 2016, where the royalty is connected with a trade carried on through a UK permanent establishment, the royalty may be deemed to have a UK source. This is regardless of whether the royalty amount would be deductible in calculating the profits of the UK permanent establishment. A foreign company with a UK permanent establishment paying a royalty to a group company must calculate the “just and reasonable” portion of that royalty that should be sourced to the UK permanent establishment vs sourced to the foreign parent. The portion which has a UK source is then prima facie subject to the basic rate of UK income tax (20%) via a withholding mechanism.

Turnover taxes

A meaningful number of countries have taken actions to assert taxing rights over non-resident companies, such as foreign-based suppliers of digital products and services. These measures typically include sectoral turnover taxes targeted at (or including) revenue from online advertising services, such as India’s Equalisation Levy, Italy’s levy on digital transactions, Hungary’s advertisement tax and France’s tax on online and physical distribution of audio-visual content.In March 2018, the EU Commission published its proposal for the introduction of a digital permanent establishment. Here, companies (including those in non-EU jurisdictions) that exceed certain digital activity thresholds in a tax year in a given Member State will trigger a digital permanent establishment in that Member State. The host Member State would have the taxing rights in respect of profits attributable to that permanent establishment. The digital activity thresholds set out in the EU proposal are as follows:■ revenue from digital services in a Member State that exceed

EUR 7,000,000 (seven million euros);■ number of active users of the digital service in a Member

State that exceeds 100,000 (one hundred thousand); and■ number of online contracts concluded that exceeds 3,000

(three thousand).What the EU Commission (and other countries that have set out similar thresholds) does not do is provide guidance as to how “active users” will be measured. The problem is that there is little publicly available material on the process of defining and identifying active users and more detailed metrics need to be developed for the purpose of using “active users” as a factor. For example, how do countries identify a “user” or what level of engagement is required for a user to be considered “active”? Reliability and veracity of the information would also need to be ensured to address fraudulent accounts, multiple accounts and false information volunteered by users.Turning to how contracts will be concluded. Does this mean that for every time online platforms provide free services to their users and who specify on their websites that by accessing or using the products and services of the company the user agrees to the “Terms of Service” and this results in the conclusion of a legally binding agreement and therefore, a concluded contract? How will this work when commercial activities are carried out remotely while travelling across borders? An individual can, for example, reside in one country, purchase an application while staying in a second country, and use the application from a third country. Challenges presented by the increasing mobility of users are exacerbated by the ability of many users to use virtual personal networks or proxy servers that may, whether intentionally or unintentionally, disguise the location at which the ultimate sale takes place. The fact that many interactions on the Internet remain anonymous adds to the difficulty of the identification and location of users.



US President Barack Obama’s Chief Economic Advisor) as Chair of a new government expert panel will help in this regard and aim to ensure the UK remains at the forefront of the digital revolution. However, a balance must be struck. The UK Chancellor of the Exchequer recently raised the prospect of an “Amazon tax” for online retailers amid fears that high street shops are being put out of business. The UK has made it clear that it is not afraid of going it alone if international solutions take too long, as the introduction of the DPT demonstrates.

Closing Remarks

The 2015 report says that countries could introduce measures on a unilateral basis – albeit in line with international tax practices. But any uncoordinated actions (as set out earlier in this chapter) serve only to create uncertainty for taxpayers and are a sure way to make the digital economy an even more complex area.There are considerable technical and legal hurdles to overcome in any digital economy tax mechanisms, but if governments are to create sustainable long-term models then cooperation and coordination with all those directly involved is essential. This, of course, is all in the background of countries competing for capital, trade wars and Brexit. One of the greatest challenges facing tax authorities around the world is perhaps bridging the gap between political rhetoric and legal reality and creating enforceable frameworks which offer the clarity, certainty and coherence essential to long-term economic growth and stability. The OECD and the G20 recognise this task is highly complex when it comes to the digital economy. The TFDE will provide an update on its work in 2019, as members work towards a consensus-based solution by 2020.

Very broadly, the update provides detail of how the UK government believes “user participation” creates value for certain digital business through engagement and active contribution. It sets out four channels by which it believes value is created:■ Generation of content by users that supports a business’s

ability to attract and retain users and generate revenue.■ Deep engagement with the platform allowing tailoring of

platform and content and collection of valuable behavioural data.

■ Development of networks through engagement and actions that create connections between users.

■ Contribution to a business’s brand through provision of content, goods or services and through moderation and the rating of content.

The update identifies a number of issues, including: how much residual profit derives from user participation; how to allocate it between different jurisdictions; which legal person should be liable for the tax; and what (minimum) threshold (such as number of active users or revenues) should be applied before the tax is imposed. The update discusses issues regarding the scope of such a tax, including how to identify the businesses and revenues within its scope, challenges in identifying the location of users, how best to minimise distortions and avoid damaging the UK digital sector (including start-ups) and whether it could be applied to revenues net of certain outflows (such as payments to conduits). Avoiding damage to the UK digital sector is the key policy objective for the UK Government, as it strives to present itself as a global leader in the digital arena and in the services it offers to help digital businesses grow faster and more efficiently. The appointments of Jacky Wright (previously Corporate Vice President, Core Platform Engineering at Microsoft Corporation) as New Chief Digital and Information Officer in 2017 and Professor Jason Furman (former




Panayiota Burquier is an English qualified associate in the London office of Gibson, Dunn & Crutcher and a member of the firm’s Tax Practice Group.

Ms. Burquier qualified as a solicitor in 2009 and has a range of transactional and advisory experience. Her practice focuses on advising clients on tax aspects of a wide variety of financing and corporate transactions, including mergers and acquisitions, corporate restructurings, accessing capital markets and bank finance. Ms. Burquier also advises on real estate and investment fund transactions.

Panayiota BurquierGibson, Dunn & Crutcher LLPTelephone House 2–4Temple AvenueLondon, EC4Y 0HBUnited Kingdom

Tel: +44 20 7071 4259Email: [email protected]: www.gibsondunn.com

Sandy Bhogal is partner in the London office of Gibson, Dunn & Crutcher and a member of the firm’s Tax Practice Group.

His experience ranges from general corporate tax advice to transactional advice on matters involving corporate finance & capital markets, structured and asset finance, insurance and real estate. He also has significant experience with corporate tax planning and transfer pricing, as well as with advising on the development of domestic and cross-border tax-efficient structures. He also assists clients with tax authority enquiries, wider tax risk management and multi-lateral tax controversies.

Prior to joining Gibson Dunn, Sandy was head of tax at Mayer Brown, and prior to that was associated with Ernst & Young LLP and with a leading international legal practice.

Sandy BhogalGibson, Dunn & Crutcher LLPTelephone House 2–4Temple AvenueLondon, EC4Y 0HBUnited Kingdom

Tel: +44 20 7071 4266Email: [email protected]: www.gibsondunn.com

Gibson, Dunn & Crutcher LLP is a leading international law firm. Consistently ranking among the world’s top law firms in industry surveys and major publications, Gibson Dunn is distinctively positioned in today’s global marketplace with more than 1,250 lawyers and 20 offices, including Beijing, Brussels, Century City, Dallas, Denver, Dubai, Frankfurt, Hong Kong, Houston, London, Los Angeles, Munich, New York, Orange County, Palo Alto, Paris, San Francisco, São Paulo, Singapore, and Washington, D.C. For more information on Gibson Dunn, please visit our website, www.gibsondunn.com.


Chapter 3

Boga & Associates

Genc Boga

Alketa Uruçi

Albania

2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates?

VAT was first introduced in 1995. In 2015, the legislation was harmonised with the EU Directive on VAT. The standard rate of VAT is 20%, which applies to all persons (companies and entrepreneurs) having an annual turnover exceeding ALL 2,000,000 (approx. EUR 15,800). Exceptionally, persons carrying out certain specific categories of activity (such as lawyers, notaries, architects, auditors, doctors, accountants and similar professions) are VAT taxpayers irrespective of their annual turnover (i.e. there is no VAT threshold). Only accommodation in tourism facilities is subject to a reduced rate of 6%.Exports of goods, goods in passenger baggage, the international transport of goods and passengers and related services, and services to international intra-governmental organisations, are subject to VAT at 0% (benefitting from VAT exemption but with a right of deduction).

2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions?

VAT regulations provide for supplies exempt from VAT without a right of deduction. The most important are as follows:■ Lease and sale of land.■ Sale of buildings, unless the seller opts for VAT applicability.■ Long lease of buildings (when the lease duration exceeds two

months), unless the lessor opts for VAT applicability.■ Financial services.■ Certain services rendered by not-for-profit organisations.■ Educational services rendered by private and public

educational institutions.■ Postal services.■ Materials used for the production and packaging of medicines.■ Supply of newspapers, magazines and books of any kind.■ Supply of advertising in electronic and written media but

only when the advertising services are provided directly from the media (and not through intermediaries).

■ Supply of services performed outside Albania by a taxable person whose place of activity or residence is in Albania.

■ Supply of services relating to gambling activities, casinos and hippodromes.

1 Tax Treaties and Residence

1.1 How many income tax treaties are currently in force in your jurisdiction?

Albania has concluded tax treaties with 41 countries, 40 of which are currently in force.

1.2 Do they generally follow the OECD Model Convention or another model?

Albanian tax treaties follow the OECD model.

1.3 Do treaties have to be incorporated into domestic law before they take effect?

The Albanian Constitution requires treaties to be ratified by Parliament.

1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)?

The treaties do not incorporate anti-treaty shopping rules.

1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced subsequently)?

A treaty prevails over domestic law regardless of whether the domestic legislation existed previously or is introduced subsequently.

1.6 What is the test in domestic law for determining the residence of a company?

Entities that are established in Albania or have their place of effective management in Albania are considered resident.

2 Transaction Taxes

2.1 Are there any documentary taxes in your jurisdiction?

No, there are no documentary taxes in Albania.


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Boga & Associates Albania

will be considered deductible up to 30% of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation). The taxpayer has the right to carry forward the non-deducted part of the interest and claim its tax deductibility in the subsequent periods, except when the taxpayer’s ownership has changed by more than 50%.

3.5 If so, is there a “safe harbour” by reference to which tax relief is assured?

There is no such provision in Albanian legislation.

3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company?

The debt-to-equity ratio is calculated without taking into consideration the source of the financing or relevant guarantees. With regards to net interest expense as a percentage of EBITDA, there are no explicit rules stipulating the inclusion of third-party loans in the calculation.

3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non-resident?

Interest in excess of the annual average bank interest rate is non-deductible for tax purposes.

3.8 Is there any withholding tax on property rental payments made to non-residents?

Property rental payments made to non-residents are subject to a final withholding tax at a rate of 15%, unless a double tax treaty provides for a lower rate.

3.9 Does your jurisdiction have transfer pricing rules?

The recently changed legislation on transfer pricing is based on the Transfer Pricing Guidelines 2010 of the Organisation for Economic Co-operation and Development (OECD). However, in case of conflicts between the OECD Guidelines and provisions of the Albanian legislation on this matter, the local legislation provisions will prevail.The new legislation lays down the transfer pricing methods to be used by taxpayers when performing a controlled transaction, depending on the specifics of the transaction. The methods described are:■ the comparable uncontrolled price method;■ the resale price method;■ the “cost plus” method;■ the transactional net margin method; and■ the profit split method.The method chosen by the taxpayer depends on, and should take into account, different circumstances. However, the legislation provides the option for the taxpayer to choose another transfer pricing method, if the taxpayer proves that none of the methods listed in the legislation can be used in a reasonable way to apply the market principles in the controlled transactions.Taxpayers performing controlled transactions, as defined above, which exceed the amount of ALL 50,000,000 (approximately EUR 360,000), should present to the tax authorities (i.e. the General or Regional Tax Directorate where the taxpayer has been registered) an Annual Controlled Transactions Declaration, as per the format provided in the respective Instruction on Transfer Pricing.

2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions?

Generally, taxpayers registered for VAT are entitled to recover the input VAT, provided that the VAT is charged in relation to their taxable activity. VAT cannot be reclaimed on recreation and accommodation expenses, passenger vehicles, fuel under certain limits, or any expenses related to the above-mentioned expenses.

2.5 Does your jurisdiction permit VAT grouping and, if so, is it “establishment only” VAT grouping, such as that applied by Sweden in the Skandia case?

There is no VAT grouping available in Albania.

2.6 Are there any other transaction taxes payable by companies?

There is a fee on the transfer of an ownership right on real estate, payable by legal entities in case of sale or donation of real estate.

2.7 Are there any other indirect taxes of which we should be aware?

Except for VAT and excise, carbon and circulation taxes are levied on the production and importation of certain combustible goods (including fuel) in Albania.

3 Cross-border Payments

3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident?

Dividends and profit distribution paid to non-residents are subject to a final withholding tax at a rate of 15%, unless a double tax treaty provides for a lower rate.

3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident?

Royalties paid to non-residents are subject to a final withholding tax at a rate of 15%, unless a double tax treaty provides for a lower rate.

3.3 Would there be any withholding tax on interest paid by a local company to a non-resident?

Interest paid to non-residents is subject to a final withholding tax at a rate of 15%, unless a double tax treaty provides for a lower rate.

3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules?

The thin capitalisation rule limits the tax deduction for interest paid on a loan (for corporate income tax purposes) to the portion of interest paid on the loan not exceeding four times the company’s net assets (i.e. a debt-to-equity ratio of 4:1). The rule applies to all loans taken, except for short-term loans (payable within less than one year). It does not apply to banks, finance leases or insurance companies. Additionally, effective from 1 January 2018, in case of loans and funding from related parties, the “net interest expense”


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4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the occupation of property?

Property tax is levied annually on all residents and non-residents who own agricultural land, buildings and “terrain” in Albania. Agricultural land is classified into 10 groups and is taxed at rates varying from ALL 700 to ALL 5,600 per hectare. Buildings, from 1 April 2018, are taxed based on the market value of the building (previously, a fixed amount for each square metre). The tax rate varies: from 0.05% for buildings used as a dwelling: to 0.2% for buildings used for economic activity; and to 30% of the respective tax amount for the entire building, if the developer failed to complete the construction within the deadline set forth in the construction permit. The tax on buildings is paid each month.“Terrain” (defined in law as land available for building upon) is taxed at ALL 0.14 to ALL 20 per m2. The local municipality may modify the tax rates set by law. In addition, it decides on the payment schedule of the tax and on reductions for immediate payment of tax. Albanian legislation also provides for the tax on impact on infrastructure from new constructions (infrastructure tax). In cases of residence or business units, the tax varies from 4% to 8% of the sale price of such units. For constructions in the field of tourism, industry or for public use, the tax varies from 2% to 4% in Tirana and from 1% to 3% in other municipalities. Exceptionally, for infrastructure projects such as the construction of national roads, ports, airports, tunnels, dams or, energy infrastructure, the tax is 0.1% of the investment value (which includes the value of equipment and machinery for the project), but not less than the cost of rehabilitating any damaged infrastructure to be replaced.In addition, there are a variety of national and local taxes. These include hotel tax, royalty tax, advertising tax, etc.

5 Capital Gains

5.1 Is there a special set of rules for taxing capital gains and losses?

There are no specific capital gains taxes for corporate income tax subjects. As a general rule, capital gains are included in the business profit of the entity and are taxed at the same rate of 15%.

5.2 Is there a participation exemption for capital gains?

Tax legislation does not provide for a participation exemption for capital gains.

5.3 Is there any special relief for reinvestment?

There is no rollover relief available in Albania, or any other relief.

5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local assets/shares?

There is no withholding tax on the proceeds of the sale of interest in assets/shares, but the seller must declare and pay the tax on income generated from the transaction.

In addition, in case the tax authorities of a country with which Albania has signed a double tax treaty make a transfer pricing adjustment that results in the taxation of the profit for which the taxpayer has already been taxed in Albania, the Albanian taxpayer may submit a written request to the General Tax Directorate on the respective adjustment to be made to the profit tax in Albania. The requested transfer pricing adjustments may be refused or granted fully/partially within three months of the date of the submission of the request by the taxpayer.

4 Tax on Business Operations: General

4.1 What is the headline rate of tax on corporate profits?

As of 1 January 2019, profits are taxed at a rate of 15% for the taxpayers having a total annual income higher than ALL 14,000,000, whereas the taxpayers having a total annual income from ALL 5,000,000 up to ALL 14,000,000 will be subject to a profit tax rate of 5%.

4.2 Is the tax base accounting profit subject to adjustments, or something else?

Yes, the taxable profit that results from the financial statements prepared under and pursuant to accounting standards is adjusted as provided for and required by the tax regulation.

4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments?

The main adjustments consist of the following: depreciation allowances; restrictions related to thin capitalisation of loan interests and other expenses (e.g. thresholds of tax deductions for representation and sponsorship expenses); bad-debt requirements; penalties; provisions (except for banks and insurance companies); and impairment and revaluation of assets, etc.

4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas subsidiaries?

No, there are no tax grouping rules.

4.5 Do tax losses survive a change of ownership?

Losses are carried forward for three consecutive years (no carry back is allowed). However, if, during a taxable period, direct and/or indirect ownership of stock capital or voting rights of a person changes by more than 50% in value or number, the losses incurred in the previous years cannot be used against the profit of the year.

4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits?

No, there is no difference in this regard.


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8 Taxation of Commercial Real Estate

8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction?

Non-residents are taxed on the disposal of real estate in Albania, at a rate of 15% of the realised profit.

8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your jurisdiction?

Current legislation does not provide for indirect interest taxation.

8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent?

Under current legislation, there is no special tax regime for REITs or their equivalent in Albania.

9 Anti-avoidance and Compliance

9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule?

Albanian fiscal legislation does not provide for a general anti-avoidance rule. However, it gives the tax authorities the right to use alternative methods of tax assessment when verifying the lack of economic substance in a transaction.

9.2 Is there a requirement to make special disclosure of avoidance schemes?

Under current legislation, there are no requirements to disclose any avoidance scheme.

9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax avoidance?

Albanian legislation does not have specific rules to target parties other than the taxpayer committing the tax avoidance.

9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax?

The Tax Procedure Law requires co-operative compliance before the tax audit commences. Taxpayers are entitled to review the tax returns before a tax audit takes place; this results in lower penalties.


6 Local Branch or Subsidiary?

6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary?

There are no taxes payable upon the formation of subsidiaries.

6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident company (for example, a branch profits tax)?

There are no such differences in taxes or fees specifically designed for subsidiaries. The taxable income of branches is subject to profit tax at the same rate (15%) as any Albanian entity.

6.3 How would the taxable profits of a local branch be determined in its jurisdiction?

Branches are taxed only on taxable income from an Albanian source. Taxable income is determined in the same manner as for resident companies.

6.4 Would a branch benefit from double tax relief in its jurisdiction?

Branches are considered permanent establishments; hence they may benefit from double tax relief.

6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the branch?

Transfers or repatriation of profits by the branch are not subject to any tax in Albania.

7 Overseas Profits

7.1 Does your jurisdiction tax profits earned in overseas branches?

Foreign-sourced income is taxable in Albania. However, tax credit is allowable for the amount of income tax paid overseas for the income derived abroad up to the amount that would have been payable in Albania on Albanian-sourced income.

7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company?

Receipt of dividends is tax-exempt income in Albania.

7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply?

No, there are no “controlled foreign company” rules.


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10 BEPS and Tax Competition

10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)?

The Albanian Government has indicated that the additional thin capitalisation rule, i.e. net interest expense to EBIDTA, will be introduced in response to OECD’s project (BEPS).

10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports?

Except from the above-mentioned rule, there are no publicly expressed intentions to adopt any other legislation against BEPS, either within or beyond the OECD’s recommendations.

10.3 Does your jurisdiction support public Country-by-Country Reporting (CBCR)?

There is no support for Country-by-Country Reporting in Albania.

10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box?

There are no preferential regimes in Albania.

11 Taxing the Digital Economy

11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture digital presence?

No, there is no action to tax digital activities in Albania. Neither is there an initiative to tax the digital presence.

11.2 Does your jurisdiction support the European Commission’s interim proposal for a digital services tax?

There is no initiative to adopt any act that regulates such areas of law.


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Boga & Associates, established in 1994, has emerged as one of the premier law firms in Albania, earning a reputation for providing the highest quality of legal, tax and accounting services to its clients. The firm also operates in Kosovo (Pristina) offering a full range of services. Until May 2007, the firm was a member firm of KPMG International and the Senior Partner/Managing Partner, Mr. Genc Boga, was also the Senior Partner/Managing Partner of KPMG Albania.

The firm’s particularity is linked to the multidisciplinary services it provides to its clients, through an uncompromising commitment to excellence. Apart from the widely consolidated legal practice, the firm also offers the highest standards of expertise in tax and accounting services, with keen sensitivity to the rapid changes in the Albanian and Kosovo business environment.

The firm delivers services to leading clients in major industries, banks and financial institutions, as well as to companies engaged in insurance, construction, energy and utilities, entertainment and media, mining, oil and gas, professional services, real estate, technology, telecommunications, tourism, transport, infrastructure and consumer goods.

The firm is continuously ranked as a “top tier firm” by major directories: Chambers Europe; The Legal 500; and IFLR1000.

Genc Boga is the founder and Managing Partner of Boga & Associates, which operates in the jurisdictions of both Albania and Kosovo. Mr. Boga’s fields of expertise include business and company law, concession law, energy law, corporate law, banking and finance, taxation, litigation, competition law, real estate, environment protection law, etc.

Mr. Boga has solid expertise as an advisor to banks, financial institutions and international investors operating in major projects in energy, infrastructure and real estate. Thanks to his experience, Boga & Associates is retained as a legal advisor on a regular basis by the most important financial institutions and foreign investors.

He regularly advises EBRD, IFC and World Bank in various investment projects in Albania and Kosovo.

Mr. Boga is continuously ranked as a leading lawyer in Albania by major legal directories: Chambers Global; Chambers Europe; The Legal 500; and IFLR1000.

He is fluent in English, French and Italian.

Genc BogaBoga & Associates40/3 Ibrahim Rugova Str. 1019, TiranaAlbania

Tel: +355 4 225 1050Email: [email protected] URL: www.bogalaw.com

Alketa Uruçi is a Partner at Boga & Associates, which she joined in 1999.

Alketa practises in the areas of concession and energy, where she manages energy assignments on regulatory, corporate and commercial matters, including international arbitration proceedings.

She has extensive experience in providing regular tax advice to commercial companies in corporate tax, VAT and employee taxation matters, and is involved in the management of several tax aspects of mergers and acquisitions transactions, tax planning and restructuring.

In addition, Alketa has performed a number of tax and legal due diligence assignments and managed legal consultancy to international clients. She has also assisted foreign clients during international arbitration proceedings and is active as a tax litigator in the Albanian courts. Alketa chairs the tax and legal committee of the American Chamber of Commerce in Albania.

Alketa is fluent in English and Italian.

Alketa UruçiBoga & Associates40/3 Ibrahim Rugova Str. 1019, TiranaAlbania



Chapter 4

Marval, O’Farrell & Mairal

Walter C. Keiniger

María Inés Brandt

Argentina


In general terms, they are not. Under section 75:22 of the Argentine Federal Constitution, international treaties prevail over domestic law. Nevertheless, the economic reality principle (sections 1 and 2 of the Tax Procedure Law), which is deemed to be a general anti-avoidance rule, has been invoked by the Tax Authority and courts to deny treaty benefits to specific cases and/or arrangements.


In principle, the place of incorporation (i.e., a company set up in Argentina according to Argentine law is deemed to be an Argentine tax resident).

2 Transaction Taxes


Yes. Stamp tax is a local tax levied on public or private instruments, executed in Argentina or, if executed abroad, to the extent that those instruments are deemed to have effects in one or more relevant jurisdictions within Argentina. In general, the tax rate is around 1% and this tax is calculated on the economic value of the agreement (i.e., purchase price, fees and royalties).


Yes. Argentina applies value added tax (“VAT”) at a general rate of 21%.


VAT applies to the sale of goods, the provision of services and the import of goods in Argentina. Under certain circumstances, services rendered outside Argentina that are effectively used or exploited in Argentina (including digital services), usually called “importation of services”, are deemed rendered in Argentina and thus subject to VAT. Exports of goods are not subject to VAT and services



Argentina has 20 income tax treaties in force and has signed income tax treaties with the following countries: Australia; Belgium; Bolivia; Brazil; Canada; Chile; Denmark; Finland; France; Germany; Italy; Mexico; the Netherlands; Norway; Russia; Spain; Sweden; Switzerland; the United Kingdom; and Uruguay. Recently, Argentina signed tax treaties with the United Arab Emirates and Qatar but they are not in force yet.


Most of the income tax treaties signed by Argentina follow the OECD Model Convention and, in certain specific aspects, the UN Model Convention. The treaty signed with Bolivia follows the “Pacto Andino” Model Convention.


To take effect, treaties should be approved according to the process required by the Argentine Constitution. Under section 75:22 of the Argentine Constitution, international treaties prevail over domestic law.


Traditionally, tax treaties signed by Argentina do not include anti-treaty shopping rules. However, most of the tax treaties include the beneficial owner requirement for passive income such as dividends, royalties and interest. Moreover, most recent treaties signed by Argentina (e.g., tax treaties with Chile and Mexico) include general anti-treaty shopping rules. On the other hand, Argentina has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“BEPS”), which – once in effect – will incorporate different anti-treaty shopping rules to Argentina’s treaty network. Under such Multilateral Convention, Argentina has adopted a simplified limitation of benefits clause (“LoB”) and the principal purpose test clause (“PPT”).


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a

Marval, O’Farrell & Mairal Argentina


Yes. The excise tax (“impuestos internos”) is a tax that applies to a wide variety of items sold in Argentina (not on exports), principally on tobacco, wines, soft drinks, gasoline, lubricants, insurance premiums, automobile, mobile services, perfumes, jewellery, and precious stones. The bases of the assessment and tax rate depend on each product (for example, for alcoholic drinks the nominal rate is between 20% and 26%, for beers the nominal rate is between 8% and 14% and for jewellery and precious stones the nominal rate is 20%).



Yes. According to a recent tax reform, the income accrued for fiscal years 2018 and 2019 will be subject to income tax at a rate of 30%. Such rate will be further reduced to 25% for fiscal years beginning on or after January 1, 2020. The aforementioned tax reform also introduced a withholding on dividend distributions and branch profit remittances at rates of 7% (while the applicable corporate tax rate is 30%) and 13% (once the applicable corporate rate is reduced to 25%). Such rates could be reduced under certain treaties to avoid double taxation executed by Argentina.


Yes. Royalty payments will be subject to withholding tax. The effective withholding rate varies, depending on the type of royalty that is being paid. For example, royalties for software licences are subject to an effective 31.5% rate, payments for trademark licences are subject to an effective 28% rate, etc. In general, double tax treaties executed by Argentina reduce such rates.


Yes. The general withholding rate is 35%. A reduced 15.05% withholding rate is applicable if: (i) the borrower is a local financial institution governed by Law N° 21,526; (ii) the lender is a bank or a financial institution not located in a low tax jurisdiction; and (iii) the transaction involves seller’s financing of depreciable movable property (except automobiles). In general, double tax treaties executed by Argentina reduce such rates.


The tax reform introduced by Law N° 27,430 has also replaced the thin capitalisation rules, although many aspects still need to be addressed by regulations. The current rules only apply with respect to “financial debt” (debt incurred to acquire assets or services related to the operation of the company is excluded) entered with related parties, whether resident in Argentina or not. The deduction of this type of interest and negative foreign exchange differentials is limited to a fixed amount per year which will be determined by the Executive Branch, or 30% of the taxpayer’s taxable income before

rendered in Argentina that are effectively used or exploited outside of Argentina are not subject to VAT.


VAT is paid at each stage of the production or distribution of goods or services based on the value added during each of the stages. This means that the tax does not have a cumulative effect. The tax is levied on the difference between the so-called “tax debit” and “tax credit”. The difference between “tax debit” and “tax credit” if positive, constitutes the amount to be paid to the Tax Authority. The current general rate for this tax is 21%. However, sales and imports of capital goods are subject to VAT at a lower tax rate of 10.5%.Under a recent tax reform, VAT Law provides a system to reimburse VAT credits resulting from the purchase, manufacture, preparation or import of fixed assets (other than automobiles) that remain as a VAT credit for the taxpayer after six months. The regulations to establish the method, terms and conditions for this reimbursement are still pending.The reimbursement will be subject to the condition that the VAT credits would have normally been absorbed within a 60-month period, through VAT payable for local transactions or VAT reimbursements related to exports. If such condition is complied with, the reimbursement will be considered definitive (i.e., the tax authorities will not make a request to be repaid the reimbursed amounts). Otherwise, the taxpayer will be required to reimburse to the tax authorities with the amount that did not meet the condition, plus interest.Exports of goods and services are exempt from VAT. A reimbursement regime is in place for VAT credits related to the export activity.


This is not applicable in Argentina.


Yes. Turnover tax: This tax is a local tax levied on gross income. Each of the provinces and the City of Buenos Aires apply different tax rates to different activities. The tax is levied on the amount of gross income resulting from business activities carried out within the respective local jurisdictions. The provinces and the City of Buenos Aires have entered into an agreement to prevent double taxation on activities carried out in more than one jurisdiction. Tax on debits and credits: This tax is levied on debits and credits in Argentine bank accounts and on other transactions that, due to their special nature and characteristics, are similar or could be used in substitution for a bank account, such as payments on behalf of, or in the name of, third parties. Transfers and deliveries of funds also fall within the scope of this tax, regardless of the person or entity that performs them, when those transactions are made through organised payment systems as a substitute for bank accounts. Tax law and regulations allow for several exemptions to this tax. The general rate of the tax is 0.6% on each credit and debit. An increased rate of 1.2% applies in cases in which there has been a substitution of a bank account. 33% of the tax on debits and credits paid can be used as a credit to offset income tax liabilities.


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25%). Such rates could be reduced under certain treaties to avoid double taxation executed by Argentina.The withholding on dividends applies when the dividend is paid: (i) to an Argentine resident individual; and (ii) to a non-Argentine resident (either individual or a legal entity).


Yes. The tax base is the accounting profit subject to adjustments.


The main adjustments are related to valuation of assets, depreciations, uncollectable credits, among others.


There are no tax grouping rules.


Yes, although such change of ownership might preclude the transfer of tax losses if a tax-free reorganisation takes place within a two-year term of such change of ownership.


Please see our answer to question 4.1.


Personal assets tax (“wealth tax”) applies on shares and other equity participations in local companies and is paid by the local company itself. The applicable rate is 0.25% on the company’s net worth or market value if the company is listed.

5 Capital Gains


Capital gains obtained by Argentine companies are treated as ordinary income. If a non-Argentine resident sells shares issued by an Argentine company, the gain – if any – is subject to a 15% tax rate calculated on the actual net gain or a presumed net gain of 90% of the gross amount of the transaction. Losses from the sale of shares may be set off only against profits of the same kind and the same source. The results obtained by Argentine individuals from the sale, transfer or disposition of shares, securities representing shares and certificates of deposit of shares that are carried out through stock exchanges or stock markets authorised by the Argentine Securities and Exchange Commission, will be exempt. The foregoing exemption will also be

interest and depreciation, whichever limit is higher. The new rules provide for a carry back of three years and a carry forward of five years to allocate interest that was not deductible when accrued. Moreover, a company may avoid the applicable limitations if it can demonstrate that the annual amount of interest related to financial debt, as compared to its taxable income, is within or below the ratio of indebtedness with third parties determined by the economic group to which the company belongs. Furthermore, interest may be deducted without limitations if the company incurring the debt can demonstrate that the beneficiary of the interest paid the corresponding income tax for those benefits.


Please refer to our answer to question 3.4.


There are no specific provisions in the income tax law; therefore, general rules as described in the answer to question 3.4, would apply.


No, there are not.


Rental payments are subject to an effective income tax withholding of 21%. Such rate could be reduced under certain treaties to avoid double taxation executed by Argentina.


Yes. In general these rules follow the OECD Guidelines. Transfer pricing practices take place when an Argentine company enters into business transactions with: (i) a related party located abroad and the prices agreed in such transactions do not reflect normal market practices, i.e., they are not at arm’s length; or (ii) a non-related party located in a low-tax or non-cooperative jurisdiction, as defined by the income tax law. Export and import operations with an international intermediary are subject to additional scrutiny by tax authorities as the taxpayers must show that the intermediary’s fee is reasonable considering its functions, risks and assets involved in the transactions.



According to a recent tax reform, the income accrued for fiscal years 2018 and 2019 will be subject to income tax at a rate of 30%. Such rate will be further reduced to 25% for fiscal years beginning on or after January 1, 2020. The aforementioned tax reform also introduced a withholding on dividend distributions and branch profit remittances at rates of 7% (while the applicable corporate tax rate is 30%) and 13% (once the applicable corporate rate is reduced to


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(2) The shares, participations or rights of the foreign entity being sold represent at least 10% of the equity of that entity, at the time of their disposal or in any of the previous 12 months.



No specific tax would be imposed upon the formation of a branch or a subsidiary.


No, except for certain specific aspects (e.g., a branch cannot be part of a tax-free merger, while a subsidiary can). Taxation of a local branch and a subsidiary is very similar. Please see the answer to question 4.1.


The tax base is the accounting profit subject to adjustments, as in the case of a subsidiary. Please see the answer to question 4.2.


Yes. A local branch is deemed as an Argentine resident for tax purposes.


Remittance of profits by a local branch is treated similarly to a dividend distribution by a subsidiary. Please see the answer to question 4.1.

7 Overseas Profits


Yes. The income obtained by overseas branches is taxed for the resident parent company in Argentina as foreign-source income. The profits of foreign permanent establishments are attributed to the owner even if such profits have not been distributed or remitted. The same rule applies to the attribution of tax losses, except with respect to losses derived from the sale of securities or interest or units in foreign mutual funds, which can be offset only from foreign source income obtained by the permanent establishment from the same type of transactions. According to income tax law, foreign taxes paid will be allowed as a tax credit against the Argentine tax liability to the extent the foreign tax does not exceed the Argentine tax.

applicable to foreign beneficiaries to the extent that said beneficiaries do not reside in, and the funds do not come from, non-cooperative jurisdictions as defined by the income tax law.


There is no participation exemption for capital gains obtained by Argentine companies.


Taxation on capital gains obtained upon the transfer of land or buildings which have been held as fixed assets (“bienes de uso”) for a minimum of two years may be deferred to the extent that the whole amount obtained upon the transfer is reinvested in compliance with the following requirements:(i) the total amount arising from the disposal must be reinvested

within one year in assets of a similar nature; or(ii) the total amount arising from the disposal must be reinvested

in the construction of a new building or the refurbishment of an existing building, and the construction or refurbishment works must commence within one year as from the disposal and the works must be completed within four years.

A rollover alternative is also available for depreciable assets. The taxpayer may defer the capital gains arising from the sale or transfer of depreciable assets if:(i) the taxpayer invested in a substitute asset; and (ii) the sale or transfer of the fixed asset and the acquisition of the

new one is done within a 12-month period. If the taxpayer defers the capital gains, the tax basis of the substitute asset will be reduced by the capital gains so reinvested.


According to the amendments introduced by Law N° 27,430, the indirect disposal of assets in Argentina was included as a taxable event under certain conditions. A presumption of income from an Argentine source was introduced into income tax law when non-residents transfer shares and participations of foreign entities whose underlying assets are fully or partly located in Argentina. This new concept is in the article following Article 13 of income tax law and is entitled “indirect disposal of assets located in the national territory”.This concept establishes that when a non-resident transfers shares, quotas, participations and other rights representative of the capital or equity of an entity incorporated, domiciled or located abroad, the resulting income will be considered as Argentine source income as long as the following conditions are met:(1) At least 30% of the value of the shares, participations or

rights of the foreign entity, at the time of sale or in any of the previous 12 months, derives from assets that the entity owns directly or indirectly in Argentina.

Argentine assets will be valued at their fair market value and will include:(i) shares, rights, quotas or other forms of ownership,

control or participation in the profits of a company, fund, trust or other entity incorporated in Argentina;

(ii) permanent establishments in Argentina belonging to a non-resident person or entity; and

(iii) other assets of any nature located in Argentina or rights over them.


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medium- and low-income populations; (ii) mortgage loans; and/or (iii) mortgage securities, distributions originated in rental or the result of the sale of the assets.



Yes. The general anti-avoidance rule is the economic reality principle established the Tax Procedure Law.


No, there is not.


Yes. Pursuant to section 8 of the Tax Procedure Law, joint and several liability for tax debts and penalties of a taxpayer is extended to those persons who “through their fraud or negligence, facilitate the tax evasion”.


There is no specific provision regarding “cooperative compliance rules”.



On December 29, 2017, Argentina published Law N° 27,430 in the Official Gazette. Law N° 27,430 contains the following BEPS measures:■ VAT on digital services and income tax on cryptocurrencies –

BEPS Action 1.■ New CFC rules included in the income tax law – BEPS

Action 3.■ Modification of the thin capitalisation rules – BEPS Action 4.■ Anti-abuse clause included in recent Double Taxation Treaties

executed by Argentina (Spain, Chile, Mexico, Brazil) – BEPS Action 6.

■ New definition of Permanent Establishment – BEPS Action 7.

■ Regulation of Joint Determination of Prices of International Operations – BEPS Actions 8–10.

■ Sanctions related to Country-by-Country (“CbC”) Reporting – BEPS Action 13.

■ Regulation of the Mutual Agreement Procedure – BEPS Action 14.


Yes. The receipt of dividends by a local company from a non-resident company is subject to income tax as foreign source income. According to income tax law, foreign taxes paid will be allowed as a tax credit against the Argentine tax liability to the extent the foreign tax does not exceed the Argentine tax.


Yes. CFC rules apply to foreign companies that have “fiscal personality” (this is, companies that are treated as local taxpayers in the jurisdictions where they are residents) in the jurisdiction where the company is located and to the extent certain conditions are met, including the following: (i) the resident taxpayer (together with related parties, if applicable) owns at least a 50% participation in the foreign entity; (ii) the foreign entity “does not have organization of material and personal resources to carry out its activity” or obtains at least 50% of passive income, or its revenues constitute deductible expenses for resident related parties; and (iii) the income tax paid abroad is lower than 75% of the tax that would have corresponded with Argentine income tax rules. If such conditions are met, the Argentine resident shareholder should recognise the income obtained by the foreign company as if the foreign company did not exist.



The income arising from the sale of the real estate obtained by a non-Argentine resident is subject to a withholding. The corresponding withholding rate is 17.5% (the approximate percentage gross-up being 21.21%), since the law presumes that 50% of the amount paid abroad constitutes net income for the foreign beneficiary. By applying a tax rate of 35% to that amount, the withholding rate becomes, in effect, 17.5%. The non-resident may opt to pay tax at the rate of 35% on net income, instead of the presumed net income. Net income is calculated by deducting the actual expenses incurred in Argentina for obtaining the taxable income (i.e., the acquisition cost of the real estate) from the gross amount received.


Yes. Please see the answer to question 5.4.


No. However, there is a specific regime to encourage the development of housing construction for medium- and low-income population, mutual funds or financial trusts, whose investment objectives are: (i) real estate developments for social housing of


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Argentine residents abroad whose use or effective exploitation is carried out in Argentina, as long as the customer is not subject to the tax for other taxable events and does not assume the quality of registered taxpayer. In this respect, a definition of the concept of digital services is introduced as subparagraph “m” of paragraph 21 of subparagraph “e” of Article 3. Digital services will be understood, whatever the device used for download, display or use is, as those carried out through the internet or any adaptation or application of protocols, platforms or technology used by the internet or other network through which equivalent services are provided that, by their nature, are basically computerised and require minimum human intervention. Various cases are also established in which digital services are considered.


This is not implemented.

AcknowledgmentThe authors would like to thank María Soledad González for her invaluable assistance in the preparation of this chapter. María Soledad Gonzalez joined Marval, O’Farrell & Mairal in 2003 and is currently a senior associate of the tax department. Before joining the firm, she worked at Dr. Duloup’s Law Firm, as an intern and paralegal. She graduated from the Universidad de Buenos Aires with a Law Degree in 2002 and later completed an International Program in Tax Law at the Universidad Torcuato Di Tella. María Soledad is a member of the Asociación Argentina de Estudios Fiscales, where she actively participates on different research commissions. Tel: +54 11 4310 0100 / Email: [email protected]


■ Signature of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting – BEPS Action 15.


No, it does not.


On June 30, 2016, Argentina signed the Multilateral Competent Authority Agreement on the Exchange of CbC Reports which establishes a roadmap to automatically exchange CbC Reports between nations. General Resolution 4130-E implemented a supplementary information regime applicable to the local entity of an MNE Group regardless of whether such MNE Group is subject to CbC reporting, i.e., regardless of whether the €750,000.00 threshold is exceeded. The following information must be provided annually to the AFIP.


No, it does not.



Not regarding income tax. Unilateral actions have been adopted regarding VAT. Article 1 of the Law on VAT introduces a new taxable event related to the provision of digital services by non-


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Marval’s tax department has an unrivalled range of expertise. Our team is equally strong in all types of advisory work, tax planning and transactional matters, as well as litigation before all levels of the courts.

Our tax department is renowned for assisting clients with sophisticated tax structures, complex cross-border transactions and high-profile tax litigation. We also have unmatched experience advising clients on regional tax matters involving other Latin American jurisdictions.

Our tax department works closely with the firm’s market-leading corporate, finance and capital markets departments, particularly in M&A and other transactions.

Our tax practice covers a wide range of matters including:

■ Comprehensive tax advisory service.

■ Advising in domestic and international transactions.

■ Tax aspects of M&A, corporate reorganisations, foreign investments and international financial transactions.

■ Tax advisory and planning services for individuals.

■ Representation of clients before the Argentine tax authorities.

■ Tax litigation before all levels of the local courts, including the Argentine Supreme Court.

■ Advising and representation before local courts regarding customs taxation.

Walter C. Keiniger joined Marval, O’Farrell & Mairal in 1999 and is a partner in the tax department. He has provided advice to local and foreign companies in the design, planning and organisation of a variety of transactions, including loans, project financing, securitisation of assets, IPOs, etc.

From 1995 to 1999, he worked at Gutman Tax Law Firm. He graduated as a lawyer specialising in Tax Law from the Universidad de Buenos Aires in 1994 and in 1997 he earned the degree of Tax Specialist from the same university. In 1998, he took a course specialising in Tax Law at the University of Salamanca, Spain. In 2003, he obtained a Master of Laws in Taxation from the University of Florida, USA.

He has written articles and has been a speaker both nationally and internationally. He has also given classes in several universities in Argentina and the USA.

Walter C. KeinigerMarval, O’Farrell & MairalLeandro N. Alem 882Buenos AiresArgentina

Tel: +54 11 4310 0100Email: [email protected]: www.marval.com

María Inés Brandt is a partner of Marval, O’Farrell & Mairal Tax Department with more than 20 years’ experience in tax matters. She focuses on tax advice and planning and has outstanding expertise in the tax aspects of large, challenging corporate and finance transactions, including the design, planning and organisation of tax-efficient transactions. Before joining Marval, she was a founding partner at Tanoira Cassagne Abogados and a partner at Estudio Beccar Varela.

María Inés is recognised as a leading tax lawyer by all the key legal publications, including Chambers Global, Chambers Latin America, The Legal 500 and LL250.

She is a member of the Argentine Fiscal Association, regularly contributes articles to well-known legal publications and has been invited as a speaker at various conferences

She graduated with honours from the Universidad de Buenos Aires in 1993 and specialised in Tax Law in 1995 at the same university.

María Inés BrandtMarval, O’Farrell & MairalLeandro N. Alem 882Buenos AiresArgentina

Tel: +54 11 4310 0100Email: [email protected]: www.marval.com


Chapter 5

Greenwoods & Herbert Smith Freehills

Richard Hendriks

Cameron Blackwood

Australia


Australia’s tax treaties traditionally did not incorporate anti-treaty shopping rules. However, limitation of benefits articles are included in some of Australia’s more recently negotiated treaties, including its treaties with the US, Japan and Germany. Other new treaties contain specific provisions within the dividend, interest, and royalty articles. In addition, Australia’s domestic general anti-avoidance rules and the new diverted profits tax (see question 9.1 below) may apply to prevent treaty shopping.Australia’s treaty with Germany includes a simplified anti-treaty shopping rule that incorporates a BEPS-style principal purpose test.


Yes, occasionally. The Agreements Act gives treaties the force of Australian law. To the extent that a treaty provision conflicts with domestic legislation, the treaty provision takes precedence. However, specific overriding provisions found in the Agreements Act allow Australia’s general anti-avoidance rule to operate unaffected by a treaty.


A company is tax-resident in Australia if it is incorporated in Australia, or if it carries on business in Australia with central management and control in Australia or its voting power is controlled by shareholders resident in Australia. Most of Australia’s tax treaties include a tie-breaker for dual residency, usually by reference to the place of effective management, though this will be removed for some treaties pursuant to the MLI.The Tax Office has updated its guidance on the meaning of these tests in a recent ruling (TR2018/5), following 2016 Australian High Court decisions in Bywater Investments and Hua Wang Bank.

2 Transaction Taxes


Yes. Stamp duty is a documentary tax.



Australia has comprehensive income tax treaties with 45 countries, including the US, UK, most Western European countries, most East and South-East Asian countries and New Zealand. Australia has also concluded Tax Information Exchange Agreements with a number of countries, including many low-tax jurisdictions such as the Cayman Islands. It is a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), and to the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (Common Reporting Standard or CRS). Australia has entered into a “Model 1” intergovernmental agreement with the US and enacted domestic legislation to give effect to the US Foreign Account Tax Compliance Act (FATCA).


Australia’s income tax treaties generally follow the OECD model. However, the US treaty follows the US model and some differences exist in some other treaties. Australia’s treaties vary as to the allocation of rights to tax alienation of interests in land-rich entities.The US, UK, Finnish, New Zealand, Norwegian, Japanese, French, South African, Swiss and German treaties provide withholding concessions and exemptions for interest paid to unrelated financial institutions and dividends paid to holding companies and significant corporate shareholders. For details, please see questions 3.1 and 3.3.Australia’s most recently signed double tax treaty – its treaty with Germany, signed in November 2015 – largely gives effect to the OECD’s Base Erosion and Profit Shifting (BEPS) recommendations.


Treaties must be incorporated into Australia’s domestic law before they take effect. Each time a treaty is concluded, the International Tax Agreements Act 1953 (Agreements Act) is amended to give force of law to the treaty.


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Greenwoods & Herbert Smith Freehills Australia

business entities if they are 90% commonly-owned. Both the head office of a company and its branch office are treated as a single entity for Australian GST purposes, although it is possible to register a branch as a separate taxpayer for GST purposes. A foreign company (whether or not it has an Australian branch) can join an Australian GST group.


Various States impose minor licensing fees.


Yes. Australia also imposes the following indirect taxes:Excise dutyExcise duty is levied on some goods manufactured in Australia, including alcohol, tobacco and petroleum.Land taxLand tax is imposed by each State and the Australian Capital Territory on the value of commercial real estate. Agricultural land is excluded. Broadly, the liability for land tax rests with the landowner and the rates differ depending on the jurisdiction. The maximum rate is 3.7% per annum for land values in excess of A$1.231 million in South Australia.Queensland, Victoria and New South Wales have each introduced a surcharge for foreign owners of residential property at rates of up to 1.5% per annum.Customs dutyGoods imported into Australia may be subject to customs duty.Major bank leviesA UK-style levy on Authorised Deposit-taking Institutions (ADIs) with licensed entity liabilities of at least A$100 billion commenced on 1 July 2017. Currently only five Australian banks have liabilities of that magnitude. The levy rate is 0.015% per quarter.



Dividends paid by a resident company out of untaxed profits are subject to a 30% dividend withholding tax, unless the rate is reduced under an applicable treaty (generally to 15%). On the other hand, dividends paid by an Australian resident company out of post-tax profits are exempt from dividend withholding tax.Under the US, UK, Japanese, Finnish, New Zealand, Norwegian, Swiss and German treaties (each a recently concluded or renegotiated treaty), dividend withholding tax is also reduced to nil where certain beneficially entitled companies (generally, listed companies, or companies that are wholly or mainly owned by a listed company or listed companies) hold at least 80% of the voting power in the Australian company paying the dividends, and a 5% rate applies where any beneficially entitled company holds at least 10% of the voting power. The second concession also applies under the French, Chilean, South African and Turkish treaties, which are also recently renegotiated treaties. Finally, dividends will not be subject to dividend withholding tax where they are paid out of “conduit foreign income”. Conduit

Stamp duty is levied by the various Australian States and Territories. Although largely aligned, the duty regimes differ between the States and Territories.Stamp duty is levied on transfers of interests in land (including on the value of plant and equipment transferred with land), the creation of beneficial interests in land, transfers of shares and units in landholder entities, motor vehicle transfers and insurance contracts at rates of up to 7%. Victoria, New South Wales, South Australia, Tasmania and Queensland have introduced a foreign purchaser surcharge of up to 8% on foreign purchases of residential land; a similar surcharge is also proposed in Western Australia to commence on 1 January 2019.Queensland, Western Australia and the Northern Territory also levy duty on transfers of business assets such as goodwill.A nominal amount of duty also applies to some documents, e.g. trust deeds in New South Wales and Victoria.While stamp duty was historically a documentary tax, avoidance-type rules can also trigger duty if transactions are effected without documents.


Goods and services tax (GST) is imposed on supplies that are connected with Australia and on goods imported into Australia. The GST rate is 10%. GST is similar in scope and operation to the Value Added Tax systems of European Union Member States.


Supplies that are classified as “GST-free” do not attract GST. These supplies include education, health-related services, most basic types of food, exports (of goods and services), and the supply of a business as a going concern.Other supplies that do not attract GST are known as “input-taxed” supplies. These include financial supplies such as a transfer of shares in a company, residential rent and the sale of previously occupied residential premises.The distinction is important because while neither class of supply is subject to GST, input tax credits cannot be claimed for GST included in the price of acquisitions that relate to input-taxed supplies.


An entity is broadly entitled to claim input tax credits for things acquired in the course of its business, except to the extent that the acquisition relates to input-taxed supplies (for example, financial supplies such as money lending or other dealings with debt or equity interests). Input tax credits are offset against the taxpayer’s own GST liabilities so that only a net GST amount is payable. Apportionment for “mixed use” acquisitions is required. Reduced input tax credits are available for some transactions that would otherwise be input-taxed supplies (for example, transaction banking and funds transfer services, securities brokerage and trustee and custodial services).


Australian GST law allows the grouping of multiple registered


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Safe harbours are provided under de minimis exemptions and maximum allowable debt tests.De minimis exemptionsExemptions from the thin capitalisation rules apply to:■ taxpayers with interest deductions of less than A$2 million;

and■ outward investors whose Australian assets make up 90% or

more of total assets by value.Maximum allowable debt testsThin capitalisation rules will not deny any portion of an entity’s interest deductions provided that the entity’s debt is within the maximum allowable amount.Entities that are not ADIs are allowed a “safe harbour” debt-to-equity ratio of 1.5:1. The safe harbour may be exceeded if a higher level of debt could reasonably be borrowed by the entity from commercial lenders. However, this “arm’s length debt” level is judged according to strict statutory criteria (parent company support is disregarded).Investors that are not ADIs are also allowed gearing of their Australian operations at up to 100% of the overall group’s worldwide gearing.Significantly higher debt levels are afforded to financial institutions, including a 15:1 safe harbour. ADIs are allowed gearing levels referable to their regulatory prudential capital requirements.


The thin capitalisation rules apply to all debt interests, including debt advanced by related and unrelated parties, whether Australian or foreign-resident, and in the case of debt advanced by an unrelated party, whether or not it is supported by a related party.


Any interest withholding tax due on interest payments by a local company to a non-resident must be remitted to the Tax Office before the local company is entitled to a tax deduction for the interest payments.Australia’s transfer pricing rules (see question 3.9 below) also require Australian operations to have an arm’s length capital structure and can therefore also restrict interest deductions beyond the restrictions imposed by the thin capitalisation rules.


Generally, no. Income derived by non-residents from real property located in Australia is subject to tax in Australia on an income tax assessment basis. However, there are two significant exceptions. Net rental income distributed by an Australian-managed investment fund (i.e. an Australian REIT – please refer to question 8.3 below) is subject to 15% or 30% withholding tax depending on the country of residence of the investor. In addition, rent paid to a non-resident for the use of industrial, scientific or commercial equipment can

foreign income is essentially foreign income of the Australian company that is not subject to Australian tax (for example, non-portfolio dividends – please refer to question 7.2 below) and is paid on to a foreign resident as a dividend rather than accumulated in Australia. Dividends paid by an Australian company that are effectively connected with the Australian branch of a non-resident are taxed in Australia by assessment rather than by a withholding tax.


Royalties paid to a non-resident are subject to a 30% royalty withholding tax. If a treaty applies, royalty withholding tax is usually reduced to 10%. Royalty withholding tax is reduced to 5% under the US, UK, New Zealand, Finnish, South African, Japanese, Norwegian, French, Swiss and German treaties.The term “royalty” is broadly defined in Australia’s domestic legislation and includes fees paid for the use or supply of commercial property and rights. The term “royalty” is also defined in Australia’s treaties and can differ from Australia’s domestic legislation. In those cases, the treaty definition prevails.More recently negotiated treaties exclude natural resource payments and equipment royalties from royalty withholding tax. However, interest withholding tax applies to rental payments to non-residents under arrangements in which cross-border leases are structured as hire-purchase arrangements.Royalties derived by a resident of a country with which Australia has concluded a comprehensive income tax treaty, that are effectively connected with an Australian branch, are treated as business profits and are taxed in Australia on an income tax assessment rather than a withholding tax basis.


Interest paid to a non-resident is generally subject to a 10% interest withholding tax, although interest paid on debentures and other debt instruments (such as Eurobonds) offered publicly is exempt from withholding tax. If the tax applies, this rate may be reduced under an applicable treaty. Under Australia’s recently concluded and renegotiated treaties (e.g. the US, UK, French, Japanese, Finnish, New Zealand, Norwegian, South African, Swiss and German treaties), interest paid to an unrelated financial institution is also exempt from withholding tax. Interest that is effectively connected with an Australian branch of a non-resident is taxed in Australia on an income tax assessment rather than a withholding tax basis.


Australia’s thin capitalisation rules apply to foreign-controlled Australian groups (inward investors) and Australian groups that invest overseas (outward investors). The rules restrict interest deductions when the amount of debt used to finance the Australian operations exceeds specified limits (see question 3.5 below).


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Taxable income often differs from commercial accounting profit because of:■ different tax depreciation rates for plant and equipment;■ differences in the timing of recognition of income and

deductions for tax purposes compared to revenue and expenses for accounting purposes;

■ tax concessions for certain research and development expenditure;

■ recognition of some taxable capital gains not recognised for accounting purposes;

■ capitalisation of some expenses for tax purposes;■ in the case of consolidated groups (see question 4.4 below),

different calculations of the tax cost of assets; and■ elimination from taxable income of impairment, fair value

and mark-to-market type adjustments made for commercial accounting purposes.


Special grouping rules apply in respect of income tax and GST.Income tax consolidated groupAn Australian resident head company may irrevocably elect to form an income tax consolidated group. A consolidated group consists of a head company and all its wholly-owned Australian subsidiary companies, trusts and partnerships. The consolidated group is taxed as a single entity and intra-group transactions are ignored. The head company is primarily liable for the group income tax although subsidiaries may be jointly and severally liable if it fails to pay. Broadly, the tax consolidation regime allows group restructuring, pooling of losses and other tax attributes and movement of assets within the group, without tax consequences. The tax costs of a subsidiary member’s assets are set at the time of joining the group and the tax costs of shares in the subsidiary are set on leaving the group. Losses made by overseas subsidiaries cannot be brought onshore. This is the case irrespective of income tax consolidation.First-tier Australian companies in a wholly-owned multinational corporate group that has multiple entry points into Australia may irrevocably elect to form a “Multiple Entry” consolidated (MEC) group for income tax purposes.GST GroupAs a separate election, groups with 90% common ownership may be registered as a GST group. A GST group must nominate a representative member who is responsible for the GST liabilities of the whole group. Supplies and acquisitions made within the group are ignored for GST purposes.


Companies and stock-exchange-listed trusts can utilise losses following a change of majority ownership if they continue to carry on substantially the same business and do not undertake a new business or transactions of a kind not undertaken before the change. Unlisted trust losses do not survive a change of ownership.

constitute a royalty subject to the withholding tax regime (with some treaty-based exceptions as described in question 3.2 above).


Australia has transfer pricing rules that are modelled on the OECD Transfer Pricing Guidelines. The rules are contained in Australia’s domestic legislation and its tax treaties. The rules apply to “non-arm’s length” cross-border transactions. Guidance on what is considered “arm’s length” is provided by the Tax Office via a number of public rulings.The rules give the Tax Office the discretion to adjust non-arm’s length pricing of transactions to increase taxable income in Australia. Conversely, treaties can require Australia to reduce taxable income.The preferred methods applied in Australia to determine the appropriate arm’s length pricing of cross-border transactions are:■ the Comparable Uncontrolled Price method;■ the Resale Price method;■ the Cost Plus method;■ the Profit Split method; and■ the Transactional Net Margin method.To confirm that international prices are arm’s length, taxpayers can apply for an advanced pricing agreement with the Tax Office.Legislation enacted in 2012 also allows taxation of profits on an independent entity basis, having regard to OECD principles, rather than on a purely transaction-by-transaction basis.



The headline rate of company tax is currently 30%. A reduced 27.5% tax rate applies to companies with an annual turnover of up to A$50 million in the 2018–19 income year. However, legislation before the Australian Parliament will deny the lower tax rate to companies with at least 80% of their turnover comprising passive income such as dividends, interests, royalties and rent.Companies are generally required to pay tax under a “Pay As You Go” (PAYG) collection system which requires large companies (and most other large taxpaying entities) to pay monthly or quarterly instalments of estimated tax, calculated by reference to the amount of income derived during that period. Any difference in tax payable from the estimate is due, in the case of a company, five months after the year’s end.


Broadly, Australian taxpayers are taxed on their worldwide “taxable income”, typically for the year ending 30 June.Taxable income comprises “assessable income”, as defined by statute, less allowable tax deductions. The amount of assessable income and tax deductions often varies from the amount of income and expenses recognised for accounting purposes. Tax adjustments often therefore produce differences between a company’s taxable income and its reported profits.


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for the gain reductions (“CGT discounts”) available to individuals and complying superannuation funds.


Different exemptions from capital gains tax apply to non-resident and resident investors.Non-resident investorsA non-resident investor is not subject to capital gains tax on a sale of shares in an Australian company, unless the investor’s shareholding exceeds 10% of the company and the Australian company’s value is mostly attributable to Australian real property.Resident investorsAustralian resident companies are prima facie subject to Australian tax on their worldwide income. However, a capital gain or loss made by a resident company on shares in a foreign company may be reduced (in some cases to nil) under a “participation exemption”. The resident company must have held a 10% or greater direct voting interest in the foreign company for a continuous period of 12 months in the last two years. In that case, the capital gain or loss is reduced by the value of the foreign company’s active business assets as a percentage of the value of its total assets.


Relief for reinvestment is not available in Australia per se. However, the CGT provisions contain some “replacement asset” rollovers which allow deferral of tax on capital gains. They are generally targeted at restructures and takeovers. A commonly used rollover (“scrip-for-scrip” rollover) is available where the bidder acquires at least 80% of the shares in the target company and pays sellers in scrip. A reinvestment rollover is available where the ownership of a capital asset ends due to compulsory acquisition by the Government or where an asset is lost or destroyed provided it is replaced within 12 months.


Purchasers of Australian real property or interests in land-rich entities must withhold 12.5% of the purchase price if payable to a non-resident vendor. This is a non-final withholding tax, and does not apply to transactions valued at less than A$750,000 or on-market securities transactions. Non-resident vendors can provide purchasers with Tax Office clearance certificates confirming that tax need not be withheld.An Australian agent can also be required to answer for tax payable by a non-resident principal on profits derived through the agent, and the Commissioner can, by notice, require any person controlling money belonging to a non-resident to account for tax due by the non-resident.



No tax is imposed on the formation of a subsidiary. A nominal administrative charge is levied by the Australian corporate regulator


Australian tax is generally imposed on company profits, regardless of distributions. In addition, “conduit foreign income” rules allow the active foreign business income and foreign non-portfolio dividends of an Australian resident company to be passed on to foreign investors (as dividends) free of Australian tax.


Fringe benefits taxFringe benefits tax (FBT) is a tax on employers on the value of non-cash “fringe benefits”, provided to their employees. Fringe benefits typically include the use of motor vehicles, expense payments and low-interest loans. Employees are not taxed on these benefits.The FBT rate is currently 47% of the “grossed-up” value of benefits (that is, grossed-up so that the tax payable is equivalent to the tax that would be payable on an equivalent amount of salary). Petroleum resource rent taxPetroleum resource rent tax is imposed on income from the recovery of petroleum products from offshore petroleum projects and, since 1 July 2012, also from onshore petroleum projects. Various other natural resource royalties are also applied by the Federal Government and the States.Luxury car taxLuxury car tax is levied at 33% of the excess of the retail value of a new car sold in or imported into Australia over (A$66,331 (indexed) or A$75,526 (indexed), for specified fuel-efficient cars).Wine equalisation taxWine equalisation tax is levied at 29% of the wholesale value of wine for consumption in Australia.Payroll taxPayroll tax is a tax imposed by each State and Territory, on aggregate wages, salaries and other employee benefits above annual threshold amounts ranging from A$650,000 to A$2 million, at rates of up to 6.85%.

5 Capital Gains


A comprehensive set of statutory rules within the income tax legislation includes capital gains (after netting off capital losses) in assessable income.These rules also contain capital gains tax exemptions and concessions, including the ability to index cost bases until 19 September 1999 and, alternatively, reductions of taxable gains made by individuals, trusts, life insurance companies and complying superannuation funds (but not companies) on assets held for at least 12 months. The reduction does not apply to gains accrued after 8 May 2012 by foreign individuals, either directly or as trust beneficiaries. However, non-residents are only taxable on gains from real property interests (see question 5.2 below).The rate of tax imposed on capital gains made by a company is the same 30% tax rate imposed on income. Companies are not eligible


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Australian resident companies are unable to deduct costs incurred to derive income earned through an offshore branch if the income is exempt.


A “non-portfolio” dividend paid by a foreign company to an Australian resident company is not subject to Australian tax, whether received directly or through an interposed partnership or trust. A non-portfolio dividend is a dividend from a company in which one holds at least 10% of the voting power. The exemption is restricted to dividends paid on shares that are “equity” under Australian tax law. Dividends on legal form shares that are “debt” under Australian tax law, such as some redeemable preference shares, are not exempt.Other dividends received from non-resident companies are taxed in Australia, subject to a credit for any foreign tax imposed on the dividend.


Australia’s “controlled foreign company” rules attribute to Australian residents a share of income earned or gains made by foreign companies they control, even though the foreign income or gains may not be distributed.A foreign company is a “controlled foreign company” if:■ a group of five or fewer Australian entities, each individually

controlling at least 1% of the company, collectively controls at least 50% of the company shares;

■ a single Australian entity (and its associates) controls 40% or more of the company, unless it is controlled by another person or group; or

■ a group of five or fewer Australian entities (either alone or together with their associates) otherwise controls the company.

To be attributable, the taxpayer must hold at least 1% within a group of five controllers, or hold 10% itself.



Yes. Gains on the disposal of Australian commercial real estate are currently subject to tax on an income tax assessment basis. In addition, as mentioned in question 5.4 above, a non-final 12.5% withholding tax applies to the proceeds of substantial real estate sales by non-residents.


Yes, capital gains tax applies to these sales, and the 10% non-resident withholding tax mentioned in questions 5.4 and 8.1 above also applies to them.An indirect interest is an interest in a resident or non-resident entity with more than 50% of its assets comprising Australian real estate, held either directly or indirectly. However, only indirect interests of at least 10% held for 12 of the past 24 months are subject to tax. Treaty relief may also be available for residents of Germany.

(ASIC) on incorporation of a company and also applies to the registration of a branch of a foreign company.


Australia’s tax rules generally do not differentiate between conducting Australian operations through a subsidiary or a branch. Both forms of operation are subject to the same 30% corporate tax rate.However, an Australian resident subsidiary with offshore investments would prima facie pay Australian corporate tax on its worldwide income (subject to a participation exemption for the income of a foreign branch or subsidiary as mentioned in question 5.2 above and questions 7.1 and 7.2 below, and the conduit foreign income rules mentioned in question 3.1 above), whereas a branch of a non-resident company would be taxed only on its Australian-sourced income.Subsidiary company profits on which tax has been paid in Australia are able to be repatriated as dividends free of Australian dividend withholding tax, and Australia does not impose a branch profits tax.


A foreign company with an Australian branch is taxed on its Australian-sourced income that is attributable to that branch. Arm’s-length transfer pricing rules apply to allocate profits between a branch and its offshore head office or other foreign branches.


Generally yes, but Australia’s tax treaties broadly allow full taxing rights to the source country where a treaty resident company carries on business through a permanent establishment in Australia. The treaties invariably require arm’s-length principles to be applied in determining the taxable income of the branch. In these respects, Australia’s treaties broadly follow OECD treaty principles. However, the branch of a non-resident generally would not be able to take advantage of Australia’s treaties with a third country.


No withholding tax or other tax is imposed on the remittance of profits by a branch.

7 Overseas Profits


Income derived by an Australian resident company in carrying on business at or through a permanent establishment in a foreign country generally will not be subject to Australian tax. Likewise, a capital gain or loss made by an Australian resident company on an asset used in carrying on business at or through a permanent establishment in a foreign country generally will be disregarded.


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advance of the company’s tax return being submitted, although a regime is being developed by the government. However, large company tax returns are required to report any tax position that is only “as likely as not to be correct”, or which is both uncertain and disclosed in the company’s or a related party’s financial statements, e.g. pursuant to the US Fin 48 accounting rule. Taxpayers may seek a Tax Office ruling for assurance about the tax treatment of a potentially contentious transaction. Rulings are binding on the Tax Office.


Australian law prohibits an adviser or another person promoting a scheme for the dominant purpose of a tax benefit that is not reasonably arguable (a “tax exploitation” scheme), or promoting any scheme on the basis of its conformity with a Tax Office “product” ruling if the scheme actually implemented is materially different to the scheme ruled on.


The Tax Office applies a “risk-differentiation framework” to assess taxpayer compliance risk. The framework is designed to identify the likelihood of tax positions being taken that the Tax Office disagrees with. It takes into account the Tax Office’s perception of taxpayer behaviour, its approach to business (e.g. risk appetite), its governance, and its past compliance with tax laws.The assessment outcomes determine the extent of Tax Office resources to monitoring ongoing taxpayer compliance. Higher-risk taxpayers are subject to continuous review, typically including comprehensive audit and intensive risk analysis.In addition, the new DPT applies a 40% tax rate in lieu of the 30% general company tax rate, with an express intention that taxpayers conform to cross-border tax positions that the Tax Office considers acceptable and therefore avoid DPT assessments.



Australia has taken a number of initiatives directed at base erosion and profit shifting.As mentioned in question 9.1 above, legislation was enacted in December 2015 to extend Australia’s general anti-avoidance law to schemes for the avoidance of Australian permanent establishments. As also mentioned in question 9.1 above, legislation was enacted in June 2017 to introduce a DPT, and Australia has also introduced Country-by-Country Reporting requirements (discussed below) with effect from 1 January 2016.Legislation to introduce anti-hybrid rules is currently before Parliament. These rules are to be modelled on the OECD’s BEPS recommendations.Australia’s recent treaty practice has incorporated recommendations of the BEPS project and Australia’s domestic transfer pricing rules

A revenue account gain on transfer of an indirect interest in Australian real property is also subject to tax in Australia if sourced in Australia, applying common-law source-of-income rules.


Australia uses the term “managed investment trust” (MIT) to describe domestic REITs. These trusts (or their managers) are required to be regulated by Australian-managed fund laws, to be sufficiently widely held (there are varying thresholds for retail and wholesale funds) and to satisfy non-trading conditions.Distributions to non-residents of MIT rental income and capital gains are subject to a final withholding tax of 30%, or 15% if the non-resident is a resident of a country with which Australia has concluded an information exchange agreement. (To the extent that a distribution includes interest and dividends, those components are subject to interest and dividend withholding taxes.) An MIT can also make an election for gains on property to be taxed on capital account rather than revenue account.Investors in MITs with a single unitholder class or that are registered with (and therefore regulated by) the Australian Securities and Investments Commission, are taxed on amounts attributed to them, rather than distributions. Withholding tax applies to income that is attributed but retained by the fund.



Australia has a general anti-avoidance rule, contained in Part IVA of the tax legislation. It supplements other, more specific anti-avoidance rules dealing with, for example, franking credit streaming and dividend stripping.The provisions of Part IVA are extremely broad and extend to schemes entered into with the sole or dominant purpose of obtaining a tax benefit. A tax benefit is essentially a reduction of assessable income, an increase in allowable tax deductions (including tax deferral beyond what would be reasonably expected), a reduction in withholding tax or access to a tax credit. The application of Part IVA is dependent on the Commissioner’s discretion, which is generally reserved for schemes that the Commissioner considers artificial or contrived. Part IVA prevails over other provisions of the Australian tax legislation and Australia’s tax treaties. Where it is applied, the tax benefits are denied and administrative penalties are generally imposed.In December 2015, the Part IVA was extended to schemes for the avoidance of Australian permanent establishments. It applies from 1 January 2016 to groups with worldwide income in excess of A$1 billion. In May 2016, Australia introduced a UK-style, 40% diverted profits tax (DPT). This tax commenced on 1 July 2017 and also applies to groups with worldwide income in excess of A$1 billion.


Australia does not yet have a special disclosure rule imposing a requirement to disclose avoidance schemes to the Tax Office in


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Australia maintains a preferential tax regime for “offshore banking units” (OBUs). An OBU is a “unit” or notional division of (usually) a bank that conducts offshore banking activities. In broad terms the taxable profit of an OBU is effectively taxed at 10%, rather than the standard 30% company tax rate.



Yes. The expansion of Australia’s general anti-avoidance rule in 2015 (see question 9.1 above) was directed primarily at non-resident companies which carry on business but without a permanent establishment in the country. In addition, non-residents who sell digital products over the internet to Australian customers (and exceed the A$75,000 threshold) are required to register for the GST. The rules can also extend to companies which operate electronic platforms. Finally, in May 2018, the government announced that it will release a discussion paper to explore further options for taxing digital business in Australia.


Australian officials have been involved in work on this topic being undertaken by the G-20 and OECD and will likely follow the recommendations arising from that work very closely.


have been amended to incorporate changes to the OECD Transfer Pricing Guidelines. In June 2017, the Australian Government signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.


In addition to the measures discussed in questions 9.1, 9.2 and 10.1 above, the Australian Government has promoted a new tax transparency code (i.e. voluntary public disclosure of income and taxation statistics) for taxpayers with an annual turnover in excess of A$100 million.Since a May 2016 Australian Government directive, Australia’s Foreign Investment Review Board is also now actively imposing tax (e.g. capitalisation) conditions on approval of significant foreign investment into Australia.


Yes, Australia has signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports, and in December 2015 enacted legislation to introduce a CBCR regime.Multinational entities with worldwide income in excess of A$1 billion are required to comply with CBCR requirements for income years commencing on or after 1 January 2016. Statements corresponding to the Local file, Master file and Country-by-Country Reports outlined in the OECD’s BEPS recommendations are required within 12 months of year-end.


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Greenwoods & Herbert Smith Freehills is Australia’s largest specialist tax advisory firm and one of the country’s leading providers of tax services.

Greenwoods advise clients on a range of taxation issues, with specific expertise in the Real Estate, Financial Services, Projects & Infrastructure, and Energy & Resources sectors. The Corporate and M&A team regularly act on Australia’s most significant transactions and the Private Wealth team advise many of the country’s most successful private groups and emerging entrepreneurial businesses.

Unique to Greenwoods is the hands-on role taken by Directors, ensuring the highest standards of technical expertise and providing the experience necessary for creative, yet commercial, solutions.

Greenwoods is consistently recognised for its expertise:

The Legal 500, Asia Pacific | 2018

■ Tier 1 firm.

Best Lawyers, Australia | 2018

■ Best law firm for Tax in Australia.

International Tax Review – World Tax | 2018

■ Tier 1 firm.

Financial Review Client Choice Awards | 2018

■ Best Accounting Firm (revenue under A$50 million).

Doyles Guide | 2017

■ Tier 1 firm for tax law in NSW, Victoria and Western Australia.

Richard is Head of Corporate and M&A at Greenwoods. He specialises in listed-company M&A and demergers, capital management, and corporate restructures, including equity and debt raisings. Richard has in-depth knowledge of tax consolidation, executive share and option plans, and cross-border tax matters. Richard has acted in several recent key Australian M&A deals. He led the Greenwoods team advising the Westfield Corporation in relation to its acquisition by Unibail-Rodamco for A$32.7 billion, Australia’s largest M&A transaction, and is leading the Greenwoods team advising The Walt Disney Company on its acquisition of Twenty-First Century Fox.

Richard also acts for a number of large Australian private groups and high-net-worth individuals.

Richard HendriksGreenwoods & Herbert Smith FreehillsANZ Tower, 161 Castlereagh StreetSydney, NSW 2000Australia

Tel: +61 2 9225 5971Fax: +61 2 9221 6516Email: richard.hendriks@ greenwoods.com.auURL: www.greenwoods.com.au

Cameron brings more than a decade of transactional tax expertise to his role as Director in Greenwoods & Herbert Smith Freehills’ Sydney office. He specialises in advising clients on the tax complexities of mergers, acquisitions and restructures, including capital management and cross-border issues, and all aspects of employee share schemes and regularly works in close collaboration with Herbert Smith Freehills. Cameron has also been involved in undertaking tax due diligence for insurers providing warranty and indemnity insurance in M&A transactions.

Cameron has also been heavily involved in recent ATO and Treasury consultation on capital management, cross-border and employee share scheme issues.

Cameron is a member of The Tax Institute’s Large Business and International Committee and NSW Technical Committee. He holds a Bachelor of Business (Hons) and Bachelor of Laws (Hons) from the University of Technology, Sydney, and a Master of Taxation from the University of Sydney. Cameron is admitted as a solicitor in New South Wales.

Cameron BlackwoodGreenwoods & Herbert Smith FreehillsANZ Tower, 161 Castlereagh StreetSydney, NSW 2000Australia

Tel: +61 2 9225 5950 Fax: +61 2 9221 6516Email: cameron.blackwood@ greenwoods.com.auURL: www.greenwoods.com.au


Chapter 6

Schindler Attorneys

Clemens Philipp Schindler

Martina Gatterer

Austria

“lex specialis”. Technically, a provision introduced subsequently could override treaty law as “lex posterior”, but Austria has not enacted any tax treaty override legislation so far. However, Austrian tax authorities take the view that tax treaty law does not limit the application of domestic anti-abuse provisions. For example, the Annual Tax Act 2018 introduced CFC rules (see question 7.3) for permanent establishments (applicable for business years starting 1 January 2019) overriding the rules of treaties for permanent establishments.


A corporation will be deemed tax-resident in Austria if either its legal seat (place which is designated as such in its articles of association) or its place of management is situated in Austria. The place of management is defined as the centre from which the activities of the company are effectively directed from a management perspective; whereas in the past the focus was mainly on where the relevant decisions are taken (usually proven by board meeting minutes), the tax authorities now increasingly also take into account where such decisions are communicated and implemented by the management. Resident companies are subject to unlimited taxation in Austria on their worldwide income.Based on the tax treaties concluded by Austria, a company is considered to be resident in the state in which the place of its effective management is located. In practice, the domestic term “place of management” is understood in the same way as “place of effective management”.

2 Transaction Taxes


The Austrian Stamp Duty Act (Gebührengesetz – “GebG”) contains an exhaustive list of legal transactions that are subject to Austrian stamp duty provided that a signed written deed is executed and a nexus to Austria exists. Legal transactions such as, inter alia, lease agreements, assignments, suretyships and mortgages are covered by the stamp duty provisions at rates of between 0.8% and 1% of the contract value. No stamp duty is levied on share transfer agreements, furthermore on loan and credit agreements signed after 31 December 2010.Signing a written deed on a stamp-dutiable transaction in Austria will trigger stamp duty. Due to a broad interpretation of the term



Austria has an extensive network of income tax treaties, with 89 treaties currently in force (as of 1 January 2018). In addition, Austria has concluded seven tax information exchange agreements with Andorra, Gibraltar, Guernsey, Jersey, Mauritius, Monaco and St. Vincent & the Grenadines. Furthermore, the Convention on Mutual Administrative Assistance in Tax Matters is applicable.


Austrian tax treaties generally follow the OECD Model Convention, with certain minor modifications. Double taxation of dividends, interest and royalties is mostly eliminated by the credit method under Austrian tax treaties, while double taxation of other income is avoided by the exemption method. Some of the tax treaties contain tax-sparing provisions for different types of income, such as royalties and interest.


After ratification by the Austrian Federal President and the two chambers of Austrian parliament, tax treaties apply directly without further incorporation into domestic law.


Austria has no general policy to include anti-avoidance rules in tax treaties that go beyond the rules in the OECD Model Convention, but Austrian courts rely on the general anti-abuse rules (see question 9.1 for further details). On the request of the tax treaty partner, a few treaties incorporate such rules. For example, the tax treaty concluded with the United States includes a limitation-on-benefits clause.


In general, the tax treaty provisions prevail over domestic law as


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Schindler Attorneys Austria

is any person (individual or legal entity) conducting a business independently in order to realise earnings (though not necessarily profits), regardless of nationality or residence.If an entrepreneur renders both VAT-able and VAT-exempt supplies, only the input VAT attributable to the VAT-able supplies can be recovered. Input VAT deduction is only allowed if an invoice that fulfils certain formal requirements has been provided by the supplier.It should be noted that holding companies (including acquisition vehicles) are usually not entitled to claim credit for input VAT, unless they also provide VAT-able services, in which case input VAT may be claimed for the related expenses. Accordingly, holding entities often provide such VAT-able services (e.g. accounting, procurement or IT services) to other (group) entities, to recover some input VAT.


The Austrian Value Added Tax Act provides that the effects of a VAT tax group are limited to the Austrian parts of the company. Therefore, it is possible, under current legislation, to include an Austrian permanent establishment of a foreign company (but not the entire company) into an Austrian VAT tax group. Services between the foreign head office and the domestic permanent establishment are thus taxable. The Austrian tax authorities interpret the provisions in place in line with the Skandia case.


Real estate transfer tax is levied on every acquisition of domestic real estate and, in some cases, also if shares in corporations or interests in partnerships that directly own real estate are transferred. In particular, the transfer of buildings and land, building rights and buildings on third-party land falls within the scope of the Austrian real estate transfer tax, whereas the transfer of machinery and plants is not subject to real estate transfer tax.In short, the real estate transfer tax is 3.5% (reduced rates apply between specific family members and in the case of a transfer of shares in corporations or interests in partnerships or reorganisations) and it is irrelevant whether it is acquired by an Austrian or a foreign citizen or resident. In sale and purchase transactions, the tax base of the real estate transfer tax is the amount of consideration for the transfer (fair market value) – at least the value of the real estate. In the absence of a consideration (e.g. if shares are transferred), special rules determine the relevant tax base. In general, taxation is based on the fair market value of real estate property.In addition to real estate transfer tax, a registration duty for the land register at a rate of 1.1%, also based on the purchase price or the fair market value, is levied if a new owner is registered (i.e. not if shares are transferred, as the owner of the real estate does not change in such case).


Austrian Capital Duty (a 1% tax on equity contributions by the direct shareholder) has been abolished as of 1 January 2016. Due to EU legislation, such capital duty cannot be reintroduced.Austrian Insurance Tax applies on the payment of insurance premiums for several types of insurance contracts.

“signed written deed”, even if the contract is not signed in Austria, bringing a written deed originally signed outside Austria into Austria may result in the necessary nexus to Austria for a stamp-dutiable transaction. In addition, any written reference to the contract/transaction that is signed by only one of the parties to the transaction but is then handed over (sent) to another party or (in certain circumstances) to a third party, could provide sufficient evidence of the transaction to give rise to stamp duty. The term “written deed” comprises even email communication carrying an electronic or digital signature (details are disputed), which gives evidence of a stamp-dutiable transaction (e.g. mentioning of a lease or assignment agreement by a party thereto).


VAT is levied at all levels of the supply of goods and services with the right to deduct input VAT to the extent the recipient thereof qualifies as an entrepreneur. Austria’s VAT Act is based on the EU Council Directive on the common system of VAT.The standard rate is 20%. A reduced rate of 10% applies, inter alia, to food, books, newspapers and periodicals, passenger transport and renting of residential immovable property. As of 1 January 2016, a second reduced rate of 13% has been introduced (including accommodation in hotels (as of 1 May 2016), and various recreational and cultural services).


There are two types of exemption from VAT: an exemption under which credit for input VAT is not possible; and an exemption which entitles the taxpayer to credit for input VAT.The first type of exemption includes banking, finance and insurance-related transactions, the disposal of shares, the leasing or letting of immovable property for commercial purposes, the supply of land and buildings, health and welfare services, and supplies by charitable organisations. For most of these transactions, there is an option for standard VAT treatment (i.e. VAT has to be charged, but with the benefit that credit for input VAT may be claimed). For the rental of land and buildings for commercial purposes, the option to charge VAT is only applicable if the tenant uses the object to render services that are subject to VAT.The second type of exemption includes exports, intra-community supplies, the supply of services consisting of work on movable property acquired or imported for the purpose of undergoing such work, and the supply of services when these are directly linked to the transit or the export of goods.The supply of services and the delivery of goods of an entrepreneur, who operates his business domestically and whose turnover does not exceed an amount of EUR 30,000 p.a. (regime for small entrepreneurs – Kleinunternehmerregelung), are exempt from VAT without credit for input VAT.


A deduction or refund for input VAT is available to both resident and non-resident entrepreneurs, if the respective supplies are used to render supplies that are not VAT-exempt under the first type (without the entitlement to claim credit for input VAT), with financial institutions being the most relevant example. An entrepreneur


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capitalisation, as a matter of administrative practice and case law, loans provided by related parties to an Austrian company may be considered “hidden” equity and thus not be treated as debt if the Austrian corporation is too thinly capitalised (taking into account debt provided by unrelated parties). In such case, interest payments are reclassified as dividends for Austrian tax purposes, and accordingly are not deductible and are subject to withholding tax. However, an interest barrier rule is foreseen under the Anti-BEPS Directive (national implementation is expected closer to the implementation deadline).


While there is no official “safe harbour” rule, the Austrian tax authorities generally accept debt-to-equity ratios of around 4:1 to 3:1. However, this can only serve as guidance and the adequate debt-to-equity ratio has to be analysed on a case-by-case basis. Having said that, higher debt-to-equity ratios have also been accepted.


No. However, debt provided by unrelated parties is to be taken into account when determining the debt-to-equity ratio.


No, there are no other restrictions on tax-deductibility of interest paid to third (i.e. unrelated) parties. In cases of interest payments to related parties, limitations apply to avoid base erosion if the interest income is not sufficiently taxed abroad (see question 10.1).Although not limited to cross-border payments in other jurisdictions, one should note that Austria, as of today, has no interest barrier rule. Accordingly, interest payments made to third (i.e. unrelated) parties are always tax-deductible. However, as a result of the OECD BEPS project, it is worth noting that the Anti-BEPS Directive provides for such interest barrier rule to be implemented by the EU Member States before and applied as of 1 January 2019. The Austrian tax administration is of the opinion that the existing provisions in connection with interest payments to related parties are sufficient as national implementation.


Such payments would not be subject to withholding tax, but the rental payments that relate to domestic real estate would be subject to limited taxation and the non-residents would be obliged to file a tax return for the rental payments.


Austria has generally adopted the OECD Transfer Pricing Guidelines. The Austrian Ministry of Finance has issued transfer pricing guidelines as well, which are based on the OECD Guidelines.Therefore, transactions between related corporations, as well as profit attributions to permanent establishments, must be at arm’s length. There is also an obligation to prepare documentation for transfer prices in inter-group transactions.



Dividends paid to a non-resident are subject to a withholding tax of 27.5%.A reduction or relief from withholding tax might be available based on a tax treaty or the EU Parent-Subsidiary Directive. According to the Austrian rules implementing the EU Parent-Subsidiary Directive, there is no withholding tax on dividends if (i) the parent company has a form listed in the EU Parent-Subsidiary Directive, (ii) the parent company owns (directly or indirectly) at least 10% of the capital in the subsidiary, and (iii) the shareholding has been held continuously for at least one year.Provided that certain documentation requirements (including a tax residence confirmation for the foreign recipient, which needs to be issued by the foreign tax authorities on a special tax form) are met, a reduction or relief can be granted at source. No relief at source is granted in cases of potential tax avoidance, e.g. in case of holding companies with little or no substance in the state of residence (i.e. if the recipient is a company that does not have an active trade or business, employees and business premises). If no reduction or relief was granted at source, companies can apply for a refund. In the course of the refund procedure, the company has to provide evidence that the interposition of the foreign company does not constitute an abusive arrangement. If such refund procedure was successful, a simplified procedure is applied in the following three years.As a further option, a refund of withholding tax on dividends can also be claimed by a foreign corporation resident in the EU to the extent that the Austrian company is not relieved from its withholding obligation, so long as the tax withheld is not creditable in the recipient’s home state under a double taxation treaty.


Royalties paid to a non-resident are subject to a withholding tax of 20%.A reduction or relief from withholding tax might be available based on a tax treaty or the EU Interest and Royalties Directive. According to the Austrian rules implementing the EU Interest and Royalties Directive, there is no withholding tax on royalties if (i) the parent company has a form listed in the EU Interest and Royalties Directive, (ii) the parent company owns directly at least 25% of the capital in the subsidiary, and (iii) the capital holding has been held continuously for at least one year.The procedures for the application of reduction or relief, as well as for refund, are the same as for dividends.


Interest paid to non-resident corporations is generally not subject to withholding tax.


Despite the fact that there are no Austrian statutory rules on thin


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parent to the extent of the direct participation of the lowest resident group member in the non-resident group member (profits are not attributed at all). Losses attributed to the Austrian parent company in the past have to be recaptured in Austria if the non-resident group member offsets the losses with its own income in subsequent years (or fails to do so despite being entitled to) or if the non-resident group member exits the Austrian tax group. The foreign losses have to be calculated on the basis of Austrian tax law, but they can only be offset to the extent a loss also exists according to foreign tax law. Special rules for the recovery of losses apply in case of the liquidation of a non-resident group member. Additionally, foreign losses shall be deductible only to the extent of 75% of the total profit generated by all domestic group members and the parent company.In general, write-offs on participations in group members are not tax-deductible (the rationale is that losses can be offset from other profits anyway). For shares acquired in an Austrian target that became a group member, a goodwill amortisation over a period of 15 years (capped at 50% of the purchase price) was applied, leading to an additional tax deduction. For shares acquired after 28 February 2014, this option is no longer available. Goodwill amortisations from transactions before that date can be continued, if the goodwill amortisation influenced the purchase price of the shares. In this context, it should also be noted that the restriction of this goodwill amortisation to domestic targets violated EC law, according to case law.


The tax loss carry-forwards of a corporation are, in general, not affected by a change of ownership. However, there are two exemptions.Loss carry-forwards can expire if the “economic identity” of the company is no longer given in connection with an acquisition of the shares for consideration (Mantelkauf). The law specifies that the “economic identity” is lost if there is a significant change of the shareholder structure, the organisational structure and the business structure of the company. Generally, all three criteria have to be met cumulatively in order to apply, taking into account not only the time of the acquisition, but also the following months (up to approximately one year).Furthermore, loss carry-forwards can expire in a reorganisation if the business unit that caused the losses does not exist anymore or is reduced in such a way that it cannot be considered comparable to the business unit in which the losses occurred.


No. Both retained and distributed profits are taxed at the same rate at the level of the corporation (i.e. only corporate income tax), but additional taxes may apply at the shareholder level when the profits are then distributed. By comparison, in the case of a partnership, the profits are immediately taxed at the progressive income tax rate if the partner is an individual or at the rate of 25% corporate income tax if the partner is a corporation, irrespective of whether or not they are distributed, so that no further tax is triggered upon distribution to the partners.


An annual real estate tax on all domestic immovable properties is

Under Austrian procedural law, a formalised advance ruling procedure can be filed to determine the applicable transfer prices.Furthermore, there are provisions about documentation obligations (as mentioned below at question 10.3).



Generally, Austrian corporations are subject to the corporate income tax levied over their profits, at a rate of 25%.There is an annual minimum corporate income tax (i.e. which applies irrespective of the actual income and thus also in a loss situation) of EUR 500 p.a. for a limited liability company in the first five years after incorporation and EUR 1,000 p.a. during the next five years. Thereafter, the minimum corporate income tax is raised to EUR 1,750 p.a. The minimum corporate income tax for a stock corporation amounts to EUR 3,500 p.a.


Companies are obliged to keep books according to the commercial law rules; the accounting profits based on Austrian generally accepted accounting principles (“GAAP”) then serve as the basis for determining the tax base. The accounting profits are then adjusted for certain positions as per the section below.


The main adjustments include:■ tax-exempt income (e.g. income from dividends and capital

gains subject to the participation exemption);■ non-deductible expenses (e.g. profit distributions, certain

expenses in relation to company cars, certain representation expenses, directors’ fees exceeding EUR 500,000, expenses in connection with tax-free income, interest or royalties paid to related parties in low-tax jurisdictions); and

■ differences in the calculation of provisions, in depreciation rates and regarding valuation (impairment) rules for other assets and liabilities.


According to the Austrian group taxation regime, a group parent company can form a tax group with a subsidiary if the parent company exercises financial control over the subsidiary (i.e. the parent owns more than 50% of the capital and voting power in the subsidiary).Eligible group members include both resident companies and non-resident companies; in case of the latter, however, this is only if they are resident in an EU Member State or in a third state with which Austria has concluded a comprehensive administrative assistance agreement regarding the exchange of information.With regard to Austrian group members, 100% of the profit/loss of the company is attributed to and taxed at the level of the parent company (i.e. irrespective of the participation held), while losses of non-resident group members are only attributed to the group


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further differences between the taxation of a local subsidiary and a local branch of a non/resident company. In particular, there is no branch profit tax in Austria.Transactions between the subsidiary and the foreign parent have to comply with the “arm’s length” principle. On the other hand, a permanent establishment cannot conclude contracts with the head office, as both are considered to be one legal entity. Therefore, it can be more burdensome in practice to determine and allocate an appropriate profit to the permanent establishment, as compared to a subsidiary.


For the calculation of the taxable profit, a permanent establishment will be treated as a notional “independent enterprise”. A functional analysis has to be conducted, which is based on “significant people functions”. Functions, risks and assets, as well as an appropriate amount of capital, have to be allocated to the permanent establishment to determine the arm’s length profit of the permanent establishment. Besides a transfer pricing concept, there is also a requirement to have separate tax accounts for the permanent establishment (while, according to the prevailing view in legal writing, there is generally no such obligation under commercial law).


The branch as such would not be entitled to tax treaty benefits, as it is not a legal person. Only the head office would be able to claim treaty protection. However, the branch can, in fact, in many cases benefit from treaty relief as a consequence of the anti-discrimination clauses contained in most Austrian tax treaties or on the basis of EC law.


There is no such taxation in Austria.

7 Overseas Profits


Austrian companies are taxed on their worldwide income, including income from overseas branches. In most cases, such income will be exempt in Austria based on an applicable double tax treaty (only very few Austrian treaties foresee the credit method for business profits). If there is no treaty in place with the respective country, relief from double taxation is granted via unilateral measures under certain circumstances.


Currently, Austrian legislation grants a participation exemption for the dividends received from a domestic corporation. An exemption also applies to dividends received from a foreign corporation, as

levied at a basic federal rate, multiplied by a municipal coefficient on assessed value of real estate for tax purposes (Einheitswert). The basic federal rate is usually 0.2% and the municipal coefficient ranges up to 500%.

5 Capital Gains


Capital gains and losses derived from the sale or other disposal of business property are taxed as ordinary business income of a company at normal rates (in the case of individuals, reduced rates apply to certain capital gains).


Capital gains derived from the sale of shares in a foreign corporation may be exempt under the International Participation Exemption (see question 7.2). By comparison, there is no exemption for capital gains derived from the sale of shares in a domestic corporation.


No, there is no rollover relief available for companies in relation to capital gains. It should, however, be noted that the regime applicable to Austrian private foundations, which often are the shareholders of Austrian companies, provides for such relief if the private foundation reinvests within a period of 12 months.


There is a withholding tax of 27.5% on proceeds from shares sold over a securities account at an Austrian credit institution. This does not apply to the sale of limited liability companies.For the sale of Austrian real estate, a withholding tax of 30% is levied.



On 1 January 2016, the former capital duty of 1% levied on equity contributions was abolished, therefore no taxes are due upon formation.


A branch will be taxed as a permanent establishment of the foreign head office, while a subsidiary is a separate taxable entity. The profits (subject to corporate income tax) of a permanent establishment can be remitted to the head office without any tax consequences. In contrast, the taxed profits of a subsidiary have to be distributed as a dividend (subject to withholding tax). Besides that, there are no


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Currently, there are no statutory CFC rules in Austria. However, the Annual Tax Act 2018 implemented the standards set by the EC Anti-Tax Avoidance Directive and introduced CFC rules for “controlled foreign companies” and permanent establishments. According to these new provisions specific non-distributed passive income (e.g. interest payments, royalty payments, taxable dividend payments and income from the sale of shares, financial leasing income, and activities of insurances and banks) of a controlled foreign subsidiary is included in the corporate tax base of the Austrian parent company by applying the CFC rule. The preconditions for such attribution of income of the foreign company are that the subsidiary: (i) is directly or indirectly controlled (50% of voting rights or capital or rights to profit); (ii) is situated in a low-tax country (meaning that the effective corporate tax paid by the subsidiary is lower than 12.5% considering the foreign income calculated based on Austrian tax law and the factual paid foreign tax); and (iii) does not carry out any significant economic activity in terms of personnel, equipment, assets and premises. Low-taxed passive income shall only be attributed to the Austrian parent company if it amounts to more than one third of the income of the foreign company. To avoid any potential double taxation triggered by the CFC rules a tax credit for actually paid foreign taxes and a reduction of taxable capital gains by the amount of profits (forming part of such capital gain) which have already been subject to the Austrian tax pursuant to the CFC rules are provided.The new CFC rules apply for business years starting 1 January 2019.



A non-resident company is taxed on the disposal of real estate located in Austria at a corporate income tax rate of 25%. A non-resident individual is taxed on the disposal of real estate located in Austria at a special tax rate of 30%.


The transfer of an indirect interest in real estate does not trigger (corporate) income tax, but could trigger transfer tax. However, real estate transfer tax is triggered if 95% of the shares of a company that directly holds Austrian real estate are consolidated in the hands of one shareholder (Anteilsvereinigung) or a group of shareholders within the meaning of the Austrian group taxation regime. Furthermore, if within a period of five years 95% or more of the partnership interests of a partnership that directly holds real estate are transferred, this triggers real estate transfer tax (under the scope of this rule, this can include several transactions with different purchasers). In each case, the real estate transfer tax amounts to 0.5% of the fair market value of the real estate. Shares held by trustees are to be attributed to the trustor for the purposes of calculating the 95% threshold. If Austrian real estate is transferred in the course of a reorganisation (Umgründung) under the Umgründungssteuergesetz (UmgrStG), the real estate transfer tax will likewise be 0.5% of the fair market value of the real estate.

well as to capital gains thereof, which are also exempt from taxation (unless the parent company opts for taxation) if the following conditions are fulfilled:■ the participation amounts to at least 10%;■ the participation is held uninterruptedly for at least one year;■ the foreign corporation is comparable to an Austrian

corporation (or an entity enumerated in the Annex to the EU Parent-Subsidiary Directive, in which case this is met in almost all cases); and

■ the anti-abuse provision is not applicable.Under the anti-abuse provision, the International Participation Exemption regime will not be applicable if there are reasons to suspect tax avoidance or tax abuse. Subsequently, the “switch-over” clause will be applicable, i.e. the income is fully taxable with a tax credit for the foreign corporate tax paid by the subsidiary.Tax avoidance or tax abuse is presumed by law if the following two conditions are cumulatively fulfilled:■ the foreign subsidiary generates predominantly interest

income, income from the letting of moveable tangible or intangible assets (e.g. rental income and royalties) and/or income from the sale of participations (sources of income referred to as “passive income”); and

■ the income of the foreign subsidiary is not subject to a tax that is comparable to the Austrian corporate income tax (due to either a lower applicable tax rate or a reduced tax base (“low taxation”)). If the effective tax rate is 15% or lower, low taxation is deemed to occur.

Furthermore, portfolio dividends (i.e. dividends from a participation under 10%; no minimum percentage or holding period is required) received from either a foreign corporation listed in the Annex to the EU Parent-Subsidiary Directive, or from a foreign corporation, which is comparable to an Austrian corporation, either resident in an EU Member State or resident in a jurisdiction which has a broad exchange of information clause in its double tax treaty with Austria, will be exempt from Austrian income tax as well. It should be noted that this exemption only applies to dividends, thus capital gains from a participation under 10% are always taxable.The above-mentioned portfolio dividends exemption is denied if the distributing corporation is “low-taxed” (i.e. if the effective rate of corporate income tax paid is below 15%) or if it benefits from substantial tax exemptions. There is no requirement that the foreign corporation earn (active) business rather than passive income, as is the case for the International Participation Exemption. Where income is low-taxed, a “switch-over” clause will be triggered.The participation exemption will not apply if the dividend distributed to the Austrian company is tax-deductible by the foreign corporation in its home jurisdiction. This is now also the standard under the EU Parent-Subsidiary Directive.As per the Annual Tax Act 2018, the current switchover mechanism for portfolio participations has been adapted and applies to low-taxed passive income of qualified international participations and qualified portfolio investments of at least 5%. Following this, the switchover to the credit-method will be triggered if (i) the foreign subsidiary predominantly achieves low-taxed passive income, and if (ii) the CFC legislation (see question 7.3) is not applicable. The amended switchover mechanism for portfolio participations applies for business years starting 1 January 2019.It is worth noting that interest expenses directly related to the debt financing of the acquisition of a participation are deductible even if the income is exempt under the participation exemption, if applicable.


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form” principle applies. This is the case if a person is in a position to exercise those rights which are distinctive for ownership such as the use, consumption, amendment, pledge and sale of the assets, and if such person is simultaneously entitled to exclude any third party on a permanent basis from having an impact on the assets.


No, currently there is no specific disclosure requirement for avoidance schemes. However, the EU Directive of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements provides for a reporting obligation in connection with international tax planning models and has to be implemented by the EU Member States until 31 December 2019. The Directive already provides for a reporting obligation for those tax planning models whose first implementation step took place after 25 June 2018. It is therefore to be expected that tax planning models already initiated in 2018 will also be affected by the obligation to notify.


No, there are no special rules with regard to anyone who promotes, enables or facilitates tax avoidance. However, tax evasion (Abgabenhinterziehung) and tax fraud (Abgabenbetrug) are subject to criminal prosecution pursuant to the Austrian Fiscal Criminal Act (Finanzstrafgesetz). In the course of such criminal proceedings, persons who assist tax evasion and tax fraud are also subject to penalties.


No, Austria does not encourage “co-operative compliance” and, therefore, there are no procedural benefits or reduction of tax provided.



As a reaction to the BEPS project, a new provision was introduced by the Austrian Tax Amendment Act 2014, stating that interest expenses or royalties are no longer deductible from the tax base of an Austrian corporation in the case that, cumulatively:■ the interests or royalties are paid to an Austrian company or a

foreign company that is comparable to an Austrian company;■ the interests or royalties are paid to a company which is

directly or indirectly part of the same group of companies or is influenced directly or indirectly by the same shareholder; and

■ the interest or royalty payments in the state of residence of the receiving company are: (i) not subject to tax because of


A REIT that is established based on the Austrian Real Estate Investment Fund Act is subject to a special tax regime. Such special tax regime may also be applicable to REITs established under foreign law (Sec 42 of the Austrian Real Estate Investment Fund Act). The REIT itself is not treated as a taxable entity. Rather, it is treated as a transparent entity where the income earned is attributed to the unit owner, regardless of whether it is distributed or not (comparable to a partnership). Besides income from the renting of property, interest on liquid reserves and profit distributions from Austrian real estate companies, the profit of an Austrian REIT also includes valuation gains from the annual revaluation of the real estate properties of the funds, regardless of whether they are realised or not. Profits from a REIT or from the sale of the REIT certificates are generally subject to withholding tax at a rate of 27.5% as of 1 January 2016. Please note that several major Austrian real estate companies are not established as fund-type vehicles based on the Austrian Real Estate Investment Fund Act, but rather as non-transparent corporations subject to the ordinary tax regime.



Sec 22 of the Austrian Federal Fiscal Code (Bundesabgabenordnung – “BAO”) provides that tax liability cannot be avoided by an abuse of legal forms or methods offered by civil law (“abuse of law”). This is assumed in cases where transactions are entered into, or entities are established, solely for the purpose of obtaining special tax advantages. If such an abuse has been established, the tax authorities may compute the tax as if such abuse had not occurred. Generally, tax abuse is only assumed in a multi-step situation (i.e. the taxpayer takes more than one step to avoid or reduce the tax). Furthermore, if a taxpayer can demonstrate substantial business reasons for a structure chosen, tax abuse may be rebutted. The Annual Tax Act 2018 introduced a legal definition of “misuse/abuse” in Sec 22 BAO based on EC Anti-Tax Avoidance Directive. Following this, abuse shall exist “when a legal arrangement, which may include one or more steps, or a sequence of legal arrangements, is inappropriate in terms of economic purpose. Inappropriate are those arrangements that, disregarding the associated tax savings, no longer make sense, because the essential purpose or one of the essential purposes is to obtain a tax advantage, which is contrary to the aim or purpose of the applicable tax law. There is no abuse, if there are valid economic reasons that reflect the economic reality”.The new definition of “misuse/abuse” applies to circumstances that will be implemented after 1 January 2019.Additionally, Sec 23 BAO provides that an act or transaction not seriously intended by the parties (“sham transaction”) but performed only to cover up facts that are relevant for tax purposes will be disregarded, and that taxation will be based on the facts the taxpayer sought to conceal.Furthermore, Sec 24 BAO provides specific provisions in connection with the attribution of business assets, in particular with regard to security ownership, trusteeship, beneficial ownership and joint ownership. This provision says that in general, assets are to be attributed to their beneficial owner. Here the “substance over


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The Austrian legislator adopted the Transfer Pricing Documentation Act, which includes documentation and reporting obligations for a multinational group of companies (CBCR). These obligations essentially apply for business years starting from 1 January 2016.


No, there is no preferential tax regime such as a patent box. In this context, however, it should be noted that there are various tax incentives for research and development activities.



No, currently there are no defined plans to tax digital activities or to expand the tax base to capture digital presence. However, in the course of the current Austrian EU Council Presidency taxation of digital activities is one of the agenda items.


Yes, Austria’s government supports the European Commission’s interim proposal for a digital services tax.


a personal or objective exemption; (ii) subject to tax at a rate lower than 10%; or (iii) subject to an effective tax at a rate lower than 10% due to any available tax reduction.

It is not relevant whether the tax at a rate lower than 10% is based on the domestic law of the state of residence of the receiving company or the applicable double taxation treaty concluded between Austria and the respective state of residence.If the receiving entity is not the beneficial owner, the respective conditions have to be investigated at the level of the beneficial owner (e.g. in certain back-to-back refinancing scenarios).The new regulation is effective to all payments carried out since 28 February 2014, irrespective of when the corresponding contract was concluded. The Austrian government is of the opinion that the existing provisions in connection with interest payments to related parties is sufficient as national implementation of the EC Anti-Tax Avoidance Directive.Furthermore, hybrid structures have been substantially limited: the participation exemption will not apply if the dividend distributed to the Austrian company is tax-deductible by the foreign corporation in its home jurisdiction. This is now also the standard under the EU Parent-Subsidiary Directive.


No, currently there are no legislative plans which go beyond what is recommended in the OECD’s BEPS reports besides the new regulations implemented by the Annual Tax Act 2018 (see questions 7.2, 7.3 and 9.1).


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Schindler Attorneys is a leading Austrian law firm for structuring and transactional work, with a particular focus on private equity and extensive experience in the fields of corporate, employment, finance, real estate, tax and securities law. Based on our international expertise, we are continually involved in cross-border matters and coordinate multi-jurisdictional teams. Due to our particularly close connections to Central, Eastern and South Eastern Europe and Brazil, we maintain a dedicated desk for these regions. In addition, our firm has a private client team that advises high-net-worth individuals, trusts and foundations, family offices and private banks.

Having one of the most international and accomplished tax practices among Austrian law firms enables Schindler Attorneys to provide high-end integrated legal and tax advice over the whole course and on all aspects of a project – not only on a national but also on an international level. Our tax practice focuses on transactional work, intra-group reorganisations as well as international tax structuring. In addition, we offer a broad range of tax services including fiscal criminal law and tax litigation, but also special issues such as taxation of financial products or real estate, VAT and sophisticated transfer tax matters. Our tax team also regularly works on private client matters.

Clemens Philipp Schindler is a Founding Partner of Schindler Attorneys. Before establishing the firm, Clemens spent six years as a Partner at Wolf Theiss, where he led some of the firm’s most prestigious transactions and headed its Brazil operations. Prior to that, he practised with Haarmann Hemmelrath in Munich and Vienna, as well as with Wachtell, Lipton, Rosen & Katz in New York.

In his work, Clemens focuses on corporate and tax advice in relation to public and private mergers and acquisitions, private equity and corporate reorganisations (such as mergers, spin-offs and migrations), most of which have a cross-border element. Furthermore, he specialises in international holding structures, including charter financing and leasing operations, as well as private client work.

In addition to law degrees from the University of Vienna (Dr. iur.) and the New York University School of Law (NYU Law) (LL.M.), Clemens holds degrees in business administration from the Vienna University of Economics and Business Administration (Dr. rer. soc. oec.). He is admitted in Austria both as an attorney-at-law and as a certified public tax advisor.

Mr. Schindler is ranked by international legal directories such as Chambers Global, Chambers Europe, The Legal 500, IFLR1000, Best Lawyers and Who’s Who Legal. The German legal directory JUVE lists him as one of Austria’s top 20 corporate and M&A lawyers, whereas the Austrian business magazine TREND named him among Austria’s top 10 lawyers in both the corporate as well as the tax section. Besides their Austrian listings, Chambers Global and Chambers Europe acknowledge his Brazilian expertise in a special ranking on outstanding expertise in foreign jurisdictions.

Clemens Philipp SchindlerSchindler AttorneysKohlmarkt 8–101010 ViennaAustria

Tel: +43 1 512 2613Email: clemens.schindler@ schindlerattorneys.comURL: www.schindlerattorneys.com

Martina Gatterer is a Senior Associate at Schindler Attorneys and focuses on the areas of individual and corporate tax law, reorganisation tax law and accounting law, where she advises corporations as well as private clients. Before joining Schindler Attorneys, Martina worked for Wolf Theiss and Schönherr and started her career at Deloitte & Touche. Martina holds a law degree from the University of Vienna and is admitted in Austria as an attorney-at-law.

Martina GattererSchindler AttorneysKohlmarkt 8–101010 ViennaAustria

Tel: +43 1 512 2613Email: martina.gatterer@ schindlerattorneys.comURL: www.schindlerattorneys.com


Chapter 7

Utumi Advogados Ana Claudia Akie Utumi

Brazil

(in which the representative in Brazil has authority to commit on behalf of the foreign entity) are considered tax residents in Brazil.

2 Transaction Taxes


There are no stamp or similar taxes in Brazil.


Yes. VAT corresponds to five different taxes in Brazil:■ Two Social Contributions on Gross Revenue – PIS and

COFINS, whose rates are generally 1.65% and 9.25%. The import of goods is subject to PIS/COFINS, while export revenues are exempt.

■ Federal Excise Tax on Manufactured Goods – IPI, whose rates vary from zero to 300%, depending on the type of product. Most products are subject to IPI rates varying from zero to 30%, while beverage and tobacco are subject to higher rates. IPI rates may be reduced or increased by the President. In case of increase, a 90-day waiting period applies. Import of manufactured goods is subject to IPI, while export is exempt.

■ State Value-Added-Tax – ICMS, levied on: (a) sale of goods; (b) interstate or intermunicipal transportation services; and (c) communication services. ICMS rates rates depend on the type of product or service, origin and destination. In most States, ICMS on goods is generally charged at 17% or 18%, on transportation services at 12% and on communication services at 25%. The import of goods is subject to ICMS, while export is exempt.

■ Municipal Services Tax – ISS is levied on all services not covered by ICMS and is included in the List of Services established by the law. In most cases, ISS is due to the municipality where the services provider is located, but there are some services in which the ISS is charged by the municipality where the provider performs the corresponding services. The rates vary from 2% to 5% depending on the city and the type of services. Importation of services is subject to this tax, and export of services is exempt if such services are actually performed outside Brazil.


In addition to the exemption applicable on exports:



There are 33 tax treaties in force in Brazil.


Generally, Brazil follows the OECD Model Convention, with few adjustments.


Yes. It is mandatory for treaties to be approved by the Brazilian Congress, who issue a Congressional Decree. After this approval, the President is allowed to ratify the treaty and, unless the treaty says otherwise, upon ratification the treaty enters into force in Brazil. After ratifying, the President issues a Presidential Decree to give notice about the ratification and the date that the treaty entered into force.


Most of the tax treaties in force do not contemplate limitation on benefits (“LOB”) articles, but solely beneficial owner clauses.


No, tax treaties prevail over existing and subsequently introduced domestic law.


There are no clear rules in domestic law on permanent establishment. Based on Brazilian income tax law, residence of a company is determined by its place of incorporation. For purposes of corporate taxes, branches of foreign entities and commissionaire arrangements


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Utumi Advogados Brazil

Brazilian companies may opt to distribute interest on equity, which is a deemed interest calculated on certain net equity accounts by using a long-term interest rate (“TJLP”). Interest on equity is deductible for Corporate Income Tax (“IRPJ”) and Social Contribution on Profits (“CSLL”) purposes, up to 50% of taxable profits before computing such deduction, and it is subject to WHT at 15% (25% if the beneficiary is resident in a tax haven jurisdiction). Interest on equity may result in actual reduction of tax burden to the extent that IRPJ/CSLL are levied at a combined rate of 34% (45% in case of financial institutions and insurance companies – this is expected to drop to 40% as of 2019).


Yes. Royalties paid to a non-resident are subject to the following taxation:(a) WHT, levied at 15%; (b) withholding service tax if these royalties are viewed as

services (trademark licensing is considered service rendering in Brazil), at rates that may vary between 2% and 5%, depending on the municipality and type of service;

(c) social contributions on importation of services (“PIS/COFINS”) if these royalties are viewed as services, levied on the local company at a combined rate of 9.25%;

(d) Special Tax on Royalties and Services (“CIDE/Royalties”), levied on the local company at 10%; and

(e) IOF/FX, levied on the local company upon remittance of royalties, at 0.38%. IOF/FX may be changed at any time by the President.


Yes. Interest is subject to 15% WHT (25% if the beneficiary is resident in a tax haven jurisdiction).


Yes. Brazilian thin capitalisation rules establish a limit of a 2:1 debt/equity ratio, considering all intercompany debts. If the lender is resident in a tax haven jurisdiction or subject to a favourable tax regime, the applicable ratio is reduced to 0.30:1.


No, there is no tax relief.


Yes. Thin capitalisation rules apply to third-party debts in which any related party is guarantor, except in case of local debt transactions.


Yes, in addition to thin capitalisation rules, financial transfer pricing applies. Based on these rules, interest rate is limited to LIBOR for

■ Sale of fixed assets is exempt from PIS/COFINS.■ Most food products are subject to a zero IPI rate.


PIS/COFINS: If the company is subject to the so-called “non-cumulative regime”, this company may take PIS/COFINS credits based on amounts paid to suppliers and other providers, observing specific and detailed rules on how to accrue and use these credits. IPI: Industrial companies and those that are equivalent to industrial companies by IPI law can take credits on IPI paid on industrial inputs (raw materials, intermediary materials and packing materials).ICMS: Industrial and commercial companies may take credit of ICMS paid to suppliers of industrial or commercial inputs and fixed assets (credit acknowledged within four years, at 1/48 per month).


There is no VAT grouping in Brazil.


Yes. Transaction taxes that are levied in Brazil are the following:(a) Tax on Credit Transactions (“IOF/Credit”), levied on loans

granted by Brazilian companies.(b) Tax on Foreign Exchange Transactions (“IOF/FX”), levied

on all inflows and outflows of funds.(c) Tax on Insurance Transactions (“IOF/Insurance”), levied on

premium paid in insurance policies.(d) Tax on Bonds and Securities Transactions (“IOF/Securities”),

levied on purchase or sale of bonds and securities. (e) Municipal Tax on Real Estate Transfer (“ITBI”).IOF taxes may have their rates changed at any time by the President.


Other indirect taxes may apply depending on the business or type of product. For example, in telecommunication businesses, there are two other taxes – Fust and Funttel – whose revenues should be used to develop universalisation of communication and telecommunication technologies. Another example is the Special Contribution on Fuels (“CIDE/Combustíveis”) or Special Contribution on Filming Productions (“CONDECINE”).



For the time being, distribution of profits is exempt from withholding income tax (“WHT”). There are discussions in the Brazilian Congress to reduce corporate taxation and reinstate WHT on dividends. Any changes in income tax law may only be applicable to the following calendar year.


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requirements: (a) not resident in a tax haven jurisdiction; (b) not subject to a favourable tax regime; (c) not subject to sub-taxation regime; and (d) income arising from an active business equivalent to more than 80% of the total income. It is possible to consolidate the results of foreign subsidiaries that comply with the requirements above and calculate corporate income taxes on the consolidated result. Losses accrued by foreign subsidiaries are not deductible for corporate income taxes purposes, but they may be offset against profits obtained by the same entity in the subsequent four years. After this period, losses must be cancelled.


Generally, yes. Brazilian tax law determines that tax losses accrued locally must be written off if, between the date of accrual and date of offsetting, there is, cumulatively: (a) change of the field of business; and (b) change of control. So, if there is change of ownership without change of field of business, tax losses survive.


No, it is not.


In addition to VAT taxes and corporate taxes on profits, companies are subject to Social Contribution on Payroll (“INSS”), Tax on Real Estate Property Ownership (“IPTU”), Tax on Ownership of Motor Vehicles (“IPVA”), Tax on Rural Land Ownership (“ITR”), CIDE/Royalties, etc. Other taxes may apply depending on the type of business.

5 Capital Gains


Yes. Non-residents are subject to income tax on capital gains, to be withheld by the buyer. WHT on capital gains is levied at rates varying from 15% to 22.5%, depending on the amount of gains, or 25% in case of beneficiary residing in a tax haven jurisdiction. The rates apply as follows:

Amount of Gains RateUp to BRL 5MM 15.0%From BRL 5MM to 10MM 17.5%From BRL 10MM to 30MM 20.0%More than BRL 30MM 22.5%

Losses accrued by non-residents cannot be offset against future or past capital gains.


No, there is not.

a six-month deposit in USD, plus spread of 3.5%, except in case of prefixed transactions in USD (instead of LIBOR, average interest rate of Brazilian sovereign bonds issued in USD abroad applies) or prefixed transactions in BRL (average interest rate of Brazilian sovereign bonds issued in BRL abroad applies).


Yes, the applicable WHT is 15% (25% if the beneficiary resides in a tax haven jurisdiction).


Yes, even though Brazilian transfer pricing methods are based on the so-called “traditional methods” (comparison, resale and cost-plus), the main difference is that, in resale and cost methods, Brazilian law provides for fixed profit margins to determine transfer pricing, which may result in transfer prices different from arm’s length prices. Due to Brazil’s request to become OECD member, it is possible that, in the future, Brazilian law may include transactional transfer pricing methods and make more flexible the determination of profit margins.



Taxation on corporate profits comprises two taxes: IRPJ, levied at 25% and CSLL, levied at 9% (general rule) or 20% (financial institutions and insurance companies – this is expected to be reduced to 15% as of 2019).


Yes. The law sets forth rules on tax deductibility of costs and expenses. Besides, Brazilian law allows to avoid taxation on IFRS unrealised results, provided that certain conditions are complied with. Among such conditions, there is an obligation to control unrealised income or losses/expenses/costs in segregated sub-accounts.


The main adjustments correspond to IFRS unrealised results, non-deductibility of unnecessary expenses, expenses with bonuses of officers and directors, expenses with accounting provisions (except provision for employees’ 13th salary and vacations), expenses with defaulted credits (deduction of these credits is subject to a number of requirements, including one year or more of default in case of credits exceeding BRL 15,000, and collection lawsuit for credits exceeding BRL 100,000).


No, there is no group taxation in Brazil, except in relation to subsidiaries outside Brazil that comply with the following


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it is subject to WHT at 15% (25% if the beneficiary is resident in a tax haven jurisdiction). Interest on equity may result in actual reduction of tax burden to the extent that IRPJ/CSLL are levied at a combined rate of 34% (45% in case of financial institutions and insurance companies – this is expected to drop to 40% as of 2019).

7 Overseas Profits


Yes, both IRPJ and CSLL are levied on profits obtained outside Brazil by means of branches, subsidiaries or controlled companies, on an accrual basis, and on related companies (companies in which the Brazilian corporate shareholder does not hold control) on a cash basis.


Yes, in case of investment in a related company. In case of branches, controlled companies or subsidiaries, the taxation occurs on December 31st of each year, in such a way that there is no additional income taxation upon distribution of dividends. Inflow and outflow of funds in connection to Brazilian investments abroad are subject to IOF/FX at 0.38%. IOF/FX rates may be changed at any time by the President.


Brazil adopts what is normally called a “General CFC Regime”. “General” refers to the fact that Brazilian companies are subject to taxation on profits generated by foreign subsidiaries or controlled companies on December 31st of each year, regardless of the actual distribution of such profits. The only situation in which taxation occurs on a cash basis is if a Brazilian corporate investor does not hold control over the foreign company, and such company is not (a) resident in a tax haven jurisdiction, or (b) subject to a favourable tax regime. In this situation, the Brazilian company may pay IRPJ/CSLL on cash basis. For controlled foreign companies with at least 80% of active income, IRPJ/CSLL due on the corresponding profits may be paid in instalments, as follows: (a) 12.5% in the first year; (b) according to distribution of profits in years two to seven; and (c) remaining balance of IRPJ/CSLL due at the end of year eight. This instalment is subject to interest, based on LIBOR for a six-month deposit in USD.



Yes, they are subject to WHT on capital gains, levied at rates varying from 15% to 22.5%, depending on the amount of gains, or 25% in case of beneficiary residing in a tax haven jurisdiction. The rates apply as follows:


No, there is not.


Yes. Direct or indirect sale of local assets/shares are subject to taxation on capital gains, even if both buyer and seller are located outside Brazil. If the seller and buyer are non-residents, the non-resident buyer is obliged to withhold the corresponding amounts, and to have a representative in Brazil to collect such tax.



Upon formation of subsidiary, transfer of funds into Brazil as capital contribution is subject to IOF/FX at 0.38%. IOF/FX rates may be changed at any time by the President.


For tax purposes, a local subsidiary or a local branch of a non-resident company are subject to same tax treatments.


Taxable profits of a local branch are determined the same way as profits of other Brazilian companies and must reflect activities developed from the local presence, i.e. must include all revenues and expenses connected to the businesses developed by such a branch.


As branches are considered local corporate taxpayers, they may claim application of double tax treaties whenever negotiating with entities located in any of the countries with treaties in force with Brazil.


For the time being, distribution of profits is exempt from WHT. There are discussions in the Brazilian Congress to reduce corporate taxation and reinstate WHT on dividends. Any changes in income tax law may only be applicable to the following calendar year. Brazilian companies may opt to distribute interest on equity, which is a deemed interest calculated on certain net equity accounts by using TJLP. Interest on equity is deductible for IRPJ/CSLL purposes, on up to 50% of taxable profits before computing such deduction, and


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The Brazilian annual tax return (called “ECF” – “Escrituração Contábil-Fiscal”) includes a requirement to inform of any “significant transactions” occurred in a certain calendar year, regardless whether it corresponded to a tax avoidance scheme or not.


Over the last five years, tax authorities have included tax consultants and tax lawyers as jointly liable for tax assessments in which they accuse corporate taxpayers of performing abusive transactions that aim at saving taxes. For the time being, the Federal Administrative Court of Tax Appeals has ruled favourably to exclude tax consultants and tax lawyers from the dispute, understanding that the responsibility may only be imposed on shareholders and officers of a company, and not on third parties that do not have decision-making power.


Yes. On federal level, compliant companies may obtain benefits to speed up customs clearance upon export and import transactions, which may reduce significantly the number of days necessary for such clearance. As an example, goods under import “green channel” may be released within a week, while goods under “red” or “grey” channels may take up to 40 days to be cleared.



Yes. Brazil has adopted CBCR, enacted regulations concerning Mutual Agreement Procedures, and issued updates of black and grey lists.


Instead of enacting GAAR, Brazilian tax authorities have made use of the concept of “abuse of law” as stated in the Brazilian Civil Code, which is a broad definition and goes beyond OECD BEPS recommendation. By using such approach, any reduction of taxes may be viewed as “abusive” by the tax authorities, increasing the number of tax disputes considerably.


Brazil has started to request CBCR based on December 2016, and has committed to exchange CBCR information with other countries. For the time being, CBCR information is not available to the public in general.


Amount of Gains RateUp to BRL 5MM 15.0%From BRL 5MM to 10MM 17.5%From BRL 10MM to 30MM 20.0%More than BRL 30MM 22.5%


Yes. Whenever the transfer involves, directly or indirectly, “assets located in Brazil”, income tax on capital gains applies. If the seller and buyer are non-residents, the non-resident buyer is obliged to withhold the corresponding amounts, and to have a representative in Brazil to collect such tax.


Brazilian law does not provide for REITs, but rather Real Estate Investment Funds (“FII – Fundo de Investimento Imobiliário”), which is formed as closed-end invested condominium, without legal personality, and divided in quotas. FIIs may invest in real estate properties or real estate companies. They are exempt from taxation on income arising from real estate activities, and subject to WHT on financial income. WHT levied on portfolio may be offset against WHT levied upon distributions to quotaholder. The rate applicable on the quotaholder is 20% (including in case of sale of quotas) and on the portfolio may vary between 22.5% to 15% depending on the timing of the investment, as follows:

Period of Investment RateUp to 180 days 22.5%From 181 to 360 days 20.0%From 360 to 720 days 17.5%More than 720 days 15.0%

Resident individuals investing in FIIs with 50 quotaholders or more that comply with other requirements are exempt from WHT on distributions.



There is one paragraph that has not yet been regulated that is deemed to be a “general anti-avoidance clause”, however, it is too broad to be considered a real GAAR. It reads as such: National Tax Code (CTN), Art. 116. (…) Sole Paragraph. The administrative authority may disregard

legal acts or transactions practiced with the objective of deceiving the occurrence of tax triggering event or the nature of the elements that constitute the tax obligation, observed the procedures to be established in ordinary law.

These regulations for this paragraph have never been enacted on a national level. In June 2018, the State of Rio de Janeiro created a regulation to this paragraph that serves to drive the tax inspections and tax assessments related to ICMS and Gift and Estate Tax (“ITCD”).


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ilUtumi Advogados was born under the leadership of Ana Claudia Utumi, with a team of professionals that are eager to achieve excellence in technical assistance and client attention, with personalised and tireless work. Utumi Advogados is a boutique law firm, fully dedicated to tax consulting and tax litigation to both corporates and individuals, with the work of partners, Camila Tapias and Sabrina Sabaini.

With more than 25 years of experience, Ana Claudia accumulated a number of market acknowledgments as one of the leaders of tax law practice in Brazil, in view of her work assisting foreign and Brazilian companies, as well as high-net-worth families. Her practice involves assisting with tax litigation and tax consulting, including taxation on M&A transactions, taxation on financial and capital markets, and taxation of different economic sectors such as: food; beverages; cosmetics; chemicals; pharmaceuticals; heavy industry; technology; and electronics services, among others.

Founding partner of Utumi Advogados, Ana Claudia has more than 25 years of experience in Tax. She is member of: Practice Council of the NYU International Tax Program; Board of Directors of the Financial Planning Standards Board – FPSB; and Board of the Fundação Visconde de Porto Seguro. Ana Claudia is also Chair of the Brazilian branch of STEP, and Director of ABDF/Brazilian International Fiscal Association (“IFA”) Branch. She served as a Member of the IFA Permanent Scientific Committee from 2010 to 2017. She is a Tax Professor on various postgraduate courses, including MBAs of FIPECAFI Faculty and the LL.M. in International Tax of the University of Zurich, and a Researcher at Fundação Getulio Vargas (“FGV”) Law School. Ana Claudia holds a Ph.D in Financial and Economic Law (University of São Paulo – USP), Master in Tax Law (Catholic University of Sao Paulo), MBA in Finance (IBMEC/SP-Insper), and is a graduate of Law (USP) and Business Administration (FGV).

Ana Claudia Akie UtumiUtumi AdvogadosRua Surubim, 504, conj. 62Cidade Monções, São PauloSP 04751-050Brazil

Tel: +55 11 4118 2323Email: [email protected]: www.utumilaw.com



There is no patent box regime, the preferential tax regimes applicable to non-resident investors are concentrated in financial and capital markets (“4,373 Regime”), in which there are exemptions of gains accrued on Brazilian exchange or organised over-the-counter markets. Other benefits may apply under the 4,373 Regime, such as reduction of WHT on stock funds from 15% to 10%, and from 15% to zero on Private Equity Funds (“FIP”) in which the non-resident investor holds less than 40% of the quotas and of the economic benefit, among other requirements. The requirements for non-resident investors to be included in 4,373 Regime are the following: (a) do not reside in a tax haven jurisdiction; (b) appoint a Brazilian financial institution as representative in Brazil; and (c) register under the 4,373 Regime with the Central Bank and Brazilian SEC.



There have not yet been significant changes to expand the tax base and capture digital presence.


For the time being, there has been no official statement from the Brazilian government about this.


Chapter 8

Carey

Jessica Power

Ximena Silberman

Chile

2 Transaction Taxes


Stamp Tax is applicable to documents evidencing loans. Stamp Tax ranges from 0.066% up to 0.8% on the principal amount, depending on the maturity date (from one month or less up to 12 months or more). Loans without a maturity date or which are payable on demand are subject to a tax of 0.332%.


Yes, Value Added Tax (“VAT”) exists at a 19% rate.


As a general rule, VAT applies on: (i) customary sales of local movable and immovable property (excluding land); (ii) commercial, industrial and intermediary services provided or used in Chile; and (iii) special cases (e.g., imports, software licensing, among others).Thus, the main exclusions refer to the sale of land and professional services. Also, imports of working capital assets for the development of specific projects (e.g., mining, industrial, energy, among others); exports; and certain payments for services rendered abroad, are VAT-exempt.


VAT taxpayers can offset the VAT surcharged in their own sales (i.e., “Fiscal Debit”) against the VAT paid for in the acquisition of goods or services (“Fiscal Credit”). Fiscal Credit balance can be carried forward indefinitely.Exporters and VAT taxpayers acquiring fixed assets and complementary services are entitled to request a VAT fiscal credit refund. Other taxpayers consider the VAT paid as a cost or as an expense (see question 4.2 below). VAT paid for goods or services used for activities partly subject to VAT is proportionally granted as Fiscal Credit.



Chile has 32 tax treaties. Additionally, there are two tax treaties subscribed to by Chile which have not yet entered into force.


Yes, except for the treaty with the United States of America (not yet in force) that follows the US model.


Once treaties are ratified by the Chilean Congress and published in the Official Gazette, they become effective and enforceable, and are considered part of the domestic legislation.


Yes, most of the tax treaties have anti-treaty shopping rules and recently enacted treaties also have limitation on benefits clauses. Chile is also a signatory party to the Multilateral Convention to Implement Tax Treaty Related Measures of BEPS Actions (“MLI”).


No. Pursuant to the Political Constitution of Chile and the Vienna Convention (to which Chile is a signatory party), tax treaties should not be overridden by Chilean domestic laws, either existing or subsequent.


The place of incorporation.


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Carey Chile

designs, patents, use and exploitation of computer programs, among others). However, if the foreign beneficiary is a resident in a tax-haven jurisdiction, WHT is increased to 30%. Royalties paid for the use of standard software are WHT-exempt. Tax treaties can also reduce the WHT applicable on royalties (from 5% to 15%).


Yes. Interest payments are generally subject to a 35% WHT. A reduced 4% WHT applies on interest payments to foreign banks or financial institutions.Tax treaties can also reduce the applicable WHT (from 5% to 15%).


Yes. Local Thin-Cap Rules apply to payments subject to reduced WHT rates made to related parties abroad, when the borrower is in an “excessive indebtedness” situation (i.e., world-wide debt exceeds three times the borrower’s adjusted tax equity). Payments to related parties and excessive indebtedness will be proportionally levied with a 35% sole tax borne by the Chilean debtor, with a credit for the WHT paid.


The 3:1 debt-equity ratio established by the Thin-Cap Rules is supposed to be a safe harbour provision for the reduced WHT rate for interest payments between related parties.


Yes, Thin-Cap Rules apply to third-party debt guaranteed by a related party, including back-to-back structures.


Tax treaty relief is subject to the usual limitations (i.e., effective beneficiary and compliance requirements) and local formal requirements (i.e., tax residence certificate and a sworn statement).


Yes. Rental payments for assets located in Chile are subject to a 35% WHT. A reduced 1.75% WHT applies as a sole tax over the gross amounts paid for by the lease (with or without purchase option) of imported capital goods that fulfil certain requirements.Tax treaties may also offer reduced WHT rates.

VAT paid is not granted as a Fiscal Credit when: (i) acquiring goods or services not related to taxpayer’s business, or used in activities exempted or not subject to VAT; (ii) acquiring or maintaining vehicles, station wagons or similar, when not being the main business; and (iii) the invoice paid is deemed to be false or when issued by taxpayers not performing activities subject to VAT (unless certain formalities are taken by the taxpayer when paying the invoice).


No. Each VAT taxpayer must calculate, declare and pay its Fiscal Debit, even when it is part of the same group of related companies.


The transfer of motorised vehicles is subject to a transaction tax of 1.5% on the highest between the sale price and the vehicle’s fiscal valuation.


The following indirect taxes should be noted:1. additional tax of 15% or 50% on the first sale or import,

customary or not, of some sumptuary goods (e.g., gold and platinum jewels);

2. additional tax from 10% to 31.5% on the sale or import, customary or not, of energising, hypertonic or substitutes drinks; liquors, distilled, whiskies, wines and other alcoholic beverages;

3. additional tax from 52.6% to 62.3% on the sale or import of cigars, cigarettes and tobacco; and

4. additional tax on the first sale or import of gasoline or diesel, equal to 1.5 of a Monthly Tax Unit or UTM (approximately USD 72) per cubic metre of diesel, and six UTM per cubic metre in case of gasoline, which is also adjusted by adding or deducting a variable component provided in Law No. 20.943.



Yes. Foreign individuals or entities are subject to a 35% Withholding Tax (“WHT”) on dividends from Chile. The WHT must be withheld, declared and paid by the local payer. The 35% WHT on dividends applies regardless of the existence of a tax treaty by virtue of the “Chile clause”.A tax credit for either 100% or 65% of the Corporate Tax paid by the local company is granted against such WHT, depending on the applicable tax regime (see question 4.6 below).


Yes. Royalties are generally subject to a 30% WHT. A reduced 15% rate applies in some cases (e.g., use of utility models, industrial


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Carey Chile

2. Semi-integrated income regime: a 27% Corporate Tax applies at the first level and Final Taxes are triggered upon profits’ effective distribution, only with a credit of 65% of the Corporate Tax (except for dividends remitted to a tax treaty resident where a 100% Corporate Tax credit is granted; this also applies to tax treaties subscribed by Chile but not in force, such as those with the United States of America and Uruguay, until 2021).

The total tax burden for foreign owners under this regime is 44.45%.A tax reform bill was recently submitted before the Chilean Congress in August 23rd, 2018 for its discussion (the “Tax Reform”). The Tax Reform intends to re-establish a single fully integrated tax regime (i.e., Final Taxes triggered upon distribution and Corporate Tax fully creditable).


Commercial, investment and industrial activities are generally subject to an annual municipal licence tax at rates ranging from 0.25% to 0.5%, applied through the company’s adjusted tax equity, capped at approximately USD 600,000 per year.

5 Capital Gains


Capital gains are subject to the general tax regime (i.e., Corporate Tax plus Final Taxes). The same applies to capital losses, which are tax-deductible provided that certain requirements are met. However, special rules apply for individuals in case of capital gains arising from the sale of shares, real estate, mining property, water rights, bonds, intellectual property and industrial property, among others.


Capital gains derived from the sale of shares by individuals not keeping full accounting records, are considered non-taxable income provided that: (i) the buyer is not a related party to the seller; and (ii) the gains do not exceed 10 Annual Tax Units (UTA, approx. USD 8,700).Capital gains resulting from a non-habitual and non-related sale of shares acquired before January 31st, 1984 are considered non-taxable income. Also, a full tax-exemption applies on the sale of shares of publicly listed stock corporations that are regularly traded and provided specific requirements are met.


Some companies have the option to reduce its taxable income up to an amount of 50% of the reinvested taxable income, if certain requirements are met and with a cap of 4,000 indexed units (“UF”).


In general, 35% WHT applies on capital gains derived from the direct transfer of Chilean assets and shares of local companies.


Yes. Chilean transfer pricing rules (“TP Rules”) entitle the IRS to challenge values in cross-border-related transactions when they are not arm’s length.



At the Chilean company level, the Corporate Tax rate is 25% or 27% depending on the company’s income tax regime (see question 4.6 below), calculated annually on its worldwide taxable income on a cash or accrual basis.


In general, the net taxable income must be determined according to full accounting records, and it is equal to the accrued and received income-less costs and expenses, and subject to certain adjustments.Expenses are tax deductible if certain legal requirements are met (i.e., necessary to generate the taxable income of the period, accrued or paid, not deducted as cost, from the corresponding exercise and evidenced to the IRS).


The main adjustments refer to monetary correction of the assets and liabilities generally under local inflation and exceptionally under US dollar denomination.


No. However, taxpayers must recognise in Chile the tax result of foreign permanent establishments (“PE”) including tax losses.


Under a change of ownership (i.e., owners acquiring or completing directly or indirectly at least 50% of the shares or rights to the profits of the company), the company’s losses can be used provided that certain requirements are met regarding the operational company’s business and assets.


The Chilean income tax system is a two-level integrated system. Corporate Tax paid by the company at the first level can be totally or partially credited against owners’ income taxes (“Final Taxes”):1. Income-attribution regime: a 25% Corporate Tax applies at the

first level and the income is attributed to the owners who pay Final Taxes, regardless if it is distributed or not, and Corporate Tax is fully granted as a credit.

The total tax burden for foreign owners under this regime is 35%.


Chile

Carey Chile

above). Distributions of exempt or non-taxable income and capital reductions could be WHT-exempt.

7 Overseas Profits


Yes. As a general rule, foreign-source income is recognised in Chile on a cash basis, except in the case of foreign branches or other PEs, where the PE’s income is taxed on an accrual basis.


Yes, as ordinary income (i.e., Corporate Tax and Final Taxes upon distribution). A foreign tax credit is granted for the taxes paid abroad on such dividends, with certain limitations and requirements.


Yes. Under local CFC rules, foreign passive income of a controlled entity is recognised in Chile on an accrual basis. A foreign entity is deemed to be controlled if the taxpayer: (i) holds 50% or more of its equity, profits or voting rights; (ii) has the authority to appoint the majority of its board; and/or (iii) is entitled to amend its bylaws unilaterally. Additionally, entities located in a preferential tax regime’s jurisdiction are presumed to be controlled.



Yes. Non-residents are subject to ordinary income taxation for capital gains arising from the sale of any kind of real estate located in Chile (i.e., Corporate Tax and WHT).However, individuals who do not keep full accounting records are not subject to income taxes up to 8,000 indexed units (UF, approx. USD 332,000), provided that certain requirements are met. On the excess, a 35% WHT applies. This benefit is not capped at UF 8,000 for these sellers in case of real estate acquired before January 1st, 2004.


The ITL taxes the indirect transfer of real estate when the indirect transfer thresholds are met (see question 5.4 above).


Currently, there is no special tax regime for REITs.

The indirect transfer of Chilean assets and shares through the sale of foreign shares, equity rights, quotas, bonds or other titles or rights, may be taxed if:a) the foreign titles represent 10% or more of the offshore

entity and the underlying Chilean assets: (a) proportionally amounts to equal or higher than UTA 210,000 (approx. USD 180 million); or (b) represent 20% or more of the fair market value of the ownership in the offshore company; or

b) if the sold foreign entity is domiciled or incorporated in a tax-haven jurisdiction, unless certain requirements are met and evidenced before the IRS.

Exceptionally, indirect taxation does not apply in case of business reorganisations, provided certain requirements are met.



No Chilean tax levies the incorporation of an entity. However, the development of investment, commercial and industrial activities, among others, is subject to the municipal licence tax (see question 4.7 above).


As a general rule, Chilean branches are subject to the same income taxation as subsidiaries (i.e., two-level system with Corporate Tax and Final Taxes on taxable distributions).However, subsidiaries are subject to Corporate Tax on their worldwide income, whereas branches and other PEs are subject to taxation on results attributable to them.


Results attributable to PEs must consider income, cost and expenses originated from (a) the PE’s activities in Chile and abroad, and (b) assets allocated in or used by the PE, whether located in Chile or abroad. However, if the books of the PE are not sufficient to determine its effective income, the IRS is empowered to assess such net taxable income as a percentage of the PE’s gross income or total assets, in relation to those of the parent company.


No, because a branch is not considered a tax resident in Chile.


Distributions of taxable profits by a branch or PE have the same tax treatment as distributions made by Chilean companies. Hence, they are subject to a 35% WHT with a total or partial credit for the Corporate Tax paid by the PE (see question 4.6


Chile

Also, Chile is a signatory party to the MLI and to the CBCR Multilateral Competent Authority Agreement.Moreover, the Tax Reform bill proposes a “digital tax” on new digital business models (see question 11.1 below).


Chile is currently complying with the BEPS agenda following the OECD’s recommendations (see question 10.1 above).


Yes. The CBCR must be submitted annually by the local controller or parent company of a multinational group, in case (i) the group’s consolidated income is equal or higher than EUR 750 million, or (ii) the Chilean company has been designated by the controller or parent company as its substitute to submit the CBCR in its country of tax residence.


There is no patent box regime in Chile for revenue deriving from intellectual property licensing.However, certain transfers of intellectual property can be income-tax exempted (see question 5.1 above).



No. However, the Tax Reform includes a new 10% sole indirect tax on gross amounts paid for digital services provided by foreign individuals or entities and used in Chile by individuals.


Chile does not follow the European Commission’s interim proposal in this regard (see question 11.1 above).



Domestic law contains a general overreaching anti-avoidance rule (“GAAR”), which is a substance-over-form control rule under which the IRS is entitled to challenge the tax consequences derived from legal forms when there is abuse or simulation.


There is not a general requirement to disclose avoidance schemes.However, taxpayers are required by the IRS to permanently provide information by means of filing sworn affidavits.


Individuals or legal entities involved in the design or plan of acts, contracts or businesses deemed to be abusive or simulated may be subject to a fine of up to 100% of the avoided taxes.Persons facilitating false tax documentation can also be subject to fines and criminal sanctions.


Chilean domestic law does not contemplate general “co-operative compliance” programmes. Regarding the matter of TP, advance pricing agreements (“APAs”) between the taxpayer and the IRS could be agreed.Additionally, taxpayers may request tax rulings from the IRS to give certainty regarding specific transactions or structures. Also, the IRS is prevented from retroactively assessing taxes when a taxpayer has relied, in good faith, on a criterion set forth in a ruling or other official document (while the IRS does not issue a new ruling stating a different criterion).



The most important amendments to tackle BEPS Actions up to this date are: TP rules; GAAR (see section 9 above); CFC rules (see question 7.3 above); and Sworn Statements regarding CBCR (see question 10.3 below) and global tax characterisation, among others.

Carey Chile


Chile

Carey Chile

Carey is Chile’s largest law firm, with more than 270 legal professionals.

We are a full-service firm. Our various corporate, litigation and regulatory groups include highly-specialised attorneys and practice areas covering all areas of law.

Our clients include some of the world’s largest multinationals, international organisations, and some of the most important local companies and institutions.

Our lawyers have graduated from the best law schools in Chile and most of our mid- and senior-level associates have graduate degrees from some of the world’s most prominent universities. Several are also currently university professors.

We are an effective bridge between legal systems. Most of our partners and senior associates have worked in North America, Asia, and Europe, as foreign or regular associates with leading international law firms, or as in-house counsel for major corporations or international institutions.

Jessica Power is partner and co-head of Carey’s Tax Group. Her practice focuses on advising domestic and foreign clients on personal and corporate tax planning, local and international tax consulting, mergers and acquisitions and foreign investment transactions.

Jessica has been widely recognised by international publications such as Chambers and Partners, International Tax Review, The Legal 500, Best Lawyers, and Latin Lawyer, among others.

She is a member of the board of International Fiscal Association Chilean Branch, and a member of the Chilean Bar Association.

Jessica graduated Summa Cum Laude from Universidad de Chile and has a Degree in Tax Law from Universidad de Chile.

Jessica PowerCareyIsidora Goyenechea 280043rd Floor, Las CondesSantiagoChile

Tel: +56 2 2928 2214Email: [email protected] URL: www.carey.cl

Ximena Silberman is an associate at Carey’s Tax Group. She advises clients in personal and corporate tax planning, local and international tax consulting and tax litigation. She graduated Summa Cum Laude from Universidad de Chile, and received the Carey Award as the best Tax Law student of her class, Universidad de Chile (2010).

Ximena SilbermanCareyIsidora Goyenechea 280043rd Floor, Las CondesSantiagoChile

Tel: +56 2 2928 2214Email: [email protected]: www.carey.cl


Chapter 9

Rui Bai Law Firm Wen Qin

China

domestic tax law, a corporation which is not incorporated/registered in China is treated as a Chinese corporation (having a corporate residence in China) if such corporation has its principal office in China.

2 Transaction Taxes


Yes. China has Stamp Duty, which is imposed on certain categories of documents that are exhaustively listed in the “Interim Regulations of the People’s Republic of China on Stamp Tax”, including, for example:(1) contracts or vouchers of the nature of a contract with regard to

purchases and sales, processing, contracting of construction projects, property leasing, cargo transportation, warehousing storage, loans, property insurance, or technology;

(2) documents for transfer of property rights;(3) business account books;(4) certificates for rights or licences; and(5) other vouchers that are taxable as determined by the Ministry

of Finance.


Yes, China has Value Added Tax. There are currently several different tax rates from 6% to 16%. The main three tax rates are 6%, 10% and 16% for various services and sales of goods. Besides that, there are two types of taxpayers: general taxpayers; and small-scale taxpayers. The applicable tax rate for the small-scale taxpayers is 3%.


VAT is generally charged on all transactions, while there are certain exclusions. Certain specified categories of transactions, such as: agricultural products produced and sold by agricultural producers themselves; birth control drugs and devices; antique books; imported instruments and equipment to be directly used in scientific research, scientific experiments and teaching; materials and equipment imported by foreign governments and international organisations for gratis aid; products exclusively for the disabled directly imported by organisations for the disabled; and sales of



China has signed 105 tax treaties and 100 of them have come into force as of September 2018. In addition, there are tax arrangements between Mainland China and Hong Kong, Macao, and Taiwan, respectively.


Yes. Most of the income tax treaties currently in force in China generally follow the OECD Model Convention with certain deviations. China signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) on June 7, 2017, together with over 67 jurisdictions.


No. The treaties have to be ratified by the Standing Committee of the National People’s Congress before taking effect.


Some of the treaties have anti-treaty shopping rules or similar rules to that effect, such as the treaties with the US, Mexico, Ecuador and Russia.


No. It is a well-established constitutional principle in China that no treaty is overridden by any rule of domestic law (whether existing at the time the treaty takes effect or enacted subsequently).


The applicable test is the “the principal office” test. Under Chinese


Chin

a


Generally, yes. Interest on corporate bonds issued by a Chinese company that is paid to a non-resident bondholder (either a non-resident company or a non-resident individual) is generally subject to Chinese withholding tax at the rate of 10%.


The company made the interest payment may be denied a deduction of the interest for its own corporation income tax purposes due to the application of the “thin capitalisation” rules under Chinese domestic tax law. The Chinese thin capitalisation rules deny deductibility of interest when such company’s annual average ratio of debt to equity exceeds 5:1 for financial enterprises and 2:1 for other types of enterprises.


This is not applicable.


Yes. Under the thin capitalisation rules in China, debt advanced by a third party and guaranteed by a parent company would generally be treated as related party debt, subject to the thin capitalisation rules.




Generally, yes. Rental fees for leasing real property or rights to real property located within China and paid by a Chinese company to a non-resident (either a non-resident company or a non-resident individual) are subject to Chinese withholding tax at the rate of 10%, subject to certain exemptions.


Yes. Chinese transfer pricing rules are applicable to both a Chinese company and a Chinese branch of a non-resident company if either of them engage in transactions with any of their “foreign-related parties”.



The rate of corporate income tax shall be 25%.In respect of non-resident enterprises that meet certain requirements, the applicable tax rate shall be 20% with a 50% reduction.

goods used by sellers themselves. No government agencies except State Council may decide exempted or deductible items.


Generally, yes. At present, VAT that is charged on taxable transactions and incurred by a business enterprise is generally recoverable by way of a tax credit or refund.


No, this is not permitted.


Yes. There are some transaction taxes in China, including, but not limited to, Consumption Tax, Real Property Acquisition Tax and Automobile Acquisition Tax.


Yes. There are various indirect taxes in China such as Consumption Tax, Customs Duty, Land Value Increment Tax and Stamp Duty.



Generally, yes. Under Chinese tax law, a non-resident shareholder (either a non-resident company or a non-resident individual) of a Chinese company is subject to Chinese withholding tax with respect to dividends it receives from such Chinese company at the rate of 10% for a company shareholder and 20% for an individual shareholder; however, if the Chinese company paying the dividends to a non-resident shareholder is a listed company, this withholding tax rate is reduced to 10% for the individual shareholder.However, most of the income tax treaties currently in force in China generally provide that the reduced treaty rate of 5% for parent and other certain benefit owners, and the incomes gained by individual foreigners from dividends and bonuses of enterprise with foreign investment, are exempt from individual income tax for the time being.


Generally, yes. Under Chinese tax law, royalties relating to patents, trademarks, design, know-how with respect to technology, and copyrights used for any Chinese company’s business carried on in China and paid by the Chinese company to a non-resident licensor (either a non-resident company or a non-resident individual) are subject to Chinese withholding tax at the rate of 10%, with certain exemptions.

Rui Bai Law Firm China


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There is no participation exemption for taxation on capital gains. But if there is a tax treaty between both parties in different jurisdictions, the company can apply for a lower tax rate according to the relevant tax treaty.


Yes, where an overseas investor makes an investment directly with the profits it obtains from a Chinese resident enterprise in an investment project under the encouraged category, the tax deferral policy shall apply provided that certain requirements are fulfilled, which means that the withholding tax is not levied temporarily.


Yes, non-resident enterprises that have not set up institutions or establishments in China, or have set up institutions or establishments but the income obtained by the said enterprises has no actual connection with such institutions or establishments, shall pay enterprise income tax in relation to their income originating from China. Besides that, according to the Announcement of the State Administration of Taxation [2015] No.7, where a non-resident enterprise indirectly transfers equities and other properties of a Chinese resident enterprise to evade its obligation of paying corporate income tax by implementing arrangements that are not for bona fide commercial purpose, such indirect transfer shall, in accordance with the provisions of Article 47 of the Corporate Income Tax Law, be re-identified and recognised as a direct transfer of equities and other properties of the Chinese resident enterprise.



In order to form a Chinese subsidiary, the accounting book of such subsidiary must be prepared, which is subject to Stamp Duty, accounting books for capitals, 0.05% of the sum of the original value of the fixed assets and the self-owned current funds; for other accounting books, it is CNY5 for each document.


If a foreign company forms a Chinese subsidiary which is a corporation, such Chinese subsidiary will be treated as a resident corporation and will be subject to Chinese corporate income tax on its worldwide income in the same manner as any other domestic Chinese corporation, the only difference is that the branch which is a non-independent accounting unit will merge its financial statements to its head office, and pay the corporate income tax due to allocation proportion ratified by the local in-charge tax bureau.


Yes. The tax base for corporation tax is the net taxable income; such net taxable income is calculated based on the results reflected in the taxpayer company’s profit and loss statements, prepared in accordance with Chinese generally accepted accounting principles.


The main adjustments include, but are not limited to, the treatment of donations and entertainment expenses, welfare, employee education fund, and so on. For example, donations, including any kind of economic benefit granted for no or unreasonably low consideration, are generally deductible only up to a certain limited amount and through qualified charitable institution. The deductibility of entertainment expenses is subject to certain qualifications and a certain ceiling.


There are consolidated tax return rules for the head office and branch office; however, neither the consolidation rules nor group taxation rules allow for relief for losses of overseas subsidiaries.


Generally, yes. A change of ownership does not restrict a corporation from utilising its accumulated tax losses that the corporation incurred in prior years, usually within five years from the date of the ownership change.


Tax is generally imposed at the same rate upon all corporate taxable profits regardless of whether such profits are distributed or retained.


Yes. Among local taxes, other than those already mentioned above, Vehicle and Vessel Tax, Tax on Vehicle purchase and Automobile Tax may be of general application to the business operations in general of a company in China.

5 Capital Gains


Generally, no. For purposes of income taxes imposed on a company (not an individual) in China, generally all of the taxable income of a company is aggregated, regardless of whether such income is classified as capital gains or ordinary/business profits.



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Generally, yes. If real property (land or any right on land or any building or auxiliary facility or structure), commercial or otherwise, which is located within China is transferred by a non-resident (either a non-resident individual or a non-resident company), the gross amount of the consideration received by such non-resident from such transfer is subject to Chinese withholding tax at the rate of 10% if it is paid.


Yes, it does.





Yes, Chinese tax law does have a general anti-avoidance rule.According to Administrative Measures for the General Anti-Avoidance Rule (for Trial Implementation), a tax avoidance arrangement has the following features:(1) taking acquisition of tax benefits as the sole purpose or main

purpose; and(2) acquiring tax benefits by using a tax avoidance arrangement

whose form is permitted in accordance with the tax laws but is not consistent with its economic substance.

Tax authorities shall make the special tax adjustment by referring to other similar arrangements with reasonable commercial purpose and economic substance and based on the principle of substance over form. The adjustment methods include:(1) re-determining the nature of all or part of the transactions

under the arrangement;(2) denying the existence of a party to the transaction for taxation

purpose, or deeming such party and the other transaction parties as the same entity;

(3) re-determining the nature of the relevant income, deduction, tax incentives, overseas tax credits and others, or reallocating the split among the transaction parties; or

(4) any other reasonable method.


No. Chinese tax law does not have a disclosure rule that imposes a requirement to disclose avoidance schemes.


As mentioned at question 6.2, where the corporation is a non-independent accounting unit (if it is an independent corporation) the treatment is same with any other domestic Chinese corporation.


A branch of a company which is a resident in such treaty country can benefit from the treaty provisions to some extent.


Generally, no.

7 Overseas Profits


Yes, resident enterprises shall pay enterprise income tax in relation to their income originating both within and outside China. Non-resident enterprises that have set up institutions or establishments in China shall pay enterprise income tax in relation to income originating from China obtained by such institutions or establishments, and income occurring outside China but having an actual connection with such institutions or establishments.


Yes, but the tax paid can be deducted in the tax annual filing within a certain limit. According to the Chinese Corporate Income Tax Law: “the income tax that has been paid outside the jurisdiction for the following income obtained by enterprises may be offset from the payable tax of the current period. The offset limit is the payable tax calculated in accordance with provisions of this Law in respect of the income of such item. The portion in excess of the offset limit may be made up by the balance of the offset amount of the current year out of the annual offset limit within the next five years:(1) the taxable income originating outside China by resident

enterprises; and(2) the taxable income obtained outside China by non-resident

enterprises but having an actual connection with the institutions or establishments set up by such non-resident enterprises within China”.


Yes. China has its own “controlled foreign company” (CFC) rules and if such CFC rules are applied to any particular overseas subsidiary, such CFC subsidiary’s net profits (but not its net losses) shall be deemed to constitute the Chinese parent company’s taxable income in proportion to their shareholding percentages, regardless of whether or not such profits are distributed to the parent company.



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(3) The amount of intangible assets ownership transfer exceeds CNY100 million.

(4) The aggregated amount of other related-party transactions exceeds CNY40 million.

In the master file, a taxpayer is required to report the items as described in Annex I to Chapter 5 of the revised OECD Guidelines, which includes a description of the businesses of the MNE, the MNE’s intangibles, the MNE’s intercompany financial activities, and the MNE’s financial and tax positions. In the country-by-country report, a taxpayer is required to report the items as described in Annex III to Chapter 5 of the revised OECD Guidelines, which includes an overview of allocation of income, taxes and business activities by tax jurisdiction, and a list of all the constituent entities of the MNE group included in each aggregation per tax jurisdiction. In the local file, a taxpayer is required to report the items as described in Annex II to Chapter 5 of the revised OECD Guidelines, which includes a description of the local entity, a description of controlled transactions, and financial information.The new rules for the master file (to be filed within one year of the last fiscal day of the ultimate parent) and country-by-country report (to be filed by the time of filing the Annual Report on the Related-party Transactions) are applicable for fiscal years beginning on or after January 1, 2016. The local file shall be prepared before June 30 of the year following the year when the related-party transaction occurs and on which the new rule will be effective for corporation tax in fiscal years beginning on or after January 1, 2016.


No, China does not maintain any preferential tax regimes such as a patent box. Chinese tax law does, however, provide for special tax credits and deductions on certain research and development costs.






NoteThe information contained in this document is of a general nature only. It is not meant to be comprehensive and does not constitute the rendering of legal, tax or other professional advice or service by Rui Bai Law Firm or its partners and lawyers. Rui Bai Law Firm or its partners and lawyers have no obligation to update the information as law and practices change. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual contact or your other advisers.


No, it does not.


Yes. The Chinese tax authorities encourage corporations to cooperate with the tax authorities and to voluntarily disclose certain information for compliance purposes. However, it will not reduce any tax.



Yes, China has introduced legislation in response to Action 13, “Guidance on Transfer Pricing Documentation and Country-by-Country Reporting”, the Chinese government introduced new legislation to adopt the three-tiered documentation approach consisting of a country-by-country report, a master file and a local file, which is applicable to any fiscal year beginning on or after January 1, 2016. Please see question 10.3.


No, it does not.


In line with BEPS Action 13, in 2016, the Chinese government introduced new legislation in which it adopted the three-tiered documentation approach, under which a separate “master file” and a “local file”, as well as a “country-by-country report” are required. Any Chinese corporation which is an ultimate holding entity of a multinational enterprise (“MNE”) group with total consolidated revenues of CNY5.5 billion or more in the previous fiscal year must file a country-by-country report, and a corporation with total related revenues of CNY1 billion or more must file a master file with the tax authority online. The local file is mandated to be prepared simultaneously with the filing of the relevant corporation tax return for transactions with a certain foreign-affiliated person, with whom: (1) The amount of tangible assets ownership transfer (in case of

toll processing activities, the amount shall be calculated on the basis of customs clearance price for annual import and export) exceeds CNY200 million.

(2) The amount of financial assets transfer exceeds CNY100 million.



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Our clients seek practical, holistic solutions and so we frequently collaborate with market-leading experts in tax, financial diligence, corporate finance, risk assurance, human resources and other disciplines. Our wide range of experience, personalities and backgrounds create a compelling combination of technical excellence and commercial application. We are able to deliver integrated and innovative solutions in the most challenging business endeavours.

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Rui Bai Law Firm

Wen is a Partner from Rui Bai Law Firm, which is an independent law firm and a member of the PwC global network of firms. Prior to joining Rui Bai Law Firm, Wen was a partner of a local law firm in Beijing. He specialises in employment law, tax law, dispute resolution and general corporate law. Wen obtained a Master of Law degree from China University of Political Science and Law. Wen is a native Chinese speaker and is fluent in English.

As a legal counsel to foreign investment enterprises, Wen’s services have been praised by clients. As a result, he has been continuously recommended as one of the leading lawyers by the well-known ranking and recognition organisations in the legal profession, such as Chambers and Partners, The Legal 500 and Asialaw Leading Lawyers. In 2015, he was ranked as one of the “Eminent Practitioners” by Chambers and Partners. Chambers and Partners also quotes one of his clients saying that “he has a sound understanding of the PRC and global aspects of a case”.

Wen QinRui Bai Law FirmUnit 01, 6/F Fortune Financial Center5 Dongsanhuan Zhong RoadChaoyang DistrictBeijing 10020China

Tel: +86 10 8540 4653Email: [email protected]: www.ruibailaw.com


Chapter 10

Petros Rialas

Marios Yenagrites

Cyprus


The residence of the company is determined by the place where the management and control is situated/exercised from.The term “management and control” is not specifically defined in the legislation, but, in practice, it generally follows OECD guidelines in relation to the “effective” place of management and control.

2 Transaction Taxes


Stamp duty is imposed on documents (contracts, written agreements) relating to assets located in Cyprus and/or things or matters taking place in Cyprus. Stamp duty is imposed on the value of the agreement at rates between 0.15% and 0.20%, with the first €5,000 document value being exempt, and with a maximum cap of €20,000 stamp duty per stampable agreement.The person legally liable to pay stamp duty is the purchaser. The due date for payment is within 30 days from the day of signing the agreement. Penalties are imposed for late payment, but the non-stamping of a stampable document does not render invalid the legal/commercial validity of the document.


Cyprus VAT follows and complies with the EU VAT Directive.VAT is imposed on the provision of goods and services in Cyprus, as well as on the acquisition of goods from the European Union and the importation of goods into Cyprus. Taxable persons charge VAT on their taxable supplies (output tax) and are charged VAT on goods and services they receive (input VAT).The standard VAT rate is 19%. Certain supplies are subject to the reduced rates of 5% or 9%, some are zero-rated, and some are exempt.Generally, if the value of annual taxable supplies exceeds or is expected to exceed €15,600, registration is compulsory. The option of voluntary registration exists in case of taxable supplies below €15,600.VAT returns are submitted quarterly, and payment of VAT must be made by the tenth day of the second month following the month in which the tax period ends.



There are currently 64 bilateral double tax agreements, out of which 62 treaties have been ratified and entered into force. The treaties with the USSR, the Socialist Federal Republic of Yugoslavia and the Czechoslovak Socialist Republic are still in force with regards to some of their former constituent states. It is noted that Cyprus is considered to have one of the most attractive tax treaties with certain non-EU countries like Russia, Ukraine, India and South Africa.


Cyprus treaties have always followed the OECD Model Convention. Older treaties are continuously being updated to come in line with the latest OECD treaty model and guidelines.


Yes, treaties must first be incorporated into domestic law by way of ratification. In any case, it is noted that in accordance with the Cyprus domestic legislation, there is no withholding tax on payments of dividend, interest or royalty (provided the related rights are used outside Cyprus) towards non-Cyprus residents (individuals or companies).


Generally, no. Nevertheless, certain treaties do contain limitation of benefits articles; specifically, the treaties with Belgium, Canada, the Czech Republic, France, Germany, the Russian Federation, the United Kingdom and the United States.


No. Treaties take precedence over domestic law.

Totalserve Management Limited


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non-residents (individuals or companies) are not subject to withholding tax in Cyprus. This is a specific provision contained within the domestic legislation.


Royalties paid by a local company to a non-resident are exempt from withholding tax, provided that the royalties are earned on rights that are used outside Cyprus. If the rights are used within Cyprus, tax is withheld at 10%, except on cinematographic rights, where the rate is 5%.


Outbound interest paid by a Cypriot resident company to a non-resident is not subject to withholding tax in Cyprus.


This is not applicable, as Cyprus does not have thin capitalisation rules.






Interest expense incurred by a Cypriot company, whether payable to a resident or a non-resident, is tax deductible to the extent that it is incurred for income-generating purposes.If the interest expense relates to the acquisition of non-business assets which do not produce taxable income, then such interest expense is restricted for tax purposes accordingly. There is a specific exception where such interest can be tax allowable if it relates to the acquisition of shares in a 100% subsidiary whose assets are used for business purposes.In cases of related-party financing/loans, the transaction (e.g. interest charged) must be made on an arm’s-length basis. Otherwise, the Cyprus tax authorities reserve the right to impose tax adjustments in order to reflect the deviation from the arm’s-length principle. Usually, this is done in the form of notional interest and/or disallowance of certain related interest expense.


Outbound rental payments made by a Cypriot resident company to a non-resident are not subject to withholding tax in Cyprus. However, Cyprus sourced rental income is taxable in Cyprus accordingly.


Certain supplies are zero-rated, for instance the exportation of goods, the supply/chartering/hiring/repair/maintenance of sea-going vessels and of aircraft, the supply of services to meet the direct needs of sea-going vessels and aircraft, and the transportation of passengers from Cyprus to other countries and vice versa.Further, certain supplies are exempt from the scope of VAT, for instance the leasing of immovable property (under conditions; see below), most banking, financial and insurance services, most hospitals, medical and dental care services, certain cultural, educational and sports activities, etc.The difference between zero-rated and exempt supplies is that businesses making exempt supplies are not entitled to recover the VAT charged on the purchases, expenses or imports.As of 13 November 2017, the leasing or rental of immovable property to a taxable person for the purpose of carrying out taxable business activities is subject to VAT at the standard rate of 19%, with the exception of buildings used for residential purposes. Moreover, as of 2 January 2018, the sale of undeveloped building land by a person, intended for the erection of one or more fixed structures, is subject to VAT at the standard rate of 19%, when the supply is carried out as part of that person’s economic activities.


Generally, yes. It should be noted that input VAT cannot be recovered in the following cases:■ Acquisitions used for making exempt supplies.■ Purchase, import or hire of saloon cars.■ Entertainment expenses (except for staff entertainment).■ Housing expenses of directors.


VAT grouping is possible, on an optional basis. The wording of Article 32 of the VAT Law was amended during 2012 to include the exact wording of Article 11 of the EU VAT Directive. Certain criteria need to be met, to prove the existence of a group for VAT grouping purposes.


No transaction taxes are payable by companies.


No other indirect taxes.



Outbound dividends paid by a Cypriot resident company towards

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reference rate based on the interest rate of the 10-year government bond of the country in which the new equity is invested, or the equivalent Cyprus bond rate (whichever is the highest), increased by 3%. Benefit is restricted to 80% of the taxable profit before the deduction of the NID. Anti-avoidance provisions apply.For companies falling within the new intellectual property (IP) regime, 80% of the qualifying profit earned from qualifying assets is allowed as a tax-deductible expense (refer to question 10.4 for more details).Expenses of private motor vehicles (saloon cars) are not allowed, irrespective of whether the motor vehicles are used in the business or not.Business entertainment expenses are restricted if in excess of 1% of turnover, or if they are in excess of €17,086 (whichever is the lowest).


Companies which belong to the same “group” for tax purposes may utilise group loss relief. The tax loss of one company (the “surrendering company”) for a particular tax year can be claimed by another company of the group (the “claimant company”) and set off against the taxable profits of that company for that particular year. Tax losses brought forward from previous years are not taken into account for group relief purposes.Two companies are deemed to be part of a group for loss relief purposes if one is a 75% subsidiary of the other, or if both are 75% subsidiaries of a third company, either directly or indirectly.As of 2015, an entity which is tax resident in another EU Member State is also eligible to surrender tax losses to a Cypriot group company, provided that the surrendering EU company has exhausted all available means for set-off or carry forward of its losses in its own state of tax residence or in another Member State where an intermediary holding company is located.Group loss relief is allowed when both the surrendering company and the claimant company are part of the same group for the whole year of the assessment. In case of a newly incorporated company during the year of assessment, such a company is considered to be part of the group for the whole year of the assessment.


Yes, and can be carried forward and utilised against the taxable profits of the next five years, except for the following cases: a) within any three-year period there is a change in the ownership

of the shares of the company and a substantial change in the nature of the business of the company; or

b) at any time since the scale of the company’s activities has diminished or has become negligible and before any substantial reactivation of the business there is a change in the ownership of the company’s shares.

If any of the above two cases applies, then no loss which has been incurred before the change in the ownership of the shares of the company shall be carried forward in the years subsequent to such change.


To the extent that the ultimate beneficial owner is non-resident or


Article 33 of the Cyprus Income Tax Law provides that transactions between related parties need to be carried out at arm’s-length terms and conditions.In addition, the Ministry of Finance has issued an interpretative Circular in June 2017, providing guidance on the tax treatment of intra-group back-to-back financing arrangements. In brief, such arrangements should comply with the arm’s-length principle, and should be supported by an appropriate transfer pricing study. Simplification measures are provided for companies which carry out a purely intermediary activity (i.e. granting loans to related parties which are refinanced by loans from related entities).



Tax on corporate profits is charged at a uniform rate of 12.5%.However, the effective Cyprus tax may be much lower or even zero due to certain tax exemptions. Refer to question 4.3 below.


Adjustments may be imposed on the tax base accounting profit.


IncomesCertain types of income are exempt from Corporation Tax, such as:■ Dividend income, subject to easy-to-meet conditions (unless

claimed as tax deductible by the foreign paying company – e.g. in the case of certain hybrid instruments).

■ Profit from sale of shares and other qualifying “titles” (e.g. options, debentures, bonds).

■ Interest not arising from the ordinary activities or closely related to the ordinary activities of the company – e.g. bank deposit interest (although such interest is subject to Special Defence Contribution (SDC) at a rate of 30%).

■ Profits from an overseas Permanent Establishment (PE) (under conditions, and subject to clawback rules).

■ Foreign exchange gains, with the exception of gains from trading in foreign currencies and related derivatives.

■ Double tax relief by way of credit is unilaterally allowable, whereby foreign tax can be deducted from Cyprus tax resulting from the same income.

ExpensesAny expenses which have not been incurred wholly and exclusively for the production of (taxable) income are disallowed for the purpose of calculating a company’s taxable profit.Interest expense incurred for acquisition of non-business assets (which do not generate taxable income) is restricted for tax purposes – with the exception of the acquiring of a 100% subsidiary (under conditions).A notional interest deduction (NID) in the form of a notional expense is allowed annually on new equity introduced in the business as of 1 January 2015. This is calculated by applying on the new equity a



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No, there is no special relief for reinvestment.


No, there is no such withholding tax.



Upon registration of a Cypriot company, a fixed amount of €105 is payable, irrespective of the amount of share capital.In addition, capital duty of 0.6% is imposed on the authorised share capital, but only on the nominal value (not on the premium). In case the shares are issued at a premium, a fixed duty of €20 is also payable.


In principle, there is no difference. They would be taxed in the same manner.


In Cyprus, the local branch of a foreign company will be taxed in the same manner as if it were a company. In the jurisdiction of the foreign company, one would need to look at the applicable relevant provisions and in most cases any resulting Cyprus tax could be available (e.g. if provided by the relevant double tax treaty) for double tax relief in that foreign jurisdiction.


Yes, if so provided by the double tax treaty between Cyprus and that particular jurisdiction.


There is no such withholding tax.

7 Overseas Profits


Profits of a Cypriot tax resident company which derive from a PE situated outside Cyprus are exempt from tax in Cyprus, provided that either of the following two conditions is met:

Cyprus resident but non-domiciled for Cyprus tax purposes, then there is no tax on actually distributed dividends and the below-stated deemed dividend distribution provisions do not apply.Actual dividends distributed to Cyprus resident and domiciled individuals are subject to 17% Cyprus tax (SDC). This tax is paid at source when the dividend is paid by a Cyprus company and in cases where it is paid by a foreign company then the physical shareholder has the obligation to declare the dividend and account for the relevant tax. At the same time, to the extent that the ultimate beneficial owner of a Cyprus resident company is a Cyprus tax resident individual and domiciled in Cyprus for tax purposes, a Cypriot company with Cyprus resident beneficial shareholders (company or individual) is deemed to have distributed 70% of its after-tax profits, in the form of dividends to its shareholders, within two years from the end of the year of assessment, reduced by any relevant actual dividend payments made during this period. Such deemed dividend is subject to the same aforementioned 17% defence tax. Anti-avoidance provisions apply.


SDC is imposed on passive interest income, (e.g. interest income from bank deposit accounts) at a rate of 30%. SDC also applies on rental income at an effective rate of 2.25% (rental income is also subject to Corporation Tax at 12.5%).

5 Capital Gains


Capital Gains Tax (CGT) is imposed on gains from disposal of immovable property situated in Cyprus, at a rate of 20%, after indexation allowance. However, in case of companies whose primary activity is real estate, gains from disposal of immovable property are treated as normal business profits and are subject to Corporation Tax at 12.5%.CGT is also imposed on the gains from disposal of shares in companies which hold immovable property in Cyprus.In addition, as of 17 December 2015, CGT is also imposed on the disposal of shares in companies which hold, directly or indirectly, shares in companies which have own immovable property in Cyprus and at least 50% of the market value of their shares emanates from the market value of that immovable property.Notwithstanding the above, in case of immovable property that has been acquired between 16 July 2015 and 31 December 2016, the gain from the subsequent sale of such property shall be exempt from the imposition of CGT.


The gains from the disposal of shares are specifically tax-exempt, except in the case where the company whose shares are being disposed owns immovable property situated in Cyprus (certain exceptions apply, e.g. in the case of a publicly listed company) – also refer to question 5.1 above.



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the Commissioner reserves the right to disregard any non-genuine or fictitious transactions whose sole purpose is the reduction of the tax base, and to impose tax on the correct amount of taxable income, usually in the form of relevant tax adjustments.


There is no such requirement.


This is indirectly covered in the Anti-Money Laundering Law, under “predicate offences”.


This is not applicable in Cyprus.



In late 2016, Cyprus signed and became part of the Multilateral Competent Authority Agreement on Country-by-Country Reporting (CBCR), and the Ministry of Finance issued a relevant Decree shortly afterwards. The Decree is in accordance with Action 13 of the Base Erosion and Profit Shifting (BEPS) project, and introduces a mandatory CBCR requirement for multinational groups generating consolidated annual turnover in excess of €750 million.On 7 June 2017, Cyprus signed the Multilateral Convention to implement measures to prevent BEPS, in line with Action 15 of the BEPS project. Once the Convention is ratified, a principal purpose test will be incorporated into Cyprus’ double tax treaties, where treaty benefits will be denied in cases where transactions of arrangements are effected with the principal purpose in mind being to obtain treaty benefits.The Income Tax Law was amended in October 2016 in order to align the current Cyprus IP tax legislation with the provisions of Action 5 of the OECD’s BEPS project. The revised IP regime complies with the guidance prescribed in Action 5 regarding following a nexus approach, i.e. the existence of a direct link between the qualifying income and qualifying expenses contributing to that income.Cyprus has signed the Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Account Information (MCAA), as one of the early adopters.


Cyprus follows the recommendations of the OECD, as per the BEPS Action Plan.

a) the PE directly or indirectly engages less than 50% in activities which lead to investment income; or

b) the foreign tax burden on the income of the PE is not substantially lower than the tax burden in Cyprus (in practice, an effective tax rate of at least 6.25% is deemed to satisfy this condition).

The exemption of PE profits is subject to clawback rules, i.e. if deductions for tax losses of the PE have been allowed in previous years, then an amount of profits equal to the tax losses so allowed shall be included in the chargeable income.


Dividend income received by a Cyprus tax resident company from a foreign subsidiary is exempt from Corporation Tax. It is also exempt from SDC if either of the following two conditions apply:a) the foreign company paying the dividend directly or indirectly

engages less than 50% in activities which lead to investment income; or

b) the foreign tax burden on the income of the foreign entity is not substantially lower than the tax burden in Cyprus (in practice, an effective tax rate of at least 6.25% is deemed to satisfy this condition).

If neither of the above conditions is met, dividend income received by the Cypriot entity is subject to SDC at 17%.


There are no “controlled foreign company” rules in Cyprus.



Yes. CGT at 20% is charged on profits from the disposal of real estate, whether commercial or not – refer to question 5.1 above.


Yes. The gains from disposal of shares in companies which hold immovable property in Cyprus is subject to CGT. Please refer to question 5.1 for more details.


The Cypriot tax legislation does provide for REITs, but there is no differentiation in the relevant Cyprus tax treatment.



According to Section 33 of the Assessments and Collections Law,



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No such action, noting that income resulting from digital activities is, in principle, taxed as income of a revenue nature, unless it falls under a specifically aforementioned exempt category.


Without any official position yet, Cyprus generally supports and follows any proposals which aim at addressing BEPS issues, such as the taxing of the digital economy.


Cyprus has adopted and issued the relevant Decree in relation to CBCR, in accordance with the relevant EU Directive.


Cyprus has an IP box regime, which has been amended during 2016, in order to be in line with the recommendations of Action 5 of the BEPS Action Plan.Grandfathering provisions exist up to June 2021 for IP assets that have already qualified under the previous IP box regime. In brief, an amount equal to 80% of the qualifying profits earned from qualifying intangible assets is allowed as a tax-deductible expense. A modified nexus approach is followed, whereby for an intangible asset to qualify for the benefits of the regime, there needs to be a direct link between the qualifying income and the taxpayer’s own qualifying expenses contributing to that income.



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Totalserve Management Limited is a renowned, award-winning global service provider specialised in the fields of international tax planning, corporate, trusts, and fiduciary services worldwide. Other services pertaining to legal, accounting and auditing are also offered through associated firms.

Headquartered in Limassol, Cyprus, the group maintains a jurisdictional presence across four continents, with offices in Luxembourg, London, Moscow, Warsaw, Athens, Sofia, Bucharest, Tortola (BVI), Johannesburg and Cape Town.

Our professionals are multidisciplinary and multinational, comprising experienced accountants, bankers, tax and legal consultants. The fusion of this expertise, combined with long-established international affiliations, yields optimal comprehensive solutions with a global perspective.

Petros Rialas is a Director and the Head of the International Tax Planning Department of Totalserve Management Limited. He is a Fellow Chartered Certified Accountant with many years of experience in international tax planning, corporate taxation and trusts. His academic background includes a Degree from the University of Manchester and a Master’s Degree from City University of London.

He is a member of the Society of Trust and Estate Practitioners (STEP) and the International Tax Planning Association (ITPA). His vocational background includes a two-year employment in the auditing line of service in London, and five years in the tax services division of a Big Four firm in Cyprus.

Petros is a regular contributor of technical articles to local and foreign industry publications, and has been a frequent speaker at various conferences and seminars in Cyprus and abroad.

Petros RialasTotalserve Management LimitedTotalserve House17 Gr. Xenopoulou Street3106 LimassolCyprus

Tel: +357 25 866 000Email: [email protected]: www.totalserve.eu

Marios Yenagrites is a graduate of the London School of Economics, from which he holds an M.Sc. degree in Accounting and Finance. He is a Fellow Chartered Accountant (FCA) and a Member of the Institute of Certified Public Accountants of Cyprus (ICPAC). He has also served as Secretary of ICPAC’s Corporate Governance, Internal Audit and Risk Management Committee.

Prior to joining Totalserve Management Limited, Marios worked in the tax departments of two Big Four accounting firms for a number of years, thereby gaining a solid background and experience in all matters relating to Cyprus taxation.

In his current position, Marios is involved in providing tax consultancy services to a wide array of clients, as well as undertaking tax planning and tax structuring projects.

Marios YenagritesTotalserve Management LimitedTotalserve House17 Gr. Xenopoulou Street3106 LimassolCyprus

Tel: +357 25 866 000Email: [email protected]: www.totalserve.eu


Chapter 11

Waselius & Wist

Niklas Thibblin

Mona Numminen

Finland

be resident in Finland. Unlike in some jurisdictions, a company incorporated outside Finland may not be considered resident in Finland by applying the concept of effective place of management (although it could create a permanent establishment in Finland).

2 Transaction Taxes


Please see question 2.6 below regarding transfer tax.


Finnish VAT legislation gives effect to the relevant EC Directives. There are three rates of VAT:■ the standard rate of VAT is 24% and applies to any supply

of goods or services which is not exempt or subject to the reduced rate of VAT;

■ the reduced rates of VAT are 14% (e.g. foodstuff and restaurant and catering services); and

■ 10% (e.g. passenger transportation, hotel services, theatre, sporting events, medicine and books).


The exclusions from VAT are as permitted or required by the Directive on the Common System of VAT (2006/112EC) (as amended), and some examples of exempt supplies are: ■ the sale and letting of real estate (however, a lessor of real

estate may opt for VAT);■ medical services;■ educational services;■ insurance services; and■ banking and other financial services.


When goods and services are supplied for a business subject to VAT, input VAT is fully recoverable. If only a part of business is subject to VAT, only the VAT related to this business is recoverable. Certain



Finland has a fairly extensive treaty network, with approximately 74 income tax treaties currently in force.


Finnish tax treaties generally follow the OECD model, with some inevitable variation from one treaty to the next.


Yes. A tax treaty must be incorporated into Finnish law and this is done by way of a statutory instrument by Parliament.


In general, Finnish tax treaties do not incorporate anti-treaty shopping rules. However, the treaty with the US contains a “limitation of benefits” clause and the treaties with the UK and Ireland contain a “limitation of relief” clause. Pursuant to case law, domestic anti-avoidance rules can be applied in case of artificial cross-border arrangements.


No, but the Finnish general and special anti-avoidance rules (the “GAAR” and the “SAARs”, discussed in question 9.1 below) can, in principle, apply if there are abusive arrangements seeking to exploit particular provisions in a double tax treaty, or the way in which such provisions interact with other provisions of Finnish tax law.


A company which is incorporated in Finland will automatically


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Waselius & Wist Finland


Royalties paid to a non-resident are subject to a withholding tax at the rate of either 20% or 30%, unless tax treaty provisions or the EC Interest and Royalty Directive (2003/49/EC) reduce or prevent taxation in Finland. Royalties paid to a Finnish permanent establishment of a non-resident company are taxed as income of the permanent establishment and no withholding tax is levied.


According to domestic Finnish tax laws, interest payments to a non-resident are normally exempt from tax in Finland.


Finland has no thin capitalisation rules, but currently the deductibility of interest expenses between related parties is limited under a separate regime. Under the interest limitation regime, interest expenses are fully deductible against any interest income. The potential restriction of any interest exceeding the interest income (i.e. net interest expenses) depends on three tests that are applied on a stand-alone Finnish company level:1. Net interest expenses may be fully deducted if the total

amount of net interest expenses does not exceed EUR 500,000 during the fiscal year.

2. Where the above limit is exceeded, net interest may only be deducted up to an amount equal to 25% of the taxable business profits before interests and depreciations. Received and paid group contributions are taken into account in the calculation of the taxable business profits. Any amount of interest so restricted may be carried forward indefinitely and deducted against unused capacity in later years.

3. To the extent that interest is paid to a non-related party, it can be deducted even when exceeding the above limits. However, interest expenses paid to a non-related party are taken into account when calculating the above EUR 500,000 and 25% limits. Therefore, interest expenses paid to a non-related party are considered first and, provided that the deduction capacity under the 25% rule is not exhausted, the remaining amount can be used to deduct interest expenses paid to a related party.

Please note that the Finnish interest limitation rules shall be amended, effective as of 1 January 2019. Pursuant to a very recent Government Bill, the Finnish interest limitation rules will be extended to also cover third-party debt – subject, however, to a EUR 3,000,000 threshold that would always be deductible.


At the moment, yes. The so-called “safe harbour” rule stipulates that the restrictions on interest deductibility are not applied if the borrower company’s equity ratio (equity vs total balance) is equal to or higher than the same ratio calculated on the basis of a consolidated group of balance sheets of the ultimate parent (“balance sheet test”). The balance sheet test can only be applied to consolidated balance sheets that have been prepared in an EU or EEA Member State or a state with which Finland has concluded a tax treaty.

goods or services used for entertainment purposes are, however, excluded from the general right of deduction.


Yes. Finance and insurance companies may opt for VAT grouping. The registration is made in the name of the “representative member”, who is responsible for completing and submitting a single VAT return and making VAT payments or receiving VAT refunds on behalf of the group. All members of the group remain jointly and severally liable for any VAT debts of the group. A Finnish branch must generally treat its supplies to the overseas head office as taxable supplies in circumstances where the overseas head office is VAT-grouped in its jurisdiction and the branch does not belong to the VAT group.


Transfer of shares in Finnish companies and real property located in Finland is subject to transfer tax. The rate of transfer tax is 4% of the purchase price of real property, 1.6% of the purchase price of the shares in an ordinary limited liability company and 2% of the purchase price of the shares in a real estate company (including real estate holding companies and housing companies). The transfer tax base also includes any debt or liabilities of the acquired entity (towards the seller or a third party) assumed by the buyer based on the transfer agreement, provided that the assumption of such debt or liabilities accrues to the benefit of the seller.


Customs duties are generally payable on goods imported from outside the EU. Excise duties are levied on particular classes of goods (e.g. alcohol, tobacco, electricity and fuel). Insurance premium tax is charged on the receipt of a premium by an insurer under a taxable insurance contract.



Dividends paid by a Finnish company to non-residents are, in principle, subject to Finnish withholding tax of either 20% or 30%. However, in reality, such withholding is prevented or reduced by the provisions of the EC Parent-Subsidiary Directive (90/435/EEC) or an applicable tax treaty. Under most tax treaties, the withholding tax rate is usually reduced to 0–15% on dividends paid to persons entitled to the treaty benefits.Further, dividends paid to a recipient residing in an EEA Member State are also exempt from tax to the extent that a Finnish recipient would, under corresponding circumstances, be partly or fully exempt from tax. This can grant an exemption from withholding tax (for example, for certain foreign investment funds or charitable entities). The withholding tax relief is based on EU law and may give foreign investors the right to a retroactive tax refund claim.


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establishments are deductible, provided that certain preconditions are met. A group contribution is similarly taxable income for the receiving entity. The group contribution regime does not allow cross-border loss relief.


When more than 50% of shares in a company or its immediate parent company change ownership during a tax year, the right to carry forward tax losses from that year and previous years is forfeited. The tax authorities may grant a dispensation to allow the utilisation of forfeited tax losses.


No, it is not.


The owner of real estate is required to pay real estate tax equal to a fixed percentage of the calculated value of real estate (i.e. the land area) and the buildings located thereon. The real estate tax value differs, as such, from the tax base value, the book value and the market value of the real estate and the buildings. The rate of real estate tax is set by the municipality in which the real estate is located. However, the minimum and maximum statutory tax rates that the municipalities may apply vary between 0.41% and 6%.

5 Capital Gains


Corporation tax is chargeable on “profits”, which includes both regular business income and capital gains. There is, however, a separate regime for computing certain capital gains. In circumstances where the participation exemption does not apply, capital losses can only be used against capital gains and not against regular business income.


Yes. The participation exemption regime allows business-conducting companies to dispose of certain shares without a Finnish tax charge. Capital gains realised by a Finnish company on the sale of shares are tax-exempt provided that:(i) the shares belong to the selling company’s fixed assets and

the shareholding is deemed to be a part of the seller’s business income source (in comparison to the general income source);

(ii) the selling company owns at least 10% of the capital of the company being sold;

(iii) the selling company has held such participation for at least one year; and

(iv) the disposed shares are not shares in a housing or real estate company.

The company whose shares are sold must, furthermore, reside in Finland, in another EU Member State or in a country with which Finland has concluded a tax treaty. Further, private equity investors


Yes. Third-party debt may be reclassified as a related-party debt; for instance, in circumstances where the third-party debt is secured by a receivable of a related party.


In addition to general transfer pricing rules (see question 3.9 below), the Finnish GAAR may be applied in respect of arrangements that do not correspond to their actual purpose and meaning, which have as their main purpose the securing of a tax advantage.


Rents paid to a non-resident are considered Finnish-source income and such income must normally be declared in Finland in accordance with the ordinary tax assessment procedure (and taxed accordingly).


Yes. Finnish transfer pricing rules apply to both cross-border and domestic transactions between related parties. If the Finnish tax authorities do not accept that pricing is at arm’s length, the applied pricing can be challenged under transfer pricing adjustment rules.



The corporate income tax rate is currently 20%. There are no planned reductions at the moment, although Finland will closely monitor the changes in other developed and neighbouring countries.


In general terms, tax follows the commercial accounts subject to adjustments.


Certain expenses are not deductible for tax purposes and there are certain differences between the depreciation of assets for accounting and tax purposes; for instance, concerning machinery and buildings. There are also some tax-free income items such as tax-free capital gains (see question 5.2 below) and dividends.


The concept of consolidated income tax returns is unknown in Finland. However, under the group contribution regime, group contributions between two Finnish-resident companies or permanent


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7 Overseas Profits


As a general rule, and subject to tax treaty provisions, Finland taxes the profits earned in overseas branches of Finnish-resident companies.


Foreign dividends and Finnish dividends are treated in the same way. Dividends from foreign subsidiaries are generally exempt in the hands of a Finnish parent company, whereas portfolio dividends from listed companies are fully taxable if the recipient has an ownership stake of less than 10% in the paying listed entity. Dividends derived from non-tax-treaty countries outside the EU are, however, fully taxable in Finland.


Under the Finnish CFC rules, the CFC’s income tax is taxable, as the shareholders’ income and actual distributions are exempted. A non-resident company controlled by a Finnish tax resident may generally be regarded as a CFC, if the CFC is liable to income tax in its domicile at a rate less than 60% of the effective Finnish corporate income tax rate (meaning generally that the corporate income tax rate applicable to a CFC should currently be 12% or less). The CFC regime does not apply to income of a CFC originating mainly from industrial production or shipping if that activity has occurred in the CFC’s country of origin. In addition, an exemption applies to CFCs in tax treaty countries (subject to certain conditions) and where it is proven, on the basis of objective factors, that despite the existence of a tax motive, the CFC is actually established in an EEA country and carries out genuine economic activities there.Please note that the Finnish Ministry of Finance has proposed changes to the Finnish CFC legislation taking effect on 1 January 2019. According to the proposal the industry exception and the tax treaty country exception would be abolished and certain other amendments would be made. However, at the date of submitting this chapter, the contents of the amendments are not entirely clear.



Capital gains derived from the sale of real property (whether commercial or private) located in Finland, as well as gains derived from the sale of shares in Finnish real estate and housing companies and Finnish limited liability companies, more than 50% of whose assets consist of real estate in Finland, are generally subject to tax in Finland. Tax treaty exemptions may apply to certain share disposals.


Yes, please see question 8.1 above.

may not benefit from the participation exemption. Where the participation exemption regime applies, any losses incurred from the disposal are non-deductible.


It is possible to make a deduction in relation to (i) insurance compensation received due to the destruction of fixed assets if the new assets are acquired or the old ones are repaired within two years, or (ii) sold business premises if new premises are acquired within two years.


No withholding tax is imposed. However, please see question 8.1 below.



There are no taxes imposed on the formation of a subsidiary.


A Finnish-resident subsidiary would pay corporate tax on its worldwide income and gains, whereas a Finnish branch (permanent establishment) would be liable to corporation tax only on the net profit attributable to the branch. There is no separate branch profit tax.


Assuming that the local branch of a non-resident company is within the Finnish statutory definition of a “permanent establishment” (which, in most circumstances, will be decided by the provisions in an applicable tax treaty), it will, at the outset, be treated for tax purposes as though it were a distinct and separate entity dealing independently with the non-resident company. Generally, all branches (permanent establishments) are required to arrange bookkeeping in accordance with Finnish GAAP and are taxed accordingly (subject to certain adjustments).


No, apart from non-discriminatory rules (in the case that the branch forms a permanent establishment).


No, it would not.


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group. Preliminary discussions should be carried out prior to any transaction, and the advice given in such discussions is generally binding on the tax authorities. The preliminary discussions do not result in a reduction of tax, but may provide indirect procedural benefits through the “protection of trust” principle. However, if the subject matter is complex or subject to interpretation, there is a lack of case law, or the parties disagree with respect to the tax treatment of the transaction, the taxpayer is normally, in the preliminary discussions, advised to apply for an advance tax ruling from the Finnish Tax Administration.



Yes. An updated provision regarding the contents of transfer pricing documentation and CBCR requirements (see question 10.3) have been introduced. Prior to the introduction of the BEPS project, Finland had already introduced interest deduction limitation rules similar to those in BEPS Action 4 (see questions 3.4, 3.5 and 3.6).


In general, no.


Yes. The Finnish CBCR legislation requires multinational enterprises (“MNEs”) to prepare: a master file containing information on all group companies; a local file on material transactions of the Finnish taxpayer; and a CBCR report on, among others, the global allocation of an MNE’s income and taxes.


No such regimes currently exist.



No, it has not.


As a starting point, no. However, global solutions (for example on the OECD level) concerning taxation of digital services are regarded as a positive thing.



Yes. However, the Finnish REIT scheme remains limited to residential housing only. Under the REIT scheme, to benefit from corporate tax exemption, REITs (i.e. Finnish limited liability companies) must be listed on a public stock exchange or a multi-lateral trading facility (“MTF”) within the EEA, with no single shareholder owning, directly or indirectly, more than 9.99% of the share capital. At least 80% of the value of the assets of a REIT must also consist of real estate that is used primarily for residential purposes, and the activities of the REIT must be limited to the letting of properties (or activities closely related thereto). The capital structure of a REIT must furthermore be such that its potential debt financing does not exceed 80% of its balance sheet total. Moreover, the REIT must distribute at least 90% of its annual profits to shareholders as dividends.



Yes. If a transaction has been given a legal form that does not correspond with its actual nature or meaning or if the legal form of the transaction does not correspond to the actual behaviour of the taxpayer, the GAAR or SAARs may be applied and taxes can be reassessed as if the actual form of the transaction had been used. Case law on the application of the GAAR and SAARs has, in several instances, covered scenarios where a series of transactions have been subject to re-characterisation, especially where no adequate commercial reasons have been shown for the transaction.


There is no such requirement at the moment. However, the Ministry of Finance is currently preparing a proposal on the implementation of the EU Directive 2018/822/EU under which certain arrangements would be reportable.


There are no specific rules. However, the Finnish Penal Code includes provisions regarding tax crimes that are also applicable to parties promoting or facilitating tax crime. Mere tax avoidance does not, as such, constitute a tax crime.


The Finnish Tax Administration has recently promoted the use of so-called “preliminary discussions” for the clients of the Large Taxpayers’ Office, i.e. mainly companies belonging to a larger


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Waselius & Wist renders advice primarily in all areas of domestic and international business taxation, including mergers and acquisitions, restructurings as well as other financial transactions. Many of our assignments have an international dimension. Waselius & Wist’s tax team provides strategic tax advice early on in the transactional process, whether domestic or cross-border in nature, to ensure efficient tax structures. In addition to our involvement in the structuring of transactions, we advise on the documentation to implement transactions.

Waselius & Wist’s tax team also has substantial experience in assisting clients in administrative proceedings on taxation issues. Waselius & Wist has a well-established tax dispute resolution practice and has successfully represented clients in a wide range of disputes with the tax authorities.

Niklas Thibblin is the Managing Partner of Waselius & Wist. He has over 15 years of experience from domestic and cross-border tax matters in complex high-profile cases. He has, for instance, advised in numerous domestic and multi-jurisdictional group restructurings and transactions, as well as tax filings relating to such arrangements. He regularly acts as counsel in proceedings before the Finnish tax authorities and administrative courts, including the Supreme Administrative Court.

Niklas ThibblinWaselius & WistEteläesplanadi 24 A00130 HelsinkiFinland

Tel: +358 9 668 95277Email: [email protected]: www.ww.fi

Mona Numminen joined Waselius & Wist in 2017 as an Associate Lawyer. Her main practice areas include tax and corporate structuring, mergers and acquisitions, and corporate and commercial law. Mona has previous experience from Roschier Attorneys Ltd., where she worked as an Associate in their tax and structuring practice.

Mona NumminenWaselius & WistEteläesplanadi 24 A00130 HelsinkiFinland

Tel: +358 9 668 95211Email: [email protected]: www.ww.fi


Chapter 12

Tirard, Naudin Maryse Naudin

France

law authorising the ratification of the MLI by the French Parliament was published. The MLI should enter into force in France in 2019 depending on the date of the ratification of the instrument by the French Parliament.The MLI will affect the interpretation of bilateral tax treaties signed by France and therefore further cross-border transactions.


Bilateral tax treaties override domestic law.


Article 209-1 of the French Tax Code (“FTC”) provides that French or foreign resident companies are taxable in France on all profits made on business carried out in France under the territoriality principle. The concept of “business carried out in France” is not defined in the legislation. Cases have, however, held that the requirement is established when there is a routine commercial activity carried out in a place of business or through a representative or by operations comprising “cycle commercial complet d’activité”. This concept is very close to the definition of a permanent establishment provided by the OECD model.Under the French principle of restricted territoriality, profits (or losses) realised by a French company from business carried out outside France are not subject to French corporate tax.

2 Transaction Taxes


No documentary taxes exist per se in France. However, the sale of shares of French companies and of French or foreign companies qualifying as sociétés à prépondérance immobilière are subject to transfer duties under certain conditions. Transfer of goodwill is also subject to transfer duties.


European VAT rules apply in France, which is a member of the European Union. The standard VAT rate applicable amounts to



France benefits from an impressive tax treaties network which applies to corporate tax, but also (depending on each treaty) to individual income tax, wealth taxes (ISF and IFI), gift and/or inheritance tax as well as other French taxes. Approximately 130 bilateral income tax treaties are currently in force.


Bilateral tax treaties signed by France follow, as a general rule, the OECD model. Variations of this model allow France to apply the specificities of French internal law. As an example, the concept of “société à prépondérance immobilière” (real estate company) is very often developed. The more recently negotiated amendments or tax treaties are more sophisticated than the previous ones and allow France to apply its extensive tax scope.


Tax treaties enter into force after the ratification process has been duly accomplished by each contracting state.


The most recently negotiated tax treaties or amendments of existing tax treaties state that anti-treaty shopping rules apply, for example, to dividends and interest. France also signed, on 7 June 2017, the multilateral instrument (“MLI”) covering 83 jurisdictions. Among others, MLI’s main purposes are to limit base erosion profit shifting (“BEPS”) through treaty abuse (Action 6 of the BEPS project), improve dispute resolution, prevent the artificial avoidance of permanent establishment status and neutralise the effects of hybrid mismatch arrangements. The MLI entered into force on 1 July 2018 in five countries: Slovenia; Austria; Isle of Man; Jersey; and Poland. The MLI will enter into force on 1 October 2018 in four other countries: United Kingdom; Sweden; Serbia; and New Zealand. On 12 July 2018, the


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Tirard, Naudin France



Unless tax treaties state otherwise, dividends are subject to a French withholding tax at the rate of:■ 12.8% when paid to non-resident individuals;■ 30% when paid to non-resident companies; and■ 75% when paid to residents of a non-cooperative state (i.e. a

state which has not signed an exchange of information treaty with France).

However, most tax treaties signed by France provide either a reduced rate or a withholding tax exemption.Under Directive 90/435/EEC relating to parent and subsidiary companies (“EU Parent-Subsidiary Directive”), dividends are exempt from withholding tax if the recipient is a company resident in an EU country and has held at least 5% of the shares of the French subsidiary for at least two years. However, as from 1 January 2016, the EU Directive 2015/121 adopted on 27 January 2015 added an anti-abuse provision to the EU Parent-Subsidiary Directive. Under this new provision, withholding tax exemption only applies if the main motivation of the ownership structure was not to benefit from such an exemption. As a result, ownership structures considered artificial will no longer benefit from the EU Parent-Subsidiary Directive.Finally, the French Administrative Supreme Court recently stated that tax treaty provisions only apply assuming the resident of the other contracting state is effectively taxed in his country of residence. As a consequence, a person exempted in his country of residence by reason of his legal status or activities may no longer benefit from the provisions of a double tax treaty signed with France. This recent interpretation of the tax treaties by the French Administrative Supreme Court entails many difficulties, in the opinion of the authors. The French tax authorities will systematically refuse to apply tax treaties, while the other contracting states allow their residents “tax incentives” in comparison to the French tax treatment suffered by French residents.


Unless tax treaties state otherwise, royalties are, as a general rule, subject to a 33.33% withholding tax. When the recipient is resident in a non-cooperative country, royalties are subject to a 75% withholding tax.


As a general rule, no withholding tax is levied on interest paid by a French company, except of course when the recipient is resident in a non-cooperative country.


Like many other countries, France has legislation providing for certain limitations on the deduction of interest expenses, including thin capitalisation rules. However, as these different limitation rules apply altogether, their articulation may be difficult to deal with.

20%. Three other rates may apply depending on the nature of goods or services (10%, 5.5% and 2.1%).


All European exclusions apply in France. Some activities are excluded from the VAT scope such as, for example, certain banking and financial transactions, as well as insurance and reinsurance activities. The renting out and sale of residential real estate are also excluded from the VAT scope under certain conditions.


A taxpayer may recover VAT charged on goods and services used to realise the turnover, subject to VAT. The main exception to this principle is VAT on cars.


The concept of VAT grouping does not exist in France. Under certain conditions, companies in the same group may elect to centralise the payment of VAT. Among other conditions, the “head” company should hold at least 50% of the share capital of its subsidiaries and all companies within the group should have the same tax year period.


Registration duties are due on the transfer of real estate, “fonds de commerce” (goodwill) or clientele and company shares. (The sale price of commercial property and/or clientele is subject to registration duties at a rate of 3% for amounts between €23,000 and €200,000, and 5% for greater amounts.)Purchases of French real estate are subject to registration duties at rates which may vary depending on the location of the real estate. A French notary should be appointed. Registration duties, including the notary’s fees, may reach 7%.The rate of registration duties applicable to the company’s shares varies depending on the nature of the shares transferred:■ transfers of shares of a “société par actions simplifiée”

(“SAS”) or a “société anonyme” running an industrial or commercial activity are subject to transfer duties at a rate of 0.1%;

■ transfers of shares of a “société à responsabilité limitée” (“SARL”) running an industrial or commercial activity are subject to transfer duties at a rate of 3%; and

■ transfers of shares of any company (French or foreign) whose assets are mainly composed of real estate property located in France (that is more than 50% of their market value) are subject to transfer duties at a rate of 5%.


France is the kingdom of indirect taxes. Numerous indirect taxes apply to goods such as wines and alcoholic beverages, hydrocarbons, cigarettes, sugar, oils, etc.


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Thin capitalisation rules also apply in this case; see our answer to question 3.4.


All general anti-avoidance rules aimed at preventing internal and/or international tax evasion may also apply (see our answer to question 9.1).


No withholding tax applies on property rental payments. Non-resident companies owning real estate properties located in France should comply with French accounting obligations and file an annual corporate tax return.


France has developed transfer pricing legislation, which states that the correct transfer price for a particular transaction between related parties must be that which the parties would have agreed at arm’s length. In order to determine the tax owed by companies that depend on or control enterprises outside France, any profits transferred to those enterprises indirectly through increases or decreases in purchase or selling prices or by any other means must be added back into the taxable income shown in the companies’ accounts. The same procedure applies to companies that depend on an enterprise or a group that also controls enterprises outside France. To enforce article 57 of the FTC, the French tax authorities must prove both that a dependent relationship existed between the parties involved in the transaction under review, and that a transfer of profits occurred. French legislation also requires certain companies to provide significant documentation to the French tax authorities in relation to transfer pricing.



The standard corporate tax rate is 33.33%. However, there is an exception for companies having an annual turnover inferior to €7.63 million and fulfilling certain conditions, which are subject to a corporate income tax (“CIT”) rate of 15% for the fraction of their net profit lower than or equal to €38,120. Small and medium-sized enterprises (“SMEs”) starting their fiscal year on or after 1 January 2017, benefit from a reduced CIT of 28% on the fraction of their net profit which does not exceed €75,000. Companies eligible for the 15% rate of CIT continue to benefit from this reduced rate, and will be subject to the 28% rate only on the fraction of their net profit exceeding €38,120 and lower or equal to €75,000.

French companies liable for corporate tax can only deduct from their annual taxable basis 75% of the net interest expenses occurring during the same year, unless the interest amount does not exceed €3 million (“General interest deductibility limitation”).In addition, the deduction of interest on loans granted by related parties is disallowed when the lender is liable to tax on the interest received from the borrowing company up to an amount which is less than a quarter of the French tax burden it would have been subject to corresponding to: ■ 8.33% for fiscal years starting 1 January 2018;■ 7.75% for fiscal years starting 1 January 2019;■ 7% for fiscal years starting 1 January 2020;■ 6.63% for fiscal years starting 1 January 2021; and■ 6.25% for fiscal years starting 1 January 2022.Interest paid by a French borrowing company can be disallowed for French corporate tax purposes if its amount exceeds, cumulatively, the following three ratios:■ 1.5 times the company’s share capital (debt-equity ratio);■ 25% of the company’s earnings results before tax (interest

coverage ratio); and■ the amount of interest received from affiliates (net paid

interest).Once the ratios have been met, the portion of interest which exceeds the highest of those is not deductible from the taxable results unless either of the following applies:■ it does not exceed €150,000 per year; or■ the borrowing company can prove that the overall debt-equity

ratio of the group to which it belongs exceeds or equals its own debt-equity ratio.

Subject to restrictions, the portion of non-deductible interest from a year’s taxable results can be deducted from the following fiscal year’s results at a 5% reduction per financial year as from the second year.The deductible interest rate paid to an affiliate company cannot exceed a certain percentage, which is published every year (1.67% for fiscal years ended between 31 December 2017 and 30 January 2018).Finally, within a French tax consolidation group, the deduction of a portion of interest paid by a tax group is disallowed and added back into the global taxable income when a member company acquires the shares of either of the following:■ a “head” company controlling, directly or indirectly, the

purchasing company; that is, the acquiring company and the purchased company become members of the same group; or

■ a company controlled directly or indirectly by the “head” company.

France, as an EU Member State, will have to implement in its domestic legislation provisions complying with the Anti-Tax Avoidance Directive (“ATA Directive”) by 31 December 2018. As a consequence, the general limitation of the deduction of interests paid by taxpayers (i.e. 30% of the taxpayers’ EBITDA) provided by the ATA Directive will affect or replace the French General interest deductibility limitation.


Assuming the borrowing company demonstrates that its debt-equity ratio does not exceed the debt-equity ratio of its group, the thin capitalisation rules described below do not apply.


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The determination of the taxable income is based on the company’s accounting year, corrected to specific tax adjustments.


The income of companies taxable under corporate tax law is determined by adjusting accounting profits and losses in conformity with specific tax regulations. The major adjustments involved are the reintegration in the taxable income of the corporate tax itself and certain expenses considered unnecessary or extraneous to the purposes of the company, such as grants and subsidies granted to other companies. Some income, however, is subject to special tax provisions (notably, certain long-term capital gains, industrial property and trademarks, and income from subsidiaries).


French tax law provides for a tax consolidation regime, allowing a parent company to be liable for corporate tax (plus an additional contribution) on behalf of its whole group. The consolidated group includes French subsidiaries (foreign subsidiaries are excluded) which are liable to corporate tax and have a share capital 95% of which is held (directly or indirectly) by the parent company. A subsidiary can also be a part of a consolidated group when more than 95% of its share capital is held indirectly by a foreign EU company. Under the tax consolidation regime, profits and losses incurred by all companies of the group are aggregated to determine a tax-consolidated net result. Intra-group transactions are neutralised.As explained in questions 1.6 and 4.2 above, French corporate tax is applied on a strict territorial basis, under which neither losses incurred abroad by a company running a business in France nor losses incurred by its overseas subsidiaries can be offset against profits realised in France.


For French tax purposes, a change of ownership does not alter the carrying forward of tax losses, except if the activity of the company is substantially modified.


The validity of the additional 3% contribution applied on profits distributed by French companies has been considered by the European Court of Justice as contrary to EU law. The Finance Bill for 2018 suppresses the 3% contribution for dividend payments made on or after 1 January 2018.

For fiscal years starting on or after 1 January 2018, a 28% CIT rate applies on the first €500,000 of taxable profit of all companies. Taxable profit in excess of €500,000 are subject to a 33.33% CIT rate. For fiscal years starting on or after 1 January 2019, a 28% CIT rate will apply on the first €500,000 of taxable profit of all companies. Taxable profit in excess of €500,000 will be subject to a 31% CIT rate.For fiscal years starting on or after 1 January 2020, a 28% CIT rate will apply for all companies.For fiscal years starting on or after 1 January 2021, a 26.5% CIT rate will apply for all companies.For fiscal years starting on or after 1 January 2022, a 25% CIT rate will apply for all companies.Moreover, companies subject to CIT with turnover exceeding €1 billion would be subject to a 15% exceptional contribution on their CIT and companies subject to CIT with turnover exceeding €3 billion would be subject to a 15% additional contribution on their CIT.However, these contributions are temporary and will only apply for the financial years ended between 31 December 2017 and 30 December 2018.French corporate tax is established on a strict territorial basis; that is, it is assessed on French source income and not on a worldwide basis. Double tax treaties may, however, allow France, under specific circumstances, to tax certain foreign source income. As regards the taxation of distributed income, two co-existing parent-subsidiary regimes are applicable, based, respectively, on French domestic tax law and on EU regulations. These regimes allow a qualifying parent company to benefit from reduced taxation on certain transactions on capital gains realised by the parent company on the sale of participations and dividends received from its subsidiaries. French tax law also provides a tax consolidation regime (“intégration fiscale”); see our answer to question 4.4.Large companies subject to corporate tax may also be liable to an additional contribution at the rate of 3.3%, assessed on the amount of corporation tax due exceeding €763,000. The additional contribution does not apply to companies whose annual turnover does not exceed €7.63 million, provided that at least 75% of the company is owned by individuals or by companies that themselves fulfil these conditions. A consolidated group (see our answer to question 4.4) is liable to pay this additional contribution if its global turnover exceeds €7.63 million. See also our answer to question 4.6 relating to profits distributed by a French company to its shareholders.French corporate tax is pre-paid in four instalments (in March, June, September and December). Please note in this respect that a fifth instalment was added for certain companies through the 2017 Finance Bill. The debit/credit of corporate tax is due/refunded by 15 May the following year.Losses incurred by a company subject to corporation tax can be carried forward without time limits. However, the offsetting of losses is limited to 50% of the current year’s profits insofar as the profits exceed €1 million. Any unused losses remain carried forward to the following years.


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Sale of companies’ shares benefits from a partial exemption (amounting to 88%) if, among other conditions, the shares have been held for more than two years.


No special relief for reinvestment applies in France at the moment.


Unless tax treaties provide otherwise, withholding taxes are levied in France either in the case of the sale of a real estate property located in France by a foreign company, or in the case of the sale of company shares (French or foreign), as described below. The sale of a real estate property located in France by a foreign company is subject to a withholding tax amounting to 33.33%. Depending on the seller’s country of residence, the taxable basis of this withholding tax may vary. Assuming the seller is a company resident in a Member State of the EEA, the 33.33% withholding tax is levied on the difference between the sale price and net book value of the real estate property.Assuming the seller is a company resident in a state which is not a member of the EEA, the 33.33% withholding tax is levied on the difference between the sale price and the purchase price of the real estate, less an amount corresponding to 2% of the purchase value of the real estate per year of ownership of the sold real estate property. We are convinced that this rule restricts the free movement of capital, as does the obligation to appoint a French tax representative.A withholding tax is also levied in case of sale of shares by a foreign company, which varies depending on the quality of the company sold and on the quality of the seller.Assuming the company (French or foreign) sold qualifies as a real estate company (“société à prépondérance immobilière”), the withholding tax is levied at the rate of 33.33% on the difference between the sale price and the purchase price if the seller is a foreign company. If the seller is subject to CIT, the withholding tax levied at the time of the sale of the French real estate or of the shares of the real estate company (“société à preponderance immobilière”) is a prepayment of corporate tax (at the standard rate of 33.33%), which is computed at the end of the fiscal year during which the real estate is sold. Assuming the 33.33% withholding tax exceeds the corporate tax due at standard rates (see question 4.1.), the excess can be refunded by a claim filed to the French tax authorities.Assuming the French company sold does not qualify as a real estate company and that more than 25% of its share capital is held by a foreign company at the time of the sale or at any time during the five years preceding the sale, a 33.33% withholding tax applies which is a final payment. If the shares of the company are owned and sold by an individual a withholding tax of 12.80% is levied. The withholding tax paid is also considered as a final payment of income tax. Assuming the seller is resident in a non-cooperative state or territory, the withholding tax is increased to 75% on the capital gain amount. We are convinced that this rule restricts the free movement of capital.


France applies a lot of indirect taxes. Among others, the territorial economic contribution (“TEC”) and the annual 3% tax should be noted.The TEC replaced the former business tax (“taxe professionnelle”) in 2010. This is a local tax levied by the French departments and regions, made up of the following components:■ the “cotisation foncière des entreprises”, which is based

on the rental value of the real estate property used for the company’s business; and

■ the “cotisation sur la valeur ajoutée des entreprises”, which is based on the added value by the business on a yearly basis.

The overall amount of TEC due by the company cannot exceed 3% of the annual “added value” produced by the company.The annual 3% tax is due by French and foreign companies owning (directly or indirectly) one or more real estate properties located in France, the market value of which exceeds that of all other French movable/financial assets owned by the same company. In practice, because there are many legal exemptions, this tax is only due when the real estate located in France is not used for business and the identity of the ultimate owners has not been disclosed to the French tax authorities, or one of the intermediary companies involved in the ownership structure is based in a country which has not signed an exchange of information treaty with France, or reporting obligations have not been completed.French tax law also provides that companies which are not subject to VAT on less than 10% of their preceding year’s turnover are subject to a tax on salaries (“taxe sur les salaires”), based on wages paid on a progressive scale ranging between 4.25% and 20%.

5 Capital Gains


Capital gains are, as a general rule, included in the corporate tax basis and then subject to corporate tax as explained in question 4.1.However, specific provisions allow one to apply a more favourable tax regime to capital gains on certain assets.Capital gains on the sale of shares qualifying as a “participation exemption” may benefit from a partial exemption (see our answer to question 5.2).Capital gains on the sale of intellectual property, patents and assimilated assets are, under certain conditions, subject to corporate tax at a reduced rate of 15%.Capital gains realised on the sale of listed shares of real estate companies (“sociétés à prépondérance immobilière”) are subject to a 19% reduced corporate tax. Shares of real estate companies which are not listed are still subject to corporate tax at standard rates (see question 4.1)Finally, capital gains on certain qualifying venture capital, mutual funds and investment companies, may, under certain conditions (they should be owned for more than five years, among other conditions), benefit either from a reduced rate of taxation of 15% or from a full exemption.


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However, according to the French parent-subsidiary tax regime, assuming the French company owns more than 5% of the shares of the distributing company for more than two years, dividends benefit from a 95% exemption for corporate tax purposes. This favourable regime does not apply when the subsidiary is resident in a non-cooperative state or territory.


Article 209 B of the FTC provides that when a French company, subject to corporate tax, either realises a business enterprise in a low-tax jurisdiction or controls directly or indirectly (for more than 5% if the company is listed; 50% in other cases) the capital of a company located in a low-tax jurisdiction, profits realised by such a company are subject to corporate tax in France even if they have not been distributed to the French shareholder.



Foreign companies selling real estate located in France are subject to a 33.33% withholding tax, as explained in question 5.4 above.


Unless tax treaties provide otherwise, foreign companies are subject to a 33.33% withholding tax on the sale of shares of companies (French or foreign) owning (directly or indirectly) real estate properties located in France and having a fair market value exceeding the fair market value of other assets they own, as explained in question 5.4.


France does not recognise the concept of REITs. However, French tax law provides for a specific optional regime applying, under certain conditions, to listed real estate companies (“sociétés d’investissements cotées”). A French corporate tax exemption is granted provided that the major part of their results are distributed to their shareholders, corresponding to 95% of their rental income, 60% of their capital gains and 100% of dividends received from their subsidiaries.



The FTC provides numerous anti-avoidance or anti-abuse of law rules. Some of them have a very wide scope and may function to prevent internal and international tax avoidance (the theory of “abus de droit” or “acte anormal de gestion”). Others are specifically dedicated to preventing international tax evasion.



No tax would be imposed upon the formation of a French subsidiary by a foreign company.


As a general rule, there are very few differences between the taxation of a locally formed subsidiary and a local branch set up by a non-resident company.Because a branch (as opposed to a subsidiary) does not benefit from a legal personality different to that of its head office, interest, as well as royalties paid by a French branch to its foreign head office, is not deductible for French tax purposes. Unless a treaty applies, corporate tax profits transferred by a French branch to its foreign head office are subject to a 30% withholding tax. A 75% withholding tax applies when the non-resident company is resident in a non-cooperative state or territory. Once again, we are convinced that this rule restricts the free movement of capital.


The French branch would only be subject to French corporate tax on profits realised in France, just as a French subsidiary would have been (see our answer to question 4.1).


Branches of foreign companies are not considered resident for the application of tax treaties, and therefore cannot benefit from their provisions.



7 Overseas Profits


As explained above, according to the strict territorial regime of French corporate tax, profits realised by overseas branches of a French company are not taxable in France.


As a general rule, dividends from abroad received by a French company are subject to French corporate tax.


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Moreover, a draft law is being discussed in French Parliament, of which the purpose is to strengthen the sentences against fraudsters who violate the principles of equality in relation to public burdens and of free consent to taxation. One of the main provisions of this bill is the creation of administrative sanctions against third parties facilitating tax and social fraud in order to punish not only the perpetrators of the fraud, but also its “engineers”, who spread fraudulent schemes.


The sentences provided for by article 1741 of the FTC can be halved if the perpetrator or an accomplice in the abovementioned offences enables the French tax or judicial authorities to identify other participants in the same offences.Article 109 of the Finance Bill for 2017 also introduced, temporarily, the possibility for the FTA to compensate individuals providing information on existing “infringements” of the provisions of the FTC (i.e. absence of reporting, tax avoidance arrangements, etc.). This provision entered into force on 1 January 2017, and the system is supposed to be tested for two years.



France has already introduced legislation in response to the OECD’s project targeting BEPS, as a specific mechanism which aims to strive against the effects of hybrid mismatch arrangements. Within the scope of this legislation, when a company which is subject to CIT is bonded to another company, wherever it is located in France or in a foreign country, the loan’s interests are deductible only if the borrowing company shows that the lending company is subject to income tax on the same interests.On 7 June 2017, France signed the MLI to amend its tax treaties in line with the OECD BEPS principles. On 12 July 2018, the law authorising the ratification of the MLI by the French Parliament was published. The MLI should enter into force in France in 2019 depending on the date of the ratification of the instrument by the French Parliament. The MLI provides notably for substance-over-form and anti-treaty shopping provisions that are mandatory for all signatory States.


France largely follows the recommendations of the OECD’s BEPS reports. Sometimes, it requires more transparency in regard to transfer pricing. Companies, when they are controlled by tax authorities, have to provide the French tax authorities with a copy of the rulings from which they benefit in other countries, in addition to other reporting obligations provided by the OECD’s transfer pricing recommendations.

The French tax authorities may use the theory of abuse of law (“abus de droit”) provided by article L64 of the Tax Procedure Handbook (“livre des procédures fiscales”) to challenge an operation (or a series of operations) which allow the taxpayer to avoid, reduce or postpone a French tax. An abuse of law may be characterised when either the operation or the scheme used is fictitious or the taxpayer researched a literal application of a provision or decision that is contrary to the intention of the lawmaker and was motivated only by the intention of avoiding or reducing its tax burden. A penalty at the rate of either 40% or 80% applies when an abuse of law is deemed to have occurred.The theory of abnormal management act (“acte anormal de gestion”) allows the French tax authorities to disregard an operation which has not been realised in the best interest of the company.These general provisions may be difficult to apply because the French tax authorities may conclude that an “abus de droit” or “acte anormal de gestion” exists.This is the reason why specific anti-avoidance provisions have been introduced in the FTC which presume the existence of tax avoidance. Then the taxpayer should (sometimes) prove the absence of the intention of avoidance in order to escape the application of the presumption imposed by the law. This is the case for: article 57 of the FTC (see our answer to question 3.9); article 209 B of the FTC (see our answer to question 7.3); article 238 A of the FTC; and article 155 A of the FTC.According to article 238 A of the FTC, any payments made by a French company benefitting a company located in a low-tax country are not deductible for French tax purposes.According to article 155 A of the FTC, payments received by a non-resident (individual or company) corresponding to the remuneration of services rendered by a French taxpayer are, under certain conditions, taxable in France. Finally, as explained before, any dividends, royalties, capital gains or income from a French source are subject to a 75% withholding tax when paid to a resident in a non-cooperative state or territory.As explained in question 3.4, as an EU Member State, France will have to implement in its domestic legislation ATA Directive-compliant provisions by 31 December 2018 (with the provisions applying from 1 January 2019).


The requirement to make special disclosure of avoidance schemes has not yet been introduced into French tax law.


Article 1741 of the FTC provides that the voluntary fraudulent avoidance of taxation can give rise to a penalty amounting to €500,000 and an imprisonment sentence of five years. Under certain aggravating circumstances, the fine can be increased to €2 million and the imprisonment sentence to seven years. Article 1742 of the FTC, in combination with articles 121-6 and 121-7 of the French Criminal Code, provides that anyone facilitating the fraudulent avoidance of taxation by assisting or advising the perpetrators of such offence can also be sentenced.


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However the Constitutional Court (“Conseil Constitutionnel”) has repealed this disposition before it was enacted. Thus, France has not yet taken unilateral action to tax digital activities or to expand the tax base to capture digital presence. However, France is acting at the EU level for such a legislation to be implemented as explained in question 11.2 below.


France’s Minister for the Economy and Finance, Bruno Le Maire, has welcomed the European Commission’s draft directives in a 21 March 2018 joint statement with Finance ministers from Germany, Italy, Spain and the United Kingdom.The Digital Services Tax (“DST”) should apply to revenues created from activities where users play a major role in value creation such as those revenues created from:■ selling online advertising space;■ digital intermediary activities; and■ the sale of data generated from user-provided information.The DST should only be levied on companies which totalise:■ annual worldwide revenues of €750 million or more; and■ annual EU revenues of €50 million or more.The rate of the DST is proposed to be 3%.The DST proposal indicated that Member States shall adopt and publish by 31 December 2019 at the latest, the laws, regulations and administrative provisions necessary to comply with this Directive and that they shall apply those provisions from 1 January 2020.However, this measure is only a proposal which will require the unanimous agreement of the Member States to be adopted.


At the beginning of 2016, the European Commission published a draft directive to fight against fiscal fraud, including a country-by-country reporting mechanism. This draft was adopted on 25 May 2016, amending Directive 2011/16/EU as regards the mandatory automatic exchange of information in the field of taxation. The Member States have to apply their rules no later than 5 June 2017.However, the French Parliament took the lead and from 1 January 2016 imposed an obligation to report accounting and taxable results country-by-country. Companies which hold foreign subsidiaries or branches, establish consolidated accountings and realise a consolidated turnover of over €750 million, are subject to this specific reporting obligation. The France Country-by-Country report shall be filed at the latest on 31 December 2018 for the fiscal year closing 31 December 2017.


French legislation provides for multiple grants and tax incentives to attract new investors. They take the form of tax credits and exemptions at both a national and regional level. Investors must meet strict criteria to apply for these.The main incentive provided by French tax legislation is the “R&D tax credit” (“credit d’impôt recherche”), which is a corporate tax incentive based on the research and development expenditure incurred by any trading company located in France, regardless of sector and size. This mechanism allows all companies to benefit from a 30% (under €100 million) or 5% (exceeding €100 million) partial refund (either by way of tax reduction or tax reimbursement). This mechanism was extended to innovation expenditures incurred by SMEs, offering a yearly tax credit of 20% for up to €400,000 of expenses (that is, a yearly tax credit of €80,000).



The French Government has already tried to introduce what was commonly called the “Google Tax” in the 2017 Finance Bill.


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Tirard, Naudin is a highly reputed Paris-based boutique law firm co-founded in 1989 by Jean-Marc Tirard and Maryse Naudin, which specialises in international tax and estate planning (including trusts), tax representation and litigation in all aspects of French taxation, with a particular emphasis on international tax issues. The firm’s experience in the trust field is virtually unique in France. Its client base includes corporate clients, who come both for its special expertise in negotiating with the French tax authorities and for its experience of structuring international transactions. It also acts for high-net-worth private clients and their families who need help in resolving complex tax and inheritance issues. It has considerable expertise in property tax issues and the creation of efficient structures for non-resident investors. Tirard, Naudin acts regularly as “lawyer’s lawyers”, providing specialist support for other firms and their clients. The firm’s two founding partners are now assisted by Ouri Belmin, who is in charge of Tirard, Naudin’s team in Paris.

Maryse Naudin began her career in the tax department of one of the major accounting firms, where she was in charge of the real estate practice and the South East Asia region, prior to co-founding Tirard, Naudin. She now has more than 35 years’ experience in advising and defending varied clientele, from multinational corporations to high-net-worth individuals, in relation to cross-border tax issues. She has a particular expertise in advising foreign investors acquiring French real estate property, as well as French clients with foreign interests. Ms. Naudin also has a wealth of expertise in matters relating to trust aspects in a civil law environment, European taxation and, in particular, tax litigation with respect to community freedoms. She is the co-founder and former secretary of the French branch of STEP, and a former chairman of the International Estate Planning Commission of the Union Internationale des Avocats. She is a member of the international Academy of Estate and Trust Law.

Maryse NaudinTirard, Naudin9 rue Boissy d’Anglas75008 ParisFrance

Tel: +33 1 53 57 36 00Email: [email protected]: www.tirard-naudin.com


Chapter 13

Noerr LLP

Dr. Martin Haisch

Dr. Carsten Heinz

Germany


Under the Corporate Income Tax Act, corporate bodies, including companies, are tax-resident in Germany if they either have their effective place of management or their registered seat in Germany.

2 Transaction Taxes


Currently, there are no documentary taxes in Germany.


Germany has a Value Added Tax (VAT) that is based on the European common system of VAT. The VAT standard rate is 19%. A reduced rate of 7% applies to certain goods and services (e.g., books, food, passenger transport and accommodation in hotels).


The delivery of goods and the supply of services by an entrepreneur, whose turnover plus applicable tax in the previous calendar year did not exceed EUR 17,500 and is not expected to exceed EUR 50,000 in the current calendar year, are exempt from VAT. In addition, there are certain deliveries or supplies – mainly in the financial sector – that are exempt from VAT.


Input VAT on deliveries or supplies is fully recoverable by an entrepreneur if the deliveries or supplies are entirely used to render taxable deliveries or supplies that are not exempt from VAT. By way of contrast, as a general rule input VAT on deliveries or supplies that are used to make tax-exempt deliveries or supplies is not deductible.



On 1 January 2018, there were 96 income tax treaties between Germany and other countries in force.


German income tax treaties generally follow the OECD Model Convention(s). In addition, the Federal Ministry of Finance has developed a specimen tax convention which is the basis for negotiating all new treaties. Again, this specimen generally follows the OECD Model Convention but also contains certain deviations from it.


Treaties have to be incorporated into domestic law by adoption by the German Parliament and the German Federal Council and by ratification by the German Federal President before they take effect.


Germany generally incorporates the entirety of treaties into its domestic law, including anti-treaty shopping rules and limitation on benefits articles.


Pursuant to § 2 of the General Tax Code, treaties take precedence over domestic tax laws if the treaties have been incorporated into German law. Notwithstanding, domestic laws override treaty provision if they are more specific (special law repeals general laws) or if they have been introduced subsequently to the treaty rule (later law repeals earlier laws). Such treaty overrides constitute a breach of the treaty but are regarded to be constitutional in Germany.


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Interest paid to a non-resident is generally not subject to withholding tax. Exceptions apply to interest on shareholder loans that are not at arm’s length and to interest on certain hybrid instruments from German issuers (e.g., profit participating loans, silent participations, convertible bonds, jouissance right).


Already in 2008, Germany introduced a general limitation on the deduction of interest payments (so-called interest barrier). The interest barrier applies to shareholder, related-party, as well as third-party debt irrespectively. As a general rule, the deduction of the annual net-interest expenses (i.e., interest expenses after full deduction of interest income) is capped at 30% of the entrepreneur’s taxable earnings before interest, taxes, depreciation and amortisation (EBITDA) per annum. However, net-interest expenses that are not deductible under this 30%-rule are carried forward for an unlimited period of time and may be deductible in future tax periods.


There are three exceptions to the 30%-rule: (i) the annual net-interest expenses are less than EUR 3 million; (ii) the entrepreneur does not belong to a group of companies; and (iii) the equity ratio of the entrepreneur is equal or higher than the equity ratio of the entire group. However, the exceptions under (ii) and (iii) are not available if so-called “harmful shareholder financing” exists.


Yes, the interest barrier applies to shareholder debt as well as third-party debt. The “back to back” financing could even qualify as “harmful shareholder financing” with the consequence that the abovementioned two exceptions to the 30%-rule would not be applicable.


In addition to the interest barrier, which applies to interest payments to German-residents and non-residents irrespectively, there are currently no further restrictions on the tax relief of interest deductions, besides from the dealing-at-arm’s-length principle.


Currently, there is no mandatory withholding tax on property rental payments made to non-residents. However, the German tax authorities may order tax to be withheld on rentals paid to non-residents on a case-by-case basis if this is appropriate for securing the taxation of such income.


Germany allows VAT grouping. The VAT group can affect only those parts of companies, which are located in Germany. The impact of the Skandia case on the German VAT grouping has not yet been finally settled by German case law.


Real estate transfer tax is levied on certain direct and indirect transfers of domestic real estate. E.g., the sale or other transfer (e.g., by way of reorganisation) of legal title in German real estate is subject to this transfer tax but also the direct and indirect change of at least 95% ownership in a partnership that holds domestic real estate as well as the direct and indirect “unification” of at least 95% of the share in a corporation that holds domestic real estate. There are also plans to reduce the 95% threshold. Depending on the federal state, the tax rate is between 3.5% and 6.5% of the purchase price or the real estate value. German real estate transfer tax applies irrespectively of the tax-residency of the person or entity subject to the tax.


German Insurance Tax applies to the insurance premiums on insurance contracts that have a certain link to Germany (e.g., the insured party is resident in Germany, the insured object is located in Germany or the insurer is resident in Germany) at a standard rate of 19% (other rates exist). In addition, there is energy tax, tobacco tax, electricity tax, beer tax, coffee tax, alcoholic beverage tax, spirits tax, sparkling wine tax as well as racing bet and lottery tax, etc.



Dividends paid to a non-resident are subject to a withholding tax at a total rate of 26.375%. A reduction or relief from withholding tax might be available based on the EU Parent-Subsidiary Directive or on a tax treaty. However, to be able to rely on the EU Parent-Subsidiary Directive or a tax treaty the dividend receiving corporation has to meet certain substance requirements (§ 50d (3) of the Income Tax Act; so-called anti-directive or treaty shopping rule).


Certain royalties paid to a non-resident are subject to a withholding tax at a total rate of 15.825%. A reduction or relief from withholding tax might be available based on the EC Interest and Royalties Directive 2003/49/EC or on a tax treaty. Again, to be able to benefit from the EC Interest and Royalties Directive 2003/49/EC or a tax treaty the royalties receiving corporation have to meet certain substance requirements (see question 3.1 above).

Noerr LLP


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Tax losses carried forward and current year losses expire if a single (direct or indirect) shareholder acquires more than 50% of the issued capital (i.e., voting rights) within a five-year period; an acquisition of more than 25% and up to 50% leads to a pro-rated expiry of said tax losses (so-called “harmful acquisitions”).These forfeiture rules do not apply (i) to “harmful acquisitions” as part of certain intra-group reorganisations, or (ii) to the extent the tax losses are covered by uncrystallised/unrealised profits in the corporation’s assets that would result in German taxation upon realisation.In relation to “harmful acquisitions” occurring after 31 December 2015, tax losses may not expire upon special application where the corporation has maintained exclusively the same business during a specified observation period and during this period no “harmful event” has occurred. In this context, “harmful events” include the discontinuance of the business, the commencement of an additional business and a change in activity/business sector.


No, retained and distributed profits are taxed at the same rate at the level of the corporation.


In Germany real estate tax (Grundsteuer) is levied on the ownership of real estate as well as building rights on land and its development. To the contrary, a general wealth tax (Vermögenssteuer) is currently not applied.

5 Capital Gains


For corporations, capital gains and losses are treated and taxed equally to ordinary/on-going income.


Germany provides for an effective 95% tax-exemption for capital gains resulting from the sale or disposal of shares in German or foreign corporations. The tax-exemption applies regardless of a minimum holding quote and period. On the contrary, capital losses resulting from the sale or disposal of shares in German or foreign corporations are not deductible for German tax purposes. These rules do not apply to certain shareholdings of banks, financial service institutions or life and health insurance companies.


There is a relief for reinvestment if capital gains from the disposal of certain assets are reinvested in equivalent assets within a period of four years (§ 6b of the Income Tax Act).


German corporations must comply with the dealing-at-arm’s-length principle. This is the main principle for related party transactions. The prices for those transactions have to be settled on these grounds applying the traditional transfer pricing methods. In addition, there is further legislation spread throughout different acts and regulations.



German corporations are subject to the Corporate Income Tax and Trade Tax on their corporate profits. The Corporate Income Tax amounts to a total of 15.825% (including a 5.5% solidarity surcharge on the 15% Corporate Income Tax rate). The Trade Tax rate depends on in which municipality the corporation is effectively managed and ranges from 7% up to 17% in large cities. This results in a combined headline tax rate for corporations of at least 22.835% up to 32.975%.


The tax bases for corporations are generally based on the accounting P&L statement. However, there are important adjustments for tax purposes.


There are two types of adjustments: (i) accounting positions are not at all recognised for tax purposes; and (ii) accounting items are valued differently for tax purposes. In the first category fall, for example, the prohibition to record liabilities that are contingent on earnings or profits (§ 5 (2a) of the Income Tax Act) and the prohibition to show provision for impending losses (§ 5 (4a) of the Income Tax Act). Tax rules that provided for a valuation that deviates from the accounting provisions have become quite abundant in recent years, namely for pension liabilities (§ 6a of the Income Tax Act) and deprecations (§§ 7 et seqq. of the Income Tax Act).


There are grouping rules in Germany that allow for tax groups for Corporate Income and Trade Tax purpose (in addition to VAT grouping, see question 2.5 above). To enter into such a tax group, the parent corporation must have a majority shareholding in the corporate subsidiary (i.e., more than 50% of the voting rights) and concluded a profit and loss absorption agreement for a period of at least five years. Furthermore, the parent corporation must have a German permanent establishment and the effective place of management of the corporate subsidiary has to be in Germany. The latter generally excludes a German tax group with subsidiaries tax-resident overseas.


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There is no withholding tax for the remittance of profits by a German branch.

7 Overseas Profits


Since Germany follows the world income principle, profits earned in an overseas branch are subject to German Corporate Income Tax but are not included in the tax basis for German Trade Tax purposes due to its territorial limitation. However, such profits are generally exempt from German income taxation based on applicable tax treaties. In case the foreign branch is “low taxed” within the meaning of the German CFC rules (see question 7.3 below), Germany does deny the application of the exemption method and only allows foreign tax credits (so-called switch over).


The 95% participation exemption (see question 5.2 above) also applies to dividends from a local company received by a non-resident company subject to the general 10% holding requirement.


Yes, Germany has “controlled foreign company” rules (“CFC rules”). These apply in relation to foreign corporate bodies that are subject to low taxation (i.e., an (effective) tax rate of less than 25%) and which are held by German shareholders to more than 50% (for detrimental capital investment income (e.g., interest) the participation threshold is lowered to 1%). As a result, income earned by the foreign corporation is treated as taxable income of the German shareholders. These rules are not applied to controlled foreign companies that are residents of the EU/EEA Member States and have sufficient substance (“Cadbury-Schweppes” test).



Non-residents are subject to (corporate) income tax with capital gains from the sale or disposal of German real estate whether commercial or residential. As an exception, such gain might not be subject to tax if the real estate has been held by a private individual for more than 10 years prior to the sales or disposal. Irrespective of any holding period, a sale or disposal will trigger German real estate transfer in the hands of the non-resident.


As a general rule, there is no German withholding tax on the proceeds of selling a direct or indirect interest in local assets/shares. The main exception to this rule is where a German tax-resident private individual sells capital investments (including shareholdings of less than 1% in the capital of the issuer but not interest in partnerships). In such cases, generally the German bank, where the capital investments are held in custody, has to collect withholding tax at a total rate of 26.375% on the capital gains or – if the acquisition costs are not know to the bank – the sales proceeds.



The formation of a subsidiary in Germany is not subject to any tax, in particular, there is no capital duty.


A German corporate subsidiary is fully subject to German Corporate Income and Trade Tax. In addition, dividends paid from the German subsidiary to the non-resident company are also generally subject to German withholding tax. In contrast, in case of a German permanent establishment/branch of a non-resident company, the company is subject to German Corporate Income Tax with the profits of the branch and the branch itself is subject to Trade Tax. There is, however, no branch profits tax.


For tax purposes, a branch is treated as a functionally separate entity following the Authorised OECD Approach. Specifically, the allocation of profits between headquarter and branch are determined by a so-called “two steps approach” pursuant to § 1 (5) of the Foreign Tax Act:■ In the first step, the personnel functions of the headquarter

and the branch have to be identified and allocated. Based on the allocated functions, the assets and liabilities required to perform these functions have to be allocated. Further, the risks and awards associated with the functions, assets and liabilities so distributed have to be allocated accordingly. Finally, the capital required to perform the relevant functions must be allocated to the branch.

■ On the basis of this allocation, the second step is to determine the type of business relationship between the headquarter and its branch and the transfer prices for these business relationships.


A branch itself generally does not benefit from tax treaties because it is legally part of its corporate headquarters and therefore not a resident for tax treaty purposes.


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Noerr LLP Germany



Germany has already had anti-treaty shopping rules, CFC legislation and some anti-hybrid rules with a correspondence principle for dividends and expenses of a partnership member regarding their interest in the partnership prior to BEPS. In addition, a so-called licence barrier was introduced as of 1 January 2018. These rules limit the deductibility of licence fees or royalty payments to related parties that benefit from preferential tax regimes that are incompatible with the OECD Nexus Approach.


Germany has published an “Action Plan against Tax Fraud, Tax Avoidance Schemes and Money Laundering” on the back of which a transparency register has been introduced.


The German jurisdiction does support the CBCR and has implemented it into domestic law (§ 117 of the General Tax Code).


No, there is no preferential tax regime such as a patent box.



No, there are no unilateral actions to tax digital activities in Germany yet.


No, the German Ministry of Finance does not agree with the European Commission’s interim proposal for a digital services tax. However, the German Ministry of Finance supports the general idea of expanding the tax base concerning a digital presence.


Currently, non-residents are not subject to (corporate) income tax with capital gains from the sale or disposal or shares in (foreign) corporations holding German real estate. However, there are plans to make such indirect transfers taxable. For German real estate transfer tax purposes though, the direct and indirect change of at least 95% ownership in a partnership that holds domestic real estate as well as the direct and indirect “unification” of at least 95% of the share in a corporation that holds domestic real estate, are taxable also for non-residents.


Germany introduced a Real Estate Investment Trust (REIT) in 2007. It benefits from a special tax regime (i.e., exemption from Corporate Income and Trade Tax) if certain preconditions are met (e.g., distribution of at least 90% of the net profits). Distributions from a REIT are then taxed exclusively at investor level.



§ 42 of the General Tax Code provides for a general anti-avoidance rule for taxes in general.


Currently, there is no disclosure regime for avoidance schemes. However, as of 1 January 2019, Germany has to implement such a regime based on the Anti-Tax Avoidance Directive (draft of § 138d of the General Tax Code).


No, there are no such rules yet. The draft of § 138d of the General Tax Code does, however, also include those parties.


No, German jurisdiction does generally not encourage “co-operative compliance”.


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Noerr LLP Germany

Noerr stands for excellence and an entrepreneurial approach. With highly experienced teams of strong characters, Noerr devises and implements solutions for the most complex and sophisticated legal challenges. United by a set of shared values, the firm’s 500+ professionals are driven by one goal: our client’s success. Listed groups and multinational companies, large- and medium-sized family businesses as well as financial institutions and international investors all call on the firm.

The Noerr tax team consists of over 60 professionals throughout Europe and advises and assists banks, funds, private equity houses, investors, corporates and entrepreneurs alike in almost all domestic and international tax issues – be it on a project basis or handling on-going matters. Our experts combine specialisation with an interdisciplinary approach and deliver practicable and commercial advice taking into account the interdependence between law, tax and audit as well as industry specifics. We also help our clients to master tax audits and win tax litigation against the revenue.

Dr. Martin Haisch is tax partner at Noerr and specialises in tax and regulatory law, particularly with regard to financial products and transactions, funds, and structured finance. Furthermore, he advises on restructuring and M&A and real estate transactions and assists clients during tax audits and in proceedings before fiscal courts. His clients include financial institutions, fund houses and investors of all kinds. Martin Haisch is the co-editor of “Rechtshandbuch Finanzinstrumente”, a legal handbook on financial instruments published by Beck, and “Recht der Finanzinstrumente”, a legal magazine on financial instruments published by dfv Mediengruppe. He regularly publishes and speaks on tax and regulatory matters, especially with regard to financial products and funds.

Dr. Martin HaischNoerr LLPBoersenstraße 160313, Frankfurt am MainGermany

Tel: +49 69 97147 7221Email: [email protected]: www.noerr.com

Dr. Carsten Heinz heads Noerr’s Tax Department. His practice area is domestic and cross-border tax planning for mid-sized or multinational companies as well as for international funds. He specialises in developing tax-optimised structures and advises his clients on tax-optimised financing, group restructuring, real estate transactions and M&A. His clients are from the automotive, the road construction, the financial, the private equity or the insurance sectors. He is a lecturer for reorganisation tax at the Freie Universität Berlin.

Dr. Carsten HeinzNoerr LLPBrienner Straße 2880333, MünchenGermany

Tel: +49 89 28628 550 Email: [email protected] URL: www.noerr.com


Chapter 14

Stavropoulos & Partners Law Office

Ioannis Stavropoulos

Aimilia Stavropoulou

Greece


According to article 28 (1) of the Greek Constitution, international treaties, once they are ratified by law and come into effect, constitute an integral part of the internal legal order and supersede any contrary domestic provision. This applies to both existing and subsequently-introduced domestic law provisions.


A legal entity or other entity is considered tax-resident in Greece if one of the following conditions is met: it has been incorporated or established according to the Greek legislation; it has its registered seat in Greece; or the place of effective management is located in Greece. The determination by the tax authorities that the effective management of a legal entity is exercised in Greece is made on the basis of the actual facts and circumstances of each case and by taking into account mainly: the place where day-to-day management is exercised; the place where strategic decisions are made; the place where the annual general meeting of shareholders or partners is held; the place where the books and records are kept; the place where the meeting of the members of the board of directors (BoD) or other executive management board takes place; and the residence of the members of the BoD or other executive management board. The residence of the majority of the shareholders or partners may also be taken into consideration. Companies that are established and operate according to Law 27/1975 on the taxation of vessels and L.D. 2687/1953 on the investment and protection of foreign capital are explicitly excluded from the application of these provisions on tax residence.

2 Transaction Taxes


Stamp duty is levied on a limited number of transactions, documents and contracts, in the form of a percentage on the value of the transaction, which is not subject to VAT. The most notable cases where stamp duty applies are commercial property leases (3.6%), private loan agreements (2.4–3.6%), commercial loan agreements (2.4%) and cash withdrawal facilities granted to shareholders and partners (1.2%).



Greece has concluded income tax treaties with 57 states, i.e. all the EU Member States and: Albania; Armenia; Azerbaijan; Bosnia-Herzegovina; Canada; China; Egypt; Georgia; Iceland; India; Israel; the Republic of Korea; Kuwait; Mexico; Moldova; Morocco; Norway; Qatar; Russia; the Republic of San Marino; Saudi Arabia; Serbia; South Africa; Switzerland; Tunisia; Turkey; Ukraine; the United Arab Emirates; the USA; and Uzbekistan.


Greece’s tax treaties are generally based on the OECD Model Convention (with the exception of the treaties with the USA and the UK, which were both concluded in 1953, i.e. prior to 1963 when the first draft of the model was published).


Greece follows the dualistic principle. Thus, as prescribed by article 36 (2) of the Greek Constitution, treaties (including income tax treaties) need to be incorporated into domestic law, by virtue of a statute voted by the Greek parliament and published in the Official Government Gazette, before they take effect.


Tax treaties concluded by Greece do not generally incorporate anti-treaty shopping rules, with the following exceptions:(i) the Greece-Luxembourg tax treaty precludes from its

provisions Luxembourgian holding companies;(ii) the Greece-USA tax treaty provides for a limitation on

benefits clause; and(iii) recent tax treaties (e.g. Belgium, Ireland, etc.) contain anti-

abuse provisions precluding the application of treaty benefits concerning interest and royalties.

On 7 June 2017, Greece signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, in which a number of anti-treaty shopping rules are included.


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Stavropoulos & Partners Law Office Greece


1. Customs duties are imposed on imports from non-EU Member States, as prescribed by the Community Customs Code and the Common Customs Tariff.

2. Excise duties on coffee, tobacco products, alcohol and alcoholic drinks, and fuels (heating and transportation) are imposed in line with EU law.

3. A special luxury tax is levied on certain categories of goods considered “luxury goods”, such as leather goods, jewellery and precious stones, precious metals, aircraft, seaplanes and helicopters of private use.

4. As of 1 June 2016, cars, motorcycles and trucks that enter Greek territory are subject to registration duty at new rates varying from 4% to 32% on their retail sale price (before taxes), regardless of their cylinder capacity. Ηybrid cars, previously exempted, are also burdened with 50% of the applicable registration duty.

5. Insurance tax applies on the amount of premiums and related costs charged by insurance companies, and is borne by the customer. The rates vary from 4% to 20% depending on the type of insurance. Life insurance premiums paid in the context of contracts with a duration of at least 10 years are exempted.

6. An annual contribution of 0.6% is imposed on the average outstanding monthly balance of each loan granted by a bank operating in Greece or abroad. Certain exceptions apply with regard to loans between banks, loans to the Greek State, loans funded by the European Investment Bank, etc.



Dividends or profits distributed by a locally resident company to a non-resident are subject to (final) withholding tax at a rate of 15%. Profits deriving from a branch of a foreign company are not subject to any withholding tax on distribution.Dividend income may be subject to a lower withholding tax rate, provided the recipient of the dividend income is resident in a state with which Greece has concluded a tax treaty which provides for a more favourable tax treatment. No withholding tax applies if the conditions of the EU Parent-Subsidiary Directive (2011/96/EU) are satisfied (i.e. a 10% minimum shareholding for an uninterrupted period of at least 24 months), subject to the provisions of the recently enacted anti-abuse rules concerning hybrid mismatch arrangements and tax avoidance arrangements without economic and business substance that are solely aimed at obtaining a tax benefit.


Royalties paid to a non-resident are subject to a 20% (final) withholding tax, subject to a reduced rate under an applicable tax treaty or the application of the EU Interest and Royalties Directive (i.e. a 25% minimum shareholding for an uninterrupted period of at least 24 months).


The Greek Value Added Tax Code is based on EC Directive 2006/112/EC, i.e. on the common system of Value Added Tax (the former Sixth EC Directive). The standard VAT rate is 24%. Two other rates may apply depending on the nature of goods or services (13% and 6%). VAT rates reduced by 30%, namely to 17%, 9% and 4%, apply in certain Greek islands (e.g. Lesvos, Chios, Samos, etc.). Such reduced-rate status shall remain until 31 December 2018.


VAT applies to all stages of production and distribution of goods, provision of services and intra-community acquisitions or imports of goods from abroad, against a consideration. However, VAT exemptions are applicable which either: (i) preclude the recovery of input VAT (e.g. provision of services of a social or cultural nature, such as medical services, educational services, insurance services and most banking services); or (ii) do not, in which case the supplies are treated as zero-rated (e.g. exports, intra-community supplies, international transit of goods and transactions related to shipping and the aircraft sector).


Taxable persons are entitled to deduct input VAT from output VAT, as long as the goods and services are wholly used in taxable transactions within the same tax period or in exempt transactions but with retention of the right to deduct VAT. However, input VAT on supplies that are used to render tax-exempt supplies without retention of the right to deduct VAT is, in principle, not deductible.If taxable persons render both taxable and tax-exempt services, input VAT on supplies for both has to be split up according to the respective percentage of taxable supplies to determine the deductible part of input VAT.If input tax is higher than output tax at the end of the tax year, such difference may be either carried forward or refunded, if certain conditions are met.Lastly, there are a number of expenditures for which input VAT is not deductible, e.g. hotel accommodation, food, drink and tobacco.


No, it does not.


1. Real estate transfer tax is imposed on the higher of the objective value or the market value of the property sold and is borne by the buyer at a percentage of 3% (except from the first sale of new buildings, where VAT applies with respect to building licences issued after 1 January 2006).

2. Sales of shares listed on the Athens Stock Exchange or any other recognised stock exchange market are subject to 0.2% transaction tax.


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or states with a preferential tax regime (i.e. states where there is no taxation or de facto taxation, or where profits, income or capital are taxed at a rate equal to or lower than 50% of the corresponding Greek tax rate) are not tax-deductible, unless the taxpayer proves that these expenses relate to real and ordinary transactions and do not result in transfer of profits, income or capital for tax avoidance or evasion. Exceptionally, deduction of interest expenses paid to a tax resident in an EU/EEA Member State is not precluded, if a legal basis for exchange of information between Greece and the Member State in question exists.


No, there is not.


A general provision sets out the “arm’s length” principle by stating that any profit not realised by a domestic legal person or legal entity due to economic or commercial terms in transactions with associated persons different from the terms that would apply between non-associated persons (independent businesses) or between associated persons and third parties, increases the taxable base of the domestic legal person or legal entity by following the OECD’s general principles and guidelines for intercompany transactions. “Associated person(s)” means: a) any person who directly or indirectly owns shares, parts or participation equity in another person of at least 33% in value or number, or rights to profits, or voting rights; b) two or more persons, if a third person owns directly or indirectly shares, parts, voting rights or participation equity in such persons of at least 33% in value or number, or rights to profits, or voting rights; or c) any person with whom there is a direct or indirect relationship of substantial management dependence or control, or who exercises decisive influence or has the ability to exercise decisive influence over another person, or if both persons have a direct or indirect relationship of substantial management dependence or control or the ability to exercise decisive influence through a third party.Specific rules exist for the transfer pricing documentation file, as well as the procedure for an Advance Pricing Arrangement (APA) related to transfer pricing methodology.



The headline rate of tax on corporate profits is 29%.By virtue of Law 4472/2017, published on 19 May 2017, any business income realised by legal persons/legal entities as of 1 January 2019 shall be taxed at a rate of 26%, with the exemption of credit institutions, for which the currently applicable rate of 29% shall continue to be applicable. The reduction of the corporate income tax rate from 29% to 26% shall be applicable, on the condition that there is no divergence from the medium-term budgetary objectives set in the Economic Adjustment Program following an assessment of the International Monetary Fund and the European Commission in collaboration with the European Central Bank, the European Stability Mechanism, and the Greek authorities.


Interest payments effected to a non-resident are subject to a 15% (final) withholding tax, subject to a reduced rate under an applicable tax treaty or the application of the EU Interest and Royalties Directive (i.e. a 25% minimum shareholding for an uninterrupted period of at least 24 months). It is to be noted that interest received from Greek government bonds and treasury bills by legal entities that are not tax-resident in Greece and that do not maintain a permanent establishment in Greece are not subject to withholding tax.


Pursuant to the Greek “thin capitalisation” rules, interest costs are not recognised as deductible business expenses if: a) they exceed the amount of EUR 3 million per year; and b) they exceed interest income and that excess interest expenditure exceeds 30% of taxable earnings before interest, tax, depreciation and amortisation (EBITDA). Any interest cost that is thus not deductible may be carried forward indefinitely to future years and will be deductible in future years to the extent that those future years indicate an uncovered EBITDA amount.


There is no safe harbour. However, it should be noted that the aforementioned “thin capitalisation” rules do not apply to credit institutions, leasing companies, and factoring companies that are licensed by the Bank of Greece or respective regulatory authorities of other EU Member States.


Yes, interest from loans guaranteed by a parent company is deductible, on the conditions prescribed under the aforementioned “thin capitalisation” rules.


Interest expenses on loans received from third parties, to the extent that they exceed the interest that would arise if the interest rate was equal to the interest rate of loans on open deposit/withdrawal accounts provided to non-financial corporations, as indicated in the Statistical Bulletin of the Central Bank of Greece for the nearest period preceding the date of borrowing, are not tax-deductible. The above interest deductibility restrictions do not apply to inter-bank loans, bonds, and inter-company loans issued by sociétés anonymes.In addition, interest payments to tax residents in non-cooperative states (i.e. non-EU Member States which: have not concluded and do not apply a convention on administrative assistance in tax matters with respect to Greece; have not received at least a largely-compliant rating from the OECD on transparency and exchange of information standards; and have not committed to the exchange of financial account information under the OECD Common Reporting Standard by the end of 2018, as well as at least 12 other countries)


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The ownership of real estate property/property rights in Greece is subject to the Uniform Tax on the Ownership of Real Estate Property (ENFIA), which consists of a principal tax imposed on each real estate property and a supplementary tax imposed on the total value of the property rights on real estate property of the taxpayer subject to tax.Said tax is not imposed on the objective value of real estate property, but is determined on the basis of various factors, according to the final registration of the property at the land registry or the ownership title.In addition, a special real estate tax is imposed on companies which have ownership or usufruct on real estate located in Greece at the rate of 15%. However, exemptions are provided by law, e.g. listed companies, companies with gross revenues from other activities higher than those revenues derived from the exploitation of real estate in Greece, sociétés anonymes with registered shares up to the level of individual shareholder(s) or which declare their ultimate individual shareholders with a Greek tax registration number, etc.

5 Capital Gains


In general, capital gains derived by a Greek company are taxed as business profits and are, thus, included in the taxable profits of the company and taxed at the standard corporate income tax rate of 29%.The income derived from the goodwill arising upon the transfer of Greek government bonds or Greek treasury bills that are acquired by legal entities that do not qualify as Greek tax residents and do not maintain a permanent establishment in Greece, is tax-exempt.


No, there is not.


No, there is not.


No, it does not.



The issuance of share capital upon formation of a company is exempt from capital duty. A 0.1% surcharge for the benefit of the


Taxable business profit occurs after deduction, from the entire business income, of the business expenses, the depreciation and the provisions for bad debts. Business income includes the revenues from sale of assets as well as the liquidation proceeds. Taxable profit is determined each tax year, as set out in the entity’s P&L account, according to the Greek Accounting Standards or the International Accounting Standards (IAS), after adjustment for income tax purposes.


Deduction of expenses is subject to the following conditions they: (i) are incurred in the interest of the business or in the ordinary course of the business; (ii) correspond to an actual transaction and the value of the transaction is not deemed lower or higher than the market value, based on elements available to the tax administration; and (iii) are entered in books where transactions are recorded for the period in which they are incurred and are supported by appropriate documentation. In addition, specifically prescribed expenses are not deductible, e.g. interest on loans received from third parties, except for bank loans, interbank loans and bond loans issued by corporations, to the extent that they exceed the interest that would arise if the interest rate was equal to the rate of overdraft account loans to non-financial corporations, as indicated in the Statistical Bulletin of the Bank of Greece for the nearest period preceding the date of borrowing; any expense related to a purchase of goods or services, of more than EUR 500, where partial or total payment was not made via a bank payment instrument; fines and penalties, etc.


Νο, there are not.


If, during a tax year, direct or indirect participation or the voting rights of a company have changed by more than 33% and, in parallel, during the same and/or the following tax year the business of the company representing at least 50% of the company’s turnover has changed as compared to the preceding tax year, the right to carry forward tax losses ceases to apply.


Tax is not imposed at a different rate to distributed and retained profits. However, in the case of capitalisation or distribution of profits which have not been subjected to any corporate income tax (e.g. untaxed reserves), the capitalised or distributed amount is, in any case, subject to corporate income tax.


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Greek tax legislation for the first time pursuant to Law 4172/2013 (effective as of 1 January 2014). According to these rules, the taxable income of a taxpayer with tax residence in Greece includes undistributed income of a legal person or legal entity with tax residence in another country, under the following conditions:■ the taxpayer, alone or together with affiliated persons, directly

or indirectly owns shares, parts, voting rights, or participation in equity in excess of 50% or is entitled to receive more than 50% of the profits of that legal person or legal entity;

■ the above legal person or legal entity is subject to taxation in a non-cooperative state or in a state with a preferential tax regime;

■ more than 30% of the net income before taxes earned by a legal person or legal entity derives from interest or other income generated from financial assets, dividends, royalties or capital gains, income from movable or immovable property, or income from insurance, banking, or other financial activities;

■ more than 50% of the corresponding source of income, as illustrated above, of the legal person or entity arises from transactions with the taxpayer or with its affiliates; and

■ the legal person or entity is not a company whose principal class of shares is subject to trading on a regulated market.

The above do not apply to legal persons or legal entities with tax residence in an EU or EEA Member State, unless the establishment or the financial activity of such legal entity constitutes a fictitious situation with a view to avoiding taxation.



Legal entities which are non-resident or do not maintain a permanent establishment in Greece are not subject to Greek corporate income tax. Therefore, capital gains from the disposal of commercial real estate located in Greece by a non-resident legal entity are not subject to tax in Greece.


Capital gains earned by individuals that arise from the transfer of participations which attract more than 50% of their value directly or indirectly from real estate and do not constitute income from business operations, are taxed at a rate of 15%. The effect of the above provision is postponed until December 31 2018 by virtue of L. 4509/2017. If the aforementioned income constitutes business income, it is taxed at the ordinary corporate income tax rate of 29%.


Yes. Real Estate Investment Companies (REICs), which can be considered the equivalent of REITs in Greece, benefit from several tax exemptions. The main exceptions are:■ Exemption from corporate income tax with the exception of

dividends acquired in Greece, as L. 4389/2016 provides.

competition committee applies on the contribution of capital to a société anonyme upon its formation or any increase.


No, there is not.


A branch located in Greece is treated, according to the so-called Authorised OECD Approach (AOA), as a functionally separate entity, although it is legally a part of the parent company. Its profits are determined by taking into account the functions performed, assets used and risks assumed by the enterprise through the branch. The Greek branch of a foreign head office is subject to Greek corporate income tax as if it were a Greek corporation.


The head office, but not the branch itself, is entitled to treaty benefits because a branch is legally a part of its head office and not a resident for tax treaty purposes. However, the non-discrimination clauses in the tax treaties that Greece has signed are applicable. For EU Member States, discrimination of branches would also be prohibited by freedom of establishment.


No, it would not.

7 Overseas Profits


Resident companies are taxed on their worldwide income. Therefore, profits earned in foreign branches are included in the Greek corporate income tax base of the Greek corporations.


A participation exemption regime applies to intra-group dividends received by a local company from a non-resident company which has its legal seat in another EU Member State, subject to the provisions of the EU Parent-Subsidiary Directive (2011/96/EU). Dividends received by other non-resident companies are subject to the normal tax rate, subject to any foreign tax credit or exemption, if provided by any applicable tax treaty or the domestic legislation.


“Controlled foreign company” rules were introduced into the


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Greece has already implemented into domestic law the EU VAT Directive regarding the VAT on B2C digital services and the anti-avoidance measures included in the EU Parent-Subsidiary Directive.The existing transfer pricing rules refer to the OECD guidelines, which are, thus, immediately effective.Greece has signed a multilateral competent authority agreement for the automatic exchange of CBC reports and the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.A mutual administrative procedure provision has been included in the Greek Code of Tax Procedures. Greece is required to implement into domestic law the two EU Anti-Tax Avoidance Directives (ATAD and ATAD 2) which provide for controlled foreign company, anti-hybrid and interest limitation rules.


Greece is expected to follow the OECD recommendations for tackling BEPS.


Please refer to our answer to question 10.1.


There is a preferential tax regime for shipping companies.



Yes. In the course of OECD BEPS Action 1 and in compliance to the provisions of the VAT Directive 2006/112/EC, Greece has established a “use and enjoyment rule” applicable to broadcasting, telecommunications and electronic services provided to non-VAT taxable persons. Specifically, if the place of supply of the above services (i.e. where the recipient is located or has his permanent/habitual residence) is a non-EU country but the service is used and enjoyed in Greece, in the sense that the customer is in Greece at the time of supply, it will be taxable in Greece. Subject to certain conditions laid down in article 22 of the Greek VAT Code, the provision of e-learning and e-gambling services may be exempt from the above rule.


■ Exemption from Real Estate Transfer Tax in case of acquisition of real estate property by REICs.

■ Exemption from any tax on Capital Gains deriving from: a) the transfer of real estate property; and b) the transfer of shares.

■ Dividends distributed by a REIC are exempt from income tax.

REICs are subject to tax with a rate set at 10% of the applicable European Central Bank intervention rate (Interest Reference rate) increased by one point and calculated on the average of the investments, plus any available funds, at their current value. At investor level, there is no further income tax liability for shareholders (exhausted at REIC level) and dividends received by shareholders are exempt from Greek Withholding Tax.



A general anti-avoidance rule was first introduced with the Greek Code of Tax Procedures (Law 4174/2013). Under this rule, the tax administration may disregard any artificial arrangement or series of arrangements that aim at the evasion of taxation and lead to a tax advantage. An arrangement is considered artificial if it lacks commercial substance and is aimed at the evasion of taxation or towards a tax benefit. To determine if an arrangement is artificial, various characteristics are examined. For the purposes of this measure, the goal of an arrangement is to avoid taxation if, regardless of the subjective intention of the taxpayer, it is contrary to the object, spirit and purpose of the tax provisions that would apply in other cases. To determine the tax advantage, the amount of tax due after taking into consideration such arrangements is compared to the tax that would be payable by the taxpayer under the same conditions in the absence of such an arrangement.


No, there is not.


A person who assists or instigates another person or collaborates with another person in the commitment of tax avoidance is liable for the same penalties as the taxpayer. In addition, a person who by any means knowingly collaborates or offers immediate assistance in committing tax evasion is punishable as a primary accessory in the crime.


No. However, tax amnesty schemes and voluntary disclosure programmes are occasionally introduced, providing for tax/penalty reductions or other procedural benefits.


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“STAVROPOULOS & PARTNERS” Law Office is a Greek law firm which was established in Athens in 1991. Since its formation, the firm’s practice has included legal counsel, advice and litigation on a wide range of Greek and EU business and tax law matters. Throughout its 27 years in the Greek legal market, the firm has developed widely-recognised expertise and gained an excellent reputation, ranked within high tiers in the fields of taxation, EU and competition, corporate and mergers and acquisitions, as well as dispute resolution.

The firm is privileged to serve on a constant basis companies which are considered as “blue chip” internationally, but also has vested and continuous interests and activities in Greece, handling complex and important work that requires a high level of expertise and consistency.

The lawyers of the firm have done contemporary undergraduate and postgraduate studies and are assisted by secretarial and clerical staff supported by modern infrastructure. The main target is to successfully meet the increasing demands of clientele while maintaining a high degree of dynamism, flexibility and close personal contact with each case.

Ioannis Stavropoulos has been a Managing Partner at Stavropoulos & Partners Law Office since 1991. As a tax consultant and tax attorney, he has dealt with numerous cases concerning the application of double taxation treaties, transfer pricing and EU direct taxation and VAT legislation. A number of his cases constitute leading jurisprudence published in Greek and international legal and tax journals. He has participated in legislative and scientific committees, both as an independent expert and representing various organisations. In 2012–2013 he actively participated, as an expert, in the tax reform committee which produced the new tax codes.

As a business lawyer, Ioannis has taken part in major mergers and acquisitions projects, domestic and international share and asset transactions, as well as anti-trust cases. He has published articles on various tax issues and has participated as a speaker in numerous seminars. He participates in the Taxation Committee of the American-Hellenic Chamber of Commerce, as well as in tax and legal committees of various Federations and Chambers.

Ioannis StavropoulosStavropoulos & Partners Law Office58 Kifissias Avenue151 25 MaroussiAthensGreece

Tel: +30 210 363 4262Email: [email protected]: www.stplaw.com

Aimilia Stavropoulou joined Stavropoulos & Partners Law Office in 2017. As a Junior Associate, she regularly supports the tax team in various topics mainly relating to EU and international taxation and assists with the drafting of legal opinions on corporate taxation issues related to income taxation. In the field of EU & competition law, she regularly assists in legal research on various topics and has participated in the preparation of the defence file in a significant abuse of dominance case.

She has gained valuable experience by participating in mergers and acquisitions projects with international aspects, as part of the due diligence team, and assisting in the drafting of the due diligence reports. Finally, she regularly assists in the labour law field carrying out research and responding to queries on a wide range of employment topics raised by corporate clients on several occasions, including business transformation and restructuring.

Aimilia StavropoulouStavropoulos & Partners Law Office58 Kifissias Avenue151 25 MaroussiAthensGreece

Tel: +30 210 363 4262Email: [email protected]: www.stplaw.com

Specifically, if no additional services are provided by the lessor (e.g. cleaning, change of bedsits and towels), the income derived from the lease is taxed as income from immovable property at a tax rate ranging from 15% to 45% as provided in article 40 of the Greek Income Tax Code. Alternatively, such income is taxed at a tax rate ranging from 22% to 45% as provided in article 29 of the Greek Income Tax Code.


Yes, in fact Greece was one of the Member States that signed a letter asking the European Commission to develop a proposal to target the digital economy.


According to L. 4002/2011 as in force, profits deriving from e-gambling activities are taxed according to the general provisions of the Greek Income Tax Code. In addition to this, the Greek State participates in the gross profits from this source at a rate of 35%. In compliance with article 12 of the OECD Model Tax Convention and in accordance with the reservation expressed on the application of article 12 from Greece, article 38 of the Greek Income Tax Code covers in the definition of royalties, among others, the right to use software for commercial exploitation and personal use as well as the payment for advisory services provided electronically through a problem solving database. Royalties are taxed at a rate of 20% according to article 40 of the Greek Income Tax Code. Unilateral action has been taken in the field of Airbnb platforms as well. The taxation of renting services through the Airbnb platform is regulated under article 39A of the Greek Income Tax Code.


Chapter 15

Vivien Teu & Co LLP

Vivien Teu

Kenneth Yim

Hong Kong

business substance in Hong Kong in order to obtain a Certificate of Resident Status from the Inland Revenue Department (the “IRD”).As such, for the aforementioned reasons, Hong Kong has opted to adopt a principal purpose test (“PPT”) only in respect of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”), under which a person will not be granted benefits under a DTA if obtaining such benefits is one of the principal purposes of the transactions or arrangements involved.


Where a DTA has been concluded, the domestic law position may be overridden by the DTA if the pertinent conditions are satisfied.


A company is resident in Hong Kong if its central management and control is exercised in Hong Kong in the relevant year of assessment. However, under Hong Kong’s territorial basis of taxation, the chargeability to tax is generally determined on the source of income rather than on residence status. Having said that, the residence status can be relevant in the application of DTA provisions with other jurisdictions.

2 Transaction Taxes


The transfer of Hong Kong stock is subject to the imposition of Hong Kong stamp duty on the instrument of transfer. The rate of stamp duty on the transfer of Hong Kong stock is currently 0.2% of the higher of the consideration or the market value of the stock transferred. The stamp duty is payable by the seller and purchaser equally (i.e. 0.1% each), while the Stamp Duty Ordinance (“SDO”) stipulates that any person who purchases Hong Kong stock, as either principal or agent, is required to execute a contract note that is liable to stamp duty at the rate of 0.1% on the consideration or value of the shares bought and sold.Under the SDO, stamp duty relief may be applied on a conveyance of an interest in stock between group companies with at least a 90% common shareholding subject to satisfying certain conditions.



Hong Kong has a relatively small yet quickly expanding double tax agreements (“DTA”) network. As at September 2018, it has concluded 40 DTAs, 38 of which are effective at the moment. Currently, seven tax information exchange agreements (“TIEAs”) have been concluded. The Government aims to expand Hong Kong’s DTA network, especially with respect to countries along the so-called “Belt and Road” business initiative, with a view to bringing the total number of DTAs to at least 50 over the next few years.


In principle, Hong Kong generally follows the Organisation for Economic Co-operation and Development (“OECD”) Model Convention in negotiating and concluding DTAs and TIEAs.


Typically, DTAs concluded with other jurisdictions are subject to ratification. More specifically, a bill would have to be passed by the Legislative Council before it is enacted into law.


In accordance with the current OECD Model Convention, Hong Kong does not incorporate limitation of benefits (“LOB”) clauses in the DTAs that have been concluded so far.Nonetheless, most of the existing DTAs concluded by Hong Kong already contain specific provisions to prevent treaty abuse under specific articles (e.g. those on dividends, interest and royalties), based on whether one of the main purposes of the arrangement or transaction is to obtain treaty benefits. Furthermore, Hong Kong’s domestic tax law also contains general anti-avoidance provisions to deny a tax benefit if a transaction is entered into for the sole or dominant purpose of enabling the taxpayer to obtain tax benefit. Moreover, in practice, both Hong Kong incorporated entities and foreign-incorporated entities must have an appropriate level of


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Vivien Teu & Co LLP Hong Kong

or exploitation (“DEMPE”) of an IP and income is derived by a non-Hong Kong resident that is an associate of that person from the use of or a right to use such IP outside Hong Kong, the part of the income which is attributable to the value creation contributions in Hong Kong will be regarded as a taxable trading receipt arising in or derived from a trade or business carried on in Hong Kong. *In this regard, the deemed assessable profit in principle is 30%, subject to tax at the ordinary profits tax rate of 16.5%, resulting in a withholding tax of 4.95% on the gross payment.


Hong Kong does not impose withholding tax on interest payments made by a resident company to residents or non-residents.


Hong Kong does not have thin capitalisation rules at present.






No, as Hong Kong does not impose withholding tax on interest. Withholding taxes are generally not levied, except on (deemed) royalties.


Payments of fees for rental or management services are not subject to withholding tax in Hong Kong.


Until recently, Hong Kong had no statutory transfer pricing rules addressing non-arm’s length transactions between “closely connected persons” and the IRD relied on the general provisions in the IRO, case law, and (since 2009) practice notes to deal with transfer pricing issues. On 4 July 2018, the Legislative Council enacted Hong Kong’s new transfer pricing regime which has codified and reaffirmed the taxpayers’ and IRD’s common understanding that transactions between related parties (which are typically determined on the basis of participation in the management, control and capital of another or of common participation by/through a third party) should follow the arm’s length principle, consistent with the OECD’s transfer pricing guidelines. In connection with the codification of the OECD’s “Rule 1”, the IRD is empowered to adjust profits or losses where a transaction between related parties departs from the


Hong Kong does not have a VAT or GST regime at present.













Hong Kong does not impose withholding tax on dividend payments made by a resident company to residents or non-residents.


In brief, the following types of payments are effectively subject to a withholding tax*:■ sums derived from the exhibition or use of cinematograph

or television films or tapes, sound recording or advertising material connected with such film, tape or recording which are deemed to arise in Hong Kong because of their exhibition or use in Hong Kong; and

■ sums derived from the use of or the right to use a patent, design, trademark, copyright material, secret process or formula or other property of a similar nature which are deemed to arise in Hong Kong because of the use of or the right to use such property in Hong Kong.

A new deeming provision on income from intellectual property (“IP”) has been introduced, but the Government has deferred the effective date of this section to the year of assessment 2019/2020 to allow the business community to analyse the implications in this regard. More specifically, where a person has contributed in Hong Kong to the development, enhancement, maintenance, protection


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At present, Hong Kong does not have any tax grouping rules.


Losses of a revenue nature can generally be carried forward indefinitely and set off against chargeable profits in the future. However, losses may not be carried back. In principle, a transfer of shares in a Hong Kong company does not affect the availability of the tax losses to be carried forward by that company, unless the change in the company’s shareholders is effected for the sole or dominant purpose of using the tax losses of the Hong Kong company. Any unused tax losses incurred by the transferor cannot be transferred to the transferee on the sale of the business or the assets of the transferor.


Both the retention and distribution of profits made by Hong Kong companies are not chargeable to tax.


Property rates, based on the estimated annual letting value, are levied as a tax on the occupation of property on a quarterly basis.

5 Capital Gains


Gains of a capital nature are specifically exempt from the charge of profits tax. Whether a gain is regarded as capital or revenue in nature is a question of facts and depends on the particular circumstances of each case. Generally speaking, and considering the frequency of a fund’s normal course of business of buying and selling of investments, gains and losses derived from the purchase and sale of investments would in practice usually be regarded from a profits tax perspective as in the nature of revenue. Conversely, capital losses are not deductible for profits tax purposes.


As both capital gains and dividends are not chargeable to profits tax, there is no such need for a participation exemption in Hong Kong.


In accordance with profits of a capital nature not being taxed, there are no special reliefs for reinvestments in this regard.

transaction that would have been entered into between independent persons, in cases where this has created a Hong Kong tax advantage. There may be the upward adjustment of profits with an assessment or additional assessment of Hong Kong tax, or a computation of loss or smaller amount of computed loss may be issued. Based on the transfer pricing “Rule 2”, i.e. the separate enterprises principle, the arm’s length principle will also apply to dealings between different parts of an enterprise such as between the head office and a permanent establishment. The attribution of profits to permanent establishments is also introduced and covered in detail.The said Rule 1 applies to transactions for year of assessment 2018/19, i.e. the period commencing 1 April 2018 onwards. Rule 2 is expected to apply as of the year of assessment 2019/20, i.e. as of 1 April 2019. As an aside, it is worth noting that a formal regime for advance pricing arrangements (“APA”) has also been established, which should facilitate taxpayers entering into unilateral APAs or bilateral APAs involving other jurisdictions.



On 29 March 2018, the Inland Revenue (Amendment) (No. 3) Ordinance 2018 (the Ordinance) was gazetted to implement a “two-tiered” profits tax rates regime (instead of the previous flat rate of 16.5%).The two-tiered profits tax rates regime will be applicable to any year of assessment commencing on or after 1 April 2018. The profits tax rate for the first $2 million of profits of corporations will be lowered to 8.25%. Assessable profits exceeding that amount will continue to be subject to the tax rate of 16.5%. For unincorporated businesses (i.e. partnerships and sole proprietorships), the two-tiered tax rates will be set at 7.5% and 15%, respectively. As a result, a tax-paying corporation or unincorporated business may save up to $165,000 and $150,000 each year, respectively.


For Hong Kong profits tax purposes, the tax base is determined on the (audited) accounting profit subject to tax adjustments. Hong Kong applies a territorial basis of taxation, whereby tax is imposed on assessable income or profits arising in or derived from Hong Kong sources, or deemed as such. It is also worth noting that there is a proposal to introduce legislative amendments to allow taxpayers to elect fair value accounting for tax reporting purposes. This would provide the legal basis for a practice that has been endorsed by the IRD and remove unnecessary uncertainty for taxpayers who would like to adopt this tax-reporting basis.


Income of a capital nature (i.e. dividends and capital gains) falls outside the scope of chargeability to profits tax. Expenses, where revenue in nature and incurred in the production of (Hong Kong) assessable profits, are in principle tax deductible. Typical adjustments in this regard include depreciation and amortisation in respect of capital expenditure, intangible assets and interest.


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Hong KongVivien Teu & Co LLP

As most persons are not taxed on foreign income, the deduction is actually limited to financial institutions.


Hong Kong does not have a branch profits/remittance tax.

7 Overseas Profits


As explained above, the only items of income which have a source in Hong Kong are subject to profits tax. Moreover, Hong Kong does not have branch profits/remittance tax.


Dividend income received by a local company from a non-resident company is generally not subject to profits tax in Hong Kong, not being Hong Kong-sourced.


Hong Kong does not have controlled foreign company rules.



Non-residents investing in real estate are subject to the general taxation principles of the IRO where the source of rental income and profits derived from the sale of real estate are determined on the basis of the location of the property in question. Only income in connection with properties situated within Hong Kong is, in principle, subject to profits tax in Hong Kong.To determine the nature of the gain in relation to the sale of Hong Kong situated real estate, the IRD will generally consider various factors to distinguish capital from revenue including, but not limited to, the taxpayer’s intention, the length of the ownership of the property, the financial ability to hold the asset for long-term purposes, whether any work had been carried out to improve the property’s value, the steps undertaken to lease out the property or the reasons for not letting out the property, the rate of return obtained by leasing out as opposed to the return obtained from selling, whether the sale was incidental or part of a series of transactions, etc. Only revenue income will be assessable for Hong Kong profits tax purposes.Apart from profits tax, the transfer of Hong Kong real estate is subject to stamp duty, whereby the rate depends on the value of the immovable property based on the ad valorem rates prescribed in the SDO. An exemption may apply for the conveyance of an interest in immovable property between companies with at least a 90% common shareholding if certain conditions are satisfied under the SDO. On the basis that the residential property in question has


There is no (withholding) tax on acquisitions that take the form of a purchase of shares of a company as opposed to a purchase of its business and assets. Persons are only subject to profits tax on their profits arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong, except for any profits realised from sales of capital assets, which are not within the chargeable scope of profits tax. As such, sellers are able to dispose of equity investments free of profits tax. By contrast, sales of certain assets may trigger a recapture of capital allowances claimed and possibly higher transfer duties (depending on the assets involved). However, asset purchases do have benefits, e.g. the potential to obtain deductions for the financing costs incurred on funds borrowed to finance the acquisition of business assets.



The capital duty levied on Hong Kong companies has been abolished since 1 June 2012. A relatively small business registration fee and levy are charged for the business registration certificate which, in principle, every person who carries on a trade or business in Hong Kong must have applied for within one month from the date of commencement of business.


As branches and subsidiaries are taxed on the same basis and at the same rates, there are theoretically no noteworthy differences (though practical differences could arise in respect of, amongst others, the attribution of profits and expenses between the head office and the branch, which are less likely to be an issue with a subsidiary).


As explained above, since Hong Kong applies a territorial basis of taxation, the chargeability to tax is actually determined on the source of income as opposed to the residence status. As such, a non-resident can also be held liable for tax in Hong Kong in respect of assessable profits which are attributable to a trade or business carried on in Hong Kong and which have a Hong Kong source.


Hong Kong’s territorial basis of taxation serves, to a large extent, as a measure of unilateral relief from double taxation, since most persons are not taxed on non-Hong Kong-sourced income. A deduction would (only) be available for foreign tax paid in connection with interest or profits from the disposal or redemption of certificates of deposit and bills of exchange which are deemed to be derived from a trade or business carried on in Hong Kong.


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disclosures of avoidance schemes. However, the IRD has expressed its view in practice notes that GAAR will be invoked where taxpayers book profits offshore with a view to avoiding Hong Kong tax. In particular, the IRD pays close attention to transactions where taxpayers have entered into transactions with a closely connected non-resident person, which would have to be reported in the profits tax return at hand. Upon request by the IRD, taxpayers are obliged to provide information to substantiate claims that the profits in question are not sourced in Hong Kong.


There is no specific legislation that aims at promoting, enabling or facilitating tax avoidance. However, there are rules on tax evasion under the IRO, which apply to both taxpayers and any other persons who assist taxpayers in evading tax. Under the Hong Kong Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“AMLO”), “money laundering” is defined as “an act intended to have the effect of making any property:(a) that is the proceeds obtained from the commission of an

indictable offence under the laws of Hong Kong, or of any conduct which if it had occurred in Hong Kong would constitute an indictable offence under the laws of Hong Kong; or

(b) that in whole or in part, directly or indirectly, represents such proceeds,

not to appear to be or so represent such proceeds.” “Tax evasion” under the Inland Revenue Ordinance is an indictable tax offence fulfilling the above “money laundering” definition, which constitutes a predicate offence for money laundering in Hong Kong: (1) “Any person who wilfully with intent to evade or to assist any

other person to evade tax—(a) omits from a return made under this Ordinance any sum

which should be included; or (b) makes any false statement or entry in any return made

under this Ordinance; or(c) makes any false statement in connection with a claim for

any deduction or allowance under this Ordinance; or(d) signs any statement or return furnished under this

Ordinance without reasonable grounds for believing the same to be true; or

(e) gives any false answer whether verbally or in writing to any question or request for information asked or made in accordance with the provisions of this Ordinance; or

(f) prepares or maintains or authorizes the preparation or maintenance of any false books of account or other records or falsifies or authorizes the falsification of any books of account or records; or

(g) makes use of any fraud, art, or contrivance, whatsoever or authorizes the use of any such fraud, art, or contrivance,

commits an offence.”


Hong Kong has shown consistency in encouraging “cooperative compliance”, particularly to provide procedural benefit. Amongst others, as of 12 April 2013, Hong Kong is able to enter into TIEAs

been held for more than 36 months, no special stamp duty (“SSD”) will be triggered upon the transfer.The transfer of real estate may also trigger buyer’s stamp duty (“BSD”) consequences, but these are generally the responsibility of the purchaser (in practice, usually both the BSD and the AVD are contractually shifted to the purchaser).In addition to profits tax and stamp duty, property tax is in principle charged on the owners of land and/or buildings in Hong Kong in respect of the income derived in this connection (the standard rate is currently 15%). Notwithstanding this, a company subject to profits tax may apply for an exemption from property tax where the property is used by the company for the production of profits chargeable to profits tax. Property tax is, in principle, creditable against profits tax.Last but not least, property rates are levied on the occupation of properties. The rateable values are generally based on the estimated (annual) letting value, which can be obtained from the Commissioner of Rating and Valuation.


Both transfers of immovable property and Hong Kong shares are generally subject to stamp duty (including transfers of shares in a Hong Kong company which owns Hong Kong real estate).


Hong Kong does not have a specific tax regime for REITs or equivalents. However, in Hong Kong, REITs are regulated by the Securities and Futures Commission (“SFC”) which is given the power, under the Securities and Futures Ordinance (“SFO”), to authorise collective investment schemes (which include mutual funds and unit trusts) to be offered to the retail public. In order to be authorised as a REIT, the structure and investment restrictions of the scheme have to comply with the SFC Code on REITs and the scheme would also apply to be listed on the Hong Kong Stock Exchange. Profits tax exemption applicable to SFC authorised funds shall also apply to REITs that are authorised funds.



Hong Kong has general anti-avoidance rules (“GAAR”) in the IRO, in respect of which transactions which reduce the amount of tax payable and which appear to be artificial or fictitious may be disregarded by the tax authorities in determining the taxpayer’s assessable profits, particularly to dissuade the shifting of assessable income from a Hong Kong resident to a closely connected non-resident person. Further, there are various specific anti-avoidance rules in the IRO.


There is no specific legislation which aims at making special


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Although Hong Kong does not have a patent box regime, it does have various other preferential tax regimes and concessions, such as (but not limited to) profits tax exemption for offshore funds which has extended to private equity funds, open-ended fund companies which have their central management and control exercised in Hong Kong and meet certain conditions (of not being “closely held”), a notional tax regime for profits in connection with qualifying aircraft leasing and/or management activities, qualifying corporate treasury centres, tax concessions for gains derived from qualifying debt instruments, concessions for captive insurers reinsurance companies, and outright or accelerated tax deductions for qualifying environmentally-friendly investments, etc.



Currently, the IRO does not contain any provisions that deal specifically with e-commerce. As such, to determine if income in connection with digital activities are assessable profits, the general taxation principles (and relevant case law) and the (above-explained) “deeming provisions” with respect to sums which are chargeable to profits tax as royalties or licence fees for IP under the IRO apply in this regard. Nonetheless, to provide clarity on the IRD’s opinion on the taxation of e-commerce businesses, a specific practice note on the taxation of e-commerce was issued in July 2001. Broadly speaking, the IRD has been taking a neutral approach as regards the tax treatment of e-commerce businesses. The IRD has expressed its view that e-commerce is treated on the same basis as “conventional” forms of business and no particular business form should have either an advantage or a disadvantage for profits tax purposes in Hong Kong.


At present, Hong Kong has not expressed any formal opinion on the EC’s interim proposal for a digital services tax. Nevertheless, it is worth noting that ever since the EU had once named Hong Kong as one of the jurisdictions that were not cooperating in efforts to fight tax avoidance in the European Commission’s Corporate Tax Reform Action Plan (announced on 17 June 2015), Hong Kong has been spending utmost efforts in keeping up to comply with evolving international tax standards. Such positive attitude has also been recognised by the EU Council, demonstrated by the fact that Hong Kong was not being listed as a non-cooperative jurisdiction on the EU blacklist released on 5 December 2017. As such and to avoid any potential reputational damage, it is expected that the Government will continue its positive approach in taking necessary measures, amongst others, addressing any preferential tax regimes with a ring-fencing feature that are identified in the future.


with jurisdictions with which a DTA has not (yet) been concluded or to enhance existing exchange of information arrangements under DTAs. On 13 November 2014, the Foreign Account Tax Compliance Act (“FATCA”) agreement with the United States was signed. On 30 June 2016, Hong Kong adopted the new international standard for automatic exchange of financial account information in tax matters, i.e. the common reporting standard (“CRS”) promulgated by the OECD. On 6 October 2017, Hong Kong enabled its participation in the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and the alignment of the IRO with CRS. Furthermore, Hong Kong has expressed its commitment to the OECD’s BEPS framework, and has already put in place the necessary legislative framework for transfer pricing rules which cover the latest guidance from the OECD, spontaneous exchange of information with regard to tax rulings, country-by-country (“CbC”) reporting requirements, and the cross-border dispute resolution mechanism and the Multilateral Instrument.



In June 2016, Hong Kong accepted the invitation of the OECD to join the inclusive framework for global implementation of the Base Erosion and Profit Shifting (“BEPS”) measures. In June 2017, China signed the MLI on behalf of Hong Kong (although with rights reserved with respect to most articles of the MLI). Nonetheless, Hong Kong has expressed its commitment to the implementation of the four minimum standards of OECD’s BEPS Action Plan, namely: (i) countering harmful tax practices (Action 5); (ii) preventing treaty abuse (Action 6); (iii) imposing CbC reporting (Action 13); and (iv) improving the cross-border dispute resolution regime (Action 14). On 29 December 2017, the Inland Revenue (Amendment) (No. 6) Bill 2017 (“the Amendment Bill”) was published in the Gazette and subsequently enacted as Inland Revenue (Amendment) (No. 6) Ordinance 2018 to implement aforesaid BEPS Actions.


As explained above, Hong Kong has committed to the implementation of the four minimum standards at present.


Hong Kong resident ultimate parent companies of multinational enterprises with consolidated revenue of over HK$ 6.8 billion (i.e. approximately EUR 750 million) in the previous year of assessment, or Hong Kong entities that are nominated as surrogate filing entities, will be required to prepare and submit a CbC report to the IRD. A CbC report must be prepared for accounting periods beginning on or after 1 January 2018, in principle, within 12 months after the end of the accounting period to which the report relates.


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Vivien Teu & Co LLP is a Hong Kong solicitors firm established in early 2015.

At Vivien Teu & Co, we are dedicated to providing legal services for clients at the highest standards to meet their needs in today’s complex and dynamic business and regulatory environment. Established with the philosophy of a boutique law firm focusing on the areas of corporate, securities, asset management and financial services, our lawyers are experienced in advising international and local corporations, including large global institutions, listed entities, industry conglomerates, as well as international, Hong Kong and China financial institutions such as commercial and private banks, securities companies, asset management and private equity firms.

As a Hong Kong law firm founded with people closely connected and dedicated to Hong Kong, we understand the unique culture and position of Hong Kong as a Special Administrative Region of the People’s Republic of China and versus the rest of the world. Our lawyers carry in-depth Hong Kong and international legal practice experience, combined with deep and broad knowledge of China and regional markets.

Besides corporate and commercial practice, Vivien Teu & Co LLP has a particular focus on asset management and financial services practice areas, regularly advising local and international clients who are establishing or operating asset management platforms in Hong Kong, or otherwise accessing investors or investment opportunities in the Greater China region and beyond. The firm also boasts dedicated trusts and succession advisory expertise, increasingly serving high-net-worth private clients and entrepreneurs, in its wider financial services and wealth management practice. The firm’s tax advisory capability is an integral part of its corporate and commercial practice and a value-add where required, and augments its asset management and financial services practice.

Vivien Teu is the founding and managing partner of Vivien Teu & Co LLP. She has extensive and in-depth experience as a corporate and commercial lawyer specialising in the financial services sector, funds and wealth management. Vivien carries diverse legal practice with top-tier and magic circle firms in the areas of tax, trusts, banking and financial services, investment funds, securities regulatory and financial institutions set-up, as well as mergers & acquisitions. Along with significant in-house counsel experience at a global investment firm, Vivien brings unique insights and practical commercial approaches in her practice, and with a particular China focus.

Vivien’s experience in the areas of asset management covers diverse forms of investment funds include Hong Kong SFC authorisation of retail funds (including UCITS funds and domestic HK fund series), Mainland-Hong Kong Mutual Recognition of Funds, China-theme investment funds including QFII and RQFII China A Share Funds, RMB Fixed Income Funds, Stock Connect, accessing the China-Interbank Bond Market, and advising in relation to ETFs and REITs. Vivien also regularly advises on: China outbound investments; structured finance and securitisation; SFC licensing and regulatory matters; Hong Kong securities compliance advice; assisting clients of diverse backgrounds with establishing private investment funds including hedge funds, private equity funds, real estate funds, institutional segregated account mandates and other investment arrangements; and advising on fund distribution matters, custody structure, investment and trading matters. Vivien’s experience also includes joint ventures or mergers & acquisitions of financial institutions or asset management firms, advising on shareholders agreements, corporate governance, general corporate and commercial advice, private and corporate trusts, tax issues and tax structuring.

Vivien TeuVivien Teu & Co LLP17th Floor29 Wyndham StreetCentralHong Kong

Tel: +852 2969 5300Email: [email protected]: www.vteu.co

Kenneth Yim is a tax consultant, specialising in the tax-efficient restructuring of cross-border corporate and commercial transactions for asset managers, investors and family offices in or involving Asia.

His international tax planning experience includes tax considerations in respect of start-ups, mergers & acquisitions, joint-ventures, finance, intellectual property, real estate, insurance, estate planning, employment, and supply-chain management in a cross-border context. He also supports taxpayers in disputes with tax authorities and negotiations on advance tax rulings.

Prior to joining Vivien Teu & Co LLP, Kenneth worked for the Hong Kong office of a global professional services firm where his last position was head of tax, respectively, a “Big Four” accountancy firm where he provided and coordinated tax advice for financial institutions with business across Asia-Pacific. Before relocating to Hong Kong in 2011, he worked as a tax lawyer in the Netherlands where he developed a particular interest and experience in tax structuring with respect to Western and Asian inbound and outbound transactions.

Kenneth is the author of IBFD’s Hong Kong chapter of “Investment Funds and Private Equity”, and is a regulator contributor to their publications on international tax matters.

He graduated from Tilburg University with LL.M. degrees in tax law and civil law in 2005 and 2006, respectively. He later qualified with the Netherlands Association of Tax Advisors (“Nederlandse Orde van Belastingadviseurs”).

Kenneth YimVivien Teu & Co LLP17th Floor29 Wyndham StreetCentralHong Kong

Tel: +852 2969 5300Email: [email protected]: www.vteu.co


Chapter 16

LEX Law Offices

Garðar Víðir Gunnarsson

Guðrún Lilja Sigurðardóttir

Iceland

Finally, Icelandic domestic tax legislation includes a general anti-avoidance rule, which has been applied in cases of treaty shopping (see section 9).


No, generally they are not overridden by rules of domestic law. However, there exists a general principle that international obligations entered into by the Icelandic government should, to the extent possible, be construed in accordance with domestic law.


The test applied when determining corporate residence is comprised of three different factors. Accordingly, a company is considered a tax resident in Iceland if (i) it is registered in Iceland, (ii) its effective management is in Iceland, or (iii) Iceland is considered the domicile of the company according to its articles of association.

2 Transaction Taxes


In Iceland, stamp duty is imposed on deeds on immovable property and vessels over five gross tonnes (0.8% for individuals, 1.6% for legal entities). In the case of deeds regarding real estate, the percentage is calculated from the rateable value of the property. In the case of vessels over five gross tonnes, the percentage is calculated from the purchase price but the basis for the calculation shall never be lower than the amount of any encumbrances.


Iceland has a VAT system, regulated by the Value Added Tax Act, No 50/1988, pursuant to which VAT is imposed on all stages of supply of goods and services. Currently, there are two VAT rates applicable:■ The standard rate of VAT is 24%. The standard rate applies to

any supply of goods and services that is not exempt from VAT or subject to the reduced rate.



In Iceland there are currently 40 tax treaties in force, one of which is a multilateral treaty between the Nordic countries (Denmark, the Faroe Islands, Finland, Iceland, Norway, and Sweden). One treaty has been signed but has not yet entered into force, and two more treaties have been drafted and are currently under review. Moreover, Iceland has entered into 36 treaties concerning the exchange of information relating to tax matters. A further seven information exchange treaties have been signed but have not yet entered into force. Iceland has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, although it has not yet entered into force. Iceland has also signed an agreement with the government of the United States of America to improve international tax compliance and to implement FATCA.


The tax treaties that Iceland has entered into generally follow the OECD model.


Tax treaties are not incorporated into Icelandic law. Pursuant to Icelandic tax law, the government of Iceland has the authority to negotiate and enter into tax treaties with governments of other countries. The prevailing practice in Iceland is that after being published in the Official Gazette (Icelandic: Stjórnartíðindi), a tax treaty enters into force and has effect in Iceland.


Tax treaties that Iceland has entered into do not generally incorporate limitation of benefits articles. However, such a provision can be found in the Iceland-US treaty, the Iceland-Barbados treaty and the Iceland-India treaty. Furthermore, the Iceland-Luxembourg treaty includes a provision similar to a limitation of benefits provision, as it excludes certain types of companies from the benefits of the treaty.


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LEX Law Offices Iceland

following a tax assessment, if the company submits a tax return and files for a refund.Withholding tax rates can be reduced pursuant to provisions in an applicable tax treaty following an application to the Directorate of Internal Revenue (“DIR”). Such application can be made before the dividend is paid and then the distributing entity shall only withhold tax at the reduced treaty rate. If, however, the application has not been made prior to payment of the dividends, the receiving entity can nevertheless file for a refund and request that the treaty rates be applied retroactively.


In Iceland a 22% withholding tax is imposed on royalties paid to foreign companies and individuals. The rate can be reduced pursuant to provisions in an applicable tax treaty.


Withholding tax is levied on interests paid to non-residents by an Icelandic company. The applicable rate is 12% for both individuals and companies. However, in the case of individuals, income from interest up to ISK 150,000 is exempt from taxation. Furthermore, rates can be reduced pursuant to provisions in an applicable tax treaty.Also, it should be noted that interests on bonds issued by the Central Bank of Iceland, financial undertakings in their own name or energy companies are exempt from withholding tax, given that the bonds are listed and that the transaction in question is not subject to currency restrictions.


Yes. According to Icelandic thin-capitalisation rules, the deduction of interest paid to related parties is limited to 30% of the taxpayer’s earnings before interest, taxes, depreciation and amortisation (“EBITDA”). However, this limitation does not apply if: (i) the total interest paid to related parties does not exceed ISK 100 million; (ii) the recipient of the interest bears unlimited tax liability in Iceland; (iii) the Icelandic taxpayer proves that their debt-equity ratio is not more than 2% below the debt-equity ratio of the group to which it belongs (some restrictions apply); or (iv) the Icelandic taxpayer is a financial undertaking, an insurance company, or a company owned by such companies which undertake similar operations.


Yes. Please see the answer to question 3.4.


It is not directly stipulated by the rules. However, it is possible that the rules could be construed in that way, depending on the circumstances, having regard to the purpose of thin-capitalisation rules.

■ A reduced rate of 11%. This applies, inter alia, to food, utilities such as electricity and water for heating, passenger transportation, accommodation services, travel agency services, books, newspapers/magazines and music records.


As a general rule, VAT shall be levied on all transactions that are not expressly excluded by law. Sectors and services excluded from VAT are, inter alia: financial and banking services; insurance services; health services; social services; education; libraries; museums; sports activities; public transportation; transportation of school children, people with disabilities and elderly people; postal services; renting of real estate; lotteries; and charities. All exceptions are construed restrictively. Moreover, certain types of transactions are considered as exempt turnover, in which case the VAT is 0% but the taxable person is allowed to recover the input tax.


Only taxable entities registered for VAT purposes are entitled to recovery of input tax for transactions relating to their taxable operations. Should a taxable entity’s input tax exceed its output tax during a settlement period, that entity is entitled to reimbursement.


VAT grouping of two or more limited liability companies is permitted in Iceland, if the parent company owns at least 90% of shares in the subsidiary(ies), and pursuant to the parent company’s application to that effect. Furthermore, the companies in question must all have the same fiscal year. VAT grouping shall be in the name of the parent company and must last for at least five years.


No, there are not.


Excise tax is charged on automobiles, fuel, alcohol and tobacco. In cases of import, customs and, if applicable, excise tax may be levied parallel to the goods being imported into the country.



Non-resident individuals and companies are subject to a withholding tax on dividends gained and/or received by a resident company in Iceland. The rate for the withholding tax is 22% for individuals and 20% for companies.If the receiving company is a limited liability company registered in an EU/EEA country, the withholding tax can be reimbursed


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company remain the same as before, the tax losses will survive for the benefit of the new owner(s).In the event of a merger or division of a company, tax losses will survive if all of the following conditions are met:(i) The company/companies taking over engage in similar

operations to those of the company being dissolved. Losses are not transferred if the company being dissolved had insubstantial properties or did not engage in any operations.

(ii) The merger or division of the existing company is made for ordinary and normal operational purposes.

(iii) The losses in question occurred in operations similar to the operations of the recipient company. Note that tax losses may only be carried forward and offset against taxable income in the following 10 years.


No, the tax rate is the same for distributed and retained profits.


A social security tax is levied on all wages and is paid by companies employing staff/workers. The rate for the social security tax is now 6.85%.Real estate taxes are imposed by municipalities on all commercial real estate. The rates vary between different municipalities, but average at 1.65%.Financial institutions are subject to a special tax at the rate of 5.5%; the tax base is total salaries paid. Financial institutions are also subject to a special income tax at the rate of 6%, with a total income tax base (income less deductible expenses) exceeding ISK 1 billion. A further tax is imposed on banks and lending institutions, including ones that are undergoing winding-up proceedings, at the rate of 0.376%. The tax base is total debts, according to the tax return of the relevant company, exceeding ISK 50 billion. Other taxes include, for example: lodging tax – imposed on all entities providing lodging and accommodation services (at a flat rate of ISK 300 per night); various fuel taxes are levied on fuel upon import; and the supply of hot water is subject to 2% tax of the retail price.

5 Capital Gains


The applicable tax rate on capital gains for non-resident companies is 20%. For companies registered in Iceland, general corporate income tax (see question 4.1) is levied on all profits, including capital gains. However, in the case of a disposal of shares by a corporate shareholder, a full deduction against such capital gains is permitted, which results in 0% taxation. This may also apply to the sale of shares in companies registered in Iceland sold by companies registered in Iceland, EEA or EFTA countries or the Faroe Islands. Finally, this can apply to capital gains from the sale of shares in non-resident companies, provided that the seller can demonstrate that the foreign company’s profit has been taxed abroad under provisions that do not substantially deviate from those prevailing in Iceland and that the profits of the foreign company have been subject to taxation


There are no further restrictions that target interest payments, but general anti-avoidance rules may apply (see section 9).


Rental payments on property made to non-residents are not subject to withholding tax.


Yes. Iceland has adopted transfer pricing rules, which are based on the OECD transfer pricing guidelines. Pursuant to the transfer pricing provision, the conditions for the implementation of the provision, including documentation, are laid down in Regulation No 1180/2014 on documentation and transfer pricing in transactions between related parties.



In Iceland, the general corporate income tax rate for limited liability companies is 20% and for other company forms it is 37.6%.


The tax base is determined by the total worldwide income of resident companies, less any deductible expenses.


The main adjustments include, inter alia: deductible expenses, which generally consist of costs incurred in acquiring, securing and maintaining the taxable income; and depreciation of assets.


Icelandic tax law permits group tax consolidation for resident companies and resident permanent establishment (“PE”) of companies within the same group and are resident within the EEA area, in an EFTA member state or the Faroe Islands, which provides for relief for losses against other group companies’ profits. Note that relief for losses in the case of a PE is subject to the condition that losses cannot be set off against profits in the foreign company. Furthermore, such relief is not available and may not be extended to overseas subsidiaries.


In the event of a change of ownership, tax losses can survive if certain conditions are met. Provided that the operations of the


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In general, foreign branches are taxed in the same manner as resident companies.


No, such withholding tax would not be imposed. Remittance of profits by a branch forms part of the taxable base and is subject to corporate income tax.

7 Overseas Profits


Yes, unless overseas branch profits are exempt by an applicable tax treaty.


The general principle is that tax is imposed in such circumstances. However, a deduction in the amount of the dividends received is permitted, provided that the distributing company’s profit has been taxed abroad under provisions that do not substantially deviate from those prevailing in Iceland and that the profits of the distributing company have been subject to taxation at a rate that is not lower than the general tax rate in any OECD, EEA or EFTA country or the Faroe Islands.


Yes, Iceland has enacted CFC rules. When a company or an individual owns shares in a company (directly or indirectly) in a low-tax jurisdiction, the company’s profits are subject to taxation in Iceland as personal profits to the owner. A jurisdiction is considered to be low-tax if the taxes imposed there are lower than ⅔ of the tax that would be imposed in Iceland on the same income.



Gains from the disposal of commercial real estate are subject to tax for non-resident companies at a 20% rate and individuals at a 22% rate.


If indirect interest in real estate stems from ownership through a company and shares in said company are sold with profits, this would not be considered as the sale of real estate in regard to

at a rate that is not lower than the general tax rate in any OECD, EEA or EFTA country or the Faroe Islands. Capital gains on shares held by an individual are subject to 22% tax upon their disposal.


No. There is no participation exemption in Iceland. However, the possibility of full deduction for a corporate shareholder against capital gains may apply (see question 5.1). Furthermore, many double tax treaties to which Iceland is a party include reduced tax rates on capital gains, based on a participation threshold.


In the matter of share investments, no special relief for reinvestment is awarded following the adoption of full deduction against capital gains, leading to 0% taxation on capital gains for corporate shareholders (see question 5.1). However, regarding the sale of real estate and permanent operational assets, taxation on capital gains realised from the sale of such assets can be deferred by reinvestment within a certain time limit.


Upon the sale of shares in an Icelandic company, foreign individuals and legal entities will be subject to withholding tax under Icelandic law (individuals at 22% and legal entities at 20%). However, the possibility of full deduction for a corporate shareholder against capital gains may apply (see question 5.1). Hence, if the seller is a limited company in an EU/EEA country, full reimbursement can be applied for, following a tax assessment, if the company submits a tax return and files for a refund.Furthermore, it is possible to apply for a reduced withholding tax rate pursuant to provisions in an applicable tax treaty.



Taxes are not imposed upon the formation of subsidiaries.


A local branch of a non-resident company that is resident in the EEA, an EFTA member state or the Faroe Islands may be jointly taxed with an Icelandic company belonging to the same group (see question 4.4). There is no other difference.


There are no special rules enacted in Iceland on how to allocate income to branches. Rules on transfer pricing (see question 3.9) may, however, effect abnormal allocation. Determination of the tax base for a local branch would generally be the income allocated to the branch, less the deductible costs allocated to the branch.


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(BEPS Action 7). Furthermore, Icelandic legislation previously included CFC rules, transfer pricing rules and transfer pricing documentation.


No such legislation has been introduced.


Yes. The Icelandic CBCR rule is placed in Article 91 a. of the Income Tax Act No 90/2003. Furthermore, Regulation No 1166/2016, on Country-by-Country Reporting was introduced in December 2016 and came into force on 1 January 2017. It should also be noted that Iceland signed the Multilateral Competent Authority Agreement on the Exchange of CBC Reports in May 2016.According to the Icelandic CBCR rules, an ultimate parent company (“UPC”) in a group of multinational enterprises that has unlimited tax liability in Iceland shall hand in a CBC report to the DIR, unless the total income of the group was less than 100 billion ISK or more in the fiscal year. Furthermore, other companies in Iceland that are part of a group of multinational enterprises but are not UPCs must hand in a CBC report if the UPC is foreign and:(i) the foreign UPC is not obliged to hand in a CBC report in its

country of residence;(ii) the UPC’s country of residence has not entered into an

information exchange agreement with Iceland that includes provisions on automatic exchange of CBC reports; or

(iii) the DIR has notified the Icelandic company that the UPC’s country of residence has not entered into an information exchange agreement with Iceland or the UPC’s country of residence does not provide the Icelandic tax authorities with CBC reports for other reasons.


There is a special act on incentives for initial investment in Iceland to promote initial investment in commercial operations, the competitiveness of Iceland and regional development. If a company qualifies for this scheme the incentives may, inter alia, include: (i) derogations from certain taxes and charges; (ii) a reduced rate of income tax fixed for up to 10 years; (iii) a stability clause in terms of new taxation; and (iv) favourable depreciation rules.Special incentives are granted for film and TV production in Iceland. The film and TV production cost rebate rate is currently 25%.There is an incentives scheme for innovation companies. Under the scheme, companies that carry out research and development projects can apply to the Icelandic Centre for Research for a tax credit, which is 20% of ISK 300 or 450 million of the project cost, irrespective of whether the total project cost is higher. This support is granted as a reimbursement of the respective company’s paid income tax.


taxation and tax would not be levied on the transfer of such indirect ownership. Rules on capital gains would nevertheless apply to the sale of shares, cf. section 5.The transfer of other kinds of indirect interest, e.g. rental rights or other indirect property rights, may be subject to taxation.


No, Iceland does not have such a tax regime.



Yes, the Icelandic tax legislation has a provision under which it may be possible to disregard a transaction if its purpose is only to circumvent tax. The wording of the relevant provision does not, however, provide for clear conditions under which it is applicable. This provision has been construed as constituting a general anti-avoidance rule.


No, there is not.


According to Icelandic law, the involvement in punishable tax offences can lead to punishment for the person involved. Apart from that, there are no such rules.


No. Iceland does not encourage “co-operative compliance”.



Yes. In October 2016, three amendments that implement certain factors of BEPS were introduced into Icelandic law. These rules included Country-by-Country reporting, a provision on interest deduction (BEPS Action 4) and permanent establishment status


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LEX Law Offices is one of Iceland’s leading law firms, providing clients with comprehensive services over a wide range of financial, corporate and commercial issues, as well as most other aspects of Icelandic law.

LEX aims to be the Icelandic legal firm of choice for our clients and to address their needs in the ever-changing local and international markets.

LEX is one of Iceland’s largest law firms. Over the course of several decades, LEX has successfully acted on behalf of and advised a large number of internationally respected corporations, organisations and private individuals both in Iceland and abroad.

LEX has provided legal services to clients that include major local and international banks, financial institutions, merchants and ship owners, in addition to a large number of municipalities, government institutions, insurance companies, manufacturers, businesses, media outlets, utility companies and private individuals.

Garðar Víðir Gunnarsson joined LEX in 2009 and has been a partner since 2013. He is the firm’s leading specialist in tax law and has advised numerous companies, both domestic and international, on tax-related matters. Garðar’s tax practice is particularly focused on corporate taxation, mergers & acquisitions and cross-border investments. In addition, Garðar specialises in corporate law and is one of the country’s chief specialists in the field of arbitration law. He is a member of, inter alia, the Icelandic Bar Association and the International Council for Commercial Arbitration. He has been a lecturer at Reykjavík University since 2008. He holds an LL.M. degree in International Commercial Arbitration Law from Stockholm University.

Garðar Víðir GunnarssonLEX Law OfficesBorgartúni 26105 ReykjavíkIceland

Tel: +354 590 2600Email: [email protected]: www.lex.is

Guðrún Lilja Sigurðardóttir joined LEX in 2012. Her main field of activity is tax law; in particular, VAT and corporate taxation. Additionally, her practice focuses on corporate advice in the fields of competition law, administration law and maritime law. She is a qualified District Court Attorney and a member of the Icelandic Bar Association. She holds a Master’s degree in law from Reykjavík University.

Guðrún Lilja SigurðardóttirLEX Law OfficesBorgartúni 26 105 ReykjavíkIceland

Tel: +354 590 2600Email: [email protected]: www.lex.is

must register for VAT purposes in Iceland, collect VAT on services sold and return to the Treasury. No other action has been taken so far in terms of taxation on digital activities.


This is not applicable as Iceland is not a part of the EU tax regime.




Under the Icelandic VAT act, electronically supplied services are taxable in Iceland if the user of the services is resident in Iceland. Thus, anyone who sells electronically supplied services in Iceland


Chapter 17

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T. P. Ostwal

Siddharth Banwat

India

as the United Kingdom, Poland, Ethiopia and Nepal, to insert such a clause. Most recently, an LOB clause was added to the controversial India-Mauritius Tax Treaty. The LOB clause was already included in new treaties, such as those with Malta and Bhutan that came into force in 2015.Indian tax treaties do not follow a consistent approach in adopting the LOB clause. Some of the treaties have exhaustive LOB clauses (such as with the US); in some it is very narrowly worded (such as with the UAE), while in others it is based on the payment of sums to the other contracting country (such as with Singapore). In some of the treaties, the LOB clause is based on an expenditure test (such as with Mauritius and Singapore).Indian tax treaties also contain a “principal purpose test” to deny treaty benefits to enterprises that engage in treaty shopping; however, the test does not contain specific conditions that would attract the limiting of benefits; rather, it leaves the same to the discretion of the tax administration.Further, domestic tax law mandates non-resident persons in India to provide a Tax Residency Certificate and other information relating to their residence and tax identification, in the prescribed format, in order that they may avail themselves of the treaty benefit in India. The provisions of the General Anti Avoidance Rules (“GAAR”), which have been made effective from 1 April 2017, provide for anti-treaty shopping rules in cases where the arrangement is entered into with the main purpose of obtaining a tax benefit involving treaty shopping.


Generally, where an assessee chooses to be governed by the provisions of a tax treaty, the same would prevail over the ITA. However, the GAAR overrides the provisions of any tax treaty, and even other provisions of the ITA, in order to determine the taxability of any transaction whose main purpose is the avoidance of tax and which is declared to be an “impermissible avoidance arrangement”. GAAR would only be applicable on those arrangements where the aggregate tax benefit to all parties to the arrangement exceeds INR 30 million.


Any company incorporated in India or any other company which, in respect of its income liable to tax in India, has made the prescribed



There are currently 96 Comprehensive Agreements, eight Limited Agreements and six Limited Multilateral Agreements in force in India. Further, India has entered into 19 Tax Information Exchange Agreements. India has also signed the Multilateral Instrument (“MLI”) under the BEPS initiative and has submitted a list of 93 tax treaties which it has entered into and would like to designate as Covered Tax Agreements (“CTAs”), i.e. tax treaties to be amended through the MLI.


India, being a developing economy, generally follows the United Nations Model Double Taxation Convention. However, some of the treaties India has entered into with some developing economies are based on the OECD Model, while some other treaties are based on other models or a combination of these models.


There is no requirement under the domestic law to incorporate a treaty into domestic law in order to make it effective. The domestic tax law, through Section 90 of the Income-tax Act, 1961 (“ITA”) recognises any treaty entered into by the Indian government with another country for avoidance of double taxation, exchange of information and recovery of taxes. Also, of the treaty and domestic law provisions, the provision more beneficial to the taxpayer shall apply.


Of the 96 Comprehensive Agreements that India has entered into, 41 of its treaties have a limitation on benefits (“LOB”) clause. The India-USA Tax Treaty has an extensive LOB article. Further, an LOB clause was also inserted in the India-Singapore Tax Treaty after renegotiation in 2005 and with the UAE in 2008. In recent years, especially after the OECD’s Report on Base Erosion and Profit Shifting, India has renegotiated several treaties with countries such


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T. P. Ostwal & Associates LLP, Chartered Accountants India

specified international organisations, are exempt by way of a refund in the case of services.


Being an indirect levy, GST is recoverable by all businesses from the customers. In other words, the burden of tax is shifted onto the end-consumer. Further, every business is allowed to take a credit of tax or duty paid on inputs, be it goods or services. In cases where businesses have an excess amount of input tax against which no output tax is available for set-off, a refund of such input tax is available. Therefore, effectively, a business only has to pay the differential amount of taxes paid on inputs or purchases and taxes collected on output or sale. The final consumer of the goods or service bears the entire amount of tax or duty.


The concept of “group taxation” does not exist in India in either Direct or Indirect Tax Laws. Further, an Indian branch of a foreign company and a foreign branch of an Indian company are treated as separate legal entities for taxation purposes.


India has introduced a tax called the Equalization Levy (“EL”), with effect from 1 June 2016, which is charged on payments made to a non-resident as consideration for online advertisement or provision of digital advertising space. An amount of 6% must be deducted by any Indian resident or a non-resident with a permanent establishment (“PE”) in India making such payment for business or professional purposes to a non-resident. Further, the consideration on which EL is applicable is exempted from Income Tax in the hands of such non-resident recipient. The EL is a special levy and is not part of the Indirect Tax or Income Tax laws. Further, a Securities Transaction Tax and a Commodities Transaction Tax are levied on securities or commodities transactions that take place on any recognised stock or commodity exchange in India.


Certain taxes which will continue in the GST era are Basic Customs Duty, Stamp Duty, Property Tax levied by Local Bodies, Profession Tax, Central Excise in respect of alcohol for human consumption, Central Excise/VAT on petroleum products, etc.



Dividends paid by a domestic company to any person who is a shareholder (whether resident or non-resident) are exempted in the hands of the shareholder. However, individuals, firms and Hindu Undivided Families (“HUFs”) which are resident in India and receiving dividends in excess of INR 1 million will be taxed

arrangements for declaration and payment of dividends within India, is a resident of India. With effect from 1 April 2016, the residential status of a foreign company will be determined based on its Place of Effective Management “PoEM”. Any company whose PoEM is in India will be a regarded as resident in India. For this purpose, PoEM means the place where the key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole, are in substance made. Detailed guidelines describing parameters to determine the PoEM of a foreign company in India have been prescribed.

2 Transaction Taxes


In India, a documentary tax called Stamp Duty is levied on certain types of documents or agreements. The levy of Stamp Duty is governed by Central legislation – namely, the Indian Stamp Act, 1899 – and the respective State legislation. The rate of duty, the value on which the duty is levied, and the type of document on which it is levied, depend on the prevailing law of the state, wherever specifically provided, or otherwise the Indian Stamp Act. Certain documents have a per-unit duty, while others have an ad valorem rate.


From 1 July 2017, India adopted a dual Goods and Service Tax (“GST”), which is a destination-based tax applicable on all transactions involving the supply of goods and services for a consideration, subject to exceptions thereto. GST is imposed concurrently by the Centre and States: the Central Goods and Service Tax (“CGST”), levied and collected by Central Government; the State Goods and Service Tax (“SGST”), levied and collected by State Government/Union Territories with State Legislature; and the Union Territory Goods and Service Tax (“UTGST”), levied and collected by Union Territories without State Legislatures, on intra-State supplies of taxable goods and/or services. Inter-State supplies of taxable goods and/or services will be subject to the Integrated Goods and Service Tax (“IGST”). Rates for CGST, IGST, SGST and UTGST as notified by the Government are 5%, 12%, 18% and 28%, respectively. IGST is approximately a sum total of CGST and SGST/UTGST and will be levied by the Centre on all inter-State supplies. The maximum rate of CGST is 20%, while for IGST it is 40%.The following taxes are subsumed into GST: Central Excise Duty; Service Tax; Countervailing Duty (“CVD”) and Special CVD; Central Sales Tax; surcharges and cesses in relation to the supply of goods and services; Entertainment Tax (except those levied by local bodies); Tax on Lottery, Betting and Gambling; Entry Tax and Purchase Tax; VAT/Sales Tax; Luxury Tax; and taxes on advertisements.


In the case of GST, there are certain goods as well as services on which GST is imposed at a nil rate. For example, milk, cereal, fruits & vegetables, jaggery, food grains, rice & wheat, spices, tea, coffee, sugar, vegetable/mustard oil, newsprint, coal, Indian sweets, silk and jute fibre in the case of goods. Hotels and lodges with tariffs below Rs. 1,000, and services provided to the United Nations or


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deducted and paid to the credit of the government. In such cases, interest expenditure is disallowed for the purpose of computation of Income Tax of the payer.


Property rental payments made to a non-resident would also be subject to a withholding tax based on a maximum marginal rate of tax as applicable to such non-resident. In other words, individuals are subject to a withholding tax at the rate of 30% unless the individual obtains a certificate from the prescribed authority allowing withholding at a lower rate. Persons other than individuals are subject to withholding at a rate of 40% on the gross amount. However, even non-individuals can obtain a certificate that would allow withholding at a lower rate.


India has transfer pricing rules with respect to both domestic transactions and international transactions. However, with a view to reducing the domestic transfer pricing burden, a recent amendment has restricted the domestic transfer pricing applicability only to domestic Indian entities enjoying benefits of any tax holiday/profit-linked deduction where the aggregate of such a transaction exceeds INR 200 million.



Profits of an Indian or domestic company are taxed at 30%, and those of a foreign company at 40%. However, a recent amendment has reduced the rate of tax to 25% on companies which have an annual turnover of INR 500 million or less. Further, an additional surcharge of 7% (2% for foreign companies) is levied on income exceeding INR 10 million up to INR 100 million, and 12% (5% for foreign companies) on income exceeding INR 100 million. Additionally, a Health & Education Cess of 4% of the tax is also levied.


Indian tax law contains specific provisions for accounting treatment of certain income and certain expenditure that differs from the treatment or requirements for the purpose of ordinary or non-tax accounting and reporting. As a result, the accounting profit is subject to certain adjustments for the purpose of calculating the taxable income and tax due thereon.Further, companies are also subject to the Minimum Alternate Tax (“MAT”) whereby, if the tax payable as normally calculated is lower than 18.5% on the book profits of the company, the company would have to pay an MAT equal to 18.5% of the book profits, and the differential amount (i.e. the difference between the tax liability as normally calculated and the MAT liability) is available as MAT credit which can be carried forward for 15 assessment years.

at the rate of 10% on the excess amount of dividends. Further, the domestic tax laws also say that a domestic company distributing dividends to its shareholders has to pay a Dividend Distribution Tax (“DDT”) on such dividends at the rate of 15%.


Royalties are subject to a withholding tax at the rate of 10%, added by applicable surcharge and cess as per the domestic tax law.


Interest paid to a non-resident is generally subject to a 40% withholding tax, added by applicable surcharge and cess. However, when interest is paid for foreign currency borrowings, the withholding rate is 20% plus surcharge and cess. In certain cases, where interest is payable in respect of long-term bonds and infrastructure debt funds, the lower rate of 5% is applicable. This rate is also applicable in cases where a business trust (such as a REIT) distributes interest income received from a special-purpose vehicle to its non-resident unitholders.Further, in the case of rupee-denominated offshore bonds, popularly known as “masala bonds”, the interest would be taxed (by way of final withholding tax) at a reduced rate of 5% up to 2020.


A provision has recently been introduced into the ITA which provides for restrictions on interest deductibility in line with the OECD BEPS project, with effect from 1 April 2018.As per this amendment, any debt issued by a non-resident associated enterprise, the interest expense of which exceeds INR 10 million, shall not be allowed as a deduction in computation of its income. Further, excess interest has been defined as total interest paid or payable in excess of 30% of EBITDA or the interest actually paid or payable, whichever is less.


The safe harbour rules in India recently underwent an amendment to include intra-group loans to a non-resident wholly owned subsidiary, either in foreign currency or Indian currency.


The thin capitalisation regime under the ITA also covers cases where a debt issued by an unrelated lender, i.e. a lender which is not an associated enterprise (“AE”), is backed by either an implicit or explicit guarantee by a non-resident AE of the Indian borrower to the lender or an AE deposits a matching amount of funds, such debt would also be deemed to have been issued by such AE.


There is no restriction on payment of interest by a local company to a non-resident under the ITA unless the withholding tax is not duly


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There are many minor taxes that businesses may have to pay in the form of annual or periodic fees to various government or municipal bodies, depending on the State where the business is located. Property Tax, payable by the owner of real estate, is payable to the local municipal body; Profession Tax is levied in most States on salaried individuals and professionals, and the same is withheld and paid by the employer. Further, Profession Tax is also applicable to each legal entity engaged in an active business or profession.

5 Capital Gains


Taxability of capital gains is governed by the provisions of the ITA. The computation mechanism is specifically provided, which lays down the rules for the determination and taxation (or treatment) of capital gains and losses. The rate of tax on capital gains is lower as compared to other sources of income in most cases. Further, capital gains that arise from assets considered long-term enjoy a lower rate of tax, whereas short-term capital gains are charged tax at the regular rate of Income Tax.While computing long-term capital gains, the benefit of indexation is available based on the cost inflation index, thereby resulting in a higher deduction of cost base as compared with the original cost of acquisition. The law also contains provisions which test for the fair market value of an asset being transferred with the actual consideration. Transfer at a value other than fair market value may entail tax consequences for either or both the transferor and the transferee.Further, in cases of non-residents acquiring assets in foreign currency, gains are computed in foreign currency and thereafter arrive at the resultant gain by applying the prescribed conversion exchange rate.Set-off and carry-forward of losses is permissible intra-group and inter-group, subject to certain terms and conditions.It should be noted, that up to March 2018, capital gains from the sale of listed shares held for more than 12 months were exempt from tax, subject to certain other criteria. From April 2018 onwards, such capital gains will be taxed at 10%. The tax-free gains that would have been earned have been grandfathered by allowing the substitution of the quoted price of such stocks on 31 January 2018 instead of the actual purchase price.


India does not have the concept of a participation exemption for capital gains. Irrespective of the level of participation, capital gains on the transfer of shares or any other security are chargeable to tax on a uniform basis.


In 2015, the Indian government announced certain Income Computation and Disclosure Standards (“ICDS”), which become effective from April 2015 onwards. ICDS apply to all taxpayers following an accrual system of accounting for the purpose of computation of income under the “Heads” of “Profits and gains of business and profession” and “Income from other sources”. Further, the method of accounting prescribed in ICDS is mandatory but it is meant only for income computation and not maintenance of books of accounts. Most Indian companies follow the Indian Accounting Standards (“IndAS”) that are based on the International Financial Reporting Standards (“IFRS”) for the purpose of financial reporting, and there are differences in several areas between the IndAS and the ICDS. Further, for the purpose of Income Tax, computation of depreciation and treatment of income from sale or disposal of assets is based on the “block of assets” concept; while for accounting purposes the same is calculated for individual assets. Further, for Income Tax purposes, the income earned is segregated into five “heads” of income, and there are specific computation rules for each head, and also for adjustment of losses within the head and between different heads, and for the manner of carrying forward such losses, while the treatment as per IndAS is different. Further, adjustments also have to be made for certain deductions or accounting provisions that are disallowed (or limited) for Income Tax purposes, as well as for certain provisions or deductions that are allowed to be taken over-and-above the expenses accounted for; certain income may be exempt from taxation; and the quantum of income that is taxable may differ from the accounting revenue recognised.The concept of deferred tax liabilities and assets exists in the Indian accounting space, but not for tax purposes.


There is no concept of tax grouping rules in Indian tax law and, therefore, there is no relief for losses of overseas subsidiaries.


The tax losses of a private limited company survive a change in ownership if such change does not result in a change in voting power up to 49% of the voting power in the company. In other words, not less than 51% of the voting power should remain the same to continue the carry-forward of tax losses in a company.


There is no additional tax on “retained profits”. If tax-paid profits are reinvested in the business, or simply retained and not distributed, there is no additional tax levied. However, there is a tax on distribution by a company of tax-paid profits, the DDT which is levied at 15%.


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due to non-maintenance of records, a formulaic approach has been prescribed for the apportionment of income based on local and global turnover.


A branch, which would normally be considered as a PE of the foreign company in India, can seek relief from double taxation under the tax treaty in India and in its respective jurisdiction of residence.


Withholding taxes are payable by the person making payments to the local branch of a foreign entity, if such payment represents sums chargeable to tax in India. Further, the branch would also have to determine its actual tax liability (as per domestic law or treaty, whichever is more beneficial) and accordingly pay the additional tax over and above the tax withheld or seek a refund.

7 Overseas Profits


Yes, overseas branches of an Indian entity would be taxed in India, since taxes are levied on the global income of a resident entity. However, credit for the taxes paid on such income would be available.


Dividends received from a non-resident company, in which the recipient local company holds 26% or more of the nominal share capital, are taxable at 15% (plus applicable surcharge and cess) while, if the shareholding is less than 26%, the dividends would be taxed at the normal headline rate of tax as applicable.


There are no specific rules regarding “controlled foreign companies” in Indian tax law at present.



Yes. If a non-resident disposes of real estate (commercial or residential) located in India, the capital gains arising from such disposal would be subject to tax in India in the same manner as they are taxed in the hands of a resident. The tax would differ based on the period of holding – if the asset is a long-term asset, the cost would be indexed and the rate of tax is lower, while if the asset is a short-term asset, the cost cannot be indexed and the rate of tax is higher than for long-term assets.


There are certain rollover or capital gains tax deferment options available to taxpayers that earn capital gains with specific conditions and assets in which the gains must be reinvested with a prescribed lock-in period.


The direct transfer of any Indian asset, including shares of an Indian company, property, etc. is subject to a withholding tax when the seller of such assets is a non-resident. Further, withholding taxes are also levied where immovable property (other than agricultural land) is acquired by a resident – the withholding is applicable if the consideration exceeds INR 5 million at a rate of 1% of the consideration.Additionally, even the indirect transfer of any Indian asset is subject to withholding tax if the foreign entity being transferred derives its value substantially (i.e. more than 50%) from Indian assets, whether held directly or indirectly by such entity being transferred and the value of such Indian assets exceeds INR 100 million.



At the time of formation of a subsidiary, registration fees are levied on the amount of authorised capital of the company, subject to a maximum ceiling. Also, Stamp Duty is levied by different States on the Memorandum of Association and Articles of Association of the company (documents required to be filed while incorporating a company), the basis of which differs from one State to another.


A locally formed subsidiary is considered an Indian or domestic company and is therefore subject to tax in the same manner as any other Indian company, and is taxed at 30% on its taxable income. A branch of a non-resident company is, however, taxed at 40% on its taxable income, since it is considered a foreign company. A branch of a foreign company is taxed only on income accruing or arising in India or received in India, whereas a domestic company is taxed on its global income whether or not it is accrued or received in India.Presently, there is no branch profit tax payable specifically by local branches of non-resident companies; only Income Tax is payable on taxable income.


India follows the same rules for the determination of profits of branches and PEs, such as a company having a physical presence. However, head offices and general administrative overheads are not fully deductible, but are allowed only up to 5% of the taxable profit. When it is not possible to determine the income of the branch


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The GAAR also covers connected persons and “accommodating parties” under its purview and, consequently, they may also face implications if they are found to be part of an impermissible avoidance arrangement entered into in order to obtain tax benefits.


Although India does not have “co-operative compliance”, the Ministry of Finance has set up Large Taxpayer Units (“LTU”), which are self-contained tax offices under the Department of Revenue which act as a single-window clearance point for all matters relating to Income Tax, Corporate Tax and Goods & Service Tax.Eligible taxpayers opting for assessment by an LTU can file their excise return, direct tax return and service tax return at such LTUs and, for all practical purposes, will be assessed to these taxes thereunder.However, this does not result in a reduction of tax.



India has introduced several legislative provisions in response to the BEPS Action Plans such as the Country-by-Country Reporting, transfer pricing documentation requirements, anti-avoidance rules to minimise treaty abuse, a limit on interest deduction, secondary adjustment, etc.


India has already introduced an Equalization Levy at the rate of 6% on specified payments, mainly in respect of online advertising services, made by residents or permanent establishments of non-residents to other non-residents.


India has incorporated provisions in the ITA for Country-by-Country Reporting which came into effect on 1 April 2017. The provisions are in line with the guidelines of BEPS Action Plan 13.


India has introduced the patent box regime with effect from April 2017, under which a resident receiving royalties for a patent developed and registered in India is taxed at a reduced rate of 10%



Yes. If any share or interest in a foreign company or entity derives its value substantially from the assets, whether real estate or other, located in India, then such share or interest is deemed to be situated in India. Thus, any income arising from the transfer of such share or interest is deemed to accrue or arise in India and is taxed accordingly. The share or interest would be deemed to derive value substantially from Indian assets if they constitute 50% or more of the total value of such share or interest. Further, in the case of domestic companies holding immovable property as the only asset, there is no specific provision targeting the transfer of such company as an indirect transfer of immovable property – however, the gains arising from transfer of the company itself would be subject to tax.


In the past few years, the government has come out with new provisions and amendments to existing provisions to rationalise the REIT tax regime in India. Subject to certain conditions and requirements, REITs have been granted pass-through status and exemption from paying DDT and the income would be taxed in the hands of the unitholders instead. Further, the provisions regarding a “business connection” (which is pertinent in determining taxability of income in the hands of non-residents) for REITs sponsored by foreign funds, have been relaxed to exclude Indian fund managers of such foreign REITs from being considered as “business connections” in India.



India first introduced the General Anti-Avoidance Rules (“GAAR”) in the domestic tax law in 2012, but the same had been made effective from 1 April 2017. These rules are also, in effect, anti-abuse rules, since they give the power to the tax administration to override the provisions of tax treaties.


There is no special or additional disclosure requirement on taxpayers in respect of aggressive tax planning schemes, but true and complete disclosure of all information regarding transactions is required to be made to the tax authorities and specific information can be called for in order to determine whether the taxpayer has resorted to an avoidance scheme.In July 2018, the tax authorities introduced a disclosure requirement into the tax audit report requiring the auditor to determine and report whether any transaction could be considered an impermissible avoidance arrangement, effectively making the auditor responsible for the work of the tax authorities. After much representation and lobbying by trade and professional groups, the applicability of these requirements was deferred to the next reporting period.


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(b) transactions with a prescribed number of persons related to systematic and continuous soliciting of business activities or engaging in interaction, specifically in India, through digital means.

In July 2018, the tax authorities called for comments in relation to setting the value threshold and number-of-users threshold for determining SEP.


In effect, India has been more proactive and already introduced legislation that is proposed under the EC’s proposal. The “SEP test” introduced in India which will become live from 2019 onwards is similar to the incorporating a “digital presence” or a “virtual PE” test which is proposed under the first legislative proposal under the European Commission’s proposal.Further, through the Equalization Levy, introduced in 2016, India has already levied a 6% tax on digital/online advertising services provided by non-residents.


on the gross royalty. For a patent to be considered “developed in India”, at least 75% of the expenditure for such development must have been incurred in India.



In addition to the abovementioned Equalization Levy, in 2018, India introduced the concept of “significant economic presence” in the domestic law, which is to be applicable from tax year 2019. The provisions cover income earned by non-residents through digital means without the need to necessarily have an actual physical presence. An entity with SEP in India would be considered to have a business connection in India giving rise to income deemed to accrue and arise in India and therefore be chargeable to tax in India. A non-resident would be said to have SEP in India under two conditions if a non-resident having place of business in India undertakes the provision of services:(a) above a prescribed value threshold in respect of goods,

services or property including provision of download of data or software in India; or


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T. P. Ostwal & Associates LLP, Chartered Accountants is a professional services firm focused on providing high-quality services to its clients in the tax, consulting and regulatory spheres and bringing technical and practical business advice, with consulting, tax and regulatory inputs providing added value for the client.

The firm is engaged in providing a wide spectrum of services, providing consultancy on: inbound and outbound investment; corporate tax; management; and exchange control regulations. Furthermore, the firm offers advice on audits and investigations, and consultancy and compliance services on mergers & acquisitions, foreign collaborations, domestic taxation and international taxation, alongside strategic planning & compliance and service tax matters.

The firm was rated as the best Tier-3 firm for “World Tax” from 2009 to 2016 successively in The Comprehensive Guide to the World’s Leading Tax Firms, and has been consistently rated as one of the top 10 firms in India in the field of transfer pricing advisory services.

T. P. Ostwal is the Managing Partner of T. P. Ostwal & Associates LLP, Mumbai – a firm of Chartered Accountants with almost four decades of experience in providing a variety of high-quality advisory and assurance services. He is also founding partner of the firm DTS & Associates – primarily an audit firm headquartered in Mumbai.

He was the first Vice President of the executive committee of the International Fiscal Association (“IFA”) for the Netherlands, Chairman of IFA-India and a member of the UN Sub-Committee on Transfer Pricing for Developing Countries since 2012, which developed the first UN Transfer Pricing Guidelines and those of several committees of the Indian government, Indian Central Board of Direct Taxes and the OECD.

He is a member of the visiting faculty of International Tax on the LL.M. course at Vienna University, Austria.

Mr. Ostwal was ranked 11th in the top 50 Tax Professionals in the world for the year 2006–2007 by Tax-Business magazine, UK, in November 2006.

T. P. Ostwal T. P. Ostwal & Associates LLP, Chartered AccountantsSuite #1306/07, Lodha Supremus Senapati Bapat Marg, Lower Parel Mumbai – 400 013, MaharashtraIndia

Tel: +91 22 4945 4000Email: [email protected] / [email protected]: www.tpostwal.in

Siddharth Banwat is a Partner with T. P. Ostwal & Associates LLP, Mumbai and handles the practice areas of international taxation, transfer pricing and valuations. He is a Bachelor of Commerce & Computer Applications (“BCA”) from the University of Nagpur, a Chartered Accountant, a Company Secretary and holds an Advanced Diploma in International Taxation from the Chartered Institute of Taxation, UK (specialising in transfer pricing and Singapore taxation).

He has been advising various Indian and multinational clients on cross-border transaction tax and transfer pricing issues, regulatory aspects related to inbound and outbound investments, succession planning, and has represented various clients before the tax and regulatory authorities and other appellate bodies for matters relating to income tax, including transfer pricing, international taxation and foreign exchange regulations. He handles valuation of equity shares, business interests and other intangibles for business enterprises including large corporates and multinational entities.

Mr. Banwat is a member and convener of the International Tax Committee of the Bombay Chartered Accountants’ Society and is on the Managing Committee of the Western Region Chapter of the International Fiscal Association (“IFA”). He is an active contributor and speaker on several topics relating to international taxation, transfer pricing, GAAR, etc. He was a country reporter (jointly) on the subject “General Anti Avoidance Rules” published in IFA Cahier 2018, an annual publication.

Siddharth BanwatT. P. Ostwal & Associates LLP,Chartered AccountantsSuite #1306/07, Lodha Supremus Senapati Bapat Marg, Lower Parel Mumbai – 400 013, MaharashtraIndia

Tel: +91 22 4945 4000Email: [email protected]: www.tpostwal.in


Chapter 18

Mul & Co Mulyono

Indonesia

However, Indonesia has recently updated its domestic anti-treaty abuse rule. Please refer to question 9.1.


Article 32A of Law Number 7 of 1983 on Income Tax, as lastly amended by Law Number 36 of 2008 (“Income Tax Law”) states that the Indonesian government has the authority to enter to a tax treaty with other jurisdictions. It is also stated that the tax treaty is lex specialis in nature in relation to domestic income tax law. The Director General of Tax (“DGT”) has issued DGT Regulation Number PER-10/PJ/2017 (“PER-10”), a new guideline for tax treaties implementation. The DGT sets out several conditions, including administrative and beneficial ownership criteria that must be fulfilled, in order for the non-resident taxpayer to be eligible for the reduced rate in the tax treaty. In practice, with the issuance of this regulation, the DGT can “override” the eligibility of the non-resident taxpayers for the tax treaty benefits in the situation that all or some of the conditions in PER-10 are not fulfilled.


Article 2 paragraph (3) letter b of Income Tax Law states that a resident tax subject shall be any entity that is established or domiciled in Indonesia, except certain units of government agencies. A fully foreign-owned company that is established and domiciled in Indonesia is considered as an Indonesian tax resident, even though the key management and commercial decisions are taken outside Indonesia.

2 Transaction Taxes


In Indonesia, the documentary taxes called Stamp Duty are levied based on Law Number 13 of 1985 on Stamp Duty and Government Regulation Number 24 of 2000. Generally, the Stamp Duty is imposed to the documents, such as agreements or other letters that are made for the purpose to be used as: evidence for actions, facts, or other civil matters; notarial/land titles registrar deeds; and letters that contain a monetary amount of above Rp 1,000,000. The tariff of Stamp Duty ranges from Rp 3,000 to Rp 6,000 depending on the type and the nominal amount stated in the documents.



There are currently 68 income tax treaties in force in Indonesia. Several (new or renegotiated) tax treaties are still in the process of developments with the other jurisdictions, i.e., Cambodia, Malaysia, Mexico, Serbia, Singapore and Zimbabwe. Indonesia has also participated in the signing of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) on June 7, 2017.Until the end of 2017, Indonesia has Exchange of Information (“EOI”) cooperation based on the tax treaties with 65 jurisdictions. In addition, with the passing of Tax Information Exchange Agreement (“TIEA”), Indonesia also has EOI cooperation with four jurisdictions: Bermuda; Guernsey; Isle of Man; and Jersey.


Since Indonesia is a developing country, Indonesia largely adopts the UN Model in developing the tax treaties, with the combination of several principles in domestic taxation laws. Some of the Indonesian tax treaties might be modified from the UN Model or OECD Model, as a result of the negotiation process among the jurisdictions.


For the tax treaties to be in force, they must follow the legalisation process. Based on Law Number 24 of 2000 on International Agreements, the legalisation process of international agreements in relation to tax matters is done through the issuance of a Presidential Regulation that legalises the tax treaty. The Government of Republic of Indonesia will then submit the copy of the Presidential Regulation that legalises the tax treaty to the House of Representative to be evaluated.


Most of the tax treaties with Indonesia do not incorporate limitation on benefits clause articles, except for few tax treaties, e.g., Russia.


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of land and/or building rights (payable by the purchaser). A transfer transaction of a motor vehicle ownership is subject to duty of motor vehicle transfer (regional tax).


Certain luxury goods (vehicle and non-vehicle) are imposed with the Luxury Goods Sales Tax with the rate being between 10% and 200%. Depending on the regions and type of businesses, there are also several applicable regional taxes, such as entertainment tax, cigarettes tax, advertising tax, parking tax, and hotel tax.



In the absence of a tax treaty, the dividends paid by an Indonesian tax resident company to a foreign tax resident are subject to Article 26 withholding tax at the rate of 20%. The withholding tax is payable when the dividend is declared by the company.Most of the applicable Indonesian tax treaties generally provide a reduced rate of withholding tax on dividends at the source country to be 10–15%. Several tax treaties provide a lower rate for substantial ownership holding. For example, in the Indonesia-Hong Kong Tax Treaty, if a beneficial owner (a company) in Hong Kong holds directly at least 25% of the equity of the Indonesian company paying the dividends, the dividend is subject to withholding tax at a reduced rate of 5%.


Similar to the dividends payment, in the absence of a tax treaty, the royalties paid by an Indonesian tax resident company to a foreign tax resident are subject to Article 26 withholding tax at a rate of 20%. The withholding tax is payable at the time stated in the contract or at the time the invoice is issued.Indonesian tax treaties generally provide a reduced withholding tax rate on royalties to be 10–15%. In a few tax treaties, e.g., tax treaties with Hong Kong, Qatar and the United Arab Emirates (“UAE”), the reduced withholding tax rate is 5%.


Based on Income Tax Law, the Article 26 withholding tax at the rate of 20% is also applied on interest paid by an Indonesian tax resident company to a foreign tax resident. The withholding tax is payable at the time the interest is due to the creditors.In most of the applicable Indonesian tax treaties, they generally provide a reduced rate of withholding tax at the source country; 10–15%. In the Tax Treaty with Kuwait and the UAE, the reduced rate of withholding tax is 5%.


Article 18 paragraph (1) of Income Tax Law provides the authority to the Ministry of Finance to determine the maximum Debt-to-


In addition to direct tax, such as income tax, Indonesia also imposes indirect taxes, such as Value Added Tax (“VAT”) at the rate of 10%, in accordance with Law Number 8 of 1983 on VAT, as lastly amended by Law Number 42 of 2009 (“VAT Law”). In general, the VAT rate is 10%. There are several transactions that are imposed by VAT with the tariff of 0% (e.g., export transactions) or exempted by VAT.


The VAT Law adopts a negative list approach, of which Article 4A paragraph (2) and (3) of VAT Law define the list of goods and services that are not subject to VAT. All of the other goods and services are considered as Taxable Goods and Services that are subject to VAT. Further, the VAT Law and the implementing regulations define the criteria for a small entrepreneur, which is the entrepreneur (taxpayer) that has an annual gross turnover not more than Rp 4.8 billion. The taxpayers that do not fulfil this annual turnover threshold are not mandatorily stipulated as Taxable Entrepreneurs for VAT purposes and, therefore, the delivery of goods and services by the small entrepreneurs is not subject to VAT.


There are several restrictions for the Input VAT to be credited in the periodic VAT returns, such as:a. the Input VAT that is acquired before the taxpayers are

stipulated as Taxable Entrepreneurs, before the Taxable Entrepreneur starts commercial production, or that is not directly related to the business activities;

b. the Input VAT from the acquisition and maintenance of motor vehicles in the form of sedan and station wagon, except as commodities for sale or for rent;

c. the Input VAT of which the tax invoice does not fulfil the formal provisions; and

d. the Input VAT that is collected by issuing a tax assessment, or is discovered during a tax audit.


VAT grouping for several entities is not permitted in Indonesia. Based on current VAT Law, in case a company has several branches in different locations, each branch must be stipulated separately as the company’s branches and must conduct a separate VAT administration. In this situation, the company’s branches are allowed to request for centralisation of VAT administration in one selected location.


In the case of a land and/or building transfer transaction, there is final income tax (payable by the seller) and duty on the acquisition


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rental payments from an Indonesian tax resident to foreign tax residents for any property located in Indonesia are subject to Article 26 withholding tax at the rate of 20%.


The transfer pricing regulations in Indonesia are based on Article 18 paragraph (3) of Income Tax Law. The DGT then issued an implementing transfer pricing regulation, DGT Regulation Number PER-43/PJ/2010 on Implementation of Arm’s Length Principle (“ALP”) among Taxpayers that have a related-party relationship, as amended by DGT Regulation Number PER-32/PJ/2011. The scope of the ALP application covers:a. the transactions conducted between domestic taxpayers

or Permanent Establishments (“PE”) in Indonesia with an affiliated foreign tax resident; and

b. the transactions conducted with the other domestic taxpayers or PEs in Indonesia that have a related-party relationship, which aim to utilise different tax tariffs, such as final and non-final income tax for certain businesses, imposition of sales tax on luxury goods, and transactions conducted with oil and gas contractors.

Further, in line with BEPS Action 13, Indonesia has also introduced Ministry of Finance Regulation Number 213/PMK.03/2016 (“PMK-213”) and DGT Regulation Number PER-29/PJ/2017 (“PER-29”), which provide the detailed provisions on Country-by-Country Reporting (“CbCR”). The Transfer Pricing Documentation consists of the Master File (“MF”), Local File (“LF”), and/or CbCR. The content of MF, LF, and CbCR is generally similar with recommendations set out in the BEPS Action Plan 13.



The general Corporate Income Tax (“CIT”) rate in Indonesia is 25%. There are several facilities regarding the CIT rate applied for companies that fulfil certain criteria, as follows:a. a company that has an annual gross turnover up to Rp 50

billion is allowed the 50% reduction from the general CIT rate (12.5%) for the proportion of Taxable Income of the gross turnover up to Rp 4.8 billion;

b. a company that is listed in the stock exchange where a minimum of 40% of the shares are traded in stock exchange and fulfil other criteria, is allowed a 5% lower rate compared to the general CIT rate (20%);

c. a company that has an annual gross turnover of no more than Rp 4.8 billion can be imposed with final income tax of 0.5% from the gross turnover maximum of three years; or

d. a company that makes investments with a certain minimum investment value in several pioneering industries may receive a reduction of the CIT rate of up to 100% for a period of five to 20 years, depending on the total investment value.


Yes. The tax base for computing the CIT is Taxable Income. At the end of the fiscal year, the taxpayers are required to make fiscal reconciliations from the accounting profit to calculate the Taxable Income, which is the Taxable Revenue (gross revenue) deducted with any Deductible Expenses.

Equity Ratio (“DER”) to compute the Taxable Income. In 2015, the Ministry of Finance issued a regulation that determines the maximum allowable DER amount that determines the interest deductibility. Please see question 3.5.


Based on Ministry of Finance Regulation Number 169/PMK.010/2015 (“PMK-169”), for the CIT calculation, the threshold for DER is 4:1. If the actual DER exceeds 4:1, the amount of deductible interest expense must be adjusted proportionately to an allowable amount based on the 4:1 ratio. The amount of debt for the purpose of calculating DER is the monthly average debt balance during a certain fiscal year or part of the fiscal year. The amount of equity for the purpose of calculating DER is the monthly average equity balance during a certain fiscal year or part of the fiscal year. In case the equity is zero or negative, all of the interest expense is non-deductible. The debt includes a long-term debt, as well as short-term debt, including interest-bearing trade payables. The total equity includes equity based on the financial accounting standard and non-interest bearing loans from related parties.


PMK-169 also states that any interest payable to a related party must be calculated in accordance with the arm’s length principle. The DGT is authorised to readjust the value of interest payment to a related party according to the arm’s length principle. Please also see question 3.9.A debt by a third party but guaranteed by a parent company does not create a related-party relationship. The related-party relationship criteria based on Article 18 paragraph (4) of Income Tax Law is as follows:a. the taxpayer that has capital participation directly or indirectly

of a minimum of 25% at other taxpayer; a relationship between a taxpayer with a minimum participation of 25% at the other two or more taxpayers; or a relationship between two or more taxpayers mentioned latter;

b. the taxpayer that controls the other taxpayer or two or more taxpayers that are under the same control both directly and indirectly; or

c. there is family relation both biologically and by marriage in vertical and/or horizontal lineage of the first degree.


There are currently no other restrictions on tax relief for interest payments by a local company to a non-resident company (with no related-party relationship).


In general, Article 6 of the Indonesian tax treaties provides taxation rights to the country where the property is located and does not provide any reduced withholding tax rate. Therefore, any property


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5 Capital Gains


In general, Indonesian Income Tax Law adopts a wide meaning of an “income” as referred to an “additional economic benefit in whatever forms and names”. Article 4 paragraph (1) letter d of Income Tax Law clearly states that capital gains arising from the transfer of assets are included as Taxable Income (similar to income from ordinary/business profits). The capital gains are taxed upon realisation, which means that the unrealised gains resulting from the fair value adjustments of assets are not taxable in computing CIT.A transfer of land and/or building is subject to a special provision on final income tax at a rate of 2.5% for the seller and 5% duty on acquisition of land and/or building rights for the purchaser. A transfer of shares that are publicly traded in the stock market is also subject to a special provision of final income tax at the rate of 0.1% from the total sale value.


There is no participation exemption for taxation on capital gains.


In the context of Branch Profit Tax for a PE, the Branch Profit Tax is not imposed if the profits are re-invested back in Indonesia. Please also refer to question 6.4.There is no special relief in the context of dividend payments that are used for reinvestment in Indonesia. The dividends paid to an Indonesian company’s shareholder by its Indonesian subsidiary with a minimum of 25% share ownership are considered as Non-Taxable Income.


In general, Article 13 of the Tax Treaties with Indonesia provides Indonesia the taxing rights for alienation of property situated in Indonesia by a foreign tax resident. There is an applicable final income tax imposed to a direct transfer of land and/or building at the rate of 2.5%.A direct transfer of an Indonesian company’s shares by a foreign tax resident is subject to Article 26 withholding tax of an effective rate of 5%. In the case of an indirect transfer of shares, the Minister of Finance issues Ministry of Finance Regulation Number 258/PMK.03/2008 which regulates that an Article 26 withholding tax with an effective rate of 5% is imposed to a transfer of shares of a special purpose company (“SPC”) (that is established in a tax haven country) which has related-party relationship with a company in Indonesia. A direct transfer of shares that is publicly traded in the stock market is imposed with final income tax at the rate of 0.1%. Please also refer to questions 5.1 and 8.2.


There are several types of adjustments in the fiscal reconciliations to derive the Taxable Income from the accounting profits, as follows:a. Taxable Revenue: Excluding revenues that are 1) not included

as income tax object, and 2) already subject to final income tax.

b. Deductible Expenses: 1) temporary difference, such as differences in timing of recognition of fiscal depreciation and accounting depreciation; and 2) permanent difference; several expenses are non-deductible for CIT calculation, such as expenses to create allowance (e.g., allowance for doubtful accounts), expenses for personal interest of shareholders, benefit-in-kind, administrative sanctions.


No, there are no tax grouping rules in Indonesia. Based on elucidation or Article 4 paragraph (1) Income Tax Law, the losses from overseas operations cannot be deducted in calculating CIT.


The tax losses of a (private and public) limited liability company survive change of ownership, without certain threshold limitation. The tax loss carry-forward is valid for the period of five years. Based on Ministry of Finance Regulation Number 52/PMK.010/2017, the taxpayers that will conduct mergers can request for the use of a book value for transfer of the assets of the merger companies. In this case, the recipient company of the assets that use the book value for the transfer is not allowed to use the tax loss carry-forward from the transferor company.


The CIT is generally imposed at the end of the fiscal year towards the Taxable Income. Please also refer to question 4.1 for the CIT rate. Currently, there is no additional tax if the profits are “retained” by the companies. The distribution of profits towards the company’s shareholders is taxed upon the declaration of the dividend. There is no mandatory obligation for the domestic companies to declare dividends annually. The restrictions for distribution of profits in form of dividends are subject to Law Number 40 of 2007 on Company Law. In the case of a PE, in addition to the CIT, the profits after tax are also subject to additional Branch Profit Tax at the end of the fiscal year with the general rate of 20% (or tax treaty rate).


Depending on the regions where the company is located and the type of businesses of the companies, there are several taxes to be paid by the companies. Please refer to questions 2.6 and 2.7. The Property Tax is also payable by the company in case the property is owned by the company.


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c. the payments received in letter (b) above that are received by the Head Office are not considered as Taxable Objects by the PEs, except for interests related to the banking businesses.


A branch from an overseas entity shall be treated as a PE. In addition to the general CIT rate, the PE is subject to Branch Profit Tax, based on Article 26 paragraph (4) of Income Tax Law, unless the profits are re-invested back in Indonesia. Please also refer to question 6.2.The reinvestment must be done at the end of the following fiscal year at the latest. The PE must also submit a written notification regarding the type of capital investment, realisation of reinvestment, and/or the commencement of commercial production for the newly established company to the registered Tax Office. In general, Article 10 of the Tax Treaties with Indonesia provides a reduced rate of the Branch Profit Tax of the PE situated in Indonesia, to be 5–15%. Several tax treaties, such as with Thailand and Sri Lanka, do not provide such relief and therefore, the PE is subject to Branch Profit Tax, as regulated in the domestic taxation regulations.


In principle, the profits after tax by the branch (treated as a PE in Indonesia) are already subject to the Branch Profit Tax at the end of the fiscal year. Therefore, the remittance of the profits by the branch is not subject to additional withholding tax.

7 Overseas Profits


Indonesia adopts a Worldwide Income principle, of which all of the (domestic and overseas) incomes that are received by the companies domiciled in Indonesia (including profits from overseas branches) are taxable in Indonesia. However, based on elucidation of Article 4 paragraph (1) of Income Tax Law, the loss from overseas branches is non-deductible in computing the Taxable Income.


Yes. The dividends from a non-resident company are also subject to a general CIT rate in Indonesia. Any withholding tax applied in the source country is allowed to be credited in the same fiscal year up to a certain amount to the total tax payable in Indonesia.


Indonesia has the general provision on Controlled Foreign Company (“CFC”) rules in Article 18 paragraph (2) of Income Tax Law. Indonesia has amended its implementing regulation on CFC by issuing Ministry of Finance Regulation Number 107/PMK.03/2017 (“PMK-107”). The Indonesian taxpayer must pay



In order to form an Indonesian subsidiary company, the article of incorporation of the subsidiary must be prepared by an Indonesian Notary, which is subject to Stamp Duty in the amount of Rp 6,000. Further, the company’s subsidiary must be registered in the Ministry of Law and Human Rights (“MOLHR”) and subject to certain Non-Tax State Revenue duty.


From an Indonesian legal point of view, Indonesia does not recognise a branch as a separate legal entity. A local “branch” of a non-resident company must be registered as a PE in Indonesia. In general, a PE is subject to general CIT as in the case of a general company. Please refer to question 6.3 for the Taxable Revenue Object and allowable Deductible Expenses for a PE. There are also several specific tax rate treatments for PEs depending on the type of business, such as PEs that act as a trade representative office, conduct shipping, and airline businesses.In addition to the CIT, the PE is also subject to additional Branch Profit Tax at the rate of 20% (or a reduced rate depending on the applicable tax treaty), unless the profits are reinvested back in Indonesia. For a local subsidiary company of a non-resident company, the tax treatment is the same as a locally owned company, except the dividends declared and distributed to the foreign shareholder are subject to Article 26 withholding tax at the rate of 20% (or a reduced rate in the applicable tax treaty).


Article 5 of Income Tax Law states that the Taxable Revenue Object (gross revenue) for a PE, is as follows:a. revenue from business or activities of the PE and from the

owned assets;b. revenue from the Head Office from business or activities, sale

of goods, or delivery of services in Indonesia that is similar to the ones conducted by the PE in Indonesia; and

c. other revenues (such as interest, royalty, service fees, gift) that are received or earned by the Head Office, as long as there is an effective relationship with the assets or activities of the PE that generates the incomes.

The expenditures that are related towards the above revenues can be deducted in computing the Taxable Income. Further, in calculating the Taxable Income:a. the Head Office administrative expenditures that are allowed

to be deducted are the expenditures that are related to the business activities of the PEs;

b. the payments to the Head Office that cannot be deducted as Deductible Expenses, such as: royalties or other remunerations in connection with the use of assets, patents, or other rights; remunerations in connection with the management fees or other fees; and interest, except interest for banking business; and


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its assets constitute land and/or building in Indonesia by a foreign tax resident, the transaction is still considered as a transfer of an ordinary company’s shares (not a land and/or building transfer) and is subject to withholding tax in Indonesia at the effective rate of 5% (with certain exceptions).


Government Regulation Number 40 of 2016 and Ministry of Finance Regulation Number 37/PMK.03/2017 provide regulations on income tax on the income from real estate with the scheme of certain collective investment contracts (“KIK”). In this scheme, the real estate is owned by an SPC, of which a 99.9% share is owned by the collective investment contract. Any income that is received or earned by the taxpayer from the transfer of real estate to the SPC or the KIK, is subject to final income tax at the rate of 0.5% from the gross value of the transfer of real estate. The final income tax must be self-paid by the taxpayer prior to the deeds, decisions, or any agreements related to transfer of real estate to the SPC or the KIK being signed by the authorised officer.



In principle, Indonesia adopts a substance-over-form rule (recognition of income, in whatever names and forms), as reflected in Articles 4, 23, and 26 of Income Tax Law. Further, Article 26 paragraph (1a) of Income Tax Law has also introduced the general concept of beneficial ownership. The DGT has issued DGT Regulation Number PER-10/PJ/2017 (“PER-10”), a new guideline for tax treaties implementation. In addition of the substantive conditions, such as no tax treaty abuse, PER-10 also provides additional administrative conditions, “certain conditions”, and beneficial ownership conditions for tax treaties applications. The administrative conditions are mainly to completely prepare and submit the copy of the original or the “legalised” copy of the Form DGT-1 or Form DGT-2 in the withholding tax returns. The certain conditions criteria are generally related to the business activities of the non-resident taxpayers, e.g., the effective management, assets owned, employees and types of incomes. As regulated in PER-10, Indonesia has introduced a more prescriptive criteria of a beneficial owner, as follows:1. for an individual foreign taxpayer, does not act as an Agent or

Nominee; or 2. for a corporate foreign taxpayer, does not act as an Agent or

Nominee, or Conduit, which must fulfil certain conditions:a. has the control to use or to enjoy funds, assets, or rights,

which generate income from Indonesia;b. no more than 50% of the income is used to fulfil the

obligation to other parties (the 50% income does not include: the fair remuneration to the employee in relation to the work relationship; other disbursed expenses by the foreign taxpayer in conducting the business activities; and profit distribution in form of dividend to the shareholders);

c. bear the risk on asset, capital, and/or the liabilities that it owns; and

tax by recognising a deemed dividend to the extent that the profits of the CFC are not distributed to the Indonesian taxpayer in form of actual dividends (“Deemed Dividend”). There is no change in the timing for the recognition of the Deemed Dividend, i.e., the 4th month after the deadline submission of the CFC annual income tax return, or the 7th month after the end of the fiscal year, if the CFC has no obligation to submit an annual income tax return or if there is no submission deadline of the annual income tax return. PMK-107 regulates that the Deemed Dividend must be imposed on directly owned CFCs (“Direct CFCs”) and indirectly owned CFCs (“Indirect CFCs”). The definition of a Direct CFC is similar to that given in previous regulations and in line with Article 18 paragraph (2) of the Income Tax Law, which states that a Direct CFC is a foreign non-listed company that is directly owned at least 50% by an Indonesian taxpayer; or is directly owned at least 50% collectively by several Indonesian taxpayers. Although Article 18 paragraph (2) of the Income Tax Law has already provided the definition of a CFC (which is similar to the Direct CFC definition) and mandated the Ministry of Finance to only determine the timing of the recognition of the Deemed Dividend, PMK-107 has “expanded” the definition of CFC and indirectly introduced the definition of an Indirect CFC, which is a foreign non-listed company in which at least 50% of the shares are: owned by a Direct CFC and/or an Indirect CFC; jointly owned by an Indonesian taxpayer and another Indonesian taxpayer through a Direct and/or an Indirect CFC; or jointly owned by a Direct and/or and an Indirect CFC.The Deemed Dividend is calculated from profit after tax of a Direct CFC and profit after tax of an Indirect CFC multiplied by the percentage ownership of the Direct CFC. The profit after tax is generally based on the accounting standard in the CFC country of residence, deducted by the income tax payable in the respective country. Based on this calculation, it can be inferred that generally, all of the profit after tax from the CFC in that particular year should be recognised as Deemed Dividend income for the Indonesian taxpayer.



Most of the tax treaties with Indonesia (Article 6 of Tax Treaty) provide the taxation rights to the source country (Indonesia) for any income derived by any property situated in Indonesia. Based on Government Regulation Number 34 of 2016, the transfer of land and/or building is subject to final income tax at the rate of 2.5% from the gross value of transfer which is applied for the seller. There are few exceptions applied, i.e., 1% for basic housing and very basic housing, and 0% for transfer of land and/or building to government- or state-owned enterprises. Generally, the tax base that is used in the context of the sale and purchase of land and/or building is the actual transaction value or, in the case of an affiliated-party transaction, is the fair value of the assets.


In some treaties, e.g., Tax Treaties with Hong Kong, in the case of a transfer of an Indonesian company’s shares where the majority of


Indo

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Mul & Co Indonesia

Generally, PMK-213 and PER-29 adopt BEPS Action 13. Please refer to question 3.9. Indonesia also signed the MLI on June 7, 2017, which is related to BEPS Action 15.


In relation to adoption of BEPS Action Plan 13, as currently set out in PMK-213 and PER-29 (please also refer to question 3.9), there are several additional requirements beyond BEPS Action Plan 13, such as the LF must be supplemented with the copy of the agreement/contract for significant transaction and information related to financial statement. For CbCR, the DGT requires the taxpayer to also attach the working paper (according to the format regulated by the DGT) as part of the CbCR.There are currently no other new regulations to adopt any legislation to tackle BEPS beyond OECD’s BEPS reports.


Indonesia has only incorporated provisions of CbCR in PMK-213 and PER-29, which are generally in line with BEPS Action 13.


No, Indonesia does not maintain any preferential tax regime such as a patent box.



There are currently no new regulations reflecting unilateral action from the DGT to tax digital activities or to expand the tax base.


There is currently no digital services tax imposed in Indonesia.

d. does not have a written or unwritten obligation to transfer part or all of the income received from Indonesia to other party.


There are currently no mandatory requirements to make a special disclosure of avoidance schemes.


Article 43 of Law Number 6 of 1983 on General Taxation Provisions and Procedures, as lastly amended by Law Number 16 of 2009 (“GTP Law”), states that a representative, a proxy, employee of taxpayers, or other parties that request, jointly participate, suggest, or assist in tax criminal actions can also be subject to criminal penalty and administrative sanctions.


Article 8 of Indonesian Income Tax Law provides the opportunity for the taxpayers to voluntarily make amendments to tax returns that have been submitted. For example, in case of a tax audit, as long as the tax assessment has not been issued, the taxpayers are allowed to make amendments to their tax returns and are subject to administrative sanction of 50% from any tax underpayment.



In general, Indonesia has introduced several local regulations to adopt BEPS Action Plans. For example, Indonesia has adopted a common approach for BEPS Action 4 by introducing a thin capitalisation rule (“PMK-169”) that is based on equity approach (balance sheet test), as opposed to the fixed or group ratio in BEPS Action 4. Please refer to questions 3.4 and 3.5. Further, in line with BEPS Action 13, Indonesia has introduced PMK-213 and PER-29 on Transfer Pricing Documentation (MF, LF, and CbCR).


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Mul & Co Indonesia

Mul & Co is one of a very few Law Firms in Indonesia that specialises in taxation fields. Mul & Co is founded by experienced practitioners with multi-disciplinary backgrounds in tax, law, accounting, and finance. We mainly assist our clients in tax litigation cases (tax audit, tax objection, tax appeal, tax lawsuit, and tax civil review), as well as tax restructuring projects. We believe that our success depends upon our clients’ satisfaction. We therefore always strive to provide our clients with the best possible solutions to their tax matters. Our firm brings a rich understanding of Indonesia’s unique business and legal culture to provide our tax services to our client. Our firm is also staffed by dedicated professionals with a deep understanding of taxation law regulations and business culture. We are also independent and free from a lengthy conflict checks process which can sometimes be time-consuming.

Mulyono is the managing partner of Mul & Co. He has a triple Master’s in finance, law, and notary, as well as several professional certifications such as Certified Public Accountant, Chartered Accountant, Certified Financial Planner, Certified Management Accountant, and Affiliate Wealth Manager. He is also a licensed legal counsel in the Tax Court, a licensed advocate and member of the Indonesian Advocate Association (PERADI), and a registered tax consultant. He is currently pursuing a Doctorate degree in Law. Prior to setting up Mul & Co, he gained extensive experience working in tax and legal environments, such as in Baker McKenzie (Hadiputranto Hadinoto & Partners), PB Taxand (formerly known as PB & Co.), and McKinsey & Company. His experience in the taxation field extends to tax disputes, tax due diligence, tax advisory, tax compliance, as well as company restructuring. In tax dispute areas, he has represented various multi-national clients in tax appeal and lawsuit cases in the Tax Court, as well as assisting taxpayers in the civil review process in the Supreme Court. He has served in a variety of industries, including in manufacturing, trading, real estate, mining and oil & gas, telecommunication, hospitality, and services. His unique combination of technical knowledge in tax, accounting, finance and law, and his expertise in the Indonesian taxation business process system, enable him to be a trusted advisor to his clients.

MulyonoMul & CoJl. Pluit Raya 121 Blok A/12Penjaringan, North Jakarta, 14440Indonesia

Tel: +62 21 668 1998Email: [email protected]: www.mul-co.com


Chapter 19

Maples and Calder

Andrew Quinn

David Burke

Ireland


A company is resident in Ireland if it is incorporated in Ireland or, if not Irish-incorporated, is centrally managed and controlled in Ireland. This latter test is based on case law and focuses on board control, but is a question of fact based on how decisions of the company are made in practice.If a company incorporated in Ireland is managed and controlled in a treaty state, it may be regarded as resident in that other state under the “tie-breaker” clause of Ireland’s double taxation treaty (“DTT”) with that state.

2 Transaction Taxes


Generally a document is chargeable to stamp duty, unless exempt, where the document is both:■ listed in Schedule 1 to the Irish Stamp Duties Consolidation

Act 1999 (the principal head of charge is a transfer of any Irish property); and

■ executed in Ireland or, if executed outside Ireland, relates to property situated in Ireland or to any matter or thing done or to be done in Ireland.

The transferee is liable to pay stamp duty and a return must be filed and stamp duty paid within 45 days of the execution of the instrument.Stamp duty is charged on the higher of the consideration paid for, or the market value of, the relevant asset at the following rates:■ Shares or marketable securities: 1%.■ Non-residential property: 6%. ■ Residential property: 1% on consideration up to €1 million

and 2% on the excess.There are numerous reliefs and exemptions including:■ Group relief on transfers between companies where the

transferor and transferee are 90% associated at the time of execution and for two years afterwards.

■ Reconstruction relief on a share-for-share exchange or share-for-undertaking transaction, subject to meeting certain conditions.

■ Exemptions for transfers of intellectual property, of non-Irish shares and land, loan capital, aircraft and ships.



As of September 2018, 74 treaties have been signed, 73 of which are in force.


Generally speaking, they follow the OECD Model.


Yes, but a number of Irish domestic provisions, including certain exemptions from withholding tax, take effect immediately when a treaty is signed.


No, other than in respect of certain treaties such as the treaty with the US.Additionally, the OECD’s Base Erosion and Project Shifting project recommended that members include in their double tax treaties a limitation-on-benefits test and/or a principal purpose test (“PPT”) as a condition for granting treaty relief. This recommendation will be implemented by means of a multilateral instrument (“MLI”). The MLI was signed by Ireland on 7 June 2017 and Ireland has indicated that it will include the PPT in its treaties. Ireland’s double tax treaty with another country will be modified by the MLI where both treaty partners have ratified the MLI.


No, Irish double tax treaties prevail over domestic law. As noted under question 1.3, certain domestic exemptions mirror the treaty relief and indeed may be more favourable and apply before a treaty comes into force.


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Maples and Calder Ireland


Customs duties are payable on goods imported from outside the EU.Excise duty applies at varying rates to mineral oils, alcohol and alcoholic beverages, tobacco products and electricity, and will also apply to certain premises and activities (e.g. betting and licences for retailing of liquor).There is an insurance levy on the gross amount received by an insurer in respect of certain insurance premiums. The rate is 3% for non-life insurance and 1% for life insurance. There are exceptions for re-insurance, voluntary health insurance, marine, aviation and transit insurance, export credit insurance and certain dental insurance contracts.



Dividend withholding tax at 20% applies to dividends paid to non-resident persons. However, a number of exemptions apply in that case, including where payments are made to:■ persons resident in an EU Member State (other than Ireland)

or a country with which Ireland has concluded a DTT (“EU/treaty state”);

■ companies ultimately controlled by persons who are resident in an EU/treaty state; and

■ companies whose shares are substantially and regularly traded on a recognised stock exchange in an EU/treaty state or where the recipient company is a 75% subsidiary of such a company or is wholly owned by two or more such companies.


Royalties are not generally subject to withholding tax unless paid in respect of an Irish patent.No withholding tax will apply to royalties paid in the course of a trade or business to a company resident of an EU/treaty state or paid between “associated companies” in the EU.It is Irish Revenue’s administrative practice since 2010 not to charge withholding tax on royalties payable under a licence agreement executed in a foreign territory which is subject to the law and jurisdiction of a foreign territory (subject to the Irish company’s obtaining advance approval from Revenue).


Payments of “yearly” interest by an Irish corporation to a non-resident are normally subject to withholding tax at 20%. There are wide exemptions from this requirement, the most notable of which include payments:■ between “associated companies” under the EU Interest and

Royalties Directive;■ by a company in the ordinary course of its trade or business

to a company resident in an EU/treaty state (provided the payments do not relate to an Irish branch or agency of the


VAT is a transaction tax based on EU directives as implemented into Irish law. It is chargeable on the supply of goods and services in Ireland and on goods imported into Ireland from outside the EU.Persons in business in Ireland generally charge VAT on their supplies, depending on the nature of the supply.The standard VAT rate is 23% but lower rates apply to certain supplies of goods and services, such as 13.5%, e.g. on supplies of land and property, and 0%, e.g. on certain food and drink, books, and children’s clothing.


The application of VAT to a supply of goods or services depends on the place of supply of those goods or services. For example, business-to-business supplies of services take place where the recipient is established.The supply of the following goods and services is exempt from VAT: most banking, insurance and financial services; medical services; education and training services; and passenger transport.The transfer of certain assets of a business between accountable persons is not subject to VAT where the assets constitute an undertaking capable of being carried on independently.


VAT incurred will generally be recoverable as long as it is incurred by a taxable person (a person who is, or is required to be, VAT-registered) for the purpose of making taxable supplies of goods and services. VAT incurred by a person who makes exempt supplies is not recoverable. Where a taxable person makes exempt and non-exempt or non-business supplies, VAT recovery will be allowed in respect of the non-exempt supplies only. However, if the VAT incurred cannot be attributed to either (for example, general overheads), the VAT must be apportioned between the taxable and exempt supplies.


Under Ireland’s VAT grouping rules, inclusion within a VAT group is on an all-or-nothing basis for a legal entity and so once a branch is included within an Irish VAT group registration the entire legal entity is included. Irish Revenue is still considering the implications of the Skandia decision.


Certain taxes, including interest withholding tax, dividend withholding tax, professional services withholding tax and relevant contract tax, may be payable depending on the nature of the transaction and the type of business carried on by the parties to the transaction.


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Yes, Ireland has had transfer pricing rules since 2011 and these apply to arrangements entered into between associated companies where one of them carries on a trade. If an arrangement is not made at arm’s length, an adjustment will be made to the trading profits to reflect an arm’s length amount. The Irish tax legislation refers to the OECD Transfer Pricing Guidelines for the interpretation of the arm’s length principle. There is an exemption for small and medium-sized enterprises.



Ireland has two rates of corporation tax, a 12.5% rate and a 25% rate.The 12.5% rate applies to the trading profits of a company which carries on a trade in Ireland. There is no precise definition of what constitutes a trade for this purpose. As a general rule, it would require people on the ground in Ireland carrying out real economic activity on a regular or habitual basis, and normally with a view to realising a profit.The corporation tax rate of 25% applies in respect of passive income, profits arising from a possession outside of Ireland (i.e. foreign trade carried on wholly outside of Ireland) and profits of certain trades such as dealing in or developing land and mineral exploration activities.


A company’s profits for tax purposes will follow its accounts, provided that they are prepared in accordance with generally accepted accounting principles, subject to specific adjustments required by Irish tax legislation.


Revenue expenses which are not incurred wholly and exclusively for the purposes of the trade are not deductible from the company’s taxable profits.While accounting-based depreciation of assets is not generally deductible, tax-based depreciation can be taken into account for “plant and machinery” and “industrial buildings” subject to meeting certain conditions.It is possible to carry forward trading profits arising from the same trade and surrender losses from group companies to reduce taxable profits.


Yes. Companies can be grouped for different tax purposes (but are not taxed on the basis of consolidated accounts).For loss relief and capital gains tax (“CGT”) purposes, a group consists of a principal company and all its effective 75% subsidiaries.

lender), where that state imposes a tax that generally applies to interest receivable in that state by companies from sources outside that state;

■ on quoted Eurobonds; or■ by an Irish “section 110 company” to a person resident in an

EU/treaty state, other than where it relates to an Irish branch or agency.


There are no “thin capitalisation” rules applicable in Ireland.It is nonetheless possible in certain limited cases that the interest may be reclassified as a distribution preventing such interest from being tax-deductible.


Interest that would ordinarily be reclassified as a distribution may nevertheless be deductible for an Irish “section 110 company” if one of four safe harbours apply including where the recipient is resident and subject to tax in an EU/treaty state.




Interest is generally deductible if provided for as an expense in the statutory accounts of the company, and is incurred wholly and exclusively for the purposes of its trade.Subject to meeting certain conditions, interest incurred in lending money to a trading or rental company or in acquiring shares in a trading or rental company or a holding company of such a company, should also be deductible.Tax relief for interest is restricted where it is paid for acquiring shares in or lending to a connected company or for the purposes of acquiring a trade or business of that or another connected company (irrespective of the payee’s country of residence).The new EU Anti-Tax Avoidance Directive (“EU ATAD”) contains certain restrictions on borrowing costs. Ireland has applied for a derogation for implementation of the restrictions until 2024 but it is unclear whether an agreement will be secured in relation to this derogation from the EU Commission.


Withholding tax applies at a rate of 20% on rent paid directly to a non-resident landlord in respect of Irish situate property (payable to Irish Revenue by the tenant).The appointment of an Irish tax-resident agent by the non-resident landlord to collect rental payments on his behalf excludes the application of withholding tax on the rent altogether.


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Where an Irish company disposes of shares in a company resident in Ireland or an EU/treaty state in which it has held at least 5% of the ordinary shares for more than 12 months, any gain should be exempt from CGT. The subsidiary must carry on a trade, or else the activities of the disposing company and all of its 5% subsidiaries taken together must amount to trading activities.


No, there is no such relief.


Where a company disposes of Irish real estate, or shares deriving more than 50% of their value from Irish real estate, for a consideration exceeding €500,000, or in the case of residential property exceeding €1 million, the purchaser is obliged to withhold 15% of the sales proceeds unless the purchaser obtains a CG50 clearance certificate from Irish Revenue. Such certificate will be issued where the vendor is resident in Ireland, the CGT has been paid or no CGT arises.



No taxes would be imposed.


Yes. An Irish-resident subsidiary would pay corporation tax on its worldwide income and gains, whereas a branch would be liable to corporation tax only on the items listed in question 6.3. The charge to Irish corporation tax only applies where the non-resident company is carrying on a trade in Ireland through the branch. A branch set up for investment purposes only, and not carrying on a trade, is not subject to Irish corporation tax, though certain Irish source income (mainly rent and interest) may be subject to income tax either through withholding or by way of income tax charge, subject to any available exemptions. A branch would not be subject to a branch profits tax.


A non-resident company carrying on a trade though an Irish branch is subject to Irish tax on the following items:■ the trading income arising directly or indirectly through or

from the branch;■ income from property or rights used by or held by or for the

branch; and■ such gains as, but for the corporation tax rules, would be

chargeable to CGT in the case of a company not resident in Ireland.

An Irish company may be allowed relief for losses in an Irish subsidiary and for losses in an overseas subsidiary provided the loss is not available for use by the overseas subsidiary. Capital losses cannot be surrendered between members of a CGT group.Capital assets may be transferred between group members on a no gain/no loss basis. This has the effect of postponing liability until the asset is transferred outside the group or until the company holding the asset is transferred outside the group.Payments between members of a 51% group can be made without withholding.Transfers between associated companies are exempt from stamp duty where certain conditions are met.It is possible to apply for a VAT grouping of companies established in Ireland that are under common control. Transactions between these companies are disregarded for VAT purposes.


Tax losses may survive a change in ownership but there are rules denying the use of carry-forward losses in certain circumstances following such a change.


A surcharge of 20% applies in respect of “estate and investment” income retained by “close” companies. In general terms, close companies are ones which are controlled by five or fewer people. A surcharge of 15% will also be applicable in respect of retained professional income in cases of close “professional” service companies.


Other than “local” rates which may apply to the occupation of commercial property, no they are not.

5 Capital Gains


Yes, there is a separate set of rules for computing capital gains. Those rules are broadly as follows:■ costs of acquisition and disposal are deducted from disposal

proceeds;■ enhancement expenditure is generally deductible where such

expenditure is reflected in the value of the asset; ■ the application of capital losses carried forward may reduce

the amount of gain; and■ the purchase price and enhancement expenditure may be

adjusted for inflation (indexation relief ).The rate of tax imposed upon capital gains is currently 33% and therefore differs from the rate imposed on business profits (12.5% for trading income, 25% for investment income).


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place for the essential purpose of obtaining a tax advantage and target CFC income that has been artificially diverted from Ireland. The deadline for implementation of the EU ATAD in Member States is 1 January 2019.



CGT arises on the disposal of commercial Irish real estate by non-residents.


CGT arises on the disposal of shares or securities (other than shares or securities quoted on a stock exchange) deriving their value, or the greater part of their value, directly or indirectly from Irish commercial real estate.


Ireland introduced a REIT regime in 2013. A REIT is exempt from tax on income and chargeable gains of its property rental business, provided it meets certain conditions as to Irish residence, listing of shares (on an EU stock exchange), derives 75% of its assets and profits from its property rental business, and distributes 85% of its property income by dividend to shareholders in each accounting period. Income tax can apply where a dividend is paid to a shareholder who holds at least 10% of the share capital or voting rights in the REIT.



Ireland has a general anti-avoidance provision, section 811 of the Irish Taxes Consolidation Act 1997, the applicability of which was considered by the Irish Supreme Court in O’Flynn Construction Limited & Others v The Revenue Commissioners.Section 811 applies where Irish Revenue forms an opinion that a transaction gives rise to a tax advantage for the taxpayer, was not undertaken for any other purpose but obtaining that advantage, and would be a misuse or abuse of any relief sought by the taxpayer.Article 6 of the EU ATAD also introduces a broad general anti-avoidance provision. However, the existing Irish general anti-avoidance provision in section 811 is regarded as being broader than that contained in Article 6 and accordingly it is considered that no further amendment to section 811 is envisaged at this time.


Yes, Ireland has a mandatory disclosure regime for tax avoidance transactions similar to the regime in the UK. Section 817D –

The profits subject to tax may arise from within Ireland and from abroad.


Irish domestic legislation does not give treaty relief against Irish tax unless the person claiming credit is resident in Ireland for the accounting period in question. This means that the Irish branch of a non-resident company cannot claim treaty relief.


No such tax would be imposed.

7 Overseas Profits


Profits in overseas branches are, as a general rule, taxed in Ireland because an Irish resident company is subject to corporation tax on its worldwide profits. It is nonetheless generally possible to claim a tax credit for the foreign tax paid.


Dividends received from a non-resident company are generally taxed at 25% but the lower rate of 12.5% applies in many cases including where dividends are paid out of the “trading profits” of a company resident in an EU/treaty state or in a country which is a signatory to the Convention on Mutual Administrative Assistance in Tax Matters. In any event, tax credits can be claimed, up to the Irish corporation tax due, for:■ withholding tax suffered on the dividend; and■ underlying tax suffered on the trading profits out of which the

dividend was paid.It is possible to pool and carry forward excess foreign tax credits and offset these against Irish corporation tax on other foreign dividends.


Currently, Ireland has no controlled foreign company (“CFC”) rules. However, following the formal adoption of the EU ATAD by the Economic and Financial Affairs Council of the European Union on 12 July 2016, Ireland will be required to introduce legislative provisions to give effect to the CFC rules contained in Article 7. EU Member States have a certain level of flexibility in choosing the form and method of achieving the results intended by the EU ATAD. For example, the preamble to the EU ATAD notes that rules can target a low taxed subsidiary, particular types of income or a targeted rule which taxes profits which have been artificially diverted to that subsidiary. A corporation tax strategy paper published by the Irish Department of Finance on 1 August 2018 has provided a broad indication of Ireland’s proposed approach. It suggested that the CFC provisions will focus on non-genuine arrangements which have been put in


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It has also introduced country-by-country reporting and updated its transfer pricing legislation as recommended in the BEPS reports.


Ireland’s objective is to adopt best international practice. Preceding BEPS, Ireland already operated certain anti-avoidance measures not existing in other OECD countries, such as a legislative general anti-avoidance rule (“GAAR”) and rules denying tax deductibility in Ireland in certain cases to payments which are not correspondingly taxed in an EU/DTT country.


Yes. Regulations implementing CBCR have applied since 2016 to groups with an Irish presence and turnover exceeding €750 million.


Ireland has recently introduced a “knowledge development box” (“KDB”) which provides for an effective 6.25% tax rate on income from IP and software that was improved, created or developed in Ireland. Additionally, Ireland amended its legislation in relation to securitisation companies (section 110 TCA) in 2011 in advance of BEPS, to prevent certain possible cross-border “double non-taxation” results arising.



No such unilateral action has been taken in Ireland.


The Irish Government has strongly opposed the European Commission’s interim proposal for a digital tax with the Irish Minister for Finance emphasising the need for unanimity before any EU digital tax proposal can be agreed. Reference was made to the OECD reports on digital taxation, hinting at a need for broader international consensus on this issue, rather than EU-focused measures. Moreover, the Irish Government has also published a reasoned opinion on 16 May 2018, addressed to the President of the Council of the European Union, questioning the necessity of these measures.

section 817T of the Taxes Consolidation Act (“TCA”) deal with the mandatory reporting of certain defined transactions. The regime aims to enforce promoters, advisors, and on occasion the clients who implement tax avoidance schemes, to inform Revenue of the details of such schemes. The promoter includes persons involved in designing, managing or marketing the transaction. The promoter is entitled to assert legal professional privilege when making the disclosure, subject to informing the taxpayer of its obligation to disclose the transaction directly to Revenue.Failure to comply can result in penalties determined by the court in amounts ranging up to a maximum of €4,000 plus €500 per day for each day the scheme remains unnotified after the due date for notification.


In addition to the Irish mandatory disclosure regime, in May 2018 the Council of the European Union adopted a directive introducing new EU mandatory disclosure rules. The rules are aimed at “cross-border tax arrangements”. They therefore have a slightly different emphasis to the Irish rules. The directive targets intermediaries such as tax advisors, accountants and lawyers that design and/or promote tax planning schemes and will require them to report schemes that are potentially aggressive.Ireland has until 31 December 2019 to transpose the directive into national law, but reporting must include transactions implemented from 25 June 2018.


Yes, in January 2017 Irish Revenue relaunched its cooperative compliance framework (“CCF”) for large cases division (“LCD”) taxpayers.The CCF is designed to promote open communication between Irish Revenue and larger taxpayers, reflecting the mutual interest in being certain about tax liabilities and ensuring there are no surprises in later reviews. It is entirely voluntary and does not result in a reduction of tax.



In response to certain themes emerging from the BEPS consultation, Ireland amended its corporate tax residence rules in order to phase out the so-called “double Irish” structure used by certain multinational groups.


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Maples and Calder is a leading international law firm advising financial, institutional, business and private clients around the world, on the laws of the British Virgin Islands, the Cayman Islands, Ireland and Jersey.

The firm’s affiliated organisation, MaplesFS, provides specialised fiduciary, corporate formation and administrative services to corporate, finance and investment funds entities. The Maples group comprises over 1,700 staff in 16 offices. Since establishing in Ireland in 2006, the Dublin office has grown to over 350 people and has advised on many high-profile and complex transactions in Ireland.

Andrew is Head of Tax at Maples and Calder. He is an acknowledged leader in Irish and international tax and advises companies, investment funds, banks and family offices on Ireland’s international tax offerings. Andrew is Chairman of the Irish Debt Securities Association and the International Fiscal Association Ireland. He is a member of the Tax Committees of the Law Society of Ireland and the Irish Funds Industry Association.

Prior to joining Maples and Calder, Andrew was a senior partner with a large Irish law firm and, before that, a tax consultant with Ernst & Young. He is recommended by a number of directories including Chambers, The Legal 500, PLC Which Lawyer?, Who’s Who Legal, World Tax, Best Lawyers, International Tax Review’s World Tax Guide and the Tax Directors Handbook. Andrew has also been endorsed in Practical Law Company’s Tax on Transactions multi-jurisdictional guide.

Andrew Quinn Maples and Calder75 St. Stephen’s GreenDublin 2Ireland

Tel: +353 1 619 2038 Email: [email protected] URL: www.maplesandcalder.com

David is a highly experienced tax specialist and advises on international transactions structured in and through Ireland. He works with companies, banks and investment funds and their advisors to structure and implement capital markets, structured finance, asset finance and funds transactions.

David joined Maples and Calder in 2013 from an Irish corporate law firm. He trained in London and was Special Counsel in the London office of a New York law firm.

David holds the Chartered Tax Advisor qualification in both the UK and Ireland.

David BurkeMaples and Calder75 St. Stephen’s GreenDublin 2Ireland

Tel: +353 1 619 2779Email: [email protected] URL: www.maplesandcalder.com


Chapter 20

Puri Bracco Lenzi e Associati

Guido Lenzi

Pietro Bracco, Ph.D.

Italy

(i) the legal seat; (ii) the place of effective management; or(iii) the main object/purpose of the business.The Italian tax law provides for anti-abuse provisions where companies qualify as tax resident companies where only formally resident abroad (i.e. unless proof to the contrary is provided, a foreign company which controls an Italian company and is directly or indirectly controlled or administrated by Italian residents, is deemed to be an Italian tax resident).

2 Transaction Taxes


Transfers of assets carried out within the Italian territory are generally subject to registration tax, provided that the deed of transfer is (mandatory or voluntary) subject to registration on the Public Register. Registration tax may apply at a fixed rate of €200.00 (i.e. if the transfer is subject to VAT) or proportionally, with rates generally ranging from 0.5% to 3% (increasing up to a maximum of 15% in case of real estate properties), depending on the kind of asset transferred. Certain deed/certificates/documents, expressly indicated by the tax law, are further subject to stamp tax, which may apply at a fixed rate (ranging from €1.00 to €300.00) or proportionally (with rates generally ranging from 0.01% to 0.12%).The transfer of shares and of participating financial instruments in Italian companies is generally subject to financial transaction tax (0.2% or 0.1% in case of quoted companies), due by the purchaser, regardless of the tax residence of the seller and of the purchaser as well as the territory in which the transfer is carried out. Several exemptions and exclusions are provided for by the law (i.e. in case of transfer of limited liability companies’ quotas or intercompany transactions).


VAT is generally applied in Italy on sales of goods and provision of services, at the following rates:■ 22% standard rate;■ 10% reduced rate applied, for instance, to sales of certain

food and pharma products, water/gas/electricity supplies in specific cases, transport services, non-luxury real estate properties;



Italy has entered 96 tax treaties for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital (“double tax treaties”).


Double tax treaties signed by the Italian Government generally follow the OECD Model Convention.


Double tax treaties should be ratified by both the Italian Parliament, by means of a domestic law, and the relevant foreign Country: exchange of ratification is needed in order for the treaty to enter into force.


Italian double tax treaties generally do not contain specific anti-treaty shopping rules, with some exceptions, such as the treaties signed with the United States of America, Chile and Switzerland.


Domestic laws cannot, in principle, override a treaty’s provisions (regardless of whether they were enforced before or after the enforcement of the treaty), unless the domestic provision results are more favourable.


A company qualifies as tax resident if, for the greater part of the year, it has alternatively in Italy:


Ital

y



In principle, the payment of dividends towards a non-resident recipient is subject to a final 26% withholding tax (lower rates applicable according to double tax treaty, if any). A partial refund could be claimed by the foreign recipient (up to 11/26 of the withholding tax levied) subject to the proof (through proper documentation released by the foreign tax authorities) that the same dividends were taxed in the State of residence. A reduced rate of 1.20% may apply provided that the recipient:■ is a company or an entity (with no permanent establishment

in Italy) resident in an EU/EEA Country which allows an adequate exchange of information with Italy; and

■ is liable to corporate income tax in the residence Country.According to the Directive 2011/96/EU (“EU Parent-Subsidiary Directive”), no withholding tax is levied on dividends paid by an Italian subsidiary to its foreign parent company, provided that the latter:■ is tax-resident in an EU Member State;■ meets the requirements provided for by the Directive to be

considered as “qualified” for the purposes of the Directive;■ is subject to corporate income tax in the State of residence;

and■ has held at least 10% of the capital of the Italian subsidiary

for an uninterrupted period of, at least, one year.


In principle, the payment of royalties towards a non-resident recipient is subject to a final 30% withholding tax (lower rates applicable according to double tax treaty, if any). According to Directive 2003/49/EU (“EU Interest and Royalties Directive”), no withholding tax is levied on royalties paid to foreign companies (or permanent establishments), provided that the following requirements are met:■ the recipient is tax resident in another EU Member State;■ the recipient meets the requirements provided for by the

Directive to be considered as “qualified” for the purposes of the Directive;

■ the recipient is liable to corporate income tax in the State of residence;

■ the royalties flow is subject to corporate income tax in the State of residence of the recipient; and

■ the recipient and the payer qualify as “associated companies”: (a) one of them has continuously held directly at least, 25% of the voting rights of the other company for at least one year; or (b) a third EU company has continuously held directly at least 25% of the voting rights of the two companies for at least one year.


In principle, the payment of interest towards a non-resident recipient is subject to a final 26% withholding tax (lower rates applicable according to double tax treaty, if any).

■ 5% further reduced rate applied, for instance, to the provision of social and health services by social co-operatives; and

■ 4% ultra-reduced rate applied, for instance, to sales of specific food products, books and newspapers.


Certain VAT exclusions are provided for, for instance, in case of international sales of goods/provision of services, sales of agricultural lands, sales of going concerns and transfer of assets in the context of M&A transactions.Several VAT exemptions are provided for, for instance, in case of financial transactions and sales and rent of real estate properties.


As a general rule, VAT is recoverable for taxable persons (not for final customers), provided that the purchase of goods/services is pertinent to the business activity and that such business activity is subject to VAT. VAT is not recoverable for taxable persons who carry out VAT-exempt transactions (banks, hospitals, etc.). In case both VAT-taxable activities and VAT-exempt activities are carried out, VAT paid to suppliers is recoverable through a pro rata mechanism.Limitation to VAT deduction is provided for with respect to the purchase of certain goods (cars, telephone devices, etc.) and services (representative expenses, telephone services, etc.).


Italian corporate groups are allowed to opt for the set-off of VAT credits and debts emerging from the annual tax return (so-called “liquidazione Iva di Gruppo”).Starting from January 1st 2019, it will also be possible for taxpayers established in the State (included Italian permanent establishment of foreign companies) which qualify as the holding/subholding of a group of companies meeting specific financial, economic and organisational requirements, to opt for the establishment of a VAT group.Such VAT groups will qualify as a single taxable person for VAT purposes obtaining several benefits, including the exclusion from VAT of infra-group transactions.


Mortgage and cadastral taxes, applicable in fixed terms (€50.00 or €200.00) or proportionally (with rates ranging from 0.5% to 3%) depending on the kind of transaction, apply to the transfer of real estate properties.


As a general rule, goods imported from extra EU countries are subject to custom duties upon their entrance in the Italian territory according to EU Custom Legislation.Specific goods (e.g. alcohol, electricity, natural gas) are subject to excise duties.

Puri Bracco Lenzi e Associati Italy


Ital

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For IRES purposes, if a company qualifies as a “dummy entity” (“società di comodo”), the ordinary rate is increased to 34.5%.


For the purposes of determining the IRES taxable base, the net profit/loss resulting from the official financial statement of the company is adjusted according to several tax rules provided for by the tax law.


For IRES purposes, adjustment could be segregated between “permanent adjustments” and “timing differences”.The main permanent adjustments refer to: i) partial exemption from taxation of qualified capital gains (in accordance with the “Participation Exemption Regime”) and dividends (in both cases tax exemption on 95% of the income); and ii) total or partial avoidance of deduction for certain costs as to depreciation of lands, vehicle expenses, telephone costs, etc.The main timing differences concern: i) depreciation of goodwill, real estate properties and other immovable assets; ii) bad debt accrual (deduction limited to 5% of the receivables accounted in the financial statement); iii) receivables write off (deductible under specific circumstances as the bankruptcy of the debtor); and iv) interest deduction (limited to 30% of EBITDA with a carry back/carry forward mechanism).


Two different tax consolidation regimes are applicable in Italy (upon option):■ a domestic consolidation regime, including only Italian

controlled companies; and■ a worldwide consolidation regime, including, both Italian and

foreign controlled companies.In both cases, the tax group determines a single taxable basis for IRES purposes given by the sum of the taxable basis of the companies included in the tax consolidation perimeter. In this respect, while the option for the domestic tax consolidation regime implies that not all the Italian subsidiaries must be consolidated (“cherry picking mechanism”), the worldwide tax consolidation regime implies that all the subsidiaries must be consolidated (“all-in mechanism”).


As a general rule, tax losses suffered in the first three years of business activity can be carried forward without limitation while losses suffered in the subsequent years can be used to offset future IRES profit limited to 80% of their amount.Changes in the control of a company, in principle, do not affect the tax losses carry forward unless, according to a specific anti-abuse provision, the business activity of the company is changed in the year in which the change in control is realised or in the following two years.Anti-abuse provisions finalised at avoiding tax losses suffered by an entity being used to offset taxable incomes of another entity also apply in the case of M&A transactions.

According to Directive 2003/49/EU (“EU Interest and Royalties Directive”), no withholding tax is levied on interest paid by an Italian company to an EU “associated” one, provided that the requirements provided for by the Directive are met (please see question 3.2).


Thin capitalisation rules do not apply in Italy.






No, there are not.


In principle, the payment towards a non-resident of royalties for the exploitation of intellectual properties and rents for the rental of industrial, commercial or scientific equipment is subject to a final 30% withholding tax (lower rates are applicable according to double tax treaty, if any). A withholding tax is further applied on rents coming from short-term leases (so-called “Airbnb tax”). Such withholding tax, levied by the intermediaries of the transaction, is equal to 21% regardless of the fact that the recipient is Italian resident or not.


Italy enforced a specific transfer pricing regulation, compliant with Article 9 of the OECD Model Tax Convention, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and the outcome of BEPS Actions.The Italian law grants a penalty protection (in case of TP challenge raised by the tax authorities) provided that the tax payer prepares and makes available in case of tax inspection a TP study realised following the guidelines provided for by the Law.



In Italy corporate profits are generally subject to a 24% corporate income tax (“Imposta sul reddito delle società” or “IRES”). An increased IRES rate (27.5%) applies to certain banks and financial institutions.



Ital

y


A 26% withholding tax applies to the proceeds of selling Italian shareholdings by non-resident taxpayers. No withholding tax is conversely applied on the proceeds of selling a direct or indirect interest in local assets.



In principle, the establishment of a subsidiary is not subject to taxes in Italy.Nevertheless, should the subsidiary be formed through a contribution in kind, a capital gain could arise in the hands of the contributor, unless the contribution does not involve a going concern or majority of shareholdings.


In principle, for Italian taxation purposes there is no difference between a branch and a local subsidiary, given that both are subject to IRES and IRAP.From the foreign parent company standpoint, on the contrary, some differences may arise, given that, as a general rule, net profit/losses of the branch are ascribed to such parent company and consequently taxed in the residence Country, while net profit of the subsidiary could be taxed abroad only upon distribution.In case of dividend distribution also some differences may arise, given that no withholding tax is applied on the repatriation on branch profits while dividends distributed to a foreign shareholder are generally subject to a 26% withholding tax (see question 3.1).


For taxation purposes, the local branch is requested to prepare a proper statutory account, based on which the taxable income is equal to the net profit/loss of the year adjusted taking into consideration the IRES/IRAP adjustments applicable to domestic corporations (see questions 4.3 and 4.7).Profits of the local branch are determined pursuant to the so-called “separated entity approach” based on which the branch is considered a functionally segregated entity from the head office. Transactions with the head office are subject to transfer pricing rules.


Domestic branches are entitled to benefit from the Italian tax credit relief for taxes paid abroad on incomes taxed (also) in Italy.


The distribution vs the retainment of profits does not trigger any differences in the IRES nominal rate applicable. However, equity increases due to profit retainment may entail a notional deduction to the IRES taxable basis according to the “ACE” rule. In such a case the effective tax rate could be affected by the retainment of profit.


In addition to IRES, business profits are also subject to a 3.9% Regional Tax on Business Activity (“Imposta Regionale sulle Attività Produttive” or “IRAP”). The IRAP ordinary rate could increase/decrease by specific regional tax law on the basis of the business actually carried out by the tax payer.The IRAP taxable base is different from the IRES one and it is determined on the basis of the EBIT resulting from the official financial statement of the company being adjusted taking into consideration few specific tax adjustments provided for by the IRAP law with the purpose of excluding or limiting the deduction of labour costs, depreciations and provisions/accruals.

5 Capital Gains


In principle, capital gains/losses are included in the IRES taxable basis upon realisation. Certain capital losses (i.e. those realised upon the disposal of participation eligible for the Participation Exemption Regime – please see question 5.2) are not deductible.


Italian tax law provides for a Participation Exemption Regime according to which capital gains realised on the sale of shareholdings and assimilated financial instruments are 95% exempt for IRES purposes, provided that all of the following requirements are met:(i) the shareholdings have been held for at least 12 months

before the disposal;(ii) the shareholdings were accounted as a financial fixed asset in

the first balance sheet after the acquisition;(iii) the subsidiary is not resident in a blacklisted Country; and(iv) the subsidiary carries out an actual business activity (to be

investigated in case of holding companies and excluded in case the assets of the subsidiary are mainly represented by real estate properties).


According to the patent box regime (see question 10.4) capital gains realised upon the sale of eligible immovable assets are not subject to IRES and IRAP provided that (at least 90% of) financing coming from the sale is re-invested in R&D activities.



Ital

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The disposal by a non-resident of commercial real estate owned in Italy is subject to IRES taxation in the State.


The disposal of shareholdings in an Italian real estate company by a non-resident shareholder is subject to tax in Italy according to the ordinary discipline applicable to participation. The Participation Exemption Regime may not apply in case of real estate companies (see question 5.2).


Italian tax law provides for a special regime applicable to listed real estate investment companies (“SIIQS”), based on which income from real estate properties leased to third parties are not subject to IRES and IRAP.



The Italian tax system provides for a general anti-abuse discipline, based on which the tax authorities can disregard tax consequences of transactions that are devoid of economic substance and exclusively tax driven.Such tax avoidance behaviour (“abuso del diritto”) is realised when a transaction (as well as sequences of transactions, facts, actions and agreements) is not finalised at generating significant economic consequences but, despite apparent compliance with the tax law, at reaching undue tax benefits. These tax benefits are undue when they conflict with the purpose of the relevant tax provisions and the principles of the tax system.


The Italian anti-abuse law does not require any disclosure of potential avoidance schemes. However, before the realisation of a potentially tax abusive scheme, the taxpayers are allowed to apply for an advance tax ruling in order to obtain the blessing of the tax authority and avoid future tax challenges.


The remittance of branch profits is not subject to withholding taxes in Italy.

7 Overseas Profits


Based on the worldwide taxation principles, Italian resident companies are subject to IRES on their worldwide income, including profits realised abroad through local branches.The Italian tax law provides for a branch exemption regime based on which, Italian companies are allowed to opt for the exemption of profit and losses realised through all of their foreign branches (all-in approach).


As a general rule, foreign dividends received by Italian companies are taxed for IRES purposes (no IRAP taxation) on 5% of their amount, unless the dividends are distributed by a company resident in a “privileged tax regime” Country; in such a case dividends are taxed on their whole amount.Under the Italian tax law, States that apply a nominal corporate income tax rate lower than 50% of the Italian one (determined taking into consideration both IRES and IRAP) qualify as “privileged tax regime” Countries.


The Italian tax law provides for a “controlled foreign company” rule based on which incomes of (directly and indirectly) controlled foreign companies are ascribed to the Italian parent company (and taxed in Italy accordingly) subject to the fact that such companies:■ are resident in a “privileged tax regime” Country (see

question 7.2 for definition) other than EU and EEA States which grant an adequate exchange of information with Italy; and

■ are resident in a different Country (including EU and EEA States) and both of the following conditions are satisfied:■ they are subject to an effective taxation in the State of

residence lower than 50% of the Italian one; and■ more than 50% of their revenues are represented by

“passive incomes” and fees from the provisions of intercompany services.

The “controlled foreign company” regime may be avoided should a tax ruling be filed and accepted by the Italian tax authorities.



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In compliance with BEPS Action 13, in 2017 Italy introduced the Country-by-Country Reporting discipline, based on which Italian parent companies of multinational groups having a consolidated turnover exceeding €750 million must communicate to the tax authorities, on a yearly basis, a wide range of information concerning the group (i.e. tax residence of all the companies belonging to the group, revenues, profits, taxes paid, intangibles, employees, etc.).Italian parent companies are subject to the CBCR discipline if altenatively:■ they are mandatorily required to prepare the group

consolidated financial statement;■ regardless of the existence of a (higher level) group holding

company, such a (higher level) holding company is not requested to prepare CBCR in its State of residence; or

■ regardless of the fact that such a (higher level) holding company prepares the CBCR, its State of residence does not guarantee an adequate exchange of information with the Italian tax authorities.


A patent box regime was recently introduced in Italy, providing for a 50% exclusion from IRES and IRAP taxation of incomes deriving from the (direct and indirect) exploitation of intangibles and intellectual properties.



Starting from 2019, a specific tax on digital transactions should be levied in Italy, with a rate of 3% applied on the value of certain electronic services massively rendered (more than 3,000 transactions) by resident and non-resident service providers to Italian tax substitute (i.e. enterprises and entrepreneur) and permanent establishments of foreign companies.


The introduction of the service tax on digital transaction (see question 11.1) was made in compliance with the European Commission’s interim proposal for a digital services tax.


In principle, persons who promote, enable or facilitate tax avoidance behaviours may be subject to specific penalties.


A co-operative compliance discipline was recently introduced in Italy with the purpose of enhancing cooperation between tax payers and tax authorities and consequently preventing tax litigation. Currently the co-operative compliance programme is available only for resident companies and Italian branches of foreign companies having a total turnover or operating revenues exceeding €10 billion, for tax payers with a turnover exceeding €1 billion which adhered to the “pilot project” and for enterprises which intend to give execution to the response obtained from the tax authorities after the filing of a tax ruling concerning new investment projects.The main benefits deriving from the adhesion at the co-operative compliance programme concern: ■ reduction of time for obtaining the response to tax rulings

concerning the application of tax provisions (45 days from the request instead of 90);

■ (50%) reduction of the minimum tax penalties applicable in case of tax assessment; and

■ dispensation from the presentation of guarantees for direct and indirect tax refund purposes.



Italy has recently introduced provisions implementing BEPS Actions, such as i) the introduction of Country-by-Country Reporting, ii) some amendments to the transfer pricing legislation in compliance with the 2017 OECD Guidelines, iii) the introduction of the so-called “web tax” (see question 11.1), and iv) some amendments to the definition of permanent establishment.


Currently there is no evidence of a similar hypothesis.



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y

Puri Bracco Lenzi e Associati is a Tax Law Firm founded in 2015 by experienced professionals who came from leading Italian and international contexts and decided to combine such experience under a new organisation.

The Firm is one of the leading tax brands nationally and offers high-quality services in all tax areas. The goal of the Firm is to excel in meeting Clients’ needs; the assistance ranges from in- and out-of-court tax litigation, to tax planning and tax advice in general, both in domestic and cross-border matters, and in all related tax issues.

The Partners of the Firm, who have worked together in their past endeavours, are: Paolo Puri; Pietro Bracco; Guido Lenzi; and Raffaele Massimo Simone.

The Firm also includes about 40 other professionals – both lawyers and dottori commercialisti – who have accrued significant experience in several areas of Tax Law.

Puri Bracco Lenzi e Associati has offices in Rome and Milan.

Before becoming Founding Partner of Puri Bracco Lenzi e Associati, Guido Lenzi performed his successful activity in prestigious Italian and international Tax Law Firms such as: Ernst & Young; KPMG; Tonucci & Partners; and Miccinesi e Associati. He collaborated with some of the most important Tax Law Firms, until his partnership in 2003, when he was only 36. He has also worked abroad for several years (in London and Amsterdam), gaining a deep knowledge of international and EU tax items.

He gives assistance to international leading companies, focusing on the local and cross-border tax issues, even in operations involving investments outside the EU, benefitting from a consolidated worldwide network with notable foreign Tax Law Firms. He is President of Boards of Auditors for some Italian and foreign companies. He also collaborated with the European Commission, writing – with other Authors – a report on the Italian “exit tax” regime for the “Study on the implementation of the Merger Directive”. A spokesman in many seminars in Italy and abroad, he graduated cum laude in Business Economics at Rome University “La Sapienza”.

Guido LenziPuri Bracco Lenzi e Associati Via XXIV Maggio, 43, Roma /Via Cusani, 5, MilanoItaly

Tel: +39 06 9521 5700 / +39 02 9295 5400Email: [email protected]: www.studiopbl.it

Before becoming Founding Partner of Puri Bracco Lenzi e Associati, Pietro Bracco performed his successful activity in prestigious Italian and international Tax Law Firms in Turin, Milan, Paris, Amsterdam and Rome, and has been Partner of Fantozzi e Associati from 2011–2013 and then Partner of Miccinesi e Associati in 2014.

Amongst his clients there are important multinational groups, companies and associations. Over the years, he has consolidated his experience assisting companies engaged in the energy sector and many associations refer to him for Tax Law items. He has written many publications on specialised journals, teaches Energy and Tax Law in important masterclasses, and is a spokesman in meetings. He has been Tax Law and International Tax Law Visiting Professor at Turin University and at “Link Campus University of Malta”. He graduated in Business Economics at Turin University and achieved an International Tax Law Ph.D. at Genoa University.

Pietro Bracco, Ph.D.Puri Bracco Lenzi e Associati Via XXIV Maggio, 43, Roma /Via Cusani, 5, Milano Italy

Tel: +39 06 9521 5700 / +39 02 9295 5400Email: [email protected]: www.studiopbl.it



Chapter 21

Nagashima Ohno & Tsunematsu Shigeki Minami

Japan

entered into force on March 30, 2004 (the “Japan/US Treaty”) and some other recent treaties do incorporate certain limitation on benefits (“LOB”) clauses. The Japan/US Treaty is the first income tax treaty executed by Japan in which fairly comprehensive LOB clauses of general application are included, and have been followed, with certain variations, in the most recent modernised tax treaties. As the US has not signed the MLI, the current Japan/US Treaty will remain effective as it is. Those treaties that have similar LOB clauses include the treaties with Australia, France, New Zealand, Sweden, Switzerland and the United Kingdom. The amended Japan/Germany Treaty, signed on December 17, 2015, introduced a principal purpose test (“PPT”) in its Article 21, Paragraph 8, for anti-avoidance in line with BEPS Action 6, “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances”, which entered into force on October 28, 2016. Some treaties or agreements (other than the abovementioned modernised tax treaties) also include a simple anti-treaty shopping clause (examples of which are Article 22, Paragraph 2 of the tax agreement between Japan and Singapore and Article 26 of the tax agreement between Japan and Hong Kong). However, these agreements will be modified by the MLI if a relevant country signs the MLI and the MLI takes effect between Japan and such country, depending upon the timing of the deposit (with the OECD) of the ratification instruments by both relevant countries. The BEPS Action 6 Final Report recommended, (1) that a clear statement that the States that enter into a tax treaty intend to avoid creating opportunities for non-taxation through tax evasion or avoidance will be included in tax treaties, and (2) that countries include in their treaties either (i) the combined approach of an LOB and PPT rule, (ii) the PPT rule alone, or (iii) the LOB rule supplemented by a mechanism that would deal with conduit financing arrangements not already dealt with in tax treaties. For the preamble, Japan chose to adopt the preamble in accordance with Article 6(1) of the MLI, i.e., “Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance”, with the exception of the Germany-Japan treaty, which has a preamble already in line with the MLI.For anti-tax treaty shopping measures, Japan chose to adopt the PPT clause in accordance with Article 7(1) of the MLI, i.e., “a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude...that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit”. Therefore, a significant number of treaties that Japan has entered into will be modified to include the foregoing PPT clauses once the MLI is effective between Japan and a relevant country.



There are 60 income tax treaties (including an agreement between private associations of Japan and Taiwan) applicable to 71 jurisdictions currently in force in Japan as of October 1, 2018, and Japan has entered into 11 tax information exchange agreements and the Convention on Mutual Administrative Assistance in Tax Matters.


Yes. Most of the income tax treaties currently in force in Japan generally follow the OECD Model Convention with certain deviations. Japan signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) on June 7, 2017. Japan ratified the MLI on May 18, 2018, and deposited its instrument of ratification with the OECD on September 26, 2018. Based on such ratification, with respect to certain countries, including United Kingdom, Australia, France, Israel, Sweden, New Zealand, Poland, and Slovakia, the MLI will be effective as early as January 1, 2019. With the important exception of the US, which has not signed (and currently does not intend to sign) the MLI, the MLI covers the 39 existing tax treaties that Japan has entered into.


No. Once treaties are ratified by the Diet (the Japanese Parliament) and are promulgated in Japan, such treaties take effect domestically in Japan in accordance with those treaties, without being incorporated into domestic law. However, the “Act on Special Provisions of the Income Tax Act, the Corporation Tax Act and the Local Tax Act Incidental to Enforcement of Tax Treaties” provides certain procedures for obtaining treaty benefits, including filing of various application forms and tax residence certificates (if applicable) with the competent tax offices.


No, although the new modernised tax treaty with the United States


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Nagashima Ohno & Tsunematsu Japan

rate is increased to 10% on October 1, 2019, as currently planned, the 8% preferential rate will apply to foods (excluding liquor and dining-out) and certain newspapers.


Generally, yes. At present, Consumption Tax that is charged on taxable purchases and incurred by a business enterprise is generally recoverable in full, by way of a tax credit or refund. By way of exception: (i) if the ratio of a taxpayer’s revenue from taxable transactions over the taxpayer’s total revenue from transactions within Japan is less than 95%; or (ii) if a taxpayer’s revenue from taxable transactions in the relevant fiscal year exceeds 500 million yen, such taxpayer would recover only the Consumption Tax incurred from the taxable purchases that correspond to its taxable sales. For recovery of the Consumption Tax incurred from taxable purchases, taxpayers are obliged to keep books and records, but not invoices, of purchased goods and services as the Japanese Consumption Tax has yet to adopt an invoice system, which will be introduced on October 1, 2023.


No, VAT grouping is not permitted.


Yes. There are some transaction taxes in Japan, including, but not limited to, Registration and Licence Tax, Real Property Acquisition Tax and Automobile Acquisition Tax.


Yes. There are various indirect taxes in Japan such as Tonnage Tax, Special Tonnage Tax, Liquor Tax, Tobacco Tax and Gasoline Tax.



Generally, yes. Under Japanese domestic tax law, generally, a non-resident shareholder (either a non-resident company or a non-resident individual) of a Japanese company is subject to Japanese withholding tax with respect to dividends it receives from such Japanese company at the rate of 20.42%; however, if the Japanese company paying the dividends to a non-resident shareholder is a listed company, this withholding tax rate is reduced to 15.315%, except for the dividends received by a non-resident individual shareholder holding 3% or more of the total issued shares of such listed Japanese company, to whom the rate of 20.42% is applicable.However, most of the income tax treaties currently in force in Japan generally provide that the reduced treaty rate at the source country shall be 15% or 10% for portfolio investors and 10% or 5% for parent and other certain major shareholders. Furthermore,


No. It is a well-established constitutional principle in Japan that no treaty is overridden by any rule of domestic law (whether existing at the time the treaty takes effect or enacted subsequently).


The applicable test is the “location of head or principal office” test. Under Japanese domestic tax law, a corporation is treated as a Japanese corporation (having a corporate residence in Japan) if such corporation has its head office or principal office in Japan, regardless of the place of effective management.

2 Transaction Taxes


Yes. Japan has Stamp Tax, which is imposed on certain categories of documents that are exhaustively listed in the Stamp Tax Act, including, for example, real estate sales agreements, land leasehold agreements, loan agreements, transportation agreements, merger agreements, promissory notes, articles of incorporation and bills of lading.


Yes. Japan has Consumption Tax which is a Japanese version of Value Added Tax, consisting of a national consumption tax and a local consumption tax. The current aggregate tax rate is 8% (national 6.3% and local 1.7%). Although an additional increase to 10% (national 7.8% and local 2.2%) was planned to be effective originally on October 1, 2015, the government decided to defer the increase until October 1, 2019 for fear of negative impacts on the economy.


Consumption Tax is generally charged on all transactions, while there are certain exclusions. Specifically, taxable transactions, for the purposes of Consumption Tax, are broadly defined to mean those transactions conducted by a business enterprise (including any resident and non-resident companies and individuals, regardless of whether they have any permanent establishment in Japan) to transfer or lease goods or other assets or to provide services, for consideration, within Japan. However, certain specified categories of transactions, such as, for example, transfers and leases (other than for certain temporary purposes) of land, housing leases (other than for certain temporary purposes), transfers of securities, extension of interest-bearing loans, provision of insurance, deposit-taking and other certain specified categories of financial services, and provision of certain specified medical, social welfare or educational services, are excluded from taxable transactions for the purposes of Consumption Tax. With respect to imported goods, they are, when released from a bonded area, subject to Consumption Tax, except for certain specified categories of imported goods. When the tax


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(3) Interest on loans extended by a non-resident lender (either a non-resident company or a non-resident individual) to a Japanese company in relation to such company’s business carried on in Japan is generally subject to Japanese withholding tax, under the Japanese domestic tax law, at the rate of 20.42%, with certain exemptions.

(4) As an exception to the foregoing, if a certified non-resident company makes a deposit or extends a loan to certain qualified financial institutions through a special Japan Offshore Market account, such non-resident company would be exempt from Japanese withholding tax with respect to interest to be paid on such deposit or loan.

(5) Most of the income tax treaties currently in force in Japan provide that the withholding tax rate for interest (regardless of whether it is interest on bonds, deposits or loans) is reduced generally to 10%. It is worth noting that under the modernised tax treaties, beginning with the Japan/US Treaty, certain specified categories of financial or other qualified institutions (the scope of which may slightly vary from treaty to treaty) which are residents of the contracting states, may be exempt from source country taxation with respect to interest, subject to certain requirements.


No. The payor company of interest may be denied a deduction of the interest which it paid to a non-resident recipient for its own corporation tax purposes, due to the application of the “thin capitalisation” rules under Japanese domestic tax law. The Japanese thin capitalisation rules deny deductibility of interest expenses paid to the payor company’s foreign affiliates when such company’s annual average ratio of debt to equity exceeds 3:1, subject to an exemption available based on a certain alternative parameter. However, even when the deductibility is denied under the thin capitalisation rules, the relief under a treaty (i.e., the reduced withholding tax rate) available to the non-resident recipient of such interest, would nevertheless not be restricted.


No. This is not applicable. Please see question 3.4.


Yes. Under the thin capitalisation rules in Japan, debt advanced by a third party and guaranteed by a parent company would generally be treated as related party debt, subject to the thin capitalisation rules.


Yes. Japan has earnings stripping rules, under which deduction for net interest payments (as defined in these rules) to certain related persons (as defined in these rules) in excess of 50% of an adjusted taxable income (as defined in these rules) will be disallowed, and the disallowed amounts may be carried forward for seven ensuing business years. If the disallowed interest amount under the earnings stripping rules is smaller than the amount disallowed for deduction under the thin capitalisation rules, then deduction is disallowed to the extent of the larger of the two disallowed amounts.

under the Japan/US Treaty and a certain limited number of other modernised tax treaties recently executed by Japan (including those with Australia, France, the Netherlands, Sweden, Switzerland and the United Kingdom), the withholding tax rate is reduced to 10% for portfolio investors and 5% or 0% for parent and other certain major shareholders.


Generally, yes. Under Japanese domestic tax law, royalties relating to patents, trademarks, design, know-how with respect to technology, and copyrights used for any Japanese company’s business carried on in Japan and paid by the Japanese company to a non-resident licensor (either a non-resident company or a non-resident individual) are subject to Japanese withholding tax at the rate of 20.42%, with certain exemptions.Most of the income tax treaties currently in force in Japan provide that the withholding tax rate for royalties generally be reduced to 10%. Furthermore, under the Japan/US Treaty and a certain limited number of other modernised tax treaties recently executed by Japan (including those with France, the Netherlands, Sweden, Switzerland and the United Kingdom), an exemption from source country taxation with respect to royalties may be available.


Generally, yes.(1)

(a) Interest on corporate bonds issued by a Japanese company that is paid to a non-resident bondholder (either a non-resident company or a non-resident individual) was generally subject to Japanese withholding tax at the rate of 15.315%.

(b) Also, under Japanese domestic tax law, with respect to a certain specified scope of discount corporate bonds issued by a Japanese company (except for certain qualified short-term discount bonds), such Japanese company was required to withhold, at the time of the issuance of the discount corporate bonds, 18.378% (or 16.336% for certain bonds), as the case may be, of the amount equivalent to the difference between the face value and the issue price thereof (original issue discount). There were important exceptions to the foregoing (a) and (b): (i) corporate bonds issued outside Japan by Japanese corporations; and (ii) book-entry corporate bonds.

The 2013 Tax Reform, which came into force on January 1, 2016, introduced, among others, a new rule for withholding tax to be applied to discount corporate bonds. Under such new rule, a withholding tax at the time of the issuance of discount corporate bonds was lifted, and a withholding tax at the time of the redemption was introduced. An issuer company of discount corporate bonds is generally required to withhold, at the time of the redemption of such discount corporate bonds, 15.315%, as the case may be, of the amount equivalent to (i) 0.2% of the amount of the redemption (if the term of the bond in question is one year or less), and (ii) 25% of the amount of the redemption (if the term of the bond in question is more than one year).

(2) Interest on bank deposits and other similar deposits made by a non-resident depositor (either a non-resident company or a non-resident individual) with any office of a bank or other institution in Japan is generally subject to Japanese withholding tax, under Japanese domestic tax law, at the rate of 15.315%.


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The main differences include, but are not limited to, the treatment of donations and entertainment expenses. Donations, including any kind of economic benefit granted for no or unreasonably low consideration, are generally deductible only up to a certain limited amount. The deductibility of entertainment expenses is subject to certain qualifications and a certain ceiling. Please also see questions 5.2 and 5.3.


Yes. There are two categories of tax grouping rules under Japanese tax law: (1) the consolidated tax return rules; and (2) the group taxation rules.(a) A group of Japanese companies, where a Japanese parent

company directly, or indirectly through other Japanese companies, owns no less than 100% of other Japanese subsidiaries, can elect to file, subject to the approval of the Commissioner of the National Tax Agency, a consolidated tax return. The consolidated tax is calculated on the basis of the aggregate net taxable income of the parent company and all consolidated subsidiaries. With certain exceptions, when a company participates in the consolidated tax return group from outside, the participating company’s carry-forward losses will be lost and cannot be used to offset the income of the existing companies in the consolidated tax return group.

(b) Separate from the above-mentioned consolidated tax return system, there are special rules for intra-group transactions (the “Group Taxation Rules”), which apply to group companies in a 100% group (companies that have a direct or indirect 100% shareholding relationship), even if they do not elect to file a consolidated tax return. The Group Taxation Rules apply to Japanese companies wholly owned by a foreign or Japanese company or an individual (to which certain family members’ ownership is attributed). The Group Taxation Rules include the following rules, among others: (i) deferral of capital gains/losses from transfer of certain assets between Japanese companies in a 100% group; and (ii) denial of deduction and exclusion of income on donations between Japanese companies in a 100% group. Under the Group Taxation Rules, the losses of one company are not allowed to be used to offset income of other group companies.

In Japan, neither the consolidation rules nor Group Taxation Rules allow for relief for losses of overseas subsidiaries.


Generally, yes. (a) A change of ownership does not restrict a corporation from

utilising its accumulated tax losses that the corporation incurred in prior years, in general. However, for a company under certain specified events which shall take place within five years from the date of the ownership change (measured, in principle, by more-than-50% of the issued and outstanding shares), utilisation of the tax losses of the company may be restricted. The restriction applies, for example: (i) when a company was dormant before the ownership change and begins its business after the ownership change; or (ii) when a company ceases its original business after the ownership change and receives loans or capital contributions, the amount of which exceeds five times the previous business scale.

The aforementioned 50% (of an adjusted taxable income) threshold appears to be less rigorous than the standard recommended by BEPS Action 4 Report, “Limiting Base Erosion Involving Interest Deductions and Other Financial Payments” (i.e., 10% to 30%). The Japanese government is, therefore, expected to tighten its earnings stripping rules, presumably by lowering the threshold and by widening the scope of the rules in line with the OECD recommendations and suggestions. Even if deductibility is denied under the earnings stripping rules, the relief under a treaty (i.e., the reduced withholding tax rate) available to the non-resident recipient of such interest, would nevertheless not be restricted.


Generally, yes. Rental fees for leasing real property or rights to real property located within Japan and paid by a Japanese company to a non-resident (either a non-resident company or a non-resident individual) are subject to Japanese withholding tax at the rate of 20.42%, subject to certain exemptions.


Yes. Japanese transfer pricing rules are applicable to both a Japanese company and a Japanese branch of a non-resident company if either of them engage in transactions with any of their “foreign-related persons” (measured by, in principle, a direct or indirect 50%-or-more share ownership).



The nominal rate of Corporation Tax (national tax) is 23.2%, and the effective corporation tax rate – national and local combined – is: (a) approximately 31% for large companies (i.e., companies with a stated capital of more than 100 million yen); and (b) approximately 37% with a 22–25% favourable rate for up to the first 8 million yen for small and medium-sized companies (i.e., companies with a stated capital of 100 million yen or less), operating in Tokyo for the fiscal year beginning on or after April 1, 2018.


Yes. The tax base for corporation tax is the net taxable income; such net taxable income is calculated based on the results reflected in the taxpayer company’s profit and loss statements, prepared in accordance with Japanese generally accepted accounting principles.If a taxpayer company’s stated capital is more than 100 million yen, the tax base for the local Enterprise Tax is determined by certain factors; specifically, by a combination of (a) the net taxable income, (b) the amount of value added as determined by the compensation paid to employees, the net interest paid, the net rental fees paid and the net profit or loss in each fiscal year, and (c) the stated capital of such taxpayer company, with certain exceptions for electricity, gas and insurance businesses.


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However, with respect to dividends paid to a Japanese company by its foreign subsidiary, a participation exemption from Japanese income taxation is granted for a 95% portion of such dividends if the Japanese company owns at least 25% of such foreign subsidiary’s issued and outstanding shares or voting shares for at least six months. The 25% threshold requirement may be altered if a tax treaty explicitly so provides or if a particular taxpayer is eligible for treaty benefits under an applicable tax treaty in which a lower threshold is required for a treaty-based indirect foreign tax credit eligibility (for example, a 10% shareholding threshold is provided under Article 23(1)(b) of the Japan/US Treaty).


Generally, yes. Dividends received by a Japanese company from another Japanese company may be either 100%, 50% or 20% (subject to certain adjustments) excluded from the recipient company’s taxable income, depending on whether or not the recipient Japanese company owns more than a third, more than 5%, or 5% or less of the total issued and outstanding shares of the dividend-paying Japanese company. Such dividend-received exclusion is also available to a Japanese branch of a foreign corporation with respect to dividends received by such branch from any Japanese company.


Generally, no. However, Japan imposes withholding tax on the proceeds of selling a direct interest in real property located within Japan. See questions 8.1 and 8.2 below. With respect to capital gains from shares of a company, when a non-resident shareholder (either a non-resident company or a non-resident individual) having no permanent establishment in Japan alienates its shares in a Japanese company, such shareholder is not subject to any Japanese taxation, with certain exceptions, including the case where such shareholder owns 25% or more of the issued shares of a Japanese company in a three-year window period and sells 5% or more of the issued shares in aggregate in a single fiscal year, in which case such non-resident alienator is required to file a tax return in Japan and is subject to Japanese personal income tax or corporation tax (but not withholding tax), as the case may be, on a net income basis.



In order to form a Japanese subsidiary, the articles of incorporation of such subsidiary must be prepared, which is subject to Stamp Tax in the amount of 40,000 yen. Further, such subsidiary must be registered in the commercial register kept at the competent office of the legal affairs bureau of the Ministry of Justice, subject to Registration and Licence Tax at the rate of seven-thousandths (7/1,000) of its stated capital amount, but no less than 150,000 yen in the case of a joint-stock company (Kabushiki Kaisha).If a non-resident company forms a subsidiary in Japan (i.e., establishing a company incorporated under the laws of Japan) by making a capital contribution in cash, the formation of the subsidiary is not a taxable event for corporation tax purposes.

(b) In respect of a merger, a surviving company is able to utilise the carried-forward losses of a merging company: (i) if the merger falls under a “qualified merger”; and (ii) if the merger takes place five years after there is a relevant

more-than-50% change in issued and outstanding shares or,

the merger satisfies “joint-business” requirements.(c) In general, the tax losses of the past fiscal years can be

carried forward to offset (by deduction) the taxable income of the current fiscal year, while such deduction is limited to a maximum of 80% (to be amended to 65% from April 1, 2015, and to 50% from April 1, 2017) of the taxable income (before the deduction). Losses survive for nine years (or 10 years from April 1, 2017). Please note that these limitations are not applicable (thus, deduction of losses up to 100% of the income is available) to a small and medium-sized company as stipulated under Japanese tax law, which is a company with stated capital of 100 million yen or less that is not a wholly-owned subsidiary of a company (Japanese or non-Japanese) with stated capital of 500 million yen or more.


(a) Japanese corporation tax is generally imposed at the same rate upon all corporate taxable profits regardless of whether such profits are distributed or retained. As an exception, a certain additional surtax (at the rate of 10%, 15% or 20%) may be imposed on certain portions of retained earnings of certain types of so-called family companies, unless such family company is a small and medium-sized company as stipulated under Japanese tax law, which is a company with stated capital of 100 million yen or less that is not a wholly-owned subsidiary of a company (Japanese or non-Japanese) with stated capital of 500 million yen or more.

(b) There are certain special qualified corporate entities used for investment purposes, including Investment Corporations and Tokutei Mokuteki Kaisha (“TMK”), which can deduct as expenses dividends paid to their shareholders if they distribute more than 90% of their distributable profits.


Yes. Among local taxes, other than those already mentioned above, Prefectural Inhabitant Tax per capita levy, Municipal Inhabitant Tax per capita levy, Fixed Assets Tax and Automobile Tax may be of general application to the business operations in general of a company in Japan.

5 Capital Gains


Generally, no. For purposes of income taxes imposed on a company (not an individual) in Japan, generally all of the taxable income of a company is aggregated, regardless of whether such income is classified as capital gains or ordinary/business profits.


There is no participation exemption for taxation on capital gains.


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7 Overseas Profits


Yes. A Japanese company is generally subject to Japanese corporation taxes with respect to its worldwide income, with exclusion of a 95% portion of dividends from certain overseas subsidiaries. Please see question 7.2 below.


The 95% portion of the dividends paid to a Japanese company by its overseas subsidiaries is excluded from Japanese corporation tax, subject to certain shareholding threshold and holding period requirements. Please see question 5.2 above.


Yes. Japan has its own CFC rules and if such CFC rules are applied to any particular overseas subsidiary, such CFC subsidiary’s net profits (but not its net losses) shall be deemed to constitute the Japanese parent company’s taxable income in proportion to their shareholding percentages, regardless of whether or not such profits are distributed to the parent. These apply to Japanese companies which own 10% or more of shares in a certain overseas subsidiary more-than-50% owned by Japanese resident individuals or companies directly or indirectly, and located in a jurisdiction where its effective tax rate is less than 20% (applicable for relevant subsidiaries’ fiscal year beginning on or after April 1, 2015, amended from “20% or less”). The Japanese CFC rules were overhauled in 2017 in line with BEPS Action 3, “Designing Effective Controlled Foreign Company Rules”, and the new rules will be applicable for relevant subsidiaries’ fiscal years beginning on or after April 1, 2018. Under the new rules: (1) profits of the foreign subsidiaries which are either a (a) “paper

company”, (b) “cash box company”, or (c) “company located in the black-list jurisdictions” will be included in the taxable income of the Japanese parent unless the effective tax rate for the relevant subsidiaries is “30%” or higher;

(2) profits of the foreign subsidiaries falling out of the foregoing categories (1)(a)–(c), but not satisfying the “Economic Activity Test” (i.e., the test to see whether the subsidiary is engaged in active business by examining the subsidiary’s (a) category of business, (b) fixed facility, (c) management, and (d) volume of unrelated sales/purchases or place of manufacture) will be included in the taxable income of the Japanese parent, unless the effective tax rate for the relevant subsidiaries is “20%” or higher; and

(3) even if the foreign subsidiaries satisfy the “Economic Activity Test”, its “passive income” will be included in the taxable income of the Japanese parent, unless the effective tax rate for the relevant subsidiaries is “20%” or higher.



Generally, yes. If real property (land or any right on land or any building or auxiliary facility or structure), commercial or otherwise,


Yes. If a foreign parent forms a Japanese subsidiary which is a corporation, such Japanese subsidiary will be treated as a Japanese taxpayer and will be subject to Japanese corporation tax on its worldwide income in the same manner as any other domestic Japanese corporation, subject to 95% exclusion of dividends from certain foreign subsidiaries (see question 5.2 above). A branch of a non-resident corporation, by contrast, is generally only subject to Japanese corporation tax on the profits attributable to its permanent establishment in Japan under an applicable tax treaty or under the Japanese domestic tax law. There is no branch profits tax or other similar tax to which a branch of a non-resident company, but not a subsidiary, is subject.


Under the Corporation Tax Act, if a non-resident company which has its branch in Japan earns profits attributable to its permanent establishment in Japan such business profits constitute Japanese source income taxable in Japan in line with the Authorised OECD Approach. The rules similar to the transfer pricing regulations for foreign-related persons are applicable to the branch. With respect to the question of how the amount of such business profits should be determined, certain specific rules are provided in the relevant regulations. With respect to the detailed method of calculating taxable income, the rules applicable to a Japanese company are, in principle, also made applicable to a branch of a non-resident company, mutatis mutandis. In calculating the taxable income of a branch, only such expenses as are related to business carried on through the branch (permanent establishment), are treated as deductible expenses. Specifically, expenses of a relevant foreign corporation must be allocated to (a) the business carried on through the branch, and (b) other business in accordance with a reasonable criterion, such as revenue, value of assets, number of employees, etc.


A branch of a company which is a resident in such treaty country can benefit from the treaty provisions to some extent. However, with respect to the treaty relief given to passive income such as dividends, interest and royalties, a branch of a non-resident company would not be allowed to enjoy such treaty relief since most of the income tax treaties currently in force in Japan include provisions similar to Articles 10(4), 11(4) and 12(3) of the OECD Model Convention, which deny treaty benefits to the beneficial owner of dividends, interest, or royalties who carries on business through a permanent establishment situated in the source country if its relevant shares, debt-claim, or intellectual property is effectively connected with such permanent establishment.


Generally, no. Banks are obligated to file a report with the competent tax office regarding any remittance to a foreign country in the amount of more than 1 million yen.


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deductible by the GK but subject to withholding tax at the rate of 20.42% under the Japanese domestic tax law.



No. Japanese tax law does not have a general anti-avoidance rule. However, Japanese tax law includes a so-called “specific” anti-avoidance rule for a family company (i.e., a company where more than 50% of its shares are held by three or fewer shareholders and certain related persons). Japanese tax law also has specific anti-avoidance rules that involve corporate reorganisation transactions and consolidated tax return filing. In addition, an anti-avoidance rule was introduced for transactions regarding income attributable to a permanent establishment of overseas corporations, which is applicable to, among others, internal dealings between a non-Japanese company and its Japanese branch. Under these specific anti-avoidance rules, if transactions are viewed as “unjust”, the transactions can be recharacterised and reconstructed to a “normal” or “natural” form of transactions having different tax implications (presumably higher tax burdens).


No. Japanese tax law does not have a disclosure rule that imposes a requirement to disclose avoidance schemes. The Japanese tax authorities are studying a potential adoption of mandatory disclosure rules in line with BEPS Action 12. However, given the ambiguity of the scope of the “avoidance schemes”, the tax authorities are apparently being cautious in introducing new rules and a specific proposal has yet to be seen as of October 1, 2018.


No. The Japanese tax authorities are studying a potential adoption of mandatory disclosure rules applicable to promoters, enablers or facilitators of tax avoidance in line with BEPS Action 12. However, the tax authorities are apparently being cautious in introducing new rules, and a specific proposal has yet to be seen as of October 1, 2018.


Yes. The Japanese tax authorities encourage corporations to cooperate with the tax authorities and to voluntarily disclose certain information for compliance purposes. As an incentive, if the authorities acknowledge that a certain taxpayer is well in compliance with tax laws, the authorities may refrain from auditing that taxpayer for one year in addition to the period that the authorities customarily took to audit that taxpayer in the past. However, it is up to the discretion of the authorities and a voluntary disclosure will not necessarily entail exemption or relaxation of any tax audit or other procedural requirements. It will not reduce any tax either.

which is located within Japan is alienated by a non-resident (either a non-resident individual or a non-resident company), the gross amount of the consideration received by such non-resident from such alienation is subject to Japanese withholding tax at the rate of 10.21% if it is paid, or deemed paid, within Japan, with certain exceptions (including no withholding tax for the sale to an individual for use as a personal or family residence in consideration for 100 million yen or less) and exemptions.Regardless of the imposition of the aforementioned withholding tax, if a non-resident (either a non-resident individual or a non-resident company) alienates real property located within Japan, such non-resident alienator is required to file a tax return in Japan and is subject to Japanese personal income tax or corporation tax, as the case may be, on a net income basis with respect to any capital gains (after cost basis and expenses deducted) derived from such alienation. In the case where such non-resident alienator is subject to the aforementioned withholding tax, the amount of such withholding tax may be credited against such income tax or corporation tax, subject to certain procedural requirements.


Yes. When a non-resident individual or a non-resident company and his/her/its special related parties, in aggregate, hold: (i) more than 5% of the shares issued by a company with 50%

or more of its assets’ value attributable directly or indirectly to real property (land or any right on land or any building or auxiliary facility or structure), commercial or otherwise, which is located within Japan (“Real Property Related Company”) where such shares are either listed on a stock exchange or traded over-the-counter; or

(ii) more than 2% of the shares issued by a Real Property Related Company not so listed,

the special rules apply. When the special rules are applicable, if the non-resident individual or the non-resident company transfers the Real Property Related Company shares, such non-resident company or the non-resident individual is required to file a tax return in Japan and is subject to Japanese income tax or corporation tax, as the case may be, on a net income basis with respect to any capital gains (after cost basis and expenses deducted) derived from such transfer.


REITs structured in Japan (“J-REITs”) are generally structured in the form of a company, although it is legally possible to structure J-REITs in the form of a trust under Japanese law. Thus, dividends from J-REITs are, practically, subject to the same taxation as dividends paid by a local resident company to a non-resident (please see question 3.1 above), and transfers of investment equity to J-REITs are subject to the same taxation as transfers of Real Property Related Company shares (please see question 8.2), in general. J-REITs are often structured in the form of certain special qualified corporate entities established under Japanese law, such as Investment Corporations and TMK, which can deduct as expenses dividends paid to their shareholders if they distribute more than 90% of their distributable profits. As another alternative, real estate investments are made in the form of a Godo Kaisha (“GK”) corporation contributed to by silent partners through a Tokumei Kumiai (“TK”), under which dividends to investors are fully


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(a) The local file (reporting specifically material transactions of the local taxpayer) is mandated to be prepared simultaneously with the filing of the relevant corporation tax return (and to be presented to the local tax authority upon instruction within a maximum of 45 days of receiving such instruction) for transactions with a certain foreign-affiliated person, with whom either (1) the sum of payments and receipts is 5 billion yen or more, or (2) the sum of payments and receipts for intangible transactions is 0.3 billion yen or more, in the previous fiscal year. In addition, presentation of the local file for any transaction, the value of which is below the foregoing threshold amounts, is also to be made with the local tax authority, upon instruction by the auditor, within a certain period designated by the auditor, which is no more than 60 days.

In the local file, a taxpayer is required to report the items as described in Annex II to Chapter 5 of the revised OECD Guidelines, which includes a description of the local entity, a description of controlled transactions, and financial information.

(b) In the master file, a taxpayer is required to report the items as described in Annex I to Chapter 5 of the revised OECD Guidelines, which includes a description of the businesses of the MNE, the MNE’s intangibles, the MNE’s intercompany financial activities, and the MNE’s financial and tax positions.

(c) In the country-by-country report, a taxpayer is required to report the items as described in Annex III to Chapter 5 of the revised OECD Guidelines, which includes an overview of allocation of income, taxes and business activities by tax jurisdiction, and a list of all the constituent entities of the MNE group included in each aggregation per tax jurisdiction.

Notification as to the ultimate parent entity (to be filed by the last fiscal day of the ultimate parent), a master file and a country-by-country report (to be filed within one year of the last fiscal day of the ultimate parent) are applicable for fiscal years of the ultimate parent beginning on or after April 1, 2016. The new rules for a local file (to be prepared by the time of the filing of a relevant corporation tax return) will be effective for corporation tax in fiscal years beginning on or after April 1, 2017.


No. Japan does not maintain any preferential tax regimes such as a patent box.Japanese tax law does, however, provide for special tax credits and deductions on certain research and development costs.



No. No specific legislation has been taken to capture digital presence so far. However, in enforcement, the Japanese tax authority appears to be eager to capture digital presence. For example, in 2009, it was reported that the Japanese tax authority made adjustments on a certain Japanese affiliate of Amazon.com for the reason that such affiliate was a permanent establishment of Amazon based on the




Yes. Japan has introduced legislation, in response to BEPS Action 2 Report, “Neutralising the Effects of Hybrid Mismatch Arrangements”, which denies exclusion for dividends received from 25%-owned non-Japanese companies (see question 5.2) as long as they are deductible in the payer country, including dividends on Mandatory Redeemable Preference Shares (“MRPS”) issued in Australia and dividends from a Brazilian company. The new rules are effective for any dividends received by a Japanese corporate taxpayer whose fiscal year begins on or after April 1, 2016, subject to a certain grandfathering rule.In addition, in response to Action 13, “Guidance on Transfer Pricing Documentation and Country-by-Country Reporting”, the Japanese government introduced new transfer pricing legislation to adopt the three-tiered documentation approach consisting of a country-by-country report, a master file and a local file, which is applicable to any fiscal year beginning on or after April 1, 2016. Please see question 10.3.


No. The Japanese tax authorities appear to intend to adopt legislation to tackle BEPS in line with, but not beyond, the OECD’s BEPS reports. In addition to the new rules in line with Actions 2 and 13 set forth in question 10.1 above, the Japanese government introduced the new CFC rules in line with BEPS Action 3, “Designing Effective Controlled Foreign Company Rules”. Further, the government is expected to revise the current transfer pricing regulations in line with the revised OECD Transfer Pricing Guidelines under BEPS Actions 8–10, “Aligning Transfer Pricing Outcomes with Value Creation”, although the new transfer pricing rules have yet to be seen as of October 1, 2018. It is possible that Japan will introduce new transfer pricing rules for transfers of hard-to-value intangibles (“HTVI”) aimed at preventing base erosion and profit shifting by moving intangibles among group members in line with the “Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles” published by the OECD on June 21, 2018.


Yes. In line with BEPS Action 13, in 2016, the Japanese government introduced new transfer pricing legislation in which it adopted the three-tiered documentation approach, under which a separate “master file” and a “local file” as well as a “country-by-country report” are required. Any Japanese corporations and foreign corporations with permanent establishments in Japan that are a constituent entity of a multinational enterprise (“MNE”) group with total consolidated revenues of 100 billion yen or more in the previous fiscal year (“Specified MNE Group”) are subject to the new documentation rules. Such corporations must file (i) notification as to the ultimate parent entity, (ii) a country-by-country report, and (iii) a master file with the tax authority online (“e-Tax”).


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Nagashima Ohno & Tsunematsu is the first integrated full-service law firm in Japan and one of the foremost providers of international and commercial legal services based in Tokyo. The firm’s overseas network includes offices in New York, Singapore, Bangkok, Ho Chi Minh City, Hanoi and Shanghai, associated local law firms in Jakarta and Beijing where our lawyers are on-site, and collaborative relationships with prominent local law firms throughout Asia and other regions. In representing our leading domestic and international clients, we have successfully structured and negotiated many of the largest and most significant corporate, finance and real estate transactions related to Japan. The firm has extensive corporate and litigation capabilities spanning key commercial areas such as antitrust, intellectual property, labour and taxation, and is known for path-breaking domestic and cross-border risk management/corporate governance cases and large-scale corporate reorganisations. The 400+ lawyers of the firm, including over 20 experienced foreign attorneys from various jurisdictions, work together in customised teams to provide clients with the expertise and experience specifically required for each client matter.

Shigeki Minami is a partner at Nagashima Ohno & Tsunematsu in Tokyo, Japan. Mr. Minami is an expert in general tax law matters, including transfer pricing, international reorganisations, anti-tax-haven rules, withholding tax issues and other international and domestic tax issues. He regularly represents major Japanese and foreign companies in tax audits, tax disputes and competent authority procedures (including advance pricing agreements and mutual agreement procedures) with Japanese and foreign tax authorities and he has litigated tax cases in the National Tax Tribunal of Japan and in Japanese courts.

His recent achievements include cancellation of transfer pricing and international reorganisation assessments in the amount of more than USD 100 million, representing major Japanese and international companies.

Mr. Minami serves as the Chair of the Asia-Pacific Region Committee of the International Fiscal Association (“IFA”) and as a member of the Practice Council of the International Tax Program at New York University School of Law.

Shigeki MinamiNagashima Ohno & TsunematsuJP Tower2-7-2 Marunouchi, Chiyoda-kuTokyo 100-7036Japan

Tel: +81 3 6889 7177Email: [email protected]: www.noandt.com


finding that Amazon US’s computers were used in Japan, Japanese employees were instructed by Amazon US and the Japanese affiliate functioned for more than mere logistics. Amazon sought relief from a mutual agreement procedure with competent authorities and the US and Japanese tax authorities reached an agreement in 2010 with a result of no significant tax expense to Amazon. If the OECD makes specific recommendations for taxing digital activities, the Japanese government may move to enforce or take legislative actions in line with them.


No, it does not.


Chapter 22

Boga & Associates

Genc Boga

Alketa Uruçi

Kosovo


The test of residence of a company is whether a company: (i) is established in Kosovo; or (ii) has its place of effective management in Kosovo.

2 Transaction Taxes


No, there are no documentary taxes in Kosovo.


Kosovo introduced VAT in 2001. A new Law “On VAT” entered into force on 1 September 2015. The standard rate of VAT is 18%; the reduced rate of VAT is 8%; and exports are zero-rated. The turnover threshold for registration purposes is set to EUR 30,000.


The following activities are VAT-exempt:■ insurance and reinsurance transactions;■ financial services;■ the supply of postage stamps;■ the supply at face value of fiscal stamps and other similar

stamps;■ betting, lotteries and other forms of gambling;■ the supply of land;■ the supply of houses, apartments or other accommodation

used for residential purposes; and■ the leasing or letting of immovable property.


Generally, taxpayers registered for VAT are entitled to recover the input VAT, provided that the VAT is charged in relation to their taxable activity. When taxpayers perform both taxable and exempt supplies, VAT may be partially reclaimed. VAT cannot be reclaimed



Kosovo, as an independent country, has concluded several new tax treaties, such as those with: (i) the Republic of Albania (2016); (ii) the Republic of Macedonia (2014); (iii) the Republic of Turkey (2016); (iv) Slovenia (2015); (v) the Czech Republic (published in the Official Gazette on 27 March 2015); (vi) the United Kingdom (2016); (vii) Hungary (2015); (viii) Republic of Croatia (2018); (ix) Switzerland (published in the Official Gazette on 17 August 2017, not yet applicable); (x) United Arab Empire (2017); (xi) Republic of Austria (published in the Official Gazette on 1 August 2018); and (xii) Grand Duchy of Luxembourg (published in the Official Gazette on 18 January 2018, not yet applicable). Kosovo has also acceded to other tax treaties on the avoidance of double taxation with respect to taxes on income and capital from the former Yugoslavia (with Germany, Belgium, the Netherlands and Finland, as well as with the Czech Republic for the avoidance of double taxation on inheritance tax).


Kosovo tax treaties generally follow the OECD model.


The new tax treaties must be ratified by Parliament. A treaty ratified by Parliament becomes part of the Kosovo legal system after publication in the Official Gazette and prevails over any law which differs from the treaty’s provisions.


The treaties do not incorporate anti-treaty shopping rules.


A treaty prevails over domestic law regardless of whether the domestic legislation existed previously or is introduced subsequently to it.


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KosovoBoga & Associates


No, there are no other restrictions on tax relief for interest payments by a local company to a non-resident.


Yes. There is a 9% withholding tax on property rental payments made to non-residents.


The Corporate Income Tax Law provides that the prices between related parties should be set at open market value. Such value should be determined under the uncontrolled price method, and when this is not possible, under the resale price method or the cost-plus method. Additional rules are provided in an administrative instruction.



The Kosovo Corporate Income Tax Law provides for a rate of 10%.


The taxable base is calculated starting from the profit shown in the financial statements, and is adjusted in accordance with the limitations provided in the Corporate Income Tax Law.


The Corporate Income Tax Law provides a list of expenses that are non-deductible for tax purposes, consisting of:■ fines, penalties and interest imposed by any public authority

and expenses related to them;■ income tax paid or accrued for the current or previous tax

period and any interest or late penalty incurred for its late payment;

■ any loss from the sale or exchange of property between related persons;

■ pension contributions above the maximum amount allowed by the Kosovo Pension Law;

■ bad debts that do not meet the specified conditions;■ contributions made for humanitarian, health, education,

religious, scientific, cultural, environmental protection and sports purposes, which exceed 10% of taxable income (before the deduction of such expenses);

■ representation costs (these include publicity, advertising, entertainment and representation) which exceed 1% of the total gross income; and

■ accrued expense for which the withholding tax should be paid, unless such expense is paid on or before 31 March of the subsequent tax period.

on certain recreation expenses and representation costs, and it is limited on expenses for passenger vehicles which are not used solely for business purposes.


No, Kosovo does not permit VAT grouping.


There is an excise tax which applies to a limited number of goods such as coffee, tobacco, alcoholic drinks, soft drinks, derivatives of petroleum, and motor vehicles used mainly for the transport of passengers.


Except for VAT and excise, there are no other indirect taxes.



No, there is no withholding tax on dividends distributed from a Kosovo-resident company.


Yes. There is withholding tax at a rate of 10% on royalties paid by a Kosovo company to a non-resident.


Yes, there is withholding tax at a rate of 10% on interest paid by a Kosovo company to a non-resident.


No, there are no “thin capitalisation” rules or any similar rules.


No, there is no such provision.


There are no such rules in place.


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Boga & Associates Kosovo



There are no taxes payable upon the formation of a subsidiary.


There is no difference between the taxation of a locally formed subsidiary and the branch of a non-resident company.


Branches are taxed only on the taxable income from a Kosovo source of income. The taxable income is determined in the same manner as for resident companies. Taxable income of branches is subject to Corporate Income Tax at the same rate of 10%.


Branches have the same treatment under the local legislation.


No, there is no withholding tax or other tax with regard to the remittance of profits by the branch.

7 Overseas Profits


Foreign-sourced income is taxable in Kosovo. However, tax credit is allowable for the amount of income tax paid overseas for the income derived abroad.


No, dividends distributed by a non-resident to a local company are considered as exempt income.


There are no “controlled foreign company” rules.


No, there are no tax grouping rules.


As a general rule, the losses may be carried forward for six years, but they do not survive a change of more than 50% in ownership or a change in the legal form of the entity.


No, there is no difference in this regard.


Yes, there is a property tax in Kosovo. All persons who own, use or occupy immovable property are subject to tax on real estate. The Municipal Assembly of each Municipality shall set property tax rates for all property categories except for the public property category, at the rate of 0.15% to 1% of the market property value.

5 Capital Gains


The Corporate Income Tax Law indicates the rules applicable to capital gains. As a general rule, capital gains and losses are treated as ordinary income/losses from economic activity. Capital gains are not recognised for fixed assets which are depreciated in a pool and purchased prior to 1 January 2010.


No, there is no participation exemption for capital gains.


No, there is no relief for reinvestment.


There is no withholding tax on the proceeds of selling a direct or indirect interest in local assets/shares.


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There are no provisions encouraging “co-operative compliance”.



Kosovo has not introduced any legislation in response to the OECD’s project targeting BEPS.


There is no any expressed intention of Kosovo to adopt any legislation to tackle BEPS.


Kosovo does not support public CBCR.


Kosovo does not maintain any preferential tax regimes.



Kosovo has not taken unilateral action with regard to tax digital activities.


Kosovo has not expressed support for the proposal for a digital services tax.



Non-residents are taxed on the disposal of commercial real estate in Kosovo, at a rate of 10% of the realised profit.


There is no tax on the transfer of an indirect interest in commercial real estate located in Kosovo.


Kosovo does not have any special regime for REITs or their equivalent.



The Tax Procedure Law provides for the right of tax authorities to disregard and re-characterise a transaction or element of the transaction that does not have a substantial economic effect, where the form of the transaction does not reflect its economic substance and where it was entered into as part of a scheme to avoid a tax liability.


There are no requirements to disclose avoidance schemes.


There are no such rules.


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Boga & Associates, established in 1994, has emerged as one of the premier law firms in Albania, earning a reputation for providing the highest quality of legal, tax and accounting services to its clients. The firm also operates in Kosovo (Pristina) offering a full range of services. Until May 2007, the firm was a member firm of KPMG International and the Senior Partner/Managing Partner, Mr. Genc Boga, was also the Senior Partner/Managing Partner of KPMG Albania.

The firm’s particularity is linked to the multidisciplinary services it provides to its clients, through an uncompromising commitment to excellence. Apart from the widely consolidated legal practice, the firm also offers the highest standards of expertise in tax and accounting services, with keen sensitivity to the rapid changes in the Albanian and Kosovo business environment.

The firm delivers services to leading clients in major industries, banks and financial institutions, as well as to companies engaged in insurance, construction, energy and utilities, entertainment and media, mining, oil and gas, professional services, real estate, technology, telecommunications, tourism, transport, infrastructure and consumer goods.

The firm is continuously ranked as a “top tier firm” by major directories: Chambers Europe; The Legal 500; and IFLR1000.

Genc Boga is the founder and Managing Partner of Boga & Associates, which operates in the jurisdictions of both Albania and Kosovo. Mr. Boga’s fields of expertise include business and company law, concession law, energy law, corporate law, banking and finance, taxation, litigation, competition law, real estate, environment protection law, etc.

Mr. Boga has solid expertise as an advisor to banks, financial institutions and international investors operating in major projects in energy, infrastructure and real estate. Thanks to his experience, Boga & Associates is retained as a legal advisor on a regular basis by the most important financial institutions and foreign investors.

He regularly advises EBRD, IFC and World Bank in various investment projects in Albania and Kosovo.

Mr. Boga is continuously ranked as a leading lawyer by major legal directories: Chambers Global; Chambers Europe; The Legal 500; and IFLR1000.

He is fluent in English, French and Italian.

Genc BogaBoga & Associates27/5 Nene Tereza Str.10000 PristinaKosovo


Alketa is a Partner at Boga & Associates, which she joined in 1999.

She practises in the areas of concession and energy, where she manages energy assignments on any regulatory, corporate and commercial aspects, including international arbitration proceedings.

Alketa has extensive experience in providing regular tax advice to commercial companies, for corporate tax, VAT, employees’ taxation matters, involvement in the management of several tax aspects of mergers and acquisitions transactions, tax planning and restructuring.

In addition, Alketa has assisted clients in their acquisitions of Albanian and Kosovo targets, including tax and legal due diligences, structuring of the acquisition transaction, assisting in the preparation of the transaction documents and the respective closing.

Alketa is fluent in English and Italian.

Alketa Uruçi Boga & Associates27/5 Nene Tereza Str. 10000 PristinaKosovo



Chapter 23

Sele Frommelt & Partners Attorneys at Law Ltd. Heinz Frommelt

Liechtenstein


International treaties ratified by Liechtenstein rank higher than domestic law. Consequently, a treaty override is not conceivable.


Any legal entity having its registered seat or its place of effective management in Liechtenstein is subject to unlimited corporate tax liability in Liechtenstein (Art. 44 para. 1 Tax Act). The registered seat is the place defined as such in the statutes of the legal entity and determines the substantive law applicable to the same, whereas the place of effective management is deemed as the place where the central entrepreneurial activity for the entity is undertaken (Art. 2 para. 1 lit. d) Tax Act), i.e. the place where the strategic management decisions are made. Such is not the place where the day-to-day administration of the entity is carried out.

2 Transaction Taxes


Liechtenstein is part of the Swiss customs area, for which reason the Swiss federal legislation on stamp duties (including formation duty, duty on insurance premiums and securities transfer stamp tax) is directly applicable in Liechtenstein. Swiss formation (or issuance) duty is levied upon a company limited by shares, a limited liability company or a co-operative at a rate of 1% with an allowance of CHF 1 million upon formation or increase of the statutory capital of the entity or in the case of a non-repayable equity contribution by the shareholder. Certain transactions (e.g. restructuring within a corporate group) are tax-exempt.The Swiss duty on insurance premiums applies upon insurance contracts concluded by a Liechtenstein-based insurance company or between a Liechtenstein-resident policyholder and a non-Liechtenstein-based insurance company. The standard rate amounts to 5% of the premium; the rate for life insurance is 2.5%. Several types of insurance are exempt.Swiss securities transfer stamp tax applies upon the sale of certain securities, viz. mainly bonds, shares (in companies or funds) or other participating rights, provided one of the directly or (as an



To date, Liechtenstein has signed 20 Double Taxation Agreements (DTAs), two of which are not yet in force. Liechtenstein has concluded DTAs with the following countries (in alphabetical order): Andorra (2015); Austria (1955, amended in 1969 and 2013); Bahrain (2012, not yet in force); the Czech Republic (2014); Georgia (2015); Germany (2011); Guernsey (2014); Hong Kong SAR PRC (2010); Hungary (2015); Iceland (2016); Jersey (2018, not yet in force); Luxembourg (2009); Malta (2013); Monaco (2017); San Marino (2009); Singapore (2013); Switzerland (1995, amended 2015); the United Arab Emirates (2015); the United Kingdom (2012); and Uruguay (2010).Liechtenstein is keen on expanding its DTA network. As a result, negotiations are ongoing with several jurisdictions, in particular with major European countries, with a view to signing further DTAs.


All DTAs concluded by Liechtenstein follow the OECD Model Convention.


DTAs are concluded and signed by the Government. In order to come into effect and become law, they must be approved by the Liechtenstein Parliament and be published in the Official Gazette.


Yes. In general, the DTAs concluded so far contain anti-treaty shopping rules, and all future DTAs shall contain such rules in light of Liechtenstein’s commitment to implement BEPS Action Point 6 (see question 10.1 below). Currently, the DTAs with Hong Kong SAR PRC, Luxembourg, Malta and Singapore do not contain limitation-on-benefits (LOB) clauses. However, with respect to Luxembourg, the two Governments have agreed that LOB shall nevertheless apply in respect of privileged taxed entities (i.e. subject to merely the minimum income tax; see question 4.1 below).


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Sele Frommelt & Partners Attorneys at Law Ltd. Liechtenstein


VAT is, in principle, recoverable for all entrepreneurs in relation to the VAT paid on all goods and services (including the import service VAT). In case the taxpayer uses the goods or services both for entrepreneurial and non-entrepreneurial purposes, the VAT is recoverable only to a certain extent. Analogous provisions apply in the case of privately used goods or services.


Entities having their registered seat or permanent establishment in Liechtenstein, which are connected under a uniform direction of a single entity, may apply to be treated as a single VAT-taxable entity (VAT group). The group can also comprise entities, which do not pursue a commercial activity, as well as individuals. The pooling to a VAT group can be activated as of the beginning of each taxable year and be terminated as of the end of the respective taxable year (Art. 13 VAT Act).A VAT group can be formed by any legal entity, partnership or individual as long as they have their registered seat or a permanent establishment in Liechtenstein. Entities having their registered seat abroad can be part of a VAT group provided they have a permanent establishment in Liechtenstein. Liechtenstein permanent establishments of Swiss-incorporated companies are attributed to the Swiss headquarters and can therefore form part of a Swiss VAT group. Conversely, Swiss permanent establishments of Liechtenstein-incorporated companies are attributed to the Liechtenstein headquarters and can thus not be part of a Swiss VAT group, but only a Liechtenstein VAT group.


No, there are no other transaction taxes apart from the stamp duties (see question 2.1 above) and real estate capital gains tax (see question 8.1 below).


No, there are not.



As a rule, Liechtenstein does not levy any withholding tax on dividends. However, under the terms of a Tax Cooperation Agreement with Austria concluded in 2013, Liechtenstein paying agents, e.g. banks, are obliged to withhold a tax in the amount of 27.5% on dividends (as well as on capital gains) paid to a trust, foundation or establishment deemed transparent for tax purposes with a beneficial owner resident in Austria, unless the bank’s client and beneficial owner have waived the banking secrecy and instructed the bank to notify the income payment directly to the Austrian Tax Authority.

intermediary) indirectly involved parties is a Swiss- or Liechtenstein-resident stockbroker. In particular, Swiss or Liechtenstein banks or securities dealers are deemed as stockbrokers, as are any corporate entity with more than CHF 10 million worth of taxable securities in their books. The applicable rates vary between 0.15% and 0.30%, depending on the residency of the entity having issued the taxable security.In all those cases where the Swiss federal legislation on stamp duties is not applicable, a special Liechtenstein formation duty or a duty on insurance premiums is levied (Art. 66 and 67 Tax Act).The Liechtenstein formation duty is levied upon the formation of a legal entity, transfer of its registered seat into Liechtenstein or increase of the statutory capital, unless the Swiss legislation on stamp duties is already applicable. Thus, such duty applies, e.g. in the case of the setting up of a Liechtenstein foundation or a Liechtenstein establishment (Anstalt). The standard rate is 1% with an allowance of CHF 1 million, which decreases to 0.5% for capital above CHF 5 million and to 0.3% for capital above CHF 10 million. Foundations are subject to a formation duty at a rate of 0.2% on their statutory capital; at least 200 CHF. The same charge applies upon the setting up of a trust.The Liechtenstein duty on insurance premiums is charged on insurance contracts, provided the insured risk is located in Liechtenstein and unless the Swiss legislation on stamp duties is already applicable. The provision is very much coined after the Swiss equivalent, thus the same rates apply (standard rate 5%, life insurance 2.5%). Several types of insurance are exempt.Moreover, Liechtenstein has a capital gains tax which is levied upon the transfer of real estate (see question 8.1 below).


Because of the customs area with Switzerland, Liechtenstein is part of the Swiss VAT area and applies the substantive Swiss VAT regime. Liechtenstein has thus enacted its own VAT Act (2009) and a VAT Ordinance (2009), which are modelled upon the Swiss legal basis.The standard VAT rate has been 7.7% since 01.01.2018. A reduced rate of 2.5% applies for certain goods like food, medicaments, books and newspapers, inter alia. A special rate of 3.7% applies for bed and breakfast facilities (see Art. 25 VAT Act).


The general principle is that all services within the meaning of the VAT Act (i.e. supply of goods and provision of services), which are rendered within Switzerland or Liechtenstein by an entrepreneur resident in Liechtenstein, are subject to VAT. In addition, VAT is levied by a reverse charge procedure upon services imported from an entrepreneur based outside the VAT area (i.e. Switzerland and Liechtenstein), provided the annual aggregate amount exceeds CHF 10,000. The import of goods from outside Switzerland is subject to import duty VAT. The VAT Act lists several transactions which are not taxable. The most important are services by medical doctors, dentists and other medical practitioners, children and youth care, services in the area of education and training, artistic performances, insurance and reinsurance transactions, dealing with securities and fund shares, transfer of real estate, letting of real estate and sale of agricultural products.An entrepreneur with an annual turnover below CHF 100,000 is out-of-scope of VAT.


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has been defined as relatively far-reaching, including not only participating entities, entities of which the taxpayer is a beneficiary, and members of the board of the taxpayer, but even persons to whom the taxpayer is connected by personal bonds of family relationship or friendship (Art. 31a Tax Ordinance). Taxpayers are further obliged to keep appropriate transfer pricing documentation and to apply the OECD Transfer Pricing Guidelines for Multinational Enterprises (Art. 31b Tax Ordinance). In determining the appropriate transfer pricing method, taxpayers have to consider the effective facts and circumstances of the respective transaction, and may choose between the comparable uncontrolled price method, the resale price method, the cost plus method, the transactional net margin method, the transactional profit split method or another method in case the other available methods are not suitable for reflecting the transfer price objectively. Taxpayers which are part of a group with a consolidated turnover in excess of 900 million CHF are obliged to document the appropriateness of the transfer price by way of a Master File and a Local File pursuant to the OECD-Guidelines. It is possible, and also general practice, to obtain an Advance Pricing Agreement (APA) from the Tax Authority in relation to the applicable transfer price.



Corporate profits are taxed at a flat rate of 12.5% p.a., whereby a minimum annual tax of CHF 1,800 is payable irrespective of gains made by the legal entity.A special tax regime applies for legal entities qualifying as so-called Private Asset Structures (basically a holding or investment vehicle – very often a private foundation – used for the management of an individual’s private wealth without pursuing an economic activity). Those entities pay merely the minimum annual tax irrespective of their effective income and are not required to file a tax return.


Yes, that may be the case. The relevant tax base is the annual profit pursuant to the financial statements drawn up under the applicable commercial and accounting rules.


The main adjustments leading to an increase in the net profit are: depreciations, value adjustments and reserves which are not commercially justified; profit distributions and hidden profit distributions to shareholders or related persons; disallowance of tax expenses; and income generated from capital made available to shareholders or related persons which does not correspond to the “arm’s length” principle.


The Tax Act provides for group taxation upon request (Art. 58 Tax Act). A tax group is possible with a parent subject to unlimited tax liability in Liechtenstein, and affiliated group members subject to tax in Liechtenstein or abroad. Group taxation allows the proportionate


Liechtenstein does not levy any withholding tax on royalties.


As a rule, Liechtenstein does not levy any withholding tax on interest. However, under the terms of a Tax Cooperation Agreement with Austria concluded in 2013, Liechtenstein paying agents, e.g. banks, are obliged to withhold a tax in the amount of 25% on interest paid to a trust, foundation or establishment deemed transparent for tax purposes with a beneficial owner resident in Austria, unless the bank’s client and beneficial owner has waived the banking secrecy and has instructed the bank to notify the income payment directly to the Austrian Tax Authority.


Liechtenstein does not have thin capitalisation rules. However, with respect to interest-bearing liabilities between related parties booked in Swiss francs, the Liechtenstein Tax Authority currently allows a maximum interest rate of 1.5%. For liabilities in other currencies, other rates apply (e.g. 1.75% for EUR, 2.75% for GBP).


Please see question 3.4 above.


Generally no, as the administrative practice illustrated in question 3.4 above applies only between related entities. However, each case must be looked at individually as further utilisation of the loaned amount may have an influence on the assessment by the Tax Authority.


No, there are not.


There is no withholding tax on property rental payments made to non-residents. However, real estate located in Liechtenstein which is owned by a non-resident individual is subject to limited wealth tax.


The Liechtenstein Tax Act contains a general “arm’s length” principle in its Art. 49, which states that commercial transactions between related persons must correspond to the terms generally applied between unrelated parties. The term “related person”


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No, there is not.


The sale of real estate located in Liechtenstein is subject to real estate capital gains tax, payable by both resident and non-resident owners. The applicable rate is equal to the income tax bracket applicable for unmarried individuals plus a municipality surcharge of 200%. The sale of shares of a real estate holding company owning real estate in Liechtenstein is treated for tax purposes as if the real estate was sold directly. The tax is owed by the seller.The sale of shares of local companies is not subject to any withholding tax.



Any Liechtenstein company formed as a subsidiary of a resident or non-resident parent company will be subject to the same formation duties applied to all resident legal entities, i.e. depending on the legal form, either the Swiss formation (issuance) duty or the Liechtenstein formation duty (see question 2.1 above).


A subsidiary locally formed or having its seat transferred into Liechtenstein is subject to taxation on its worldwide income. The branch of a non-resident company is taxed as a permanent establishment only on its Liechtenstein-sourced income, which is deemed as the income from agricultural and silvicultural land in Liechtenstein, rental income from real estate located in Liechtenstein and the taxable net income from a permanent establishment located in Liechtenstein. The definition of “permanent establishment” contained in the Tax Act is akin to the definition used in the OECD Model Tax Convention.


A local branch is subject to limited tax liability in relation to its Liechtenstein-sourced income. The branch is obliged to follow the same accounting rules which exist for other entities, and its taxable profits are thus determined in accordance with the applicable accounting provisions.


A branch is not deemed as a separate legal entity under domestic law. The branch can therefore not benefit directly from double tax relief, but only its head office or entrepreneur, depending on the terms of the applicable DTA.

offset of losses from the subsidiaries to the group parent, or from the group parent to any group member subject to unlimited tax liability in Liechtenstein.


Yes. Losses may be carried forward for an indefinite period of time, but the carryover is limited to 70% of the taxable net gain. Special rules apply in relation to losses from a foreign permanent establishment.


No; Liechtenstein taxes profits on an annual arising basis.


No; there is no such tax on the occupation of property. Foundations and trusts with settlors and/or beneficiaries resident in Liechtenstein may be subject to endowment tax if assets are transferred to a foundation or trust which is deemed opaque for wealth tax purposes. Endowment tax is not applied to companies limited by shares and other types of corporate entities.

5 Capital Gains


Capital gains on the sale of participations in Liechtenstein or abroad, as well as the sale of real estate located outside of Liechtenstein, are tax-exempt. However, as from 01.01.2019, the gain on participations is taxable if the owned foreign company generates more than 50% of its income from passive income and is taxed at a low rate (i.e. less than half of the Liechtenstein corporate tax rate (i.e. 6.25%) in case of ownership below 25% or in case of ownership above 25% if the effective tax charge of the foreign company is less than half of the effective tax charge of the local company (switch-over principle)). With regard to existing participations as of 31.12.2018, this second rule will apply from 2022 only.Gains realised upon the sale of any other assets are subject to ordinary corporate income tax. Gains from the sale of real estate located in Liechtenstein are subject to special rules (see question 5.4 below). Capital losses are tax-deductible until end of 2018. With effect from 01.01.2019, such provision will be abolished.


Capital gains on the sale of shares in participations are tax-exempt, irrespective of the quota held and the duration of time for which the shares are held. However, the exemption will not apply in case of a foreign company which generates more than 50% of its income from passive income and whose net gain is taxed at a rate which is less than half of the Liechtenstein corporate tax rate (i.e. 6.25%) (see question 5.1 above).


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The Tax Act lists certain transactions concerning real estate, which are deemed as transfer of real estate for capital gains tax purposes. These are: the transfer of real estate by way of forced execution or expropriation; the change of ownership by means of transactions having the same effect as a disposal; the encumbrance of a piece of real estate if this influences the saleability or the sale value of the real estate considerably and consideration is charged for; and the transfer of shares in a real estate holding company (Art. 35 para. 3 Tax Act).


No, it does not.



Yes. Art. 3 Tax Act stipulates when a tax arrangement can be deemed abusive. A legal or factual arrangement, which can be deemed inadequate in relation to its economic reality and whose only aim is to obtain a tax advantage, is deemed abusive if the granting of tax advantages could collide with the rationale of the Tax Act and if the taxpayer cannot indicate any economic or otherwise significant arguments for such arrangement and the same does not show any of their own economic consequences. All mentioned requirements must be met in order to affirm the application of the anti-avoidance provision. If the anti-avoidance rule is applied, the Tax Authority is empowered to disregard the tax planning and to assess the taxes as they would be levied in the case of an appropriate legal arrangement in compliance with the respective business transactions, facts and circumstances. In practice, this rule has so far been used in just a small number of cases.Moreover, with effect from 01.01.2019, new anti-abuse provisions in relation to the notional equity interest deduction will become applicable.


No, there is not.


No; tax avoidance (as opposed to tax evasion) is not a crime under Liechtenstein law.


Liechtenstein does not impose any withholding tax or similar tax with respect to the remittance of profits by the branch.

7 Overseas Profits


The earnings of the foreign branch of a Liechtenstein company are exempt from tax in Liechtenstein.


Generally, dividend income is exempt from income tax. However, as from 01.01.2019, dividends are taxed upon the local company if and insofar as (i) the receiving company holds at least 25% of the dividend-paying company and the dividend payment has been treated as a tax allowance at the level of the dividend-paying company (correspondence principle); or (ii) in case the dividend-paying company generates more than 50% of its income from passive income and its net gain is taxed at a low rate (i.e. less than half of the Liechtenstein corporate tax rate (i.e. 6.25%)) in case of ownership below 25% or in case of ownership above 25% if the effective tax charge of the dividend-paying company is less than half of the effective tax charge of the local company (switch-over principle). With regard to existing participations as of 31.12.2018, this second rule will apply from 2022 only.


No; Liechtenstein does not have “controlled foreign company” legislation. However, for individuals resident in Liechtenstein, a comparable provision is applied in respect of foundations or trusts used as wealth holding vehicles. These are generally deemed as tax transparent by the Tax Authority and their assets are consequently subject to wealth taxation in respect of the settlors or the beneficiaries resident in Liechtenstein. This provision does not apply to foundations or trusts with settlors and/or beneficiaries resident outside of Liechtenstein.



Yes. Capital gains realised by a non-resident on the disposal of real estate located in Liechtenstein are subject to capital gains tax. The applicable rate is equal to the income tax bracket applicable for unmarried individuals plus a municipality surcharge of 200%. The tax is owed by the seller.


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■ Country-by-Country Reporting (CBCR): Liechtenstein has implemented this BEPS recommendation as per Action Point 13. The duty to file the relevant report applies to a parent company of a multinational group of companies with an annual turnover exceeding CHF 900 million. The report will be exchanged with those countries that have ratified the Multilateral Competent Authority Agreement on the Exchange of CBC Reports, in which any of the members of the multinational group are subject to tax either by virtue of residency or on the grounds of a permanent establishment.

■ Anti-treaty abuse: In accordance with BEPS Action Point 6, Liechtenstein has committed to include LOB clauses and anti-abuse clauses in all its DTAs.


No. From today’s standpoint, Liechtenstein’s plan is to implement the Minimum Standards requested by the BEPS Action Points.


Yes. CBCR has been introduced from 01.01.2017 onwards (see question 10.1 above).


Liechtenstein has had a preferential tax regime for income from IP rights since 2011, which taxed income from the exploitation or sale of patents, trademarks and designs, as well as software and scientific databases at a preferred rate of 2.5%. Because the IP-box regime was deemed not to comply with the OECD’s nexus approach, the tax regime was abolished with effect from 01.01.2017. Grandfathering provisions until the calendar year 2020 apply for companies, which were already making use of this tax regime up to the end of 2016.



No, it has not.


Liechtenstein is not a Member of the EU and is therefore following the European Commission’s proposal in a mere passive role. So far, the Government has not taken an official stand on the digital services tax.


The Tax Act provides for the possibility of a voluntary disclosure which allows the regularisation of undeclared income or assets without incurring in penalties.



Liechtenstein applies all the Minimum Standards of the BEPS proposal and has therefore implemented – at this stage – four of the 15 BEPS Action Points. The following amendments came into force on 01.01.2017:■ Hybrid arrangements: The so-called “correspondence

principle” was introduced with regard to the taxation of dividends. Under the new regime, dividend income from participations above 25% are no longer tax-free, if the dividend paid has been treated as a tax allowance at the level of the dividend-paying company. The idea is to combat hybrid arrangements which can lead to a double non-taxation.

■ Exchange of Tax Rulings: Liechtenstein has introduced a duty to exchange Tax Rulings with foreign jurisdictions in accordance with BEPS Action Point 5. The exchange is carried out based on the principles of spontaneous exchange of tax information. Rulings are exchanged in relation to: preferential tax situations, transfer-pricing issues, cross-border decrease of taxable gains not evidenced in the financial accounts, existence of a permanent establishment or attribution of gains to a permanent establishment, income or money-flow to associated companies routed via other legal entities.

Only Tax Rulings concluded after 31.12.2016 or those concluded before such date and still in force as of 01.01.2017 are subject to the exchange.The jurisdiction(s) with whom an exchange occurs will depend upon the type of Tax Ruling concluded.■ Intellectual Property box (IP-box) regime: Liechtenstein has

had an IP-box regime since 2011. The current regime was deemed not to comply with BEPS Action Point 5 insofar as the list of IP rights eligible for preferred taxation was rather wide (including, e.g. trademarks) and the provisions did not reflect the “nexus approach” required by the OECD. The tax regime has therefore been abolished with effect as of 01.01.2017. Grandfathering provisions until the calendar year 2020 apply for companies, which were already making use of this tax regime up to the end of 2016.

■ Transfer pricing documentation: Following BEPS Action Point 13, a duty to establish transfer pricing documentation on significant transactions with related persons has been introduced. The assessment of the transfer prices is to be made in accordance with the internationally recognised Transfer Pricing Rule, e.g. the OECD Transfer Price Guidelines for Multinational Enterprises and Tax Administrations.



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Sele Frommelt & Partners Attorneys at Law is one of the largest law firms in Liechtenstein. We have particular expertise in commercial, corporate and tax law. Many national and international players, both companies and individuals, put their trust in our competent and independent experts with years of experience. In our centres of excellence in tax law, corporate law, civil, administrative and constitutional law, real estate, financial markets, M&A and litigation, we provide extensive legal advice and represent our clients at all courts and authorities in Liechtenstein. Our actions are characterised by straightness, drive and efficiency. We think in generations – to the benefit of our clients.

Heinz Frommelt is a partner with Sele Frommelt & Partner Attorneys at Law Ltd. and of NSF Services Trust reg. Heinz Frommelt studied law at the University of Zurich, graduating in 1988 (Dr. iur.) and was admitted to the Bar in 1992. Heinz Frommelt acted as Minister of Justice in the Government of the Principality of Liechtenstein from 1997 to 2001. His practice focuses on tax planning and asset structuring, but also on banking, investment funds and insurance law. Heinz Frommelt publishes on a range of tax issues and is active in various think tanks. He is Secretary of the International Fiscal Association (IFA), Liechtenstein branch, a member of Liechtenstein Chamber of Lawyers, AIJA (International Association of Young Lawyers) and DACH Europäische Anwaltsvereinigung (European Lawyers’ Association).

Heinz FrommeltSele Frommelt & Partner Attorneys at Law Ltd.P.O. Box 1617, Meierhofstrasse 5 FL-9490 VaduzLiechtenstein

Tel: +423 237 11 55Email: [email protected]: www.sfpartner.li


Chapter 24

GSK Stockmann

Mathilde Ostertag

Katarzyna Chmiel

Luxembourg

parliament (Chambre des députés). The parliament’s approval takes the form of a law (loi d’approbation). After the aforementioned procedure is completed, the treaty will take effect once it is ratified by the Grand Duke. The treaty must then be published in the Mémorial in order to be in force in Luxembourg.Tax treaties signed by Luxembourg generally specify an exact date on which the treaty enters into force.


As a general rule, tax treaties concluded by Luxembourg do not include anti-treaty shopping rules. However, a limitation on benefits (“LOB”) clause is used in the treaties signed with i.a. Hong Kong, Poland, Senegal, Singapore, Trinidad and Tobago, and the USA. Interestingly, the new treaty signed with France contains a specific anti-treaty shopping rule in its new Article 28 (“Denial of benefits under the Convention”).In addition the MLI signed by Luxembourg contains a general anti-abuse provision in the preamble to all of its tax treaties, which includes the express statement to eliminate double taxation without creating opportunities for reduced taxation or non-taxation. Such provision is a minimum standard and cannot be opted out by any of the signatories to the MLI. In the context of Article 7 (prevention of treaty abuse) countries may choose to apply either the Principle Purpose Test (“PPT”) or the detailed LOB provisions. Like most of the signatories to the MLI, Luxembourg chose to apply the PPT.


Luxembourg applies the hierarchy of norms. The constitution is the highest source of law, followed by laws and regulations. It is worth noting that relationship between international law and domestic law is governed entirely by case law. Such established case law states that tax treaties incorporated into internal legislation by a ratification law should constitute a superior law. Therefore, if a conflict between the provisions of an international treaty and those of a national law occurs, international law should take precedence over the national law. Further to the above and under the general principles of Luxembourg public law, treaties are considered a “lex specialis” and therefore take precedence over the national provisions.



As at September 2018, Luxembourg has 83 tax treaties currently in force and an additional 12 under negotiation.In addition, Luxembourg was one of 68 jurisdictions that signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the “MLI”) during the signing ceremony held by the OECD in Paris on 7 June 2017. The Bill n° 7333 was submitted to the Luxembourg parliament on 3 July 2018. It is expected that the MLI will become effective for Luxembourg purposes in 2020.


Tax treaties concluded by Luxembourg are usually based on the OECD Model Tax Convention (the “OECD MC”). Luxembourg has agreed with most of the treaty countries to implement a provision on the exchange of information in line with Article 26 of the OECD MC. Although not yet ratified, the new tax treaty signed with France on 20 March 2018 reflects all the post-BEPS changes and the 2017 version of the OECD MC; inter alia, the treaty changes the definition of a permanent establishment to include commissionaire arrangements and restricts the scope of the “preparatory and auxiliary” activities. It further changes the distributive rules for payments of dividends, interest and royalties in line with the 2017 OECD MC. A few treaties signed by Luxembourg deviate from the OECD MC. A notable example is the treaty concluded with the USA which follows the US Model Income Tax Convention. A more recent example is the treaty signed with Senegal which more closely resembles the UN model.


All tax treaties are incorporated into domestic law pursuant to the following procedure: the legislator adopts a consenting law (loi d’adaptation) that authorises the Grand Duke to ratify the tax treaty. Before the treaty takes effect, it is submitted for approval by the


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Directive”). Such exemptions are granted i.a. in the context of financial services, fund management or medical services. An important point to highlight is that Luxembourg does not allow for an “opt in/opt out” mechanism for activities that are exempt, with the exception of rent, in which case the taxable person can choose to either apply VAT or not.


In accordance with EU VAT rules, companies registered for VAT can deduct input VAT to the extent it is linked with their output VATable economic activity. In the past a pro rata deduction was used based on the percentage of VATable and non-VATable activities. However, after the judgment of the Court of Justice of the European Union (the “CJEU”) in BLC Baumarkt GmbH & Co. KG (C-511/10) the VAT directive must be interpreted as allowing Member States to use a more accurate method than the one of the general pro rata. In Circular n° 765 of 15 May 2013, the Luxembourg VAT authorities referred to a direct allocation or another key allocation method. The general pro rata deduction should not be used if a more precise allocation method can be applied.As per the Circular n° 765-1 of 11 June 2018 the VAT tax administration extended the regime applicable in Circular n° 765 to persons carrying out both economic and non-economic activities for VAT purposes. The former Circular referred only to persons carrying out an economic activity partially exempt for VAT purposes.


In its judgment of 4 May 2017, the CJEU ruled that the Luxembourg implementation of the VAT group regime was not compatible with the VAT Directive, as it extended the benefits of the exemption to taxable activities that were not directly necessary for the exempt or out-of-scope activities of the VAT group. In the light of the above decision, Luxembourg has repealed its old regime and implemented a new VAT group regime as per the law of 6 August 2018 (in line with the Skandia case (C-7/13)). The new VAT group regime treats all of the transactions between its members as “out of the scope” of the VAT. One of the major differences between the new and the former regime is that the VAT group regime is restricted to persons established in Luxembourg and Luxembourg branches of foreign companies, whereas the former regime allowed for grouping with other Member States of the EU.


A fixed registration fee of €75 is due in some specific cases determined by law such as but not limited to: upon incorporation or subsequent capital increase and migration of a company to Luxembourg.


There are custom and excise duties applicable for certain goods.


According to Article 159 of the Luxembourg income tax law (“LITL”), an entity is treated as a resident of Luxembourg for direct tax purposes if it has (i) its registered office (siège statutaire) in Luxembourg, or (ii) its central administration (administration centrale, i.e. the place of effective management) located in Luxembourg.

2 Transaction Taxes


Under Luxembourg law, certain acts such as official acts, acts of estate agents and transfer of ownership of certain goods are required to be registered with the Luxembourg Administration de l’Enregistrement, des Domaines et de la TVA. Registration duties are fixed or proportional, depending on the nature of the acts and transfers that are subject to them. A fixed fee of €12 is levied on all acts which do not contain a movement of securities, while a proportional duty (ranging from 0.01% to 14.4% depending on the transaction and the nature of the underlying asset) is levied on acts and conventions involving a movement of securities.For instance, payment obligations are subject to a proportional 0.24% registration duty (which tax is calculated on the principal or highest amount stated in the document), if stated in a loan agreement physically attached to a deed subject to mandatory registration (such as a notarial deed).With regard to the transfer of real estate, the registration duty is of 6% (or 9% for Luxembourg City), increased by an additional transcription tax of 1%. Should the real estate property be acquired for resale, the registration duty is increased to 7.2% (10.8% for real estate located in Luxembourg City). A reduction of the registration duty is available in case of a resale within two to four years from the acquisition.In cases where Luxembourg real estate is contributed to a company (whether Luxembourg resident or foreign) against the issuance of shares, a reduced real estate transfer tax of 1.1% is due (or 1.4% for real estate located in Luxembourg city).


Luxembourg applies Value Added Tax (“VAT”) pursuant to the law of 12 February 1979 as amended (the “VAT Law”). Currently four rates are applicable: 17% standard rate; an intermediary rate of 14%; a reduced rate of 8%; and a super-reduced rate of 3%. Annexes A, B and C provide for a detailed list of services and goods that are subject to the reduced rates. Such Annexes are to be interpreted strictly.


Luxembourg as a Member State of the EU follows the partially harmonised VAT system and applies exemptions as prescribed for by the Council Directive 2006/112/EC, as amended (the “VAT


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those payments and possible application of a 15% WHT (subject to applicable tax treaty or participation exemption if applicable). Back-to-back financing is not subject to the abovementioned ratio.As of 1 January 2019, Luxembourg will introduce interest deduction limitation rules in its legislation (currently under the draft law n° 7318 submitted on 19 June 2018, implementing the ATAD 1 and i.a. introducing a new Article 168bis LITL). The interest limitation rule will be applicable to Luxembourg corporate taxpayers which are subject to CIT, as well as to permanent establishments of foreign companies. According to the draft law “financial undertakings”, “standalone entities”, as well as securitisation vehicles that are governed by Article 2(2) of the EU Regulation (2017/2402), are excluded from the scope of application of the rule thereto. Loans that were concluded before 17 June 2016 should as well be grandfathered (as long as the terms of the loans have not been modified since).


The only safe harbour rule is set out in the Circular n° 56/1-56bis/1 in relation to transfer pricing rules. The rule stipulates that for entities providing financial services to group companies and acting as a simple intermediary, a minimum return of 2% after tax is considered as a transaction performed at arm’s length. It should be noted that the safe harbour rule applies only at the level of the Luxembourg tax administration and other tax administrations may consider the transaction as not at arm’s length.


Debts guaranteed by a parent company (other than pledging the shares of the Luxembourg debtor to the creditor) are treated as a shareholder loan and as a result, in the absence of a transfer pricing report, the 85:15 debt-to-equity ratio will most likely be used.


If the interest payments are made not at arm’s length or are paid under a profit participating debt instrument, there is a risk of re-classification of the interest payments as dividend payment, with the tax consequences set above under question 3.4.


Luxembourg does not levy any WHT on property rental payments made to non-residents nor residents.


Luxembourg transfer pricing rules are embedded in the revised Article 56 LITL, which incorporates the concept of the arm’s length principle based on Article 9 OECD MC. The amended provision, however, goes further and reflects the spirit set out in BEPS actions 8–10 such as the concept of comparability analysis and a GAAR that allows the disregarding of a transaction that has been made without any valid commercial or business justification.



Dividends paid to residents as well as non-residents are in principle subject to a 15% withholding tax (“WHT”) in Luxembourg. It is possible, however, to benefit either from a reduced rate or an exemption under a double tax treaty or from the domestic participation exemption regime.Domestic participation exemption is granted if, at the time of the dividend distribution:■ the parent company is a Luxembourg fully taxable company,

or a resident company of a Member State of the EU as defined in Article 2 of the EU Parent-Subsidiary Directive 2011/96, as amended (the “PSD”), or a Swiss resident capital company that is subject to an income tax in Switzerland without being exempt from tax, or a foreign joint-stock company which is subject in its country of residence to an income tax regime corresponding to the Luxembourg corporate income tax (“CIT”);

■ said company holds or commits to hold a participation of at least 10% (or with an acquisition price of at least €1.2 million) in the nominal share capital of the distributing company; and

■ such qualifying participation has been held for an uninterrupted period of at least 12 months.

If the shareholder is an EU company within the scope of the PSD, the exemption applies subject to the additional general anti-abuse rule (“GAAR”) below:■ the EU parent company is not used for the main purpose or

as one of the main purposes of obtaining a tax advantage that defeats the object of the PSD.

Liquidation proceeds are not subject to dividend WHT. If properly structured a partial liquidation may as well not be subject to the WHT. In addition dividend payments made by certain type of vehicles, e.g. SPFs, SICAV, SICAR and securitisation vehicles are not subject to WHT.


There has been no WHT on royalties in Luxembourg since 1 January 2004.


There is no WHT on arm’s length interest payments in Luxembourg. Interest paid under certain hybrid instruments or not at arm’s length may be subject to a 15% WHT if reclassified as dividend payments by the tax authorities.


There is currently no legislation concerning the thin capitalisation ratio specifically but, in practice, the tax administration uses a debt-to-equity ratio of 85:15 for the intra-group financing of participations. In case a taxpayer fails to comply with this ratio, the surplus of interest may be requalified as a hidden dividend distribution. Such requalification would result in a lack of deductibility for


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Luxembourg allows a group of companies to apply a fiscal unity (or tax consolidation). Under such regime, the respective taxable profits of each company in the consolidated group are pooled or offset to be taxed on the aggregate amount, which means that the group is effectively treated as a single taxpayer.Generally, the conditions to qualify for a fiscal unity are as follows:■ each company that is part of the tax unity is a Luxembourg

resident fully taxable company (the top entity may be a Luxembourg permanent establishment of a fully taxable non-resident company) (the “Eligible Company”);

■ at least 95% of each subsidiary’s capital is directly or indirectly held by an Eligible Company;

■ each company’s fiscal year starts and ends on the same date; and

■ the fiscal unity is applied for at least five financial years.The taxable income/loss of the fiscal unity is calculated as the sum of the taxable income/loss of each constitutive entity. The vertical fiscal unity regime has been extended since 1 January 2016 in accordance with the CJEU case law in particular to allow horizontal integrations. Eligible Companies (at least two Luxembourg companies) that are held by a common parent established in any EEA country and subject to tax comparable to Luxembourg’s CIT in its country of residence are now also permitted to form a fiscal unity. Companies consolidated for CIT are also automatically consolidated for MBT. However, there is no tax consolidation for net wealth tax (“NWT”) purposes.Securitisation entities and venture capital companies are excluded from the possibility to form a fiscal unity in order to prevent tax evasion schemes.


Companies resident in Luxembourg can carry forward their losses for 17 years for financial losses realised as from the financial year closing after 31 December 2016 (before that, tax losses could be carried forward indefinitely; losses incurred between 1 January 1991 and 31 December 2016 are, however, grandfathered in) and offset them against any future profits if the following conditions are met cumulatively:■ the losses have not already been offset;■ the company has maintained proper accounting in the loss-

making period; and■ the losses are offset by the company that incurred them.Based on Luxembourg case law, companies should have a right to carry forward tax losses in case of change of ownership, unless an abuse of law has been established. Such condition should be interpreted in the meaning of corporate law and not solely on economic rationale. The right to offset the losses based on the hereinabove conditions should only be interpreted in light of the definition of a company based on corporate law. As a consequence, amendments to articles of association relating to sale of shares of the company do not lead to the creation of a new legal entity and hence do not prohibit that entity from the carrying forward of losses. However, application of the tax carry forward may be denied if the transaction occurred purely for tax reasons; the so-called “Mantelkauf ” theory.It should be noted that the tax losses may be offset against CIT and MBT but not against NWT.

On 27 December 2016, the Luxembourg tax authorities issued the Circular n° 56/1-56bis/1 which has reshaped the transfer pricing framework for companies carrying out intra-group financing activities in Luxembourg. The Circular provided additional guidance in terms of substance and transfer pricing requirements in line with the OECD Guidelines. In particular, it provided substantial details on how to conduct the comparability and functional analyses in a way consistent with the OECD principles. Furthermore, the Circular requires the performance of a comprehensive risk analysis in order to determine the adequate level of equity capital.



Luxembourg levies CIT on the annual net worldwide profits of Luxembourg resident companies and on source-based profits of non-resident companies. Income exceeding €30,000 is taxed at a rate of 18%. In addition a 7% solidarity surcharge for the employment fund and a 6.75% municipal business tax (“MBT”) for companies registered in Luxembourg City are levied. For companies located outside of the Luxembourg City a different rate of MBT may apply. The above amounts to an aggregate tax rate for Luxembourg-City domiciled companies of 26.01%.It is worth noting that in the past (from 1 January 2011 up until 31 December 2015) companies were subject to a minimum CIT in the amount of €3,210. However, since that provision was rendered as incompatible with the EU PSD, Luxembourg abolished minimum CIT and introduced a minimum net wealth tax as of 1 January 2016 which amounts to €4,815.


As a general rule, companies in Luxembourg follow Luxembourg general accounting principles (“LuxGAAP”) under which both upward and downward adjustments are allowed.


Profits in the commercial accounts differ from the taxable profits mainly for the following reasons:■ tax-exempt profits (e.g. as per the participation exemption

regime applicable for dividends and capital gains);■ add-back expenses (e.g. interest expenses on assets generating

tax-exempt income);■ adjustment to the tax results from the transactions that were

not at arm’s length (e.g. the interest rate set was not at market conditions, or interest payments were reclassified as hidden dividend distribution and hence not tax deductible anymore); and

■ discrepancies between the application of different valuation rules in accounting and in tax (e.g. amortisation, rollover relief).

Under certain conditions a tax balance sheet may be prepared in a way which deviates from the statutory accounts.


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Yes, Article 54 LITL provides for a reinvestment relief if fixed assets consisting of a building or non-depreciable assets are disposed of during the course of operations, provided that certain conditions are met. The purpose of this article is that the profit on the disposal of assets should not be taxed if the funds released are retained in the business and will be used to invest in other capital assets.


Luxembourg does not impose WHT on the sale of a direct or indirect interest in local assets/shares as such profits are taxed as capital gains.



A €75 registration duty is due upon formation of a subsidiary; the same duty is paid in case its articles of association are amended.


Branch is a corporate law term; therefore the classification of an entity/activities as a branch is not imperative for the determination of its tax treatment. Instead tax law uses the term of permanent establishment to determine whether an entity is taxable in Luxembourg.Branches and subsidiaries fall under the same tax regime. In addition all transactions between the head office and the branch are disregarded for tax purposes, e.g. there is no WHT on any payments.


In principle, Luxembourg branches of foreign companies should be taxed the same way as resident companies (subject to the provisions of a relevant tax treaty) with the exception that transactions between a branch and a head office are disregarded.


It depends on the domestic law of the jurisdiction where the head office is located and the applicable double tax treaty. However, as a general rule, a permanent establishment is not considered as a resident under a tax treaty and cannot claim the benefits of such treaty on its own.


No, transactions between the branch and the head office are not subject to WHT or any similar tax.


Luxembourg taxes retain and distribute profits in the same manner. However, distributed profits may be subject to withholding tax unless a domestic or treaty exemption applies. It should also be noted that undistributed profits might also be subject to NWT.


Yes, Luxembourg levies net wealth tax (“NWT”) on Luxembourg corporate tax residents. NWT is assessed on 1 January of each year on the basis of the estimated realisable value of the company’s net operating assets (total assets minus total liabilities, the so-called unitary value). There is a possibility of reduction of the NWT up to the CIT paid for the previous fiscal year. NWT of 0.5% is levied on the unitary value of up to €500 million (inclusive) and 0.05% for the unitary value exceeding this threshold. A minimum NWT of €4,815 is due by Luxembourg corporate taxpayers holding financial assets representing at least 90% of their total assets and having a balance sheet exceeding €350,000.Exemptions are available for securitisation vehicles, SICARs, SEPCAVs, ASSEPs, and RAIFs that invest exclusively into risk capital-related securities – which only pay the minimum flat NWT of €4,815. A Luxembourg resident company can also benefit from a NWT exemption on qualifying participations under the same conditions applicable for the participation exemption on dividend income, except that no minimum holding period is required.

5 Capital Gains


In principle capital gains arising from the sale of assets are treated as ordinary income and taxed as such, unless participation exemption as specified in question 5.2 below applies.


Capital gains exemption is available under the following conditions:At the time the capital gains are realised: ■ the Luxembourg company has held a direct participation

representing at least 10% of the nominal paid-up share capital of its subsidiary (or if below 10%, a direct participation having an acquisition price of at least € 6 million);

■ it has held such qualifying participation for an uninterrupted period of at least 12 months; and

■ the subsidiary entity is (i) a Luxembourg resident entity fully subject to Luxembourg income taxes, or (ii) a non-resident capital company liable for an income tax in its country of residence comparable to the Luxembourg CIT, or (iii) an entity resident in a Member State of the European Union (as defined in Article 2 of the PSD).

It is important to note that the GAAR does not apply to capital gains deriving from qualifying subsidiaries benefitting from the Luxembourg participation exemption, regardless of their location.


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Yes, non-residents are subject to capital gains tax upon disposal of a real estate located in Luxembourg as per domestic law. Such position might be overruled under double tax treaties signed with Luxembourg.


Luxembourg does not impose such tax unless the sale is done by a tax transparent entity from a Luxembourg point of view; then the non-resident company directly above the tax transparent entity is taxable on capital gains realised on the sale of the real estate in question.


No, Luxembourg does not have any special tax regime for REITs.



Luxembourg has implemented the provisions of the Directive 2014/86/EC of 8 July 2014 amending the PSD introducing a GAAR on the participation exemption regime. The rule denies the benefits of the PSD to an arrangement, or series of arrangements, which have been effected for the main purpose, or one of the main purposes, of achieving a tax advantage that defeats the object or purpose of the PSD, and is/are not commercially genuine having regard to all relevant facts and circumstances. An arrangement is considered as not genuine if it has not been put into place for valid commercial reasons which reflect economic reality. In light of the implementation of the GAAR rule as prescribed by ATAD 1, the draft law n° 7318 will replace the existing abuse of law provision with the harmonised GAAR. Such provision reproduces mutatis mutandis the GAAR deriving from the amended PSD. However, one shall remember that the GAAR is still subject to EU law and its interpretation by the CJEU. In this context the CJEU Cadbury Schweppes case-law and the notion of wholly artificial arrangements should be taken into account when applying the GAAR.


In accordance with DAC 6 (the fifth amendment to the Directive 2011/16/EU as regards to mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements), cross-border arrangements indicating a potential risk of tax avoidance should be disclosed to the tax

7 Overseas Profits


As a general rule, in the absence of a double tax treaty, profits realised by an overseas branch would be included in the taxable basis of the Luxembourg head office (as it is taxed on its worldwide income). However, within the framework of double tax treaties, Luxembourg generally exempts profit of a permanent establishment which are taxed in the other Contracting State. It should be noted that profits of an overseas branch would not be subject to MBT, as this tax is applicable to commercial activities carried on in Luxembourg only.


Yes, all dividends received from abroad are calculated in the taxable profits of a company. Such income might be exempt under the applicable tax treaty or the domestic participation exemption.Under the domestic participation exemption, dividend income (and liquidation proceeds) is exempt if, at the time the income is put at the disposal of the taxpayer: ■ the subsidiary entity is (i) a Luxembourg resident entity fully

subject to Luxembourg income taxes, (ii) an entity resident in a Member State of the European Union (as defined in Article 2 of the PSD), or (iii) a non-resident capital company liable to an income tax in its country of residence comparable to the Luxembourg CIT;

■ the Luxembourg company holds a direct participation representing at least 10% of the nominal paid-up share capital of its subsidiary (or if below 10%, a direct participation having an acquisition price of at least €1.2 million); and

■ it has held (or commits itself to hold) such qualifying participation for an uninterrupted period of at least 12 months.

If the dividends are distributed by an EU subsidiary which is listed in Article 2 of the PSD, the exemption applies subject to the two additional conditions below:■ the EU subsidiary is not used for the main purpose or as one

of the main purposes of obtaining a tax advantage that defeats the object of the PSD (GAAR); and

■ the dividend/profit distribution from the EU subsidiary have not been deducted from its taxable base (anti-hybrid rule).


Based on the aforementioned draft law n° 7318 transposing ATAD 1, Luxembourg will introduce CFC rules. The ATAD 1 CFC rules are the mere implementation of BEPS Action 3. In a nutshell, the CFC rule redistributes income of a 50% owned direct or indirect foreign subsidiary or permanent establishment to Luxembourg (i.e. the jurisdiction of the controlling entity), in cases where the actual corporate tax paid on that subsidiary’s or permanent establishment’s profits is lower than half the CIT that would have been paid in Luxembourg. The rule, however, excludes Luxembourg MBT from the scope of the CFC provisions.


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would go beyond othe recommendations of the BEPs report. The interesting exception to that is the introduction of the mandatory binding arbitration, which is not required under the MLI instrument. Also, it is worth noting that the Luxembourg law on transfer pricing expressly makes reference to the OECD transfer pricing guidelines, when interpreting the law.


Yes, Luxembourg has transposed the EU Directive 2016/881 concerning automatic and mandatory exchange of tax information by the law of 23 December 2016 concerning the CbCR. The law requires the annual filing of a CbCR declaration by every ultimate parent company residing in Luxembourg for tax purposes (or a designated reporting entity). The CbCR must be filed within 12 months from the last day of the fiscal year in question. There is also an obligation to submit a notification stating whether the entity is either the ultimate parent of the group, a substitute parent or the designated reporting entity, and if it performs none of these functions, the notification shall clearly state the identity and fiscal residence of the reporting group entity no later than on the last day of the fiscal year of the group. The notification is submitted electronically.


Yes, the law dated 22 March 2018 replaced the IP box regime that was abolished in 2016. It introduced a new Article 50ter LITL that provides for an 80% exemption on income derived from the commercialisation of certain intellectual property (“IP”) rights, as well as a full exemption from NWT. The new rules are applicable as from the fiscal year 2018. Qualifying assets include the following IP rights:■ patents (broadly defined) and functionally equivalent rights

that are legally protected by utility models, extensions of patent protection for certain drugs and phyto-pharmaceutical products, plant breeder’s rights, and orphan drug designations; and

■ copyrighted software.In line with the BEPS – Action 5 recommendations, marketing-related IPs can no longer benefit from the IP box regime.Qualifying income includes the following:■ income derived from the use of, or a concession to use,

qualifying IP rights (i.e. royalty income);■ IP income embedded in the sales price of products or services

directly related to the eligible IP asset. The principles of Article 56bis ITL must be used to separate income unrelated to the IP (e.g. marketing and manufacturing returns);

■ capital gains derived from the sale of the qualifying IP rights; and

■ indemnities based on an arbitration ruling or a court decision directly linked to a breach of a qualifying IP right.

The regime applies on a net income basis, meaning that expenses relating to the qualifying IP assets need to be deducted from the gross qualifying income. The proportion of qualifying net income entitled to the benefits will be determined based on the ratio of qualifying expenditures and overall expenditures (nexus ratio). The previously-qualifying IP assets can continue to benefit from the old regime during the grandfathering period, running until 30 June 2021.


authorities. The directive entered into force on 25 June 2018 and must be introduced into national law by 31 December 2019.


According to DAC 6, intermediaries, i.e. persons who design, market, organise or make the arrangement available for implementation, are responsible for filing the information on reportable cross-border arrangements to the tax authorities. National law may give the intermediary the right to a waiver from filing information if the reporting obligation would breach the legal professional privilege. For example, lawyers have a legal obligation to maintain professional secrecy under the Luxembourg Criminal Code.


A corporate entity may approach the tax administration and request an advance tax ruling, which constitutes a binding agreement with the tax authorities and a confirmation of the tax treatment.



Luxembourg implemented many changes to align its law with the BEPS Action Plan:■ Action 1: implementation of EU VAT directive addressing

VAT on business to customer’s digital services.■ Actions 2–4: implementation of ATAD that addresses CFCs

and interest deduction limitation rules, with effect as of 1 January 2019 (hybrid rules are to be implemented by 1 January 2020).

■ Action 5: Luxembourg introduced a BEPS-compliant new IP box regime as of the fiscal year starting in 2018.

■ Actions 8–10: introduction of the new Article 56bis to the LITL (please refer to question 3.9 above).

■ Action 12: as per the introduction into domestic law of DAC 6 (please refer to question 9.2 above).

■ Action 13: transfer pricing documentation as requested by the new transfer pricing rules (please refer to question 3.9 above); country-by-country reporting (“CbCR”) which is applicable in Luxembourg for financial years starting on or after 1 January 2016.

■ Action 14: Luxembourg chose to opt for mandatory arbitration under the MLI.

■ Action 15: Luxembourg signed the MLI.


No, Luxembourg is implementing all the mandatory measures which derive from the EU parliament initiative. However, as a competitive jurisdiction it does not plan to impose measures that


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GSK Stockmann is a leading, independent business law firm with international reach and offices in Berlin, Frankfurt am Main, Hamburg, Heidelberg, Munich and Luxembourg.

We advise international and domestic clients across a wide range of areas in relation to Corporate/M&A, Private Equity, Investment Funds, Tax, Capital Markets and Banking and Finance.

GSK Stockmann is the trusted advisor of leading financial institutions, asset managers, private equity houses, insurance companies, corporates and innovative FinTech and start-up companies, having both a local and global reach. GSK Stockmann thrives to provide the highest quality legal advice and responsiveness combined with a pragmatic approach to the transactions. Solution driven, we tailor our services to the exact business needs of our clients. Teamwork is one of our core values, as is respect, solidarity and integrity. This combination ensures that we work efficiently for the benefit of our clients.

Mathilde Ostertag heads the tax practice at GSK Stockmann in Luxembourg. She practised within a Benelux and an international law firm in Luxembourg for the past nine years prior to joining GSK Stockmann (Luxembourg bar, 2008). Her areas of expertise include domestic and international tax law, in particular tax planning, private equity, real estate, start-ups and other foreign investment structures. She also has in-depth knowledge on capital market transactions, cross-border restructurings, i.a. inbound and outbound migrations, mergers and acquisitions and debt restructuring. Mathilde holds a Master’s degree from the Université Robert Schuman, Strasbourg and a postgraduate degree in Corporate and Tax Law (DJCE).

Mathilde is a board member of the Ladies in Law Luxembourg Association (“LILLA”) which aims at actively promoting gender diversity and women in senior positions in the legal sector. She is also a member of the International Fiscal Association (“IFA”) and the International Bar Association (“IBA”); she publishes regularly.

Mathilde is fluent in French, English, German and Portuguese.

Web: https://www.gsk.de/en/person/en.mathilde.ostertag.

Mathilde Ostertag GSK Stockmann44, Avenue John F. KennedyL-1855Luxembourg

Tel: +352 2718 0200Email: [email protected]: www.gsk-lux.com

Katarzyna Chmiel is an Associate at GSK Stockmann in Luxembourg. She graduated from Maastricht University with an LL.B. (“European Law School”) and an LL.M. in International and European Tax Law. Prior to joining GSK Stockmann Katarzyna gained experience in BIG 4 advisory firms in Luxembourg and Poland and completed a traineeship at the European Parliament in Brussels.

Practice areas of Katarzyna include international and European tax law, domestic Luxembourg taxation, tax planning and restructuring. She is passionate about the taxation of sharing economy and virtual property.

Katarzyna is a member of the International Fiscal Association (“IFA”) and speaks English, Polish, and French.

Web: https://www.gsk.de/en/person/en.katarzyna.chmiel.

Katarzyna Chmiel GSK Stockmann44, Avenue John F. KennedyL-1855Luxembourg

Tel: +352 2718 0200Email: [email protected]: www.gsk-lux.com


Luxembourg does not support the digital service tax to be implemented only on the EU level as it may hurt its competitiveness. However, it believes that such tax should be consulted with the USA and accepted on the OECD level. During his state visit to France, Luxembourg finance minister Pierre Gramegna said that Luxembourg was in favour of taxation of digital giants. However, he said that the initiative “alone”, without the consensus of the OECD countries (or G20) could harm the European Union. Luxembourg’s finance minister believes that Europe should consult with the USA before going ahead with any taxation plans on large digital firms like Google. European authorities have said that the United States has demonstrated willingness to discuss the issue. Gramegna added that there is a “consensus inside the European Union that we need to find a new model to address the issue of digital economy”.




No, as any digital service tax would be detrimental to the fiscal politics of Luxembourg.It is worth noting that the Luxembourg VAT Authorities issued Circular n° 787 of 11 June 2018 to extend the VAT exemption applicable to financial transactions to virtual currencies (which follows the CJEU’s position in the Hedqvist case (C-264/14)). Concurrently therewith, the Luxembourg direct tax administration issued Circular n° 14/5-99/3-99bis/3 of 26 July 2018 which classifies virtual currencies as intangible assets for CIT, MBT and NTW rather than a currency. It is an interesting point to note that both tax administrations have a diverging interpretation on the assessment of cryptocurrencies.


Chapter 25

Wong & Partners Yvonne Beh

Malaysia


Under Malaysian law, the test to determine the tax residence of a company is based on the “control and management” test. A company carrying on a business is resident in Malaysia for a year of assessment if at any time during that year, the management and control of its business is exercised in Malaysia.

2 Transaction Taxes


Yes, stamp duty is imposed on instruments identified in the Stamp Act. The rate of stamp duty will depend on the type of instrument, and may be a fixed rate or an ad valorem rate. Stamp duty relief may be available in limited circumstances, e.g., for the transfer of property between associated companies.


Effective from 1 September 2018, the goods and services tax (“GST”) regime was repealed and replaced with a new sales tax and service tax framework.Sales tax is chargeable on the manufacture of taxable goods in Malaysia and the importation of taxable goods into Malaysia, at the rate of either 5% or 10% or a specified rate depending on the category of taxable goods.Service tax is imposed at 6% on the provision of taxable services by a registered person in the course or furtherance of a business in Malaysia. The scope of taxable services include, among others, the provision of accommodation services, food and beverage preparation services, consultancy and management services, courier services, information technology (“IT”) services and advertising services.


Malaysian sales tax is generally imposed on all goods manufactured in or imported into Malaysia, unless specifically exempted. Exemptions may be granted by way of a statutory order to exempt (i) any goods or class of goods from sales tax, or (ii) any persons or



As of 5 September 2018, Malaysia has treaties in effect with approximately 77 countries. However, the treaties with Argentina and the United States of America are of limited application, and only apply to profits from shipping and air transport undertakings.Malaysia has also concluded Tax Information Exchange Agreements with a number of countries, such as the United Kingdom, Qatar and South Africa.Malaysia is a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”). Malaysia has yet to complete its domestic ratification process, and it is anticipated that the MLI for Malaysia will enter into force in the latter part of 2019.


Malaysia’s income tax treaties generally follow the OECD Model Convention.


Yes. A treaty will take effect domestically once it has been ratified and the effective date has been declared by way of a statutory order.


No, there are generally no specific anti-treaty shopping provisions in the treaties.


No. Domestic legislation and case law stipulate that where there is conflict between the provisions of a treaty and the provisions in domestic tax legislation, the treaty provision will take precedence and prevail over domestic law.


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Wong & Partners Malaysia


Yes, withholding tax is applicable on royalties paid by a Malaysian company to a non-resident at the domestic rate of 10%, subject to reduction under an applicable double tax treaty. The term “royalty” is broadly defined in domestic tax legislation and includes any sums paid in consideration for, or derived from the use of, or the right to use in respect of any copyrights, software, designs or models or other like property or rights.


Yes, withholding tax is applicable on interest paid by a Malaysian company to non-residents at the domestic rate of 15%, subject to reduction under an applicable double tax treaty.There are certain circumstances in which interest income derived by non-residents is exempt from withholding tax. For example, interest paid or credited to a non-resident in respect of securities issued by the Malaysian Government is exempted from withholding tax.


Initial proposals to introduce thin capitalisation rules in Malaysia have been scrapped, and it is now proposed that Earning Stripping Rules (“ESR”) will be introduced. Under the proposed ESR, an entity’s deduction for interest expenses will be limited to a percentage of its earnings before interest, taxes, depreciation and amortisation based on a fixed ratio rule. It is expected that the final form of the ESR legislation will be made available in November 2018, and will take effect from 1 January 2019 onwards.


This is not applicable to Malaysia as there are no thin capitalisation rules in Malaysia.


This will depend on the final form of the ESR legislation which is expected to be made available in November 2018.


Generally, Malaysian companies will be entitled to take a deduction on interest payments made to a non-resident with respect to borrowing employed in the production of gross income or laid out on assets used or held for the production of gross income. However, the Malaysian company will not be entitled to take a tax deduction on the interest payments if the withholding tax (where applicable) chargeable on the interest payments has not been paid.

class of persons from the payment of sales tax. For example, most raw food items and medicine are currently exempted from sales tax. Persons exempted from the payment of sales tax include the Federal and State Governments. Separately, any person may also apply to the Minister of Finance for a specific exemption from sales tax. Malaysian service tax is only imposed on specific services identified as taxable services. Further, certain services provided between companies in the same group of companies are not treated as taxable services, subject to the fulfilment of certain conditions.


No. There is no input tax credit mechanism under the sales tax and service tax regime. Sales tax and service tax is therefore generally not recoverable, save for sales tax drawback mechanisms which allow a person to claim a drawback for sales tax paid on taxable goods which are subsequently exported out of Malaysia or for goods which are imported to be used in the manufacturing process.


No. Group registration is not permitted under the sales tax and service tax regime.


Real property transactions may potentially be subject to real property gains tax (“RPGT”). Malaysia imposes RPGT on chargeable gains realised from the disposal of real properties or shares in real property companies (“RPC”). An RPC is a controlled company which owns land with a defined value of not less than 75% of its total tangible assets. Capital gains on the disposal of shares in RPCs will be subject to tax in the same way as capital gains on the disposal of land.The applicable RPGT rates are set out in questions 8.1 and 8.2 below.


Import and excise duties may be imposed on the movement of goods into or out of Malaysia. Import duties are levied on a wide variety of goods imported into Malaysia, whereas export duties are levied on a very limited category of products (e.g., crude petroleum, palm oil). Excise duties are imposed on certain goods which are imported into Malaysia or manufactured in Malaysia (for, e.g., cars, alcoholic beverages, cigarettes and certain articles such as casino accessories and billiards).



No, dividends distributed by a Malaysian resident company to a non-resident shareholder are not subject to Malaysian withholding tax.


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qualifying conditions set out in the domestic tax legislation. The tax grouping rules only apply if the transferor and transferee companies are related companies (as defined), resident in Malaysia and incorporated in Malaysia for the relevant year of assessment.


Generally, tax losses can be carried forward indefinitely. However, from the year of assessment 2006 onwards, the accumulated tax losses of a company will not be allowed to be carried forward if there has been a substantial change in the shareholders of the company, i.e., a change of more than 50% of the shareholders of the company. However, the Ministry of Finance subsequently issued an exemption from the “substantial shareholder” requirements, which allowed tax losses to be carried forward even if there has been a substantial change in shareholders, except for dormant companies. The exemption will continue to be in force until otherwise revoked.


No. Malaysian income tax is imposed on profits, regardless of whether they are retained or distributed.


Other taxes which may be imposed include quit rent and assessment tax relating to real property. Assessment tax is payable on a half-yearly basis based on the value of the property. Quit rent is payable to the local state government on an annual basis with respect to alienated land in Malaysia.

5 Capital Gains


Malaysia does not impose tax on capital gains, except for RPGT with respect to gains arising from the disposal or real property or shares in RPCs. Please refer to section 8 below regarding the imposition of RPGT.


This is not applicable in Malaysia.


This is not applicable in Malaysia.


Generally, no. However, RPGT may be imposed on gains arising from the sale of shares in an RPC, i.e., a company whereby 75% or more of its total tangible assets consist of real property. Where RPGT is applicable, the purchaser of the RPC shares is required to


No, there is no such tax.


Yes. The domestic tax legislation contains specific transfer pricing provisions which govern transactions between associated companies and require such transactions to be conducted on an arm’s length basis. The Director-General of Inland Revenue may make adjustments or disregard certain transactions as necessary if he has reason to believe that any property or services provided between associated persons have not been supplied at an arm’s length price.There are also specific rules which came into effect on 1 January 2009, which require the preparation of contemporaneous transfer pricing documentation for controlled transactions between associated persons. To complement these rules, the Malaysian Inland Revenue Board (“IRB”) also issued transfer pricing guidelines to provide taxpayers with further guidance on the (i) administrative requirements in preparing transfer pricing documentation, and (ii) application of transfer pricing methodologies to related party transactions.



The income tax rate for resident and non-resident companies in Malaysia is 24% from the year of assessment 2016 onwards. For the years of assessment 2017 and 2018, companies incorporated under the Companies Act 2016 will be eligible for a reduction between 1% and 4% on the standard tax rate for a portion of their income, if there is an increase of 5% or more in the company’s chargeable income compared to the immediately preceding year of assessment.


The chargeable income that is subject to tax comprises of the gross income, less permitted deductions.


A company is permitted to take deductions for expenses incurred wholly and exclusively incurred in the production of income. Other adjustments which would be made in arriving at the chargeable income subject to tax include:(i) capital allowances;(ii) reinvestment allowances;(iii) approved donations; and(iv) losses carried forward from prior years.


Yes. A Malaysian company may transfer up to 70% of its current year losses to one or more related companies, subject to certain


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No. Malaysian withholding tax would not be imposed on the remittance of profits by the local branch in Malaysia to the non-resident company.

7 Overseas Profits


Generally, only Malaysian-sourced income (i.e., income derived from or accrued in Malaysia) will be subject to Malaysian income tax. Profits earned in overseas branches are only taxed in Malaysia to the extent that the profits are derived from or accrued in Malaysia.The income received in Malaysia from outside Malaysia is exempted from Malaysian income tax, save for the income of a resident person carrying on the business of banking, insurance, sea transport or air transport.


No, dividends distributed by a non-resident company to a local Malaysian company would generally be regarded as foreign-sourced income, which is not taxable in Malaysia.


No, Malaysia does not have any such rules.



Yes. RPGT is chargeable on gains derived by non-residents from the disposal of real property in Malaysia. Real property gains tax is imposed at the rate of 30% for disposals made by a company within three years from the date of acquisition, 20% for disposals made in the fourth year from the date of acquisition, 15% for disposals made in the fifth year from the date of acquisition and at the rate of 5% for disposals made in the sixth year onwards, from the date of acquisition.


Yes. Real property gains tax is also chargeable on gains derived from the disposal of RPCs. A company is regarded as a real property company if it is a controlled company and 75% or more of the value of its total tangible assets comprises of real property or shares in

withhold 3% of the cash consideration payable to the seller, and remit the sum to the Malaysian Inland Revenue Board within 60 days from the date of acquisition.



Malaysia does not impose taxes on the formation of a subsidiary incorporated in Malaysia. The execution of some statutory documents relating to the incorporation process may be subject to stamp duty, such as the memorandum of association of the company. There are also some administrative charges imposed by the Companies Commission of Malaysia for the incorporation of a company in Malaysia.


In Malaysia, a local branch of a non-resident company and a local subsidiary would be subject to corporate tax at the same rate of 24% (for years of assessment 2016 onwards) with respect to Malaysian-sourced income. However, there are some distinctions in the tax treatment of a branch and a subsidiary. For example, a local subsidiary may potentially avail itself of tax incentives under the Promotion of Investments Act 1986 and Income Tax Act 1967, but a local branch of a non-resident company generally would not qualify for such benefits. Further, a local branch of a non-resident company is generally regarded as a non-resident for Malaysia tax purposes since management and control are exercised outside Malaysia, and accordingly certain payments (e.g., interest, royalties, service fees) paid by a Malaysian payor to the local branch would be subject to Malaysian withholding tax.Malaysia does not impose branch profits tax on the branch remittances by the local branch in Malaysia to its non-resident head office.


The branch of the non-resident company will be taxed on income accrued in or derived from Malaysia. The calculation of the chargeable income which will be subject to income tax is similar to the calculation applied for local subsidiaries.


The branch of a foreign company generally would not be treated as a Malaysian tax resident since management and control are exercised outside Malaysia, and accordingly would not be able to benefit from the relief afforded under Malaysia’s tax treaties with a third country.


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Yes, the Malaysian tax authority encourages voluntary disclosures by taxpayers. Under the tax audit framework, reduced penalty rates will be offered in instances where a taxpayer makes a voluntary disclosure of instances of non-compliance with the income tax legislation.



Yes. Malaysia has introduced legislation for the implementation of the country-by-country reporting requirements recommended under BEPS Action 13. The three-tiered approach comprising the filing of the master file, local file and country-by-country report has been incorporated into the Malaysian tax legislation. Malaysia is also considering proposals to introduce new legislation to adopt the BEPS Action 4 recommendations relating to the limitation of an entity’s deduction for interest expenses to a percentage of its income before interest, taxes, depreciation and amortisation. The new legislation is expected to be published in November 2018 and come into force on 1 January 2019.


There is no proposed legislation at this current time to tackle BEPS which goes beyond the recommendations in the BEPS reports.


Yes, Malaysia signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports in January 2016. The CBCR rules came into force in Malaysia on 1 January 2017. The rules apply to a multinational corporation group which has: (i) cross-border transactions between its constituent entities; (ii) a total consolidated group revenue of at least MYR 3 billion in the preceding financial year; (iii) its ultimate holding company incorporated and resident in Malaysia; and (iv) its constituent entities incorporated in Malaysia or outside Malaysia and resident in Malaysia.


No, Malaysia’s tax incentive regime does not include a preferential regime such as a patent box. However, there are certain incentives in Malaysia which are available for research and development activities.

other RPCs. Real property gains tax is imposed at the rate of 30% for disposals made by a company within three years from the date of acquisition, 20% for disposals made in the fourth year from the date of acquisition, 15% for disposals made in the fifth year from the date of acquisition and at the rate of 5% for disposals made in the sixth year onwards from the date of acquisition.


Yes, there is special tax treatment for REITs under the Malaysian Income Tax Act 1967.If a REIT distributes 90% or more of its total income in a year of assessment to its unit holders, the total income of the REIT for that year of assessment will be exempted from corporate income tax.Further, the rental income earned by a REIT from the letting of property will be treated as business income of the REIT, and the amount of deductible expenses that can be claimed by a REIT in a year of assessment is restricted to the gross income from the letting of properties in that year of assessment.



Yes, Malaysia has a general anti-avoidance rule in Section 140 of the Malaysian Income Tax Act 1967. The anti-avoidance rule applies to any transaction which has the direct or indirect effect of: (i) altering the incidence of tax which would otherwise have been payable; (ii) relieving any person from any liability which would have arisen to pay tax or to make a tax return; (iii) evading or avoiding any duty or liability imposed under the Income Tax Act 1967; or (iv) hindering or preventing the operation of the Income Tax Act 1967 in any respect. If the Director General of Inland Revenue has reason to believe that any of the above-mentioned transactions have occurred, he may disregard or vary the transaction and make such adjustments as he deems fit with a view to counteracting the whole or any part of the effect of the transaction.


No. Malaysian tax law currently does not impose any requirements to make disclosures of avoidance schemes.


No, there are no specific rules targeting persons who promote, enable or facilitate tax avoidance. However, in tax evasion cases, any person who assists in or advises on the preparation of tax returns where the return results in an understatement of tax liability may be guilty of an offence unless he satisfies the court that the assistance or advice was given with reasonable care.


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Wong & Partners is a Malaysian law firm dedicated to providing solution-oriented legal services to its clients. As a member firm of Baker McKenzie International, we bring a unique combination of local knowledge and global experience to every matter. Since its establishment in 1998, Wong & Partners has grown steadily and now consists of 19 partners and more than 50 associates. The Firm’s lawyers are able to deliver comprehensive and integrated advice to clients, and are trusted by respected domestic and multinational corporations for their needs in Malaysia and throughout Asia. The Firm’s lawyers are committed to helping clients apply industry-specific, innovative and practical solutions.

Yvonne is a partner with 14 years of experience, and leads the Indirect Tax sub-practice of the Tax, Trade and Wealth Management Practice Group in Wong & Partners. Her practice includes advising international and local clients on tax issues spanning across M&A, indirect taxes (sales and service tax and GST), transfer taxes, tax controversies, transfer pricing, stamp duties, real property gains tax, foreign direct investment and cross-border tax planning issues.

Some of her industry accolades include being listed as a Star Lawyer by Acritas 2018. She is listed in the Indirect Tax Leaders Guide (2017–2018) and Women in Tax Leaders Guide (2016–2017), as well as Asian Legal Business’s 40 Under 40 Lawyers to Watch in 2016. Yvonne was the recipient of the Best in Tax award by Euromoney Asia Women in Business Law Awards, both in 2015 and 2017.

Yvonne BehWong & PartnersLevel 21, The Gardens South TowerMid Valley City, Lingkaran Syed Putra59200 Kuala LumpurMalaysia

Tel: +603 2298 7808Email: [email protected]: www.wongpartners.com




Malaysia introduced two amendments to the domestic tax legislation in January 2017 which were aimed at expanding the tax base to capture digital transactions.Firstly, the definition of “royalties” under Malaysian tax legislation was expanded to include payments “for the use of, or the right to use… in respect of software”. Following this amendment, it is potentially arguable that any payments made which include a software element may be regarded as royalties which are chargeable to Malaysian withholding tax at the rate of 10%, subject to any reduction or relief afforded under an applicable double tax treaty.Secondly, the scope of service fees paid to non-residents which are subject to Malaysian withholding tax was also amended. Prior to the amendment, service fees paid by a Malaysian payor to a non-resident for services performed offshore were not subject to Malaysian withholding tax. With effect from 17 January 2017, an amendment was introduced to subject service fees paid to non-residents for offshore services to withholding tax. A broad interpretation of service fees is adopted by the Malaysian Inland Revenue Board and the Malaysian courts, and payments for digital content and electronically-supplied services could potentially fall within the ambit of service fees. However, following significant pushback by the business community, the effect of the amendment was subsequently suspended by virtue of an exemption order which came into force on 6 September 2017. From 6 September 2017 onwards, payments for offshore services provided by non-residents were exempted from withholding tax.


The Ministry of Finance is currently studying potential mechanisms for the imposition of a digital tax in Malaysia. However, there are no formal proposals or recommendations which have been made with respect to the form of the proposed “digital tax”, including whether such proposal would be introduced as a direct tax or an indirect tax. The Malaysian government has not made any formal statements on its view regarding the European Commission’s interim proposal for a digital service tax.


Chapter 26

WH Partners

Ramona Azzopardi

Sonia Brahmi

Malta

resident in Malta for tax purposes regardless of where management and control is exercised in Malta.

2 Transaction Taxes


The Duty on Documents and Transfers Act (Chapter 364 of the Laws of Malta) provides for the imposition of a tax commonly referred to as stamp duty on certain legal documents and transfers. Under the said Act, the duty is chargeable on documents and transfers or transmissions concerning immovable property, marketable securities, interests in partnerships, transfers causa mortis, contracts of exchange and policies of insurance.


VAT was initially introduced into the Maltese legal system in 1994. Since then numerous amendments have been made to the Maltese VAT Act (Chapter 406 of the Laws of Malta). The standard rate of VAT in Malta is 18%. However, in terms of the Eighth Schedule to the VAT Act, the reduced rates of 0%, 5% or 7% apply to certain transactions. The VAT Act and its subsidiary legislations are based on the EU VAT Directives.


The VAT Act distinguishes between different types of exemptions by reference to the rights granted to the person providing the transaction and the availability to claim input tax incurred in connection with the said transaction. In fact, the VAT Act lists a number of goods and services which are considered to be either exempt with credit supplies or exempt without credit supplies. Suppliers providing exempt with credit supplies do not charge VAT on those particular transactions, however, the supplier is still entitled to recover input VAT incurred on expenses and overheads that are directly connected with the provision of such supplies. On the other hand, suppliers providing exempt without credit supplies, albeit not charging VAT on those particular transactions, are not entitled to recover the input VAT incurred on expenses and overheads that are directly connected with such supplies.



Malta has a voluminous tax treaty network, with most European countries and also with third countries enabling tax-efficient structures and relief from double taxation on cross-border transactions. To date, Malta has 71 signed and ratified double taxation treaties.


Notwithstanding the fact that Malta is not an OECD member country, almost all the double tax treaties which were concluded by Malta adopt the OECD Model Convention as their basis.


Article 76(1) of the Income Tax Act (Chapter 123 of the Laws of Malta) grants the automatic ratification of double taxation agreements upon their conclusion. Double tax treaties have primacy of over domestic law as instruments of international law.


Generally, Malta double taxation agreements do not incorporate anti-treaty shopping rules or limitation of benefits articles. However, agreements like the one entered with the USA includes a limitation of benefits clause designed to avoid treaty-shopping.


In Malta, double tax treaties override any provisions to the contrary under Maltese domestic tax legislation


All companies incorporated in Malta are deemed to be domiciled and


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WH Partners Malta



In Malta, no tax is withheld on dividends paid by Maltese Companies to non-Maltese shareholders.


No withholding tax applies on royalties paid by Maltese Companies to non-residents.


No withholding tax applies on interest paid by Maltese Companies to non-residents.


There are no thin capitalisation rules in Malta.






There are currently no restrictions on tax relief for interest payments in Malta.


No withholding tax applies on property rental payments made to non-residents.


To date, there are no transfer pricing rules in force in Malta. However, this might change in the near future as a result of the local implementation of BEPS actions.


Generally speaking, a business may recover VAT payable or paid in the course of its economic activity. Every business registered for VAT purposes in terms of Article 10 of the VAT Act is entitled to recover input VAT that is attributable to: (a) taxable supplies; (b) exempt with credit supplies; and (c) supplies which take place outside Malta which would, if

made in Malta, be treated as taxable supplies or as exempt with credit supplies, or supplies taxed outside Malta which are made in Malta and would have been treated as exempt without credit supplies.

A business registered in terms of Article 10 which furnishes a tax return for a tax period has the right to deduct the input tax for that period from the output tax for that period. In addition, the right to claim input VAT must be supported by a tax invoice. However, businesses registered under Article 11 or Article 12 of the VAT Act for VAT purposes are precluded from recovering input tax.


With effect from 1st June 2018, VAT grouping was implemented in Malta and such regime allows separate legal persons, connected together by a specific criteria, to be grouped together as a single taxable person for VAT purposes. The Value Added Tax (Regulation as a Single Taxable Person) Regulations provide that if a legal person has establishments outside Malta, such establishments may be part of the group except where they are part of another VAT group outside of Malta. To this effect, the Maltese legislation seems to deviate slightly from the Skandia case.


No, there are not.


Malta imposes an import duty on imports from non-EU countries. The import duty varies according to the type of product imported. An excise duty is paid on certain specific goods (e.g. alcoholic beverages and tobacco products) imported or produced in Malta and sold in Malta. In addition, a fuel bunkering tax per metric ton is charged on the bunkering of certain fuel oils used for ships and their machinery and supplies free from customs and other duties. Moreover, an eco-tax contribution is charged on every tourist of over 18 years of age arriving in Malta and it is capped at €5 per visit.


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WH Partners Malta


No. Chargeable income is subject to income tax at a standard rate of 35%, irrespective of whether it is distributed or not. However, the shareholders – when receiving a dividend – may benefit from the relief for economic double taxation through the application of the full imputation and refund system. The shareholder may claim a refund of all or part of the Malta tax paid on the distributed profits.


Maltese Companies are not subject to any other significant direct taxes.

5 Capital Gains


Maltese tax law does not provide for blanket tax on all capital gains. Chargeable capital gains are brought to charge as part of the taxpayer’s chargeable income. Gains which are chargeable to tax in Malta, are those which are derived from the transfer of ownership, usufruct, assignment or cessation over any rights on immovable property, securities, business, goodwill, business permits, and from the transfer of beneficial interest in a trust. Maltese tax law contains specific rules on the computation of capital gains on immovable property and the transfer of securities including shares in a company and interest in a partnership. The rules also contain formulae for the increase of inflation on the value of immovable property. Foreign sources capital gains which are remitted to Malta are not charged to tax, unless they are owned by persons who are both ordinary resident and domiciled in Malta. Additionally, the transfer of assets between companies of the same group is exempt from capital gains tax.


Capital gains which are derived by a Malta company from the transfer of a participating holding, where the taxpayer has not shown such gain as part of his chargeable income, may benefit from a participation exemption. Should the Malta company decide not to opt for the participation exemption it will be subject to tax on the capital gains arising from the participating holding. The shareholder will then be entitled to claim a 100% refund of the company income tax upon the distribution of profits.


Where an asset which is used for a period of at least three years is transferred and replaced within one year by another asset which is used solely for a similar purpose in the business, any capital gains



Companies which are incorporated in Malta are subject to a standard corporate tax rate of 35% on worldwide income and capital gains. Foreign companies which are incorporated outside Malta but which are managed and controlled in Malta and/or which carry out business activities in Malta, are subject to pay tax in Malta on the income and capital gains that arise in Malta and on foreign income which is received in Malta.


In order to calculate the accounting profit, Maltese Companies follow the International Financial Reporting Standard (IFRS) accounting principles or the General Accounting Principles for Small and Medium Enterprises (GAPSME). The GAPSME are the Maltese General Accepted accounting principles based on IFRSs. The Accounting Profit Before Tax figure does not necessarily equal the Income Chargeable to Tax as the Income Tax Act provides that certain types of expenses/losses must be added back and certain income/gains are deducted from the tax computation.


Given that expenses must be wholly and exclusively incurred in the production of the company’s income; the items of expense as provisions and unrealised losses or gains are to be added back to the accounting profit/loss before tax to compute the income that is chargeable to tax.


Groups of companies may benefit from group relief in Malta where a member of one company surrenders tax losses to another member within the group. The losses surrendered by the company can be set off against the tax profits or chargeable income of the other company making the claim. The group relief is available if the companies are members of the same group throughout the year preceding the year of assessment for which the relief is claimed. In order to be eligible for tax grouping relief, the companies must be resident in Malta and none of them may be resident in any other country for tax purposes. Additionally, one of the companies must be more than a 50% subsidiary of the other or both companies must be more than 50% of a third company which is resident in Malta. Hence, the tax grouping relief is not available in the case of overseas subsidiaries.


Tax losses may be carried forward indefinitely, even if there is a change in shareholder, as long as the trading activities of the company are not altered and the change in the ownership is not deemed to be a tax avoidance scheme.


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WH Partners Malta


Malta does not impose any outbound withholding taxes on remittance of profits by the branch.

7 Overseas Profits


A company incorporated in Malta is deemed to be both resident and domiciled in Malta and thus is taxed in Malta on a worldwide basis, subject to double taxation relief. However, any income or gains derived by a local company attributable to a branch outside of Malta may be exempt from taxation in Malta in view of the participation exemption.


Dividends received by a Malta company from a non-resident company that qualifies as a “participating holding” may either (i) avail of the participation exemption, or (ii) pay tax on such dividend at the 35% tax rate, and then the shareholders will be entitled to a 100% tax refund of the Malta tax paid.This is subject to certain anti-abuse provisions and the non-resident company (the subsidiary) must either: (i) be resident or incorporated in the EU; (ii) be subject to any foreign tax of at least 15%; or (iii) have more than 50% of its income derived from passive interest or royalties. If none of these conditions are satisfied, then both of the following two conditions must be satisfied:(1) the equity holding of the Maltese company in the non-resident

company is not a portfolio investment; and(2) the non-resident subsidiary or its passive interest or royalties

have been subject to a minimum 5% foreign tax.


To date Malta does not currently have “controlled foreign company” rules and relies on general anti-abuse provisions. However, these CFC rules should be implemented in line with the implementation of the EU Anti-Tax Avoidance Directive in 2019.



The transfer of immovable property situated in Malta attracts duty on documents and tax on property transfers.


Capital gains that arise upon the transfer of real estate securities are subject to the tax and duty.

realised on the transfer of are not subject to tax. However, the cost of acquisition of the new asset is reduced by the said gain. If the asset is disposed of without replacement, the overall gain must consider the transfer price and the cost of acquisition, reduced as aforesaid. Where the asset is transferred from one company to another company and such companies are deemed to be a group of companies or controlled and beneficially owned directly or indirectly to the extent of more than 50% by the same shareholders, it is deemed that no loss or gain has arisen from the transfer.


No, Malta does not impose withholding tax on the proceeds of selling a direct or indirect interest in local assets or shares. The acquisition or disposal of marketable securities is subject only to duty on documents, however, exemptions are available for transfers of the marketable securities made in a company if such company obtains a duty exemption. The exemption is only granted if the business interest of the company is located outside Malta and the ultimate beneficial owner/s are non-Maltese resident individuals.



There are no taxes levied in Malta upon the formation of a subsidiary.


A local subsidiary is deemed to be both resident and domiciled in Malta and thus taxed on a worldwide basis in Malta. A branch of a foreign company is subject to 35% tax in Malta on the profits “attributable” to the Malta branch in terms of general rules of international taxation. The Malta branch would be covered by the local tax accounting system and can avail of the refundable tax credit system available to companies registered in Malta.


The branch would be subject to taxation in Malta on income and certain capital gains arising in Malta. For the purpose of ascertaining the total income, all expenses wholly and exclusively incurred in the production of the income shall be deducted.


Maltese branches of foreign companies that receive foreign income such as dividends, interests or royalties that have been subject to source country withholding taxes can claim that withholding tax as a credit against their tax liability.


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WH Partners Malta


To date, the Maltese Tax Authorities have not communicated on the next steps to be taken in order to tackle the actions of the OECD’s BEPS reports. Malta has been reviewed by the OECD under Action 14 and it was considered that Malta meets almost all the elements of the Action 14 Minimum Standard to ensure the effectiveness and efficiency of the mutual agreement procedure.


CBCR has been implemented in Malta by virtue of Legal Notice 400 of 2016 entitled the Cooperation with Other Jurisdictions on Tax Matters (Amendment) Regulations 2016.


No, it does not.



As a Member State of the European Union, Malta’s legislation aims to be compliant with EU legislation, harmonised with other Member States’ regimes. In Malta, incomes generated through the supply of online products would be subject to the general principles of income tax and hence taxed at progressive rates in the case of individual suppliers and at the standard corporate tax rate of 35% in the case of a company. To date, no unilateral action has been taken to tackle the taxation of digital activities.


Malta’s government has not been in favour of the interim proposal for a digital services tax. During the EU Digital Summit on 29th September 2017, Prime Minister Joseph Muscat expressed his opposition to the proposal to tax the digital turnover of large companies. Malta’s tax policy favours solutions that will address longer-term or permanent problems, rather than expedient quick-fixes that do not address the root problems caused by the largest corporations providing digital services.


REITs are not subject to tax provided that they allocate all or almost all of their profits to their investors.



Yes, the Income Tax Act caters for two anti-avoidance or anti-abuse rules:(a) Artificial or fictitious schemes which reduce the amount of

tax payable may be disregarded and the persons concerned would be assessable accordingly.

(b) Where a scheme solely or mainly aimed at obtaining an advantage which has the effect of avoiding, reducing or postponing liability to tax a person, the person who has obtained (or is in the position to obtain such an advantage), may be assessed to tax by the Commissioner of revenue on such tax advantage.


To date, there is no such a requirement. However, in the view if the implementation of the Directive on administrative cooperation in the field of taxation (DAC 6) – by 1st January 2019 – certain persons including intermediaries will be required to disclose any potential aggressive tax planning arrangements.


Following the implementation of DAC6 in Malta, certain persons who promote, enable or facilitate tax avoidance and who meet the criteria of DAC6 (subject to local specificities) will be required to disclose potential aggressive tax planning arrangements.


Malta has no specific co-operative compliance schemes providing tax benefits. There are no current tax amnesty programmes.



Malta has implemented the Country-by-Country Reporting requirement in the Cooperation with Other Jurisdictions on Tax Matters Regulations (Legal Notice of 2016), as per Action 13 of the BEPS report.


Mal

ta

WH Partners Malta

WH Partners is a leading Malta-based business law firm with a focus on taxation, gaming and gambling, financial and investment services, Fintech, and blockchain and cryptocurrencies. Both the firms and the lawyers are highly ranked by the foremost legal directories, including World Tax, Chambers & Partners, The Legal 500 and IFLR 1000.

Ramona Azzopardi is recognised as one of the leading taxation lawyers in Malta. She heads the Tax and Private Client Department and regularly advises corporate clients in the gaming and gambling, financial services, and digital services industries, on their cross-border tax implications. She also assists HNWI families in estate and tax planning. Ramona holds a Doctor of Laws Degree and Masters in Financial Services from the University of Malta. Ramona is a regular speaker at tax conferences and often contributes articles to prominent publications. She is also a Council Member at the Malta Institute of Taxation.

Ramona Azzopardi WH PartnersLevel 5, Quantum House75 Abate Rigord StreetTa’ Xbiex XBX1120Malta

Tel: +356 2092 5100Email: [email protected]: www.whpartners.eu

Sonia Brahmi is a Senior Associate at WH Partners where she primarily practises tax law. She specialises in tax transparency, advising financial institutions on the implementation of the FATCA-IGA regulations, and international groups on their Country-by-Country Reporting obligations. She also assists clients with the implementation of the Common Reporting Standard, providing staff training, advising on due diligence and reporting rules, and providing health-check services.

In addition, Sonia provides corporate tax advice, focusing on the implementation of tax-efficient structures for cross-border transactions.

Sonia BrahmiWH PartnersLevel 5, Quantum House75 Abate Rigord StreetTa’ Xbiex XBX1120Malta

Tel: +356 2092 5100Email: [email protected]: www.whpartners.eu


Chapter 27

SMPS Legal

Ana Paula Pardo Lelo de Larrea

Alexis Michel

Mexico


Entities should be deemed as Mexican residents for tax purposes, if they established the main administration of its business or the headquarters of its effective management within Mexican territory. In this regard, a legal entity could be considered as a Mexican tax resident when the parties entitled to decide its business strategies, policies, distribution of profits or dividends or other core subjects are located within national territory.

2 Transaction Taxes


There are no documentary or stamp taxes imposed in Mexico.


Mexico has a Value Added Tax (VAT), which is imposed on the following activities:a) Alienation of goods.b) Rendering of independent services.c) Granting of temporary use or enjoyment of goods.d) Importation of goods and services.The general VAT rate is 16%. In some cases, the tax rate can be 0% and other activities are tax-exempt.


In accordance with the Mexican VAT Law, there are some exempt activities for such tax such as:a) Exempt transfers.

i. Land.ii. Residential real property constructions.iii. Books, newspapers, magazines and copyright.iv. Used personal property.v. Lotteries, raffles, drawing, etc.vi. Currency and troy ounces.vii. Partnership interest, negotiable instruments.



Mexico currently has over 58 income Double Tax Treaties in force. Mexico has also entered Exchange of Information Agreements with certain countries where an income Double Tax Treaty has not been agreed.


Mexico generally adheres to the OECD Model, even to the extent that in some cases the content of local status is given by the OECD guidelines.


In order for Double Tax Treaties to take effect and have the force of a federal law under the Mexican Constitution, they are negotiated and signed by the President and then sent to the Senate for ratification and, if approved, must be published in the Mexican Official Gazette.


Most Double Tax Treaties incorporate anti-treaty shopping rules and limitations on benefits provision.Additionally, it should be noted that the Mexico tax system includes general anti-avoidance rules and has been actively participating in the G20 for the BEPS Action Plan.


Pursuant to Mexican law, a treaty may only be overridden if it is contradictory with a provision found in the Constitution. In terms of hierarchy, the Supreme Court of Justice has stated that international treaties are positioned above federal and local laws, but immediately below the Constitution.


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SMPS Legal Mexico

Likewise, in certain states, payroll taxes are imposed and paid by employers, and the rates rank from 1% to 3% on the payroll value.


In Mexico, there is also the special tax on products and services that is a federal tax applicable to certain alienations and/or import of goods such as alcoholic and some non-alcoholic beverages, tobacco, gasoline and diesel. This also applies to certain services.In addition, there are also customs duties on the import and export of goods in Mexico. Free Trade Agreements in force grant tax benefits and represent the possibility of reducing or receiving an exemption from tariffs.



Yes. There is a 10% withholding tax on dividends paid by a Mexican entity out of the after-tax earnings and profits account to a non-resident shareholder/partner. This tax can be reduced, and in some cases eliminated, by an applicable Double Tax Treaty.


Yes. There is a withholding tax on royalties paid by a Mexican entity to a non-resident recipient; different withholding tax rates apply to different type of royalties.a) 5% rate applies in the case of royalties paid for temporary use

or enjoyment of railroads;b) 35% rate applies to royalties for the use of patents, inventions,

trademarks, trade names and commercial names; andc) 25% rate applies to technical assistance and any other type of

royalty.Under most Double Tax Treaties executed by Mexico, the withholding tax rate is reduced to 10% or 15%.


Yes. There is a withholding tax on interest paid by Mexican entities to a non-resident lender. The withholding tax rate on interests is different for each case depending on the type of credit or the nature of the parties, the rate goes from 4.9% to 35% withholding tax.Finally, under some Double Tax Treaties, different withholding tax rates may apply, but are normally reduced taxes.


The Law provides that debts with foreign related parties must not exceed the 3-to-1 ratio with respect to the debtor’s capital. Otherwise, interest associated to the excess will not be deductible.Nonetheless, entities engaged in specific industries such as the financial system or the country’s strategic sectors could be allowed to have a higher debt-to-net equity ratio, and the thin capitalisation

viii. Non-participating real estate trust certificates.ix. Gold ingots.x. Between foreign residents or to toll manufacturers or

enterprises of the automotive industry.b) Exempt services.

i. Consideration for mortgage loan.ii. Commissions for management of funds from the retirement

savings system.iii. Free services.iv. Education.v. Land passenger transportation.vi. International maritime transportation of goods.vii. Agribusiness, housing loan, financial guaranty and life

insurance.viii. Interest.ix. Financial derivative transactions.x. From associations, unions to their members.xi. Public events.xii. Professional medical services.xiii. Medical and hospital services by the government agencies.xiv. Authors.

c) Exempt use or enjoyment of goods.i. Real property intended or used for residence.ii. Farms.iii. Tangible property the use of enjoyment of which is granted

by residents abroad without a permanent base in Mexico.iv. Books, newspapers and magazines.

d) Exempt imports.i. Not finalised, temporary or in transit goods.ii. Baggage and household goods.iii. Goods donated to the Federal Government.iv. Works of art intended for permanent public exhibition.v. Works of art with a cultural value.vi. Goods containing at least 80% of gold.vii. Vehicles in some specific cases.

Finally, a 0% rate applies to certain acts or activities, sale of patented medicine and products destined as food.


To recover VAT, individuals or corporations must be registered as taxpayers for income tax and VAT purposes. In the event a taxpayer is exempt for part of the transactions carried out, the VAT Law establishes an apportionment method to consider only the taxable portion of such transactions.


No, it is not applicable in Mexico.


Even though it is not a federal tax, the States of the Federation have a tax on the acquisition of real estate and the applicable tax rates are between 3% and 5% of the value of the real estate.


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SMPS Legal Mexico



The Income Tax Law provides a flat rate of 30% over all taxable income of Mexican corporate entities.


Corporate Mexican entities shall accrue all of their income earned in cash, in kind, in services, in credit or in any other form obtained during the fiscal year, including income from their establishments abroad.The tax profit shall be determined by subtracting the authorised deductions and the employee’s profit-sharing paid in the fiscal year.The tax profit for the fiscal year shall be reduced, as applicable, by the loss carry-forward from previous years.


Mexican entities may offset the income tax which has been effectively paid abroad against the tax payable in Mexico under the Income Tax Law (see question 4.7).


Under the Income Tax Law, corporate members of an affiliated group may elect the tax grouping rules (special regime) which allows the tax results obtained by entities to be combined in a group providing the benefit of a tax deferral (a portion of the tax) up to three years taking into account only the profits and losses of entities in the group.For an entity to obtain the authorisation to operate under the optional regime for groups of companies, certain requirements must be met, for example:a) It must be a Mexican resident company.b) More than 80% of the shares with voting rights of the

companies that will be integrated must be directly or indirectly held.

c) The written consent of the legal representative of each of the companies that will be integrated must be obtained.

d) A request to operate under the optional regime for groups of companies (accompanying thereto, supporting information and documentation such as the companies’ shareholders and their participation therein) must be filed before the tax authorities.

It should be noted that several restrictions apply both to the integrating company and to the integrated companies. For instance, entities that form part of the financial system, foreign residents, or legal entities with non-profit purposes may not be subject to this tax regime.


As a general rule, the right to amortise losses corresponds exclusively to the taxpayer that incurred such loss and may not be transferred even as a consequence of a merger.

rules do not apply, similarly to taxpayers which might have a special ruling on transfer pricing.


Transfer pricing safe harbour rules apply to the maquila operations.The maquila tax regime has two main benefits:a) Exemption from having a permanent establishment in

Mexico.b) Reduced income tax liability (the safe harbour).


Interest derived from back-to-back loans shall, for tax purposes, be treated as dividends, and as such, a non-deductible expense.Back-to-back loans are transactions where one person provides cash, goods or services to another person, who, in turn, provides directly or indirectly, cash, goods or services to the former person or to a related party thereof.Back-to-back loans are also transactions in which one person extends financing and the credit is guaranteed by cash, cash deposits, shares or debt instruments of any kind from a related party or from the same borrower, to the extent that the credit is guaranteed in this same manner.


Interest subject to a preferential tax regime could be subject to a 40% withholding rate on said income, if some requirements are not met. This does not apply to interest paid to foreign banks or to foreign residents derived from financial instruments.


In accordance with the Mexican Income Tax Law, there is a withholding tax on property rental payments made to non-residents at a 25% rate of the income obtained (gross income), no deduction applied. The USA Double Tax Treaty with Mexico provides a reduced rate if some requirements are met.


The Mexican transfer pricing rules have been adapted to the OECD guidelines on the subject. Accordingly, transactions between related parties must be at fair market values and are required to comply with the arm’s length principle.The extent of relationship between parties required to apply the transfer pricing rules to transactions is direct or indirect participation in management, supervision, control, or capital/ownership. The parent entity of a permanent establishment and all other permanent establishments of that entity are also considered related parties.The interpretation of the transfer pricing rules is based on Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations which were approved by the OECD. It should be mentioned that the “Best Method Rule” shall apply within the terms of the Income Tax Law.


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SMPS Legal Mexico



In Mexico, there are no taxes to the incorporation of any kind of entity.


In accordance with Mexican Income Tax Law, a subsidiary resident in Mexico would be subject to tax on its worldwide income as any other corporation. On the other hand, the branches of a non-resident are generally subject to Mexican tax on their income attributable to it (the so-called “permanent establishment”); special rules for deduction apply.In addition, foreign tax residents could also be subject to income taxation in Mexico regarding Mexican-sourced income that cannot be attributed to a permanent establishment.


Permanent establishments in Mexico are taxed on all income attributable thereto. For such purposes, income obtained as a consequence of a business activity, the rendering of a service and/or the sale of goods within national territory would be deemed as attributable income. Additionally, income obtained by the central office or by another permanent establishment set up abroad for the realisation of which the Mexican permanent establishment incurred in expenses or share costs could also be deemed as attributable income.Permanent establishments in Mexico could be allowed to deduct the expenses incurred by them for the performance of its taxable activity insofar as the applicable conditions for deductibility are met.


All payments received by a permanent establishment are considered as being done to a Mexican entity, thus a Double Tax Treaty does not apply.


In the case that the profits remitted by the permanent establishment are distributed from the Net Tax Profit Account or from the Capital Remittances Account, the remittance of such profits will be tax-free at the corporate level.Notwithstanding the foregoing, and regardless of the obligation to accrue taxable income and pay the corresponding tax (amount registered on the Net Tax Profit Account), profits distributed or reimbursed (in cash or in kind) by it to its parent company or main office would receive a similar tax treatment as that applicable to dividend payments in favour of foreign residents and the 10% withholding tax applies.


There is no additional corporate tax on a distribution event. If the amount to be distributed is from the “CUFIN”, the account is composed of profits that have already been subject to and pay corporate income tax. However, there is a second level of tax imposed, at the shareholder/partner level, when earnings are distributed by the mentioned entity. Profits obtained by non-residents or individuals resident in Mexico will be taxed an additional 10% rate when such profits are distributed.


In Mexico, the main federal taxes for entities are income tax, VAT and special tax on products and services (the excise tax). However, there are some state taxes mainly regarding real estate, including ownership or acquisition, and payroll taxes, among others.

5 Capital Gains


In Mexico, entities may deduct capital losses but only to the extent of capital gains, whenever the amount of deductions is higher than gross income. Excess capital losses may be carried forward 10 years to offset capital gains from such years.


There is no participation exemption in Mexico for capital gains of Mexican entities.


Currently, there is no special relief for profit reinvestment in Mexico.


In general, Income Tax Law provides that gains from the disposition of capital assets are sourced in Mexico when the issuer is resident in Mexico for tax purposes, or when regardless of the tax residency of the issuer, the value of the shares proceeds directly or indirectly from real property located in the country.In principle, the transfer of shares by a foreign resident is subject to a 25% withholding tax on the gross amount without deductions.However, the transferor may elect to apply a 35% tax on the net gain if some requirements are met.


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SMPS Legal Mexico

obligation of the FIBRA to make advance payments for the income tax purposes. Certain requirements must be met to be subject of this special regime of taxation.



The Mexican tax system considers transfer-pricing, thin capitalisation, CFC, back-to-back and tax re-characterisations as general anti-avoidance rules.


In Mexican tax law, there is no legal requirement to make special disclosure of avoidance schemes. In some cases, the taxpayers are required to file a notice to inform the tax authorities if they have an offshore investment that might be subject to controlled foreign corporation regulations.Likewise, whenever the tax audit report is prepared by an independent certified public accountant they are required to disclose any transaction that might be in violation of the Mexican tax law.


Under the Mexican Fiscal Code, it is a violation if any individual gives advice or provides consultancy or other services in order for a taxpayer to totally or partially omit the payment of any contribution in violation of the tax provisions.


In Mexico, there is no co-operative compliance programme as such. Regardless of the foregoing, it is worth nothing that those being audited are entitled to seek remedy before the Mexican tax ombudsman (PRODECON).This alternative allows taxpayers to negotiate with the tax authorities, solutions to avoid escalating into litigation; under this procedure, fines could be reduced or even repealed.



The BEPS Action Plan has had a major impact on the design and implementation of tax laws in Mexico. Furthermore, said document has made Mexican tax authorities aware of the everchanging nature of cross-border structures and transactions conducted by taxpayers.As a consequence thereof, provisions normally reserved to international instruments have gradually been incorporated to local statutes and regulations.

7 Overseas Profits


Mexican Income Tax Law provides that Mexican tax residents will be taxed on their worldwide income including income from their establishments abroad.


Yes, dividends received by a local company from a non-resident company will be subject to taxation. The law allows a foreign tax credit for taxes paid abroad with respect to such dividends, if requirements are met.


Concerning “controlled foreign company” (CFC) rules, the Income Tax Law establishes that Mexican tax residents and residents with a permanent establishment in Mexico could be deemed to receive income from jurisdictions considered as preferential tax regimens whenever: (i) income deriving therefrom is not subject to taxation; or (ii) the income tax to which said income is subject to in the relevant jurisdiction is less than 75% of the income tax that would have been levied in Mexico for such operation.



Yes. The Mexican Income Tax Law provides that the disposition of Mexican real estate by non-residents is subject to Mexican income taxation at a tax rate of 25% on the total revenue obtained, with no deductions allowed. However, under the US/Mexican Double Tax Treaty, the rate could be 30% on the profit if certain conditions are met.


Yes. In Mexico, the transfer of an indirect interest in real estate located in Mexico is also the subject of taxation. An indirect interest refers to the alienation of property through the disposition of shares or interests in any entity if more than 50% of the value of the shares or interests proceeds from real property.


Yes. Mexico provides a special tax regime regulation to real estate investment trusts (FIBRA) dedicated to the acquisition and development of real estate for lease or in the acquisition of the right to receive income from the lease of the property or to grant financing for such purposes. This tax regime gives benefits to taxpayers that contribute the property to the trust of tax deferrals and eliminates the


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However, some incentives are granted for national cinematographic and theatrical production, as well as for innovation (CONACYT). Also there are some incentives on the FIBRA (real estate investment trust) and on investments in risk capital and on the Maquila industry.



To this date there has not been any substantial tax law reform to tax digital activities or to expand the tax base to capture digital presence. Likewise, there is no mechanism to collect tax on digital services. However, following the OECD trends, there is a proposal to include a special tax (on the Excise Tax Law) on the sale of publicity online and digital intermediary activities that facilitate the sale of goods and services. Also, it is highly probable that in the near future there will be changes following the International VAT/GST Guidelines.


Mexico, as an OECD Member and a part of the BEPS Actions, follows the approach of the OECD on its work, that will be provided in 2019, towards a consensus-based solution by 2020.

AcknowledgmentThe authors would like to thank Mariam Bojalil Lerch, Associate, for her invaluable assistance in the preparation of this chapter. Tel: +52 55 5282 9063 / Email: [email protected]

SMPS Legal Mexico

In addition, it should be noted that more stringent requirements concerning the deductibility of certain income/expense items have been incorporated into Mexican laws in view of recent BEPS advances. For instance, for taxpayers to be able to claim treaty benefits, tax authorities could request a sworn affidavit from the foreign party stating the existence of a double taxation and identifying the statutes or provisions under foreign law in terms of which said double taxation exists.


Since the tax reform of 2014, the local set of laws have been amended to abide by the standards set forth in the BEPS Action Plan, before the OECD’s recommendations.In this regard, more stringent conditions and requirements have been established relating to hybrid mismatches (Action 2), CFC rules (Action 3), treaty abuse (Action 8), transfer pricing rules (Action 8, 9 and 10), and reporting obligations (Action 13).


The Country-by-Country Reporting filing obligations regarding transactions with related parties abroad have been included in the Income Tax Law.Taxpayers could now be required to file (no later than on December 31 of the following tax year to which the filing obligation corresponds) the following informative returns: (a) master file, information concerning the structure and activities of multinational corporate groups; (b) local file, describing the structure and activities conducted with related parties at a local level; and (c) country-by-country reporting, with respect to the activities, distribution of income and taxes paid in each jurisdiction.


No. In Mexico there is no special tax regime concerning intellectual property.


Mex

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SMPS Legal Mexico

SMPS Legal is a law firm with regional expertise created by San Martín y Pizarro Suarez, S.C., O&G Energy and Natural Resources Attorneys S.A.S. and Solorzano Corporation to form a team of experienced and specialised lawyers committed to offering integrated multidisciplinary legal counsel in Latin America from strategically located offices.

For over 20 years, the partners and lawyers of SMPS Legal have successfully counselled domestic and foreign investors in their activities in Latin America.

Specifically, SMPS Legal provides legal services and support in transactions and projects in Latin America in important industry sectors of the economy, such as infrastructure, private equity, tax, banking and finance, hospitality, insurance, capital markets, aeronautic, automotive, cultural, food, pharmaceutical, real estate, manufacturing and information technology.

Responding to the growth of emerging markets in Latin America, SMPS Legal specialises in cross-border transactions, acquisitions, spin-offs, joint ventures, strategic alliances and foreign investments in the Region.

SMPS Legal currently has offices in Mexico City and Bogota, where we provide advice on local law, and rep offices in Calgary and Dallas. SMPS Legal has strategic alliances with prominent firms in Brazil, Argentina, Costa Rica, Panama, Peru, Cuba and other Latin American countries to best serve its clients.

From knowledge of the local commercial and corporate customs and practices, to evaluating the relevant sectors of the economy and obtaining specialised legal advice, SMPS Legal assists its clients in maximising the opportunities offered by the Region, providing timely and cost effective advice.

In addition to the fact that the members of SMPS Legal share a joint vision to apply a commercial approach and provide focused legal and business advice, the Firm provides tangible added value to its clients by taking the time to understand their business and legal service needs.

Ana Paula joined SMPS Legal in 2015 as Tax partner. Her main practice is taxation concerning domestic and international aspects and involves representing corporations and individuals. She regularly advises clients on matters involving commercial transactions, tax planning, start up business, joint ventures, investments, acquisitions, mergers, spin-offs, dispositions, tax free reorganisations and transfer pricing consulting.

Ana Paula has extensive experience and negotiation skills in international transactions in corporate law, including representation of multinational groups and domestic groups, specific controversy and litigation, and representing domestic and international clients in tax audits.

Before joining SMPS Legal, Ana Paula was an associate at Hogan Lovells BSTL from 2010 and before that she was an associate at Basham Ringe y Correa. She also clerked at the tax boutique, Ortiz, Sainz y Erreguerena for two-and-a-half years.

Ana Paula obtained her Law Degree from Universidad Panamericana in 2002 and her Postgraduate Degree from the Universidad de Salamanca. She holds a LL.M. from the University of Florida – Fredric G. Levin College of Law, 2007, obtaining the Certificate of Academic Excellence.

Ana Paula is fluent in Spanish and English and she is a member of the IBA, IFA and YIN committees.

Ana Paula Pardo Lelo de LarreaSMPS LegalAndrés Bello N. 10oficina 402, Col. Polanco, 11560México, D.F

Tel: +52 55 5282 9063Email: [email protected]: www.smpslegal.com

Alexis Michel has focused his practice not only on the compliance of obligations in matters of customs and foreign trade, but in aiding, through the enforcement of administrative instruments that Mexican authorities have implemented, identifying and developing areas with opportunities of expansion for his clients. Alexis is specialised in tariff classification, customs valuation, implementation of free-trade agreements, origin verifications, criteria confirmation and certifications before different authorities, as well as development of foreign trade development programmes such as Maquila, Sector Promotion and Drawback.

Likewise, he has extensive experience in the performance of internal audits to verify compliance with the obligations arising from foreign trade transactions. He has represented clients before the different tax and customs authorities in audits, administrative proceedings and contesting of resolutions derived therefrom. Furthermore, he has developed a successful practice in matters of international commerce unfair trade practices such as anti-dumping and subventions.

Before joining SMPS, Alexis worked at Jauregui, Navarrete, Nader y Rojas, S.C., White & Case LLP, Trón y Natera, S.C. and Natera y Espinoza, S.C., accruing more than 19 years of experience.

Alexis obtained his J.D. from the División de Estudios Superiores of Centro Universitario México, with honours, in 1998 and his degree in the Specialty in Tax Law from Universidad Panamericana with honours in 2006.

Alexis is the former Head of the Foreign Trade Commission of the Mexican Bar Association (Barra Mexicana Colegio de Abogados, A.C.), is an active member of the American Chamber of Commerce, the Canadian Chamber of Commerce and the International Chamber of Commerce.

Alexis is fluent in both English and Spanish.

Alexis MichelSMPS LegalAndrés Bello N. 10oficina 402, Col. Polanco, 11560México, D.F

Tel: +52 55 5282 9063Email: [email protected]: www.smpslegal.com


Chapter 28

Houthoff

Paulus Merks

Wieger Kop

Netherlands


Based on Dutch tax law, the residency of a company is determined based on all relevant facts and circumstances, whereby the place of effective management is one of the main factors. The place of effective management is the place where the management of the company is actually established. Furthermore, under the incorporation fiction of the Dutch Corporation Income Tax Act, companies incorporated under Dutch law are always considered Dutch tax residents and therefore fully liable for Dutch corporate income tax. However, the residency of a company under Dutch tax law can be overridden by a bilateral tax treaty for the purpose of that bilateral tax treaty.

2 Transaction Taxes


The Netherlands does not levy any stamp taxes or capital duties.


Value Added Tax (VAT) applies to the following transactions: ■ The supply of goods or services made in the Netherlands by a

taxable person. ■ The intra-Community acquisition of goods from another EU

Member State by a taxable person or by a nontaxable legal person in excess of the annual threshold.

■ Reverse-charge services received by a taxable person and nontaxable legal entities in the Netherlands and the importation of goods from outside the EU, regardless of the status of the importer.

The standard Dutch VAT rate is 21%. The low rate of 6% applies to many common products or services including food, medicines, books, etc. However, the Dutch government announced that the low VAT rate will be increased from 6% to 9% as from 1 January 2019. Furthermore a 0% rate applies to certain international transactions.


Some goods and services are exempt from VAT. In case an



The Netherlands has concluded 98 bilateral income tax treaties. In addition, the Netherlands is re-negotiating some of its existing bilateral income tax treaties and negotiating various new bilateral income tax treaties with jurisdictions in Africa, Asia and Latin America.


The Dutch bilateral income tax treaties typically follow the OECD Model Convention.


According to Dutch law, treaties have to be approved by both chambers of parliament. Furthermore an announcement of the ratification of the treaties should be made in the Dutch Treaty Series (Tractatenblad van het Koninkrijk der Nederlanden) before the treaties enter into force.


The Dutch government has agreed to adopt a new (2019) tax policy agenda proposed by the Dutch State Secretary for Finance Menno Snel. The agenda includes the two following priorities to both: (1) promote a tax climate in the Netherlands that remains competitive for real economic activities; and (2) tackle tax avoidance and evasion. The latter also includes the tackling of tax avoidance and tax evasion in tax treaties.


The Dutch constitutional law contains a treaty priority principle. This principle states that a treaty overrides the rules of Dutch domestic law.


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Houthoff Netherlands

intragroup royalty payments to jurisdictions with a statutory profit tax rate of less than 7% or to jurisdictions that are EU blacklisted.


The Netherlands currently does not impose any withholding tax on interest payments. However, the Dutch government recently proposed to introduce (as of 1 January 2021) a withholding tax on intragroup interest payments to jurisdictions with a statutory profit tax rate of less than 7% or to jurisdictions that are EU blacklisted.


In line with ATAD1 the Netherlands plans to introduce an earnings stripping rule as of 1 January 2019. In connection with the implementation of the earnings stripping rule the interest deduction limitation rules for participation debt (art. 13l CITA), as well as for acquisition holding debt (art. 15ad CITA), will be abolished as of 1 January 2019.


Under the proposed earnings stripping rules, the deduction of net interest expenses is, for Dutch corporate taxpayers, limited to the highest of:(i) 30% of the earnings before interest, taxes, depreciation and

amortisation (EBITDA); and (ii) a threshold of €1 million.The net interest expenses are defined as the balance of a corporate taxpayer’s interest expense (including certain related costs and foreign exchange losses on the one hand) and interest income (including foreign exchange gains) on the other. EBITDA is calculated on the basis of tax accounts and excludes tax-exempt income.The Dutch proposal does not provide for a group escape rule or grandfathering rules for existing loans. However, the Dutch government has announced a separate proposal of law introducing a grandfathering rule for certain existing public infrastructure projects.No exception is made for banks and insurance companies. The Dutch government intends to introduce a thin capitalisation rule that will apply to banks and insurance companies as of 1 January 2020.


These rules apply regardless of whether the debt is incurred from a group company or a third party.


The Netherlands has various interest deduction limitation rules including but not limited to a restriction on the deduction of payments on certain hybrid loans (art. 10(1)d CITA) and limitations on interest payments on loans related to circular transactions and acquisitions (art. 10a CITA). In connection with the implementation of the aforementioned earnings stripping rule, the interest deduction

exemption applies, no VAT is levied and VAT is also non-deductible by the purchaser. Exempt goods and services include, but are not limited to education, healthcare, fundraising activities, childcare, financial services and insurance services.


A taxable person may recover input tax, which is VAT charged on goods and services supplied to it for business purposes. Input tax is generally recovered by being deducted from output tax, which is VAT charged on supplies made.


The Dutch VAT Act includes a provision allowing Dutch VAT-entrepreneurs to form a VAT fiscal unity. This VAT fiscal unity acts as a fiction to treat multiple VAT-entrepreneurs as a single taxpayer. A VAT group exists by virtue of Dutch law if there is financial, organisational and economic interdependence between the VAT-entrepreneurs of the VAT fiscal unity. The VAT group is limited to Dutch persons and bodies or Dutch permanent establishments.


The acquisition of real estate located in the Netherlands is generally subject to real estate transfer tax. This tax has a standard rate of 6% whereas a reduced rate of 2% applies to residential properties.


Excise duties are levied on several products (alcohol, tobacco and mineral oil products). This is a consumption tax. Furthermore, import duties are levied on various products imported into the Netherlands from outside the EU.



Dutch dividend withholding tax is currently typically imposed on dividends paid by a locally resident company to a non-resident. However, the Dutch government recently proposed to abolish the dividend withholding tax as of 1 January 2020, without a transitional regime. At the same point in time it has been proposed that a withholding tax on certain intragroup dividend payments to: jurisdictions with a statutory profit tax rate of less than 7%; or jurisdictions that are EU blacklisted, is introduced.


The Netherlands currently does not impose any withholding tax on royalty payments. However, the Dutch government recently proposed to introduce (as of 1 January 2021) a withholding tax on


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also either be a Dutch resident company that forms part of the fiscal unity itself or a company resident in an EU/EEA country.


The Netherlands has specific rules to combat the trade in so-called “loss companies”. If 30% or more of the ultimate interests in a Dutch company change among ultimate shareholders or are transferred to new shareholders, in principle, the losses of the company may not be offset against its future profits. Many exceptions to this rule exist. The company has the burden of proof with respect to the applicability of the exemptions.


No, it is not.


No, they are not.

5 Capital Gains


No, there are not.


Yes. The Dutch participation exemption regime provides an exemption for capital gains and dividends received by Dutch tax resident companies from qualifying participations. The Dutch participation exemption applies to all (rights to) interests of 5% or more in the nominal paid-up capital of the subsidiary, unless the participation is a “portfolio investment”.


Taxpayers can form a reinvestment reserve based on Dutch law if certain requirements are met in order to postpone taxation of capital gains realised on the sale of business assets. However, the book value of the assets purchased from the reinvestment reserve is corrected for an amount of the reinvestment reserve in order to ensure that the profits realised on the original sale of the business assets will be taxed in the future. The reinvestment reserve has a three-year reinvestment period and requires that a new business asset, purchased from the reinvestment reserve, is similar to the sold business asset.


No, it does not. However, the introduction of a withholding tax in 2020 in cases of (indirect) capital gains in certain abusive situations, has been proposed.

limitation rules for participation debt (art. 13l CITA) as well as for acquisition holding debt (art. 15ad CITA) will be abolished on 1 January 2019.


No, there is not.


Dutch tax law includes the arm’s-length principle (codified in the Dutch Corporate Income Tax Act) and contains specific transfer-pricing documentation requirements. Taxpayers can use the Dutch transfer-pricing decrees for guidance. These decrees provide the Dutch interpretation of the OECD transfer-pricing guidelines.



The proposed standard corporate income tax rate for 2019 is 24.3% (19% on the first €200,000). A reduction of these rates has been announced (23.9% and 17.5%, respectively, in 2020, and 22.25% and 16%, respectively in 2021).


The Dutch tax base is not necessarily calculated on the basis of the annual accounting profit. In the Netherlands, commercial accounting methods typically have to be reviewed to confirm that they are acceptable under Dutch tax law. The primary feature of Dutch tax accounting is the legal concept of “sound business practice” (in Dutch: goedkoopmansgebruik).


There are various adjustments that apply to the accounting profit in order to come to the tax base. Some of the main adjustments are:■ Participations.■ Hybrid loans.■ Depreciation of assets, including real estate.■ Inventories.■ Provisions.


Under the Dutch grouping rules, a group of companies can be treated as one taxpayer for Dutch tax purposes (a so-called fiscal unity). To elect a fiscal unity, Dutch taxpayers must be connected to each other through at least 95% of the entire legal and economic ownership of shares. A connection can be established through a common (indirect) parent company that is either a Dutch resident company that forms part of the fiscal unity itself, or a common (indirect) parent that is resident in an EU/EEA country. In the case of indirect ownership, the intermediate owner of the shares must


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In line with ATAD1 the Netherlands plans to introduce, on 1 January 2019, a CFC regime that effects controlled companies in jurisdictions with a statutory profit tax rate of less than 7% or in jurisdictions that are EU blacklisted. Control is defined as a direct or indirect interest of more than 50% in nominal capital, voting rights or entitlement to profits. Exceptions to the CFC rules apply to some financial institutions, to companies that perform genuine economic activities and to companies that mainly earn non-tainted income.



Income from Dutch real estate, including capital gains as a result of the sale of real estate, is considered a Dutch business of the non-resident. Therefore, the income is subject to Dutch (corporate) income tax. However, there may be ways to avoid the Dutch tax on the disposal of commercial real estate in the Netherlands altogether.


This is generally not the case. However, real estate transfer tax may be due in specific cases if a so-called “real estate entity” is being transferred.


Dutch Financial Investment Institutions (in Dutch: Fiscale beleggingsinstellingen) can invest directly or indirectly in Dutch real estate against a 0% corporate income tax rate. However, this will no longer be allowed as of 1 January 2020 in light of the abolishment of Dutch dividend withholding tax.



Yes, the Netherlands has a general anti-abuse doctrine called fraus legis. This is unwritten doctrine to prevent the abuse of law.


Yes, specific tax advice will have to be disclosed based on the EU Mandatory Disclosure Directive. The Dutch government will submit a legislative proposal to implement this Directive in the course of 2019.



The Netherlands does not levy duties on the incorporation of a subsidiary. A (small) annual registration fee is required by the Dutch chamber of commerce.


Local subsidiaries fall under the Dutch dividend withholding tax rules. Local branches are not liable to Dutch dividend withholding tax.


Taxable profits of a local branch can be determined on the basis of a two-step approach. First, a functional analysis is performed for both the local branch and its head office. Next, the taxable profits are attributed to the branch and its head office based on the arm’s length principle.


Although a Dutch branch is typically not regarded as a resident for Dutch tax treaty purposes, the branch can generally apply for double tax relief under Dutch domestic rules, specific double tax treaties, and pursuant to EU case law.


Profits realised by permanent establishments of Dutch tax residents are exempt under the object exemption (objectvrijstelling) in the Netherlands. Profits distributed to a foreign entity by its Dutch permanent establishment are not subject to withholding tax.

7 Overseas Profits


Profits earned in overseas branches are generally excluded from the tax base of Dutch companies based on the object exemption (objectvrijstelling).


Income realised by Dutch entities on foreign entities is subject to corporate income tax unless the participation exemption applies (see question 5.2).


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■ Transparency framework which applies to rulings: as of 1 January 2017 the Dutch “Law on Exchange of Information about Rulings” has been entered into force.

■ Nexus approach: the Dutch innovation box regime has been adjusted to comply with the nexus approach (adjustments have entered into force as of 1 January 2017).

■ Treaty abuse: this will be implemented in the Multilateral Instrument (MLI).

■ Transfer Pricing: the Dutch Transfer Pricing Decree (Verrekenprijzenbesluit) was updated on 22 April 2018 and includes various changes as a result of BEPS.

■ Country-by-country reporting: CBCR was implemented as of 1 January 2017.


No, it does not.


Yes, the Netherlands has implemented CBCR in national law.


The Netherlands has an innovation box regime to encourage innovations. Qualifying innovation profits are effectively taxed against 7% (2018 rate) instead of the standard Dutch corporate income tax rate.



The Netherlands has not undertaken any specific unilateral actions to tax digital activities and has no intention to do so.


No, it does not. The Dutch government expressed (strong) reservations regarding the new plans of the European Commission for such a tax.


This will be covered in the legislation based on the Mandatory Disclosure Directive as mentioned at question 9.2. Furthermore, advisors of illegal tax structures may be prosecuted as co-conspirators.


Yes, the Netherlands encourages co-operative compliance by conducting Advance Tax Rulings (ATRs) and Advanced Pricing Agreements (APAs) with taxpayers. ATRs are agreements concluded with the Dutch tax authorities confirming the Dutch tax consequences of transactions or situations involving taxpayers. Rulings are based on Dutch tax laws that apply at the time of the request.For certainty in advance regarding general transfer-pricing matters, an APA can be concluded with the tax authorities. APAs provide taxpayers with upfront certainty regarding the arm’s-length nature of transfer prices. All Dutch APAs are based on OECD transfer-pricing principles and require the taxpayer to file transfer-pricing documentation with the tax authorities. APAs can be entered into on a unilateral, bilateral or multilateral basis (that is, with several tax administrations). APAs may cover all or part of transactions with related parties, including transactions involving permanent establishments. Furthermore, it is possible for taxpayers to have a formal ongoing compliance relationship with the tax authorities under a horizontal monitoring agreement (horizontaal toezicht). These procedures do not result in a reduction of tax but do allow Dutch tax residents to have certainty in advance with respect to their tax treatment.



The Netherlands already introduced various laws as a result of the BEPS project: ■ Hybrid mismatches: legislation regarding hybrid mismatches

was already partially implemented with respect to the application of the participation exemption. Further laws are expected to be implemented as of 1 January 2020.

■ CFC: new legislation to be implemented by 1 January 2019.■ GAAR: a general anti-abuse regulation will be implemented

by 1 January 2019.


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Houthoff is an independent top-tier Netherlands-based firm with 300 lawyers, civil-law notaries and tax advisers, all offering exceptional legal advice and support to an extensive national and international client base.

Clients choose us to help them tackle their most complex and critical problems, the kind where genuine strategic advice is essential and not just knowledge of the law. Why? They say it is the reassuring depth of our practice group’s legal knowledge combined with the breadth of our sector knowledge and experience that gives them confidence that we will give them the very best team to work with. They also praise our proven track record of resolving disputes and capitalising on opportunities. They also talk about our pragmatic approach to problem-solving, our passion for innovation and our truly entrepreneurial spirit.

Together with our worldwide network, consisting of offices in Amsterdam, Rotterdam, Brussels, London and New York, representatives in Houston, Singapore and Tokyo, an exclusive Lex Mundi membership and our own International Friends Network, these qualities make Houthoff a reliable partner at the most critical moments.

International tax partner and an expert in both Dutch domestic and international tax law, Paulus advises on M&A transactions, restructurings, reorganisations, public offerings and transfer pricing. He also litigates disputes with the tax authorities, as well as advising on general tax law matters. Merks regularly advises US, French, Japanese and other non-Dutch companies on how best to structure their worldwide operations and acquisitions.

Paulus has previously worked as a tax lawyer in New York, Paris, Chicago and San Jose (California).

Paulus MerksHouthoffGustav Mahlerplein 501082 MAAmsterdamNetherlands

Tel: +31 20 605 6172Email: [email protected] URL: www.houthoff.com

Wieger specialises in tax law with a focus on M&A and tax proceedings, including in the area of criminal law. He advises clients on Dutch and international tax matters regarding transactions, compliance and civil liabilities, for tax and criminal tax law. Wieger is a member of the Netherlands Bar Association and the Dutch Association of Tax Advisers.

Wieger KopHouthoffGustav Mahlerplein 501082 MAAmsterdamNetherlands

Tel: +31 20 605 6560Email: [email protected]: www.houthoff.com


Chapter 29

Blackwood & Stone LP Kelechi Ugbeva

Nigeria


Under Nigerian law, the test for determining the residence of a company is the place of incorporation. A company is resident in Nigeria if it is incorporated under the relevant Nigerian law.

2 Transaction Taxes


Yes, stamp duty is payable on instruments listed in the Stamp Duties Act.


Yes, VAT is charged at a flat rate of 5%.


According to the VAT Act, VAT is charged on the supply of taxable goods and services. There are certain exemptions which include: all medical and pharmaceutical products; basic food items; books and educational materials; baby products; fertiliser, locally produced agricultural and veterinary medicine, farming machinery and farming transportation equipment; all exports; plant and machinery imported for use in the Export Processing Zone; plant, machinery and equipment purchased for utilisation of gas in downstream petroleum operations; troughs, ploughs and agricultural equipment and implements purchased for agricultural purposes; proceeds from the disposal of short-term Federal Government of Nigeria securities and bonds; proceeds from the disposal of short-term state, local government and corporate bonds (including supra-national bonds); medical services; services rendered by Community Banks, the People’s Bank and mortgage institutions; plays and performances conducted by educational institutions as part of learning; and all export services.However, there is currently a VAT Act Amendment Bill before the National Assembly, which when ratified will have the following implications:



There are currently 14 tax treaties in force in Nigeria. These treaties are between Nigeria and the following countries: Belgium; Canada; China; the Czech Republic; France; Italy; the Netherlands; Pakistan; the Philippines; Romania; Slovakia; South Africa; Spain; and the United Kingdom.


Yes, they generally follow the OECD Model Convention and the UN Model Convention.


Yes, treaties must be incorporated into Nigerian domestic law, through the National Assembly, before they take effect.


No, Nigeria does not have provisions for anti-treaty shopping rules (or “limitation on benefits” articles).


The Nigerian Constitution is the supreme law of the land and it overrides every other law, regulation or treaty. No other rules of domestic law can override a treaty that has been ratified by the National Assembly, and this position is supported by judicial authority in a number of cases. Furthermore, section 45(1) of the Companies Income Tax Act stipulates that where there is a conflict, double taxation treaties shall override the provisions of the Act itself.


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Blackwood & Stone LP Nigeria


WHT is generally applicable on interest paid by a local company to a non-resident, however, the law grants tax exemptions for interest payable in relation to foreign and agricultural loans invested in Nigeria under certain circumstances, as provided for under the Third Schedule (pursuant to section 11) of the Companies Income Tax Act.


There are currently no “thin capitalisation” rules in Nigeria.


The specific “interest-related” tax reliefs are discussed in question 3.3 above.


This is not applicable in Nigeria.


No, there are no other restrictions.


Yes. WHT is applicable on rental payments where the property is situated in Nigeria and is charged at a rate of 10%.


Yes. The Income Tax (Transfer Pricing) Regulations, No. 1, 2012 (TP Regulations) are applicable in Nigeria.



The headline rate of tax on corporate profits is 30% of the total profits made.


Yes, tax is assessed on profits, which are subject to adjustments.


The Companies Income Tax Act (CITA) allows only the deduction of expenses incurred wholly, exclusively and necessarily in the

1. Expand the exempted items to include rent/lease on residential properties, public transport services, life insurance policies, education and training conducted by public or non-profit educational institutions, and intangible properties.

2. Streamline the exemption of export services to only non-oil exports.

3. Replace the exemption of services rendered by Community banks and People’s banks with services rendered by unit Microfinance banks.


VAT is recoverable; however, it is restricted to goods purchased or imported directly for resale and goods which form the stock-in-trade used for the direct production of any new product on which the output VAT is charged.VAT on fixed assets/capital items, overheads, service and general administration are not recoverable. Furthermore, excess input VAT may be carried forward as credit against future VAT payable. In addition, the Federal Inland Revenue Service (FIRS) Establishment Act provides for a cash refund on application within 90 days of the FIRS’s decision, subject to an appropriate tax audit.


No, Nigeria does not permit “establishment only” VAT grouping.


Yes. Capital gains tax is applicable on qualifying transactions at a rate of 10%. Also, some states in Nigeria, e.g. Lagos State, require companies such as Hotels and Restaurants to pay Consumption and Sales Tax on their transactions at the rate of 5%, respectively.


Yes. Customs and excise duties are imposed by the Customs and Excise Act.



Yes, withholding tax (WHT) at the rate of 10% is imposed on dividends paid to non-resident companies. The WHT rate for recipients of dividends from double taxation treaties countries is 7.5%.


Yes. Please see question 3.1 above for the tax rates.


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assets. Another important relief is one granted to businessmen or trade, where old business assets are sold and the proceeds are used to procure new and similar business assets.


Yes, there is. Gains accruing to unit holders of a trust in respect of disposal of all securities are not chargeable to tax, provided that the proceeds are reinvested.


Capital gains on disposal of stocks and shares are tax-exempt, therefore WHT is not applicable. WHT would be applicable on proceeds from the sale of assets, except where such gains meet the exemption criteria provided in question 5.3 above.



Stamp duties will be imposed and are payable on the share capital of the subsidiary upon incorporation.


No, there is none. For tax purposes, a local branch is deemed to be independent of its parent company. A non-resident company intending to do business in Nigeria must incorporate a Nigerian entity. Invariably, a company cannot carry out business in Nigeria through an unincorporated branch. Companies incorporated in Nigeria (subsidiaries) are taxable under the same regime.


The branch of a non-resident company is treated for taxation purposes as a duly incorporated company in Nigeria and taxed to the extent that its income or profits accrue in, are derived from, are brought into or are received in Nigeria.


A Nigerian branch of a non-resident company would be deemed to be resident in Nigeria and, as such, cannot claim treaty relief. However, non-resident entities (with Nigerian branches) in treaty countries may benefit from double tax relief in instances where such non-resident entities derive profits attributable to a permanent establishment in Nigeria.


Dividends repatriated are subject to withholding tax.

promotion of a business venture, and provides for capital allowances for qualifying capital expenditure incurred in the course of doing business (as provided for under the Second Schedule to the CITA).


There are no tax grouping rules in Nigeria.


Yes, tax losses survive a change of ownership. Companies (except insurance companies) are allowed to carry forward tax losses indefinitely.


No, tax is levied on the entire profits of a company for that year of assessment. However, retained earnings are generally not subject to tax.


Other taxes include:■ Education Tax: this is payable by all Nigerian companies and

levied on assessable profits at a rate of 2%.■ Petroleum Profits Tax (PPT): this is levied on the income

of companies engaged in upstream petroleum operations. It is chargeable at a rate of: 65.75% for non-Production Sharing Contract (PSC) operations in their first five years, during which the company has not fully amortised all pre-production capitalised expenditure; 50% for PSCs with the Nigerian National Petroleum Corporation (NNPC); and 85% for petroleum operations carried out under joint-venture arrangements with the NNPC or any non-PSC over five years.

5 Capital Gains


Capital gains and losses in Nigeria are governed by the Capital Gains Tax Act. The Act provides that tax be imposed at a rate of 10% on all capital gains arising from a sale, exchange or other disposition of properties, known as chargeable assets, in each year of assessment, but excluding capital gains on the disposal of government securities, stocks and shares.


Yes, there is. Section 32 of the Capital Gains Tax Act provides for exemption on gains arising from acquisition of the shares of a company either taken over, absorbed or merged by another company, as a result of which the acquired company loses its identity as a limited company, provided that no cash payment is made in respect of the shares acquired.Other exemptions include gains made upon a disposal of business assets where the proceeds are spent in acquiring new business


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Under the TP Regulations, connected taxable persons are required to disclose any transaction which affects its income or expense. Companies are required to file statutory transfer pricing forms (Declaration and Disclosure Forms) along with their annual income tax returns.


Yes. Sections 95 and 96 of the Personal Income Tax Act and section 94 of the Companies Income Tax Act contain provisions which target anyone who promotes or facilitates tax avoidance.


Nigeria encourages co-operative compliance. However, this does not result in a significant reduction of tax.



Nigeria has not introduced any legislation in response to the OECD’s BEPS Action Plan. Suffice it to say that the BEPS recommendations will require ratification into Nigerian law before they can be implemented. However, please see the additional discussion on this subject in question 10.2 below


The BEPS recommendations for changes to the TP Regulations immediately became effective in Nigeria, as the Nigerian TP regulations incorporated the OECD TP Guidelines. The FIRS, in this regard, has already begun to adopt some of the regulations while carrying out the audits.


The FIRS has started to request that multinational entities in Nigeria submit country-by-country reports, and this has been incorporated into the audit process. The FIRS also recently released the Income Tax (Country-by-Country Reporting) Regulations 2018.


Subject to the approval of the National Office for Technology Acquisition and Promotion (NOTAP), Nigerian companies are


7 Overseas Profits


Profits earned in branches overseas are only taxable to the extent that such income accrued is derived from or brought into Nigeria.


Yes, dividends received by Nigerian companies from non-resident companies are taxable, except if brought into Nigeria through government-approved channels (any financial institution authorised by the Central Bank of Nigeria to deal in foreign currency transactions).


Nigeria currently does not have controlled foreign corporation (CFC) rules, but it is expected that such rules may be implemented soon.



Yes, capital gains tax is payable upon disposal of real estate by residents and non-residents in Nigeria, except where such gains are derived from the main or only private residence of the individual, and provided that the real estate does not exceed one acre in size.


No, it does not.


There is no special tax regime for REITs in Nigeria.



Yes, as provided under the TP Regulations. Note that, prior to the establishment of the TP Regulations, general anti-avoidance rules (GAAR) have been in existence in Nigeria via specific statutory provisions. Specifically, section 17 of the Personal Income Tax Act (2004), section 22 of the Companies Income Tax Act (2004, amended 2007), section 15 of the Petroleum Profits Tax Act (2004) and the Capital Gains Tax Act (1967, last amended in 1999) all provide for the FIRS to adjust any artificial transaction in Nigeria.


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Nigeria is yet to take any stand on the European Commission’s interim proposal for digital services tax.


allowed to remit royalties, management/technical service fees and payments under Technology Transfer Agreements to their non-resident technical partners.Such remittances are treated as allowable deductions and are not liable to tax, provided that the FIRS is satisfied that such payments are at arm’s length.



Nigeria is yet to implement the taxation of digital transactions. However, with the recent release of draft Orders and Bills, and the Country-by-Country Regulation by the FIRS, it is envisaged that the commencement of taxation of digital activities is not far off.

Kelechi Ugbeva is a Partner at Blackwood & Stone LP. Kelechi provides specialist tax and corporate/commercial legal services to resident and non-resident entities and individuals doing business in Nigeria.

Kelechi UgbevaBlackwood & Stone LP22A Rasheed Alaba Williams StreetLekki Phase 1LagosNigeria

Tel: +234 90 3350 1613Email: [email protected]: www.blackwoodstone.com

Blackwood & Stone LP is a tax law firm based in Lagos, Nigeria, dedicated to providing clients with specialised tax and corporate & commercial law services. The firm successfully represents and advises multinational companies, foreign investors, public companies, closely held businesses including those that are family-owned and owner-managed, start-ups and individuals throughout Nigeria and around the world.

Our partners are experienced tax and commercial lawyers who are experts in Nigerian and international tax and business law, each having developed a successful career at a leading law firm or organisation.


Chapter 30

Braekhus Advokatfirm DA

Toralv Follestad

Charlotte Holmedal Gjelstad

Norway


At the outset, the answer is no. It should be noted that according to the Double Tax Treaty Act, a tax treaty can only limit the taxation following Norwegian Tax Regulations. This means that the tax treaty cannot be the legal basis for taxation, i.e. taxation has to be in accordance with Norwegian tax regulations irrespective of regulation in tax treaty.


Currently, the test for determining company tax residency is from where a company is lead at the level of Board of Directors. If this takes place in Norway, the company is considered to be tax resident in Norway. However, together with presentation of the State Budget for 2019 on October 8th, the Government proposed to change the test effective from January 1st 2019. According to the proposal, companies incorporated in Norway will be considered to be tax resident in Norway (unless considered tax resident in another country according to tax treaty). For companies incorporated in a foreign country, it will be considered tax resident in Norway if the place of effective management takes place in Norway.

2 Transaction Taxes


Yes, there are.


A general Value Added Tax (“VAT”) was introduced in Norway in 1970. VAT is applicable on all supplies unless explicitly exempt under the Norwegian VAT legislation. The standard VAT rate is 25%. A reduced rate of 15% applies to foodstuff and a super reduced rate of 10% applies to certain services such as hotels, taxis and tickets to the opera/cinema. Furthermore, a zero rate applies to exports from Norway and to some specifically mentioned goods and services supplied within the Norwegian VAT territory.



Norway has currently 88 income tax treaties in force, covering 94 jurisdictions.


The income tax treaties do generally follow the OECD Model Convention. The most important exception is the tax treaty between Norway and the USA. In addition, some of the tax treaties between Norway and some developing countries are based on the United Nations Model Double Taxation Convention between Developed and Developing Countries.


At the outset, treaties in general have to be incorporated in Norwegian law according to the regulations on legislative decisions by Parliament. However, according to the Double Tax Treaty Act, tax treaties enter into force by consent of the Parliament in plenary session.


Several of the tax treaties in force contain regulations which can be characterised as anti-treaty shopping or Limitation of Benefit. The type of regulation varies but, in general, it is three out of the four methods described by OECD: “The subject-to tax approach” (e.g. Nordic Tax Treaty and UK); “The exclusion approach” (e.g. USA, Canada, Argentina and Luxembourg); and “The look through approach” (e.g. Barbados and the Netherlands Antilles). The exclusion approach is not included in any tax treaties in force.It should also be noted that in 2017 Norway signed the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”), which contains regulations to prevent treaty abuse, most importantly Article 7 with the Principle Purpose Test, Limitation of Benefit regulations or a combination of both. Please see more details in section 10 below.


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Braekhus Advokatfirm DA Norway

together with presentation of the State Budget on October 8th 2018, the Government has notified that a proposal to introduce withholding tax on royalties will be presented during 2018, aiming at new regulation in 2019.


There is currently no withholding tax on interest payments. However, together with presentation of the State Budget on October 8th 2018, the Government has notified that a proposal to introduce withholding tax on royalties will be presented during 2018, aiming at new regulations in 2019.


Relief is currently restricted by the Norwegian Tax Act §13-1, according to which transactions between related parties must be in accordance with arm’s length pricing. This regulation is also applied to “thin capitalisation”. Relief may also be restricted by the General Anti Avoidance Regulation (doctrine developed by case law).


Please see the answer to question 3.4.


Please see the answer to question 3.7.


Regulations providing limitation on the deductibility of interest costs are currently in place, irrespective of interest costs being paid to a resident or non-resident. According to these regulations, deduction for interest costs paid to a related party (direct or indirect ownership of at least 50%) shall not exceed 25% of “taxable EBITDA”. This limitation is only applied if net interest costs exceed NOK 5,000,000 (approx. EUR 500,000) per annum.Effective from January 1st 2019, this regulation will be expanded for group companies to also include external interest cost (i.e. interest costs paid to non-related parties), but there are important exemptions. First of all, it will only apply to group companies with interest costs exceeding NOK 25,000,000 (approx. EUR 2,500,000) per annum. Second, if the equity according to accounts at company level is not lower than the equity level in the consolidated accounts at a global level, deduction of interest costs is not limited. Third, deduction of interest costs is not limited if the company claiming deduction for interest costs is part of a Norwegian group and the equity ratio for the Norwegian group as a whole is not lower than the equity ratio of the group globally. Although the mentioned equity ratio test is passed for a group company, deduction will be limited if the company has interest costs paid to a related individual and thereby having total interest costs exceeding 25% of taxable EBITDA.


VAT is generally applied unless the supplies are specifically exempt under the VAT legislation. Examples of such exemptions are services relating to the sale and lease of immovable property, educational services, health care services and financial services.For the lease of immovable property an option to tax is possible.


VAT is generally fully deductible on expenses to be used in fully taxable business. Some exceptions apply independent of use such as VAT on catering, art, representation and passenger cars, where VAT deduction is disallowed. For mixed businesses (businesses making both taxable and exempt supplies) VAT is deducted based on a pro rata key


VAT grouping is allowed between companies and establishments in Norway on certain conditions. Norway has one of the most favourable VAT grouping rules in Europe The principle of the Skandia case, that a branch part of a foreign VAT group is a separate taxable person, does so far not apply in Norway.


Transfer of title to real estate is subject to a 2.5% transfer tax, calculated on the gross value of the property. When transferring ownership to a company holding title to real estate, no transfer tax is levied.


Special duties apply on certain goods and services in Norway such as sugar, tobacco, candy, alcohol, NOx and electric power.



25% withholding tax is, at the outset, imposed on dividends paid by a company tax resident in Norway according to the Norwegian tax law. However, companies tax resident in an EU/EEA country will be exempt, provided the company is in fact established and conducting real economic activity in such country. This test was developed in order to comply with the “wholly artificial arrangements” test by ECJ in the Cadbury Schweppes ruling (C-196/04). Reduced-rate or no withholding tax may follow from tax treaty.


There is currently no withholding tax on royalties. However,


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company must be “final” (ref. the Marks & Spencer ruling of ECJ, case C-446/03) and it must not be a “wholly artificial arrangement”.


Losses do, at the outset, survive change of ownership. However, losses will not survive change of ownership or other kinds of transactions if the exploitation of the loss is the principle purpose of the transaction, ref. Norwegian Tax Act §14-90. These are anti-avoidance regulations which are stricter that the General Anti Avoidance Regulations developed by case law.


Please see the answers to questions 3.1 and 4.1 above.


Companies may be subject to tax on occupation of property. This is levied by local communes, and the number of communes imposing such tax has increased in the last few years. The maximum rate is currently 0.7%, but will be reduced to 0.5% effective from January 1st 2019. This is calculated on the gross value of the property and the property is valuated according to specific regulations aiming at setting the “objective” value of the property, irrespective of actual use of the property.

5 Capital Gains


Taxation of capital gains and losses are subject to a special set of rules in the Norwegian Tax Act. Capital gains/losses are, at the outset, taxable when realised and the tax base will be the difference between cost price (less eventual depreciation) and sales price/market value. Most importantly, Norway has exit tax regulations, according to which capital gains are taxable if taken out of Norwegian tax jurisdiction or if Norwegian tax residency ceases to exist.


Norway has participation exemption regulations, according to which capital gains and losses on shareholding, ownership in partnership and similar are tax free, provided the shareholding is in a Norwegian company or a company tax resident and conducting real economic activity in an EU/EEA Member State. 3% of dividend income is taxable at the general rate.For shareholding in companies tax resident outside the EU/EEA, capital gains and losses will be tax free and only 3% of dividends will be taxed, provided shareholding has exceeded 10% of total share capital for at least two years.However, shareholding in a low tax jurisdiction will not be subject to participation exemption in any case. In addition, dividends are not covered by the participation exemption regulations if the distribution is deductible in the jurisdiction of the distributing entity.


No, there is not.


Transactions between related parties must be in accordance with the arm’s length principle. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations are incorporated in Norwegian tax law. In addition, an entity being involved in group-controlled transactions exceeding NOK 10,000,000 (approx. EUR 1,000,000) or internal balances exceeding NOK 25,000,000 (approx. EUR 2,500,000) must report this. If subject to the reporting obligation as mentioned, transactions must in addition be documented in accordance with specific reporting obligations, as the tax authorities may require such documentation with a 45-day notice. However, entities which are part of a group with less than 250 total employees that either has a turnover exceeding NOK 400,000,000 (approx. EUR 40,000,000) or gross balance (equity + debt) exceeding NOK 350,000,000 (approx. EUR 35,000,000).



Headline tax rate in general is currently 23%, but will be reduced to 22% effective from January 1st 2019. Headline tax rate on income subject to the Norwegian Petroleum Tax Act is 78%. Taxation of income from hydro-power is currently subject to a tax of 35.7%, which will be increased to 37% effective from January 1st

2019 according to specific regulations, in addition to the base rate of 23%.


Accounting profit is subject to adjustments.


The tax law has its own regulations on when income/capital gains and costs/capital losses are taxable. The most important adjustments relate to depreciation, capital gains/losses (taxable when realised) and manufacturing contracts (income taxable when completed).


Norway has tax grouping rules, according to which group contributions are deductible for the paying company and taxable for the receiving company, irrespective of whether the receiving company has a profit or loss. These regulations, at the outset, allow deduction for group contributions paid to a group company taxable in another EU/EEA State. However, eventual loss in such


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7 Overseas Profits


Norwegian tax law is based on the global tax income. The only exception is if the method for avoiding double taxation in an applicable tax treaty is the exemption method.


Unless covered by participation exemption regulations, receipt of dividends will be taxable for local company.


Norway has CFC regulations, which are applicable on Norwegian entities holding at least 50% ownership in a company tax resident in a low-tax jurisdiction both at the beginning and end of a tax year. If the ownership share is more than 60% at the end of the tax year, CFS regulations will apply in any case. Countries with a general tax rate of less than ⅔ of the tax rate for a similar company in Norway, are classified as low-tax jurisdictions.



Yes, they are.


No, it does not.


No, it does not.



Norway has General Anti Avoidance Regulations, which are developed by case law.


No, there is currently no such requirement but it is being considered by the Government.


There is relief for reinvestment capital gain from assets which have been realised involuntarily (e.g. as a result of an accident or expropriation), provided certain conditions are met. Most importantly, the proceeds must be reinvested in a similar asset.


No, it does not.



No tax will be levied upon the mere formation of a subsidiary. The income of the subsidiary will be taxed in accordance with the tax regulations as described.


There is, at the outset, no difference between taxation of a local subsidiary and local branch of a non-resident company. However, a branch may be exempted from taxation based on tax treaties (permanent establishment) whereas a subsidiary will be taxable from day one of having taxable income.


Taxable profit will be determined by applying the regular tax regulations applicable according to the Norwegian Tax Act, i.e. no special regulations in Norwegian internal tax law.Most of the Norwegian tax treaties provide that it is only the profit attributable to a permanent establishment of the branch in Norway which can be taxed in Norway. In attributing the profit to the branch, the starting point will be the profits it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions, i.e. the arm’s length principle. It will further be in accordance with the OECD Model Tax Treaty and relevant OECD Guidelines.


A branch will not benefit from any double tax relief other than provided for in a tax treaty.


There is no withholding tax on remittance of profit from branch.


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Norway has introduced CBCR regulations effective from the financial year 2016.


Norway has a special tax regime available for shipping; a tonnage tax system. This is considered to be competitive with similar systems available in Europe.



The Norwegian Government is taking an active role in the OECD Task Force on the Digital Economy and is also following the development in the EU closely. The notified legislation of withholding tax on royalty (see our answer to question 3.2 above), is partly considered to be a part of this work. Development should be monitored closely. Norway introduced VAT on the supply of electronic services by foreign established businesses to Norwegian private individuals in 2011. The rules are modelled on the OECD Guidelines.





Anyone who is aiding and abetting illegal tax avoidance may be subject to claim for damages and/or criminal proceedings.


Norwegian tax regulations have no rules on “co-operative compliance”.



The Norwegian Government is working actively on implementing BEPS in Norwegian tax legislation. Reference is made to our answer to question 1.4 above, regarding the Norwegian position on MLI (BEPS Action 15). Legislation in order to incorporate the following BEPS Actions is, or will be, incorporated in Norwegian tax law: Action 2 (Hybrid Investments), Action 4 (Interest Deductions), Action 6 (Treaty Abuse), Action 7 (Permanent Establishment), Actions 8–10 (Change in the OECD Transfer Pricing Guidelines), Action 13 (Country by Country Reporting), and Action 14 (Dispute Resolution).


This must be analysed for each relevant legislation.


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Braekhus Advokatfirm DA has a long tradition in advising clients on cross-border and international business activities. We advise clients on strategic tax and VAT issues and can also provide required tax and VAT compliance services for non-Norwegian entities doing business in Norway.

Toralv Follestad gives clients strategic tax and corporate law advice, especially Norwegian clients engaged in real estate and non-Norwegian entities doing business in Norway. This may be related to tax-optimal structuring, business transfers, mergers and acquisitions, etc. He is also regularly engaged in tax disputes on behalf of our clients. Our firm has a long tradition in advising non-Norwegian entities doing business in Norway, e.g. in the oil service industry and various construction projects both onshore and offshore, and Toralv plays an important part of the team, giving the required advice. His work experience includes the Norwegian tax administration and the Ministry of Foreign Affairs.

Toralv FollestadBraekhus Advokatfirm DARoald Amundsensgate 60161 OsloNorway

Tel: +47 99 56 85 65Email: [email protected]: www.braekhus.no

Charlotte Holmedal Gjelstad is part of our tax team where she offers legal advice to small- and medium-sized and large businesses concerning Norwegian and international VAT in addition to customs and excise duties. She has been involved as an advisor on several larger VAT audits and planning projects for both Norwegian and international clients, specifically concerning Norwegian VAT-liability on cross-border projects.

Charlotte Holmedal GjelstadBraekhus Advokatfirm DARoald Amundsensgate 60161 OsloNorway

Tel: +47 48 04 00 32Email: [email protected]: www.braekhus.no


Chapter 31

Sameta Sofia Kriulina

Russia


The Constitution of the Russian Federation provides the primacy of international law. Consequently, if there is a conflict between domestic law and an international tax treaty, the tax treaty should prevail. The same rule is set by the Tax code.


There are two tests for corporate residence in Russia. The first is the incorporation test. Generally, a company which is incorporated in Russia is automatically a Russian resident. Secondly, a foreign company is recognised as a Russian tax resident if the place of its effective management is in Russia. Both tests are subject to a tie-breaker provision of an applicable double tax treaty.

2 Transaction Taxes


Yes, the Tax code contains provisions imposing state duties which are deemed as documentary taxes.


Yes, VAT is imposed at three rates: ■ 18% (base rate – will be increased to 20% in 2019); ■ 10% (reduced rate – mostly applied to food products); and■ 0% (mostly applied to exported goods, work and services).


Generally, all transactions connected with the sale of goods, work, services and import of goods are VAT-taxable. However, the Tax code provides some exemptions, for instance: the sale of medical goods and some food products; medical services; services involving the carriage of passengers; the sale of shares in the charter capital;



There are 83 double tax treaties which have been concluded by the Russian Federation and are currently in force.Among them are agreements with Austria, China, Cyprus, France, Germany, Luxembourg, Malta, the Netherlands, the UK and the USA.


Mostly, double tax treaties follow the OECD Model Tax Convention. However, for instance, a double tax treaty with Singapore is based on the UN Model Tax Convention.


Yes, they do. A tax treaty must be incorporated into Russian law by way of ratification.


Some treaties have “limitation on benefits” articles, for example, one with the USA. Besides, Russia signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the MLI) that provides three alternative approaches to prevent treaty abuse. Signing the MLI, Russia chose to apply the principal purpose test combined with a simplified “limitation on benefits” provision, which restricts most treaty benefits to “qualified persons”. After ratification this Convention will amend 66 existing double tax treaties concluded by Russia.Besides, the Russian Tax code provides that a foreign organisation should prove that they are the beneficial owner of income in order to enjoy tax benefits under a double tax treaty.


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organisation. The tax rate for dividends payable to the foreign company is 15%, unless otherwise provided in the double tax treaty.


A Russian company is regarded as thinly capitalised only if the level of controlled debt to net equity exceeds a ratio of 3:1 (or, a ratio of 12.5:1 in case of banks and leasing organisations).


Yes, if a debt is advanced by a third party but guaranteed by a parent company “thin capitalisation” rules are also applicable, taking into account the exceptions provided by the Tax code.


The restrictions on tax relief for interest payments are imposed only in cases of controlled transactions.


Such payments are subject to withholding tax (by the tenant or agent) at 20%. However, double tax treaties allow the withholding of Russian tax only from rental payments for immovable property located in Russia.


Yes, transfer pricing rules are applicable to both domestic and cross-border transactions mainly between related parties. The Tax code includes five methods similar to those used in international transfer pricing practice. The resale-minus method has first priority for a routine distributor reselling goods to unrelated customers. In all other cases, the CUP (comparable uncontrolled price) method prevails, whereas the profit split is a method of last resort.



The headline rate is 20%; 2% of which goes to the federal budget and the other 18% to the regional budget. A subject of the Russian Federation can reduce its rate up to 13.5%. So, the minimum headline rate can be 15.5% in some regions.


The difference between a tax base of corporate tax and an accounting profit is that the applying methods of calculations are not the same. Generally, the tax base is calculated according to the special rules of the Tax code, while the rules of determining accounting profit are stipulated by Russian accounting legislation and standards. As a general rule, the tax base is determined as the difference between

property leases to foreign entities (on reciprocity basis); and carrying out banking operations, etc. Also, specific types of taxpayers are excluded from VAT.


VAT is a recoverable tax under Russian law but with restrictions for certain types of businesses applying special tax regimes.


No, Russian tax law does not stipulate any VAT grouping regulation.


No, the Russian tax system does not contain any other transaction taxes.


Excise duties are levied on certain kinds of goods (e.g. fuel, alcohol, and tobacco). Customs duties are generally payable on goods imported from outside Russia.



Yes, dividend payments from residents to non-residents are taxable at a 15% rate. The tax rate may be reduced to 10% or 5% according to particular double tax treaties.


Royalty income is taxed at a rate of 20%. Reduced tax rates from 0% to 15% may be stipulated in double tax treaties.


The standard tax rate for interest payments is 20%, but this can be reduced by double tax treaties. Reduced rates vary from 0% to 15%.


Yes, Russia has a “thin capitalisation” regime which applies to domestic as well as cross-border transactions. Under “thin capitalisation” rules there is a maximum amount of interest that may be recognised as an expense for corporate taxation purposes. Also, any positive difference between interest charged and maximum interest calculated in accordance with the Tax code shall be equated for taxation purposes with dividends paid to the related foreign


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Sameta Russia


A participation exemption is available for capital gains on the sale of unlisted shares and participations in Russian companies and listed shares in high-technology Russian companies, acquired after 1 January 2011 and held for more than five years.Besides, there is a specific tax relief (tax rate of 0%) for dividends earned by a Russian company from another Russian company or from a foreign company (excluding offshore companies) if the recipient of dividends held a share of a minimum of 50% for at least 365 calendar days.


No, there is not.


Russia imposes withholding tax (applicable to non-resident companies) on the proceeds of selling an interest (stocks and shares) in Russian organisations, more than 50% of the assets of which consist of immovable property located within the territory of Russia, as well as financial instruments derived from such shares, except for stocks recognised as listed on an organised securities market. When determining the tax base of the amount of such revenues, expenses may lower taxable income.



A state duty of 4,000 roubles is imposed upon the formation of a legal entity of any kind in Russia. Since 2019, a state duty shall not be paid in case the application of the formation of a legal entity and relevant documents are sent to the tax authority via the internet.


There are no specific taxes or fees that would be incurred by a locally formed subsidiary in comparison to a branch of a non-resident company with regard to their business in Russia. A subsidiary established under Russian law, being a separate legal entity, is to pay all Russian taxes and fees applicable to its worldwide income. A foreign company that conducts business in Russia through its branch is obliged to pay Russian taxes and fees applicable to its activity in Russia. Moreover, there are some differences in the calculation of corporate tax of a local branch of a foreign company and a Russian subsidiary.


The taxable income of a branch is, in principle, calculated and taxed according to the same rules, as they are applicable to any other Russian business taxpayer; total income minus total expenses of the

revenues and expenses. Some of the revenues are not taxable, and some expenses are non-deductible or limited by the Tax code. That is why an accounting profit and a tax base of corporate tax usually differ.


The tax base is calculated according to the special rules of the Tax code, so that it is not accounting profit subject to adjustments in Russia.


Yes, Russian tax law stipulates a structure of a consolidated group of taxpayers which are taxed on the basis of aggregate financial result. A consolidated group consists of a parent company and its direct and indirect subsidiaries which meet certain conditions. The primary responsibility for the calculation and payment of corporate tax, the payment of fines and penalties, as well as reporting to the tax authorities belongs to the responsible party of the consolidated group of taxpayers. These rules do not allow relief for losses of foreign subsidiaries.


Yes. The legal successor shall have the right to reduce the tax base by the sum of the losses incurred by the organisations put under reorganisation and prior to the moment of reorganisation. Concurrently, carry-forward losses cannot reduce the tax base by more than 50% in the current tax period.


There is the same tax rate (20%) for distributed and retained profits. Besides, there is a specific tax relief (tax rate of 0%) for dividends earned by a Russian company from another Russian company or from a foreign company (excluding offshore companies) if the recipient of dividends held a share of a minimum of 50% for at least 365 calendar days.


Most companies are subject to VAT, corporate property tax, land tax and transport tax. Other taxes are more specific such as excise duties, mineral (subsoil) extraction tax, biological resources use fee, water tax, gambling tax, etc.

5 Capital Gains


No, there are no special rules for taxing capital gains and losses. Capital gains are included in the tax base of corporate tax.


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A company is taxed on the disposal of real estate situated in Russia at a corporate tax rate of 20%.


There is no such tax in Russia. However, according to tax treaties and the Tax code, Russia imposes withholding tax on the proceeds of selling abroad an interest (stocks and shares) in Russian organisations, more than 50% of the assets of which consist of immovable property located in Russia, as well as financial instruments derived from such shares.For a Russian resident company the transfer of indirect interest in real estate located in Russia (meaning a transaction with the stocks and shares of a legal entity which owns real estate) is taxable as a transfer of stocks and shares.


The Tax code stipulates specific rules for taxation of the profit of unit investment foundation (including real estate unit investment foundation).



The Russian Tax code provides for a general anti-avoidance rule with respect to all kinds of taxes. The provisions of the article 54.1 set that if there is no misrepresentation, the taxpayer will be entitled to reduce its taxable base and/or tax payable provided both of the following conditions are fulfilled:■ the primary purpose of the transaction is not the avoidance

(or the partial avoidance) of tax and/or to obtain a tax refund; and

■ the obligations under the transaction were performed by a party to the relevant agreement with the taxpayer, and/or its legitimate assignee.


There is no special disclosure rule for avoidance schemes. During tax audits the Russian tax authorities may request information on any other suspicious transactions. Also, the tax authorities periodically publish descriptions of schemes which are considered to be tax avoidance schemes.

branch taxed at a 20% base rate or other applicable rate. Besides, if a double tax treaty allows, a non-resident company’s expenses which are incurred for the purposes of the permanent establishment, will deduct the taxable profit of the permanent establishment situated in Russia. According to the Tax code in case a permanent establishment of a foreign company carries out activities of a preparatory and/or auxiliary nature in the interests of third parties without any remuneration, the tax base is 20% of the amount of the expenses of that permanent establishment.


No, it would not. The head office, but not the branch itself, is entitled to treaty benefits because a branch is legally a part of its head office and not a resident for tax treaty purposes.


No withholding tax applies to the remittance of profits by a Russian branch to its head office.

7 Overseas Profits


Profits earned by foreign branches are included in the corporate tax base of Russian corporations. Taxes paid by these branches abroad are credited in an amount not more than the Russian corporate tax to be paid (if there is a double tax treaty).


Foreign dividends received by Russian companies are taxed basically at a 13% tax rate. Besides, there is a specific tax relief (tax rate of 0%) for dividends if the recipient of dividends held a share of a minimum of 50% for at least 365 calendar days.


The “controlled foreign company” rules apply to foreign organisations (or foreign non-legal entity organisations) that are controlled by shareholders residing in Russia holding more than 25% of the capital or 10% of the capital in case the share of all Russian tax residents is over 50%. Then, passive income earned by these foreign corporations is treated as taxable income of the Russian shareholders (individuals or legal entities). The income of a CFC in the sum of 10 million roubles or less is not taxed.


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Yes, in 2018 Russia’s Federal Tax Services issued Orders establishing the format for Country-by-Country Reports and related notifications for multinational groups, as well as instructions for completing and filing these forms electronically.


No, there is no “patent box” regime. However, there are some special tax regimes for small enterprises, such as a simplified tax system, a single tax on imputed income, a patent system of taxation, and a single agricultural tax. Also, there are some tax preferences for organisations which have acquired the status of participant in a project involving the conduct of research and development activities and commercialisation of the results of those activities in accordance with the Federal Law “Concerning the ‘Skolkovo’ Innovation Centre”.



Yes, since 2017 foreign IT companies that provide services by means of the internet to individuals (not self-employed persons) residing in Russia will have to pay VAT. The Tax code stipulates that 14 types of electronic services are subject to VAT, including services granting rights to use computer programs on the internet (such as games and databases), services of mobile phone app stores, internet advertising services, services for maintenance of electronic resources, and services relating to e-books, music, video and others. Foreign IT companies are obliged to be registered with the Russian tax authorities for calculation and payment of VAT within 30 days from the beginning of activity.


No, it does not. Besides VAT, no other taxes on digital services are planned to be imposed.


Tax law does not provide such rules. Nevertheless, the Criminal code foresees criminal liability for tax evasion for individuals and representatives of legal entities.


Yes, the Tax code provides the “co-operative compliance” programme exclusively for large taxpayers – tax monitoring. Tax monitoring is a form of tax administration, brought in to minimise tax disputes and claims and reduce the expenses for tax audits. Under the tax monitoring regime the taxpayer submits the necessary tax documentation electronically on demand or by allowing the tax authority direct access to the taxpayer’s IT system in exchange for a release from office and field audits and the ability to settle disputes on certain tax issues through a “reasoned opinion” given by the tax authority.



Russia has started to follow the BEPS Action Plan. In 2015 the “controlled foreign company” rules were enacted in Russia. Also, Russia adopted a new format of transfer-pricing documentation making taxpayers disclose the group structure and all important details of the business which will be available to the tax authorities of the involved countries (the so-called master file, local file and Country-by-Country Reporting). Russia has signed the Multilateral Convention and notified most of its treaties to the OECD so that (subject to the relevant treaty partner’s agreement) the modifications to Russia’s treaties required by BEPS can be made. Russia has also incorporated CRS requirements into domestic law.


Such information is not available.


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Sameta Russia

Sameta has been active in the Russian market since 2002. The firm offers a wide range of tax consulting and tax law services, including L&DR and specialises in corporate and labour law, М&A, corporate finance and real estate.

It constantly expands professional horizons and develops innovative services in step with new market trends and a changing legislative environment.

Sameta’s team consists of more than 60 professionals, including 40 lawyers and advisors with extensive experience across a range of industries.

Sameta is a member of the Ally Law (previously “International Alliance of Law Firms”), with more than 60 member firms in 40 countries. Members of Ally Law combine expertise with in-depth local knowledge of commercial and legal solutions.

Sameta is acknowledged by a number of international and Russian rankings:

■ The firm’s tax practice is ranked among leaders in Russia according to World Tax 2017.

■ The tax and corporate practices are recommended by Chambers and Partners 2017.

■ The Legal 500 acknowledged three practices of Sameta: tax; corporate and M&A; and dispute resolution.

■ Tax, corporate, and dispute resolution practices are also recommended by Pravo.ru rankings.

Sofia specialises in tax advice on tax matters.

As part of a team, she has worked on developing clients’ legal positions and defence tactics when challenging additional tax assessments, carried out tax due diligence of companies and advised on the prevention of tax risks. Sofia has been involved in the following recently completed projects:

■ the tax audit of a large power-generating company intended to detect tax risks before field tax audit of the company; developing recommendations to eliminate tax risks and further representing the client in a tax dispute;

■ tax advice for a major Russian leasing company during field tax audit; and

■ legal support in respect of the tax-exempt closing-down of more than 10 foreign companies.

Sofia KriulinaSameta4/3 Strastnoy BoulevardBuilding 3Moscow, 125009Russia

Tel: +7 495 937 54 85Email: [email protected]: www.sameta.ru


Chapter 32

Nithya Partners

Naomal Goonewardena

Savini Tissera

Sri Lanka


The IRA provides that where there is a conflict between the terms of a double taxation agreement and the provisions of the IRA, the double taxation agreement prevails. However, it is likely that any subsequent legislation which is not an amendment to the IRA and which specifically seeks to amend the treaty would have an overriding effect.


In terms of the IRA, a corporate entity is deemed to be resident in Sri Lanka when it is incorporated or formed under the laws of Sri Lanka or where it has its registered or principal office in Sri Lanka, or where the control and management of its affairs is exercised in Sri Lanka.

2 Transaction Taxes


Stamp duty is the documentary tax applicable in Sri Lanka and is payable on a number of instruments including promissory notes, as well as on conveyance documents such as leases, mortgages, deeds of transfer and deeds of gifts. The rates of stamp duty vary depending on the type of instrument and are generally ad valorem taxes. Stamp duty on transfers of land is charged on the value of the land at 3% for the first Rs. 100,000 and 4% for the remaining value. Gifts of land attract stamp duty of 3% for the first Rs. 50,000 and 2% thereafter. Mortgages attract a stamp duty of 0.1% of the secured amount and leases are charged at 1% of the lease payments for the entire term, including premiums, up to a maximum term of 20 years.


VAT legislation has been operative in Sri Lanka since 2002 (which replaced the previous GST regime) and is payable (in general) on the supply in Sri Lanka of goods and services and on the importation



Sri Lanka has entered into treaties relating to the avoidance of double taxation with 44 states. These include both comprehensive and limited treaties. There are 42 comprehensive treaties and there are limited treaties with Hong Kong, Oman and Saudi Arabia to cover limited areas such as shipping and air transport.


The United Nations Model Convention has been broadly followed, subject to certain variations influenced by the OECD Model.


Yes. The income tax legislation (i.e. the Inland Revenue Act No. 24 of 2017 (“IRA”)) specifically provides that such treaties need to be approved by a resolution of Parliament and published in the Gazette in order for the same to have the force of law in Sri Lanka.


There are no general anti-treaty shopping rules or “limitation on benefit” articles in any of the treaties. The IRA, however, provides that where the benefit of an exemption, exclusion or reduction is being claimed by a resident of the other contracting state, such benefit shall not be available to a body when 50% or more of the underlying ownership of that body is held by individuals who are not residents of that other contracting state. This limitation shall not apply, however, if the body which is claiming the benefit is a company listed on a Stock Exchange in the other contacting state. Furthermore, most of the treaties have specific provisions that limit the application of benefits provided therein to income to which a resident of the other contracting state has a beneficial entitlement.


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Nithya Partners Sri Lanka

goods. Once again, no refunds are permitted, but any excesses can be brought forward to future periods.


No, in general, Sri Lanka does not have any tax which is levied on a group basis.


There is a multiplicity of taxes which are levied at import point on the importation of goods into Sri Lanka. This includes customs duty, surcharge, ports and airports levy, cess levy, excise duty, VAT and NBT.


Economic Service Charge (ESC), which is in the nature of a minimum alternative tax, is payable by businesses whose aggregate turnover exceeds Rs. 12.5 million per quarter. ESC is charged at varying rates from 0.1% to 1.0% of liable turnover. The ESC can be set off against the income tax liability of the business in that year of assessment, and where such liability is less than the ESC, it can be brought forward for the next four years.



The IRA provides that a company resident in Sri Lanka must withhold 14% of the gross dividends distributed to its shareholders. An important exemption to this general rule is dividends declared out of dividends received from other Sri Lankan resident companies.This withholding tax applies to all shareholders, not just non-residents.


Royalties paid to a non-resident are subject to a final withholding tax of 14%.


In terms of the IRA, there would be a 5% withholding tax on interest paid by a local company to a non-resident. However, as the law presently stands, unlike in the case of dividends and royalties, the amounts so withheld would not be the final withholding tax. In terms of the IRA, interest earned by a non-resident will be considered to have a payment source in Sri Lanka and, accordingly, the non-resident would be liable to income tax in Sri Lanka on such interest income. This income tax liability would need to be satisfied by submitting an income tax return and making self-assessment payments.

of goods into Sri Lanka. Currently, the applicable rate is 15% and exports are generally zero-rated. There is also a special type of VAT, known as “Financial Services VAT”, which is also chargeable at the rate of 15% on persons supplying financial services. Unlike conventional VAT, however, Financial Services VAT is not payable on the basis of turnover, but on a value addition basis.Sri Lanka also has Nation Building Tax (“NBT”), which came into operation in 2009. It is a tax payable by any person who imports any article (other than personal baggage) into Sri Lanka, carries on the business of manufacturing any article, carries on the business of providing a service of any description or carries on the business of wholesale or retail sale of any article. NBT is currently payable at a rate of 2% of the liable turnover of such person. In the case of distributors, only 25% of their liable turnover is subject to NBT, whereas for wholesale/retail business, only 50% of liable turnover from such retail/wholesale sale is subject to NBT.


Both VAT and NBT are subject to a vast number of exemptions which are frequently modified.VAT, for example, is not chargeable on the supply or import of certain basic commodities and agricultural products. Essential services such as the supply of healthcare, public transport and residential accommodation are also exempt. NBT is also not chargeable on certain basic commodities and services such as the supply of water and books, and services such as medical services and transport services.There is also a Simplified VAT (“SVAT”) system whereby suppliers to businesses which are zero-rated are entitled to refrain from charging VAT on transactions with such zero-rated persons, so long as certain formalities are complied with.As an incentive to small and medium enterprises, the threshold for the payment of VAT and NBT is an annual turnover of not less than Rs. 12 million, from all businesses carried on by such person. The quarterly threshold for VAT and NBT liability would therefore be Rs. 3 million. However, this minimum threshold for persons involved in the business of wholesale or retail sale of articles is Rs. 50 million per annum.


The excess of input VAT over output VAT can be claimed by persons who are liable to VAT and as long as they are registered under the VAT legislation. Accordingly, persons who are exempt from VAT on their turnover would not be entitled to reclaim any of their input VAT.It is important to note that it is only the VAT that has been paid on the goods or services used for the purposes of the taxable supply of such person on which output VAT is paid that can be recovered as input VAT. As such, input VAT is not claimable on private expenses. Input VAT can only be recovered up to a value equivalent to the output VAT of such person. Any excess input VAT can be brought forward to future periods but, again, is subject to the same restriction that recoverability cannot exceed 100% of output VAT.Like VAT, manufacturers (although not service providers) are entitled to NBT tax credits against input NBT paid by the manufacturer on any goods which were used by it in manufacturing NBT-liable


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Generally, the highest tax bracket is 28%. However, the import and sale or the manufacture and sale of liquor and tobacco products and gaming is taxed at 40%.


The tax base for calculating corporate income tax would be the commercial accounts of a company, with adjustments made to comply with the provisions of the IRA.


The main differences would be that certain types of income may be exempt from tax, whereas certain types of expenses would not be tax deductible. Furthermore, there may be certain items which are considered as income for tax purposes, though not shown in the commercial accounts, and certain expenses not shown in the commercial accounts, which may be tax deductible. In terms of income, the adjustments made would be that there are certain limited categories of income which are exempt from income tax; for example, gains arising from the sale of shares on a stock exchange in Sri Lanka. In terms of deductibles, a significant difference would be depreciation charges in the commercial accounts and the tax deductible capital allowances charged to ascertain taxable income. Only certain types of assets have the benefit of capital allowances and only at specified rates which would differ from the depreciation calculations in the commercial accounts.


There are no provisions for group relief in Sri Lanka.


Where the underlying ownership of a company changes by more than 50%, as compared with ownership at any time during the previous three years, the company shall not be entitled to deduct losses that were incurred by the company prior to the change.


No, there is no distinction made between distributed and retained profits.


We have dealt with the more significant taxes in the preceding sections. However, the following may also be noted:


Interest paid by a company, other than a financial institution, is only tax deductible to the extent that such interest does not relate to borrowing which exceeds three times the aggregate of its share capital and reserves where it is a manufacturing company and four times in the case of any other company. Any deduction which is denied as a result of this limitation will be carried forward and deducted during the immediately succeeding six years, subject to the same limitations set out above.In terms of most double taxation treaties, the tax payable by the resident of the other contracting state in Sri Lanka shall not exceed 10% of the gross amount of the interest.


There are no “safe harbour” rules.


Since the current “thin capitalisation” rules are not confined to related party debt, it would be irrelevant that the debt has been guaranteed by a parent company.


There are no further restrictions.


There would be a final withholding tax of 14% on rent payments made to non-residents.


Yes, the IRA specifically provides that transactions entered into between two associated undertakings shall be ascertained having regard to the arm’s length price. The Minister of Finance has, under the repealed Inland Revenue Act No. 10 of 2006, published detailed Transfer Pricing Regulations which provides for methods of ascertaining the arm’s length price, assessing comparability and specifying the necessary records to be kept. Whilst the new Inland Revenue Act No. 24 of 2017 has not yet published similar Regulations, it has in place a provision which ensures that documents used in relation to the repealed Act would continue to be used under the present Act of 2017. The said Regulation recognises methods outlined in the OECD Guidelines.The IRA has provisions which allows the “Transfer Pricing Officer” (being any officer of the Inland Revenue Department designated by the Commissioner General as such officer) to initiate a transfer pricing audit for the ascertainment of arm’s-length pricing in international transactions, where the computations put forward by the transacting parties are unsatisfactory.


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There are no significant differences between the taxation of a locally formed subsidiary and a branch of a non-resident company.A locally formed company is deemed to be resident in Sri Lanka and as such is liable to pay income tax on all its profits and income, wherever they arise or derive from, whether in Sri Lanka or overseas. Branches of a non-resident on the other hand would still be considered as non-resident entities and are only liable to the extent that the income arises in or is derived from a source in Sri Lanka. It should be noted, however, that the standard double taxation treaty provides for the concept of a “permanent establishment” and it is only if the branch office satisfies such criteria that the profits attributable to such permanent establishment will be subject to income tax in Sri Lanka.


Taxable profits would be such profits to the extent that the income arises in or is derived from a source in Sri Lanka. This means that all profits and income derived from a source in Sri Lanka would be taxable. Head office expenses incurred in relation to the branch office would be tax deductible so far as such expenses do not exceed 10% of the taxable profits of the branch office.The above is subject to the provisions relating to “permanent establishments” that may be applicable when a standard double taxation treaty is in force.


The tax treaty would only provide for residents of a contracting state to be entitled to treaty relief. Since a branch does not satisfy such criteria, they would not be entitled to the benefit of such tax treaty.


Profit remittances of a non-resident company are charged with income tax at the rate of 14% of such remittances. This is the liability of the non-resident company in Sri Lanka and the payment is not made as withholding tax.

7 Overseas Profits


Yes, if the company is resident in Sri Lanka, all its profits and income, wherever it arises from, will be subject to income tax in Sri Lanka. As such, the overseas branches will be subject to the same income tax laws.

■ Liquor Licences: There are annual licence fees imposed on persons who are involved in the sale of liquor.

■ Port and Airport Development Levy (“PAL”): This is charged at 5% on the Cost, Insurance and Freight (“CIF”) value of imports, other than on specified exempt articles.

■ Betting and Gaming Levy: In addition to fixed annual levies, applicable to different types of betting and gaming activities carried out in Sri Lanka, a further 5% of the gross collections from bookmaking/gaming business is payable on a monthly basis in lieu of other indirect taxes.

5 Capital Gains


Investment gains on the realisation of assets and liabilities is liable to income tax after 1st April 2018. Investment gains would only arise from the realisation of capital assets held as part of an investment. The term “capital assets” are confined to land and buildings, membership interest in a company, partnership or trust, a security or other financial asset and an option, right or interest in respect of the aforementioned assets.


The IRA does not provide for any participation exemption for capital gains. However, there are a limited number of treaties, such as a treaty with the United States, wherein the capital gains from the alienation of shares is subject to a participation exemption.


Yes, subject to the limitations that the replacement asset should be acquired within six months before or one year after the realisation.


There is no withholding tax. However, if such sale does not involve a share listed on a Stock Exchange in Sri Lanka, the non-resident person may be liable to income tax in Sri Lanka on the basis of there being an investment gain from the realisation of an asset. In such an instance, the non-resident person is required to file a return with the Inland Revenue Department within one month of realisation and pay its tax prior to remitting the sales proceeds from Sri Lanka.





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No, it does not.


No such requirement exists.



Sri Lanka does not have any such legislation.


No, it does not.


No, it does not.


No, it does not.



No, it has not.


No, it does not.


If a local company holds more than a 10% shareholding in a non-resident company, the dividends received from such non-resident company would be exempt from income tax in the hands of the local company.


There are no such rules in force at the moment. However, it should be noted that in the case of a foreign company, if the control and management of its business is exercised in Sri Lanka, such company would be deemed to be resident in Sri Lanka for the purposes of the IRA.



There is no special taxation on the disposal of real estate in Sri Lanka by foreigners. The general laws under the IRA would apply. Profits would either be an investment gain which would be taxed at the rate of 10% or it may amount to business profits which would be taxed at the rate of 28%.


Sri Lanka does not impose tax on the transfer of an indirect interest in real estate located in Sri Lanka.


Sri Lanka does not have a special tax regime for REITs or their equivalent.



Yes, the IRA has specific anti-avoidance rules which are based on the principles in the UK. Furthermore, there are specific provisions with regard to income splitting and an arm’s length standard for arrangements between associated persons.


No such requirement exists.


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Nithya Partners was established in 1997 with the goal of delivering modern and client-focused services in corporate and financial law and we advise a broad range of local and foreign clients comprising several quoted and unquoted companies, multinationals, financial institutions, investment funds and statutory bodies. Our work covers areas such as foreign direct investments, mergers and acquisitions, corporate restructurings, loan syndications and securitisations. Apart from our involvement in some of the largest mergers and acquisitions and corporate restructurings in Sri Lanka in recent times, we have also played a lead role in several loan syndications, debt structuring and securitisations.

The firm’s tax practice is the strongest amongst the legal firms in the country and we have consistently been ranked No. 1 for tax in Sri Lanka by The Legal 500 and the Tax Directors Handbook. The firm has a strong reputation for corporate tax planning expertise, advising clients on complex tax disputes and tax-efficient structures, and has acted on behalf of both local and multinational clients in a number of high-profile tax cases.

Naomal Goonewardena is a founding partner of Nithya Partners. He has multidisciplinary qualifications in law and finance and is a leading attorney in financial and tax law in Sri Lanka. He advises companies from various industries on all aspects and types of taxation, especially income tax and VAT. He also represents companies in litigious tax matters. Prior to joining the Firm, he was a Senior Tax Manager at Ernst & Young. He has also been a lecturer in Tax Law at the Sri Lanka Law College since 2003 and is a member of the Committee of Taxation of the Ceylon Chamber of Commerce. He served as a legal advisor to the Board of Review of the Inland Revenue Department from 1998 to 2002.

Naomal Goonewardena is currently representing clients in the Supreme Court and the Court of Appeal with respect to income tax disputes involving the applicability of tax exemptions, deductibility of interest, deductibility of tax losses and add backs on account of specified levies. Furthermore, he is also involved in litigation with respect to exemptions under the VAT Act and the base on which financial services VAT is payable.

Naomal GoonewardenaNithya Partners97A, Galle RoadColombo 3Sri Lanka

Tel: +94 11 2712 625 (ext. 209) Email: [email protected]: www.nithyapartners.com

Savini Tissera joined Nithya Partners in December 2014 after completing her legal studies at the University of Warwick (UK). She is attached to the corporate division of the firm and assists in commercial matters including advice on foreign direct investments, mergers and acquisitions and advice on regulatory matters for both local and foreign clients. Further, she assists both in tax advisory and litigious tax matters. She has also been trained in transfer pricing at the International Bureau of Fiscal Documentation (“IBFD”), Amsterdam.

Savini TisseraNithya Partners97A, Galle RoadColombo 3Sri Lanka

Tel: +94 11 2712 625 (ext. 216)Email: [email protected]: www.nithyapartners.com


Chapter 33

Lenz & Staehelin

Pascal Hinny

Jean-Blaise Eckert

Switzerland

agreement, Switzerland’s withholding tax agreements with Austria and with the United Kingdom were terminated on 1st January 2017. Furthermore, Switzerland has concluded various bilateral agreements in the form of international treaties in order to be in line with the OECD Common Reporting System (“CRS”). On 7th June 2017, Switzerland, together with over 70 countries, signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) which will serve to efficiently amend double taxation agreements in line with the minimum standards agreed upon in the Base Erosion and Profit Shifting (“BEPS”) project. Switzerland will implement these minimum standards either within the framework of the Multilateral Convention or by means of the bilateral negotiation of double taxation agreements. Entry into force is not anticipated prior to January 2019.


The majority of the Swiss income tax treaties follow the OECD MC. The income tax treaty signed with the United States of America follows the US model treaty. Switzerland has signed several treaties with an arbitration clause. Further, Switzerland has opted for the mandatory and binding arbitration clause of Articles 18 to 26 of the MLI.


Given that Switzerland follows the monistic system, international treaties form part of federal law once they have been ratified and thus, immediately become valid sources of law. In other words, they do not have to be incorporated into domestic law before taking effect. Once into force they are an integral part of the internal law and supersede any contrary domestic law.


Not all double taxation treaties entered into by Switzerland incorporate explicit anti-treaty shopping rules or “limitation on benefits” articles. Naturally, the US-Swiss income tax treaty includes a limitation of benefit clause.According to prevailing jurisprudence of the Swiss federal Supreme Court, however, all Swiss treaties are subject to an implied anti-



Switzerland has a very extensive income tax treaty network with more than 90 income tax treaties in force. New tax treaties were signed in 2018 with Saudi Arabia and Brazil. Moreover, Jordan and Switzerland have agreed on the importance of concluding an income tax treaty between them. Cameroon and Switzerland have both expressed their interest in negotiating and signing an income tax treaty. In addition, a handful of inheritance tax treaties as well as tax treaties on the taxation of maritime and/or navigation companies are in force. Up until 2009, Switzerland made a reservation on Article 26 of the OECD Model Tax Convention on Income and on Capital (“OECD MC”) in its double tax treaties on income and capital and provided for exchange of information in tax matters only in cases that involved acts of fraud, subject to imprisonment according to the laws of Switzerland and the other contacting state. However, as of 2009, Switzerland fully adopted the OECD standards in exchange of information in tax matters as laid out in Article 26 of the OECD MC in its new income tax treaties, thus providing for an exchange of information upon request under certain conditions. Switzerland, today has adopted more than 50 income tax treaties that include the full implementation of Art 26 of the OECD MC as well as a handful of Tax Information Exchange Agreements (Andorra, Belize, Grenada, Greenland, Guernsey, Isle of Man, Jersey, San Marino and the Seychelles). As of January 2017, the OECD Convention on Mutual Administrative Assistance in Tax Matters (“CMAAT”) entered into force in Switzerland increasing, therefore, the number of countries with which an exchange of information in tax matters upon request can take place. On 1st January 2017, the agreement on automatic exchange of information in tax matters between Switzerland and the EU entered into force. The said agreement implements the global automatic exchange of information standard of the OECD and further replaces the taxation of saving income agreement between the EU and Switzerland. As a result, firstly, the first exchange of financial account data between Switzerland and EU Member States will occur in 2018. Secondly, Switzerland has been granted the equivalent rules to those laid down in the EU parent/subsidiary and interest/royalty agreements that is, full withholding tax exemption of cross-border dividends, interest and royalties between related entities if certain requirements are met. Further, with the entering into force of said


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Lenz & Staehelin Switzerland

existing losses are eliminated and the aggregated payments by the shareholders or members do not exceed CHF 10 million.The Securities Transfer Stamp Tax is levied on the transfer of certain Swiss and non-Swiss securities – mainly shares, similar participating rights in corporate entities, bonds and shares in investment funds, if a Swiss stockbroker (“Effektenhändler”) is involved as a party or an intermediary to the transaction. Stockbrokers are mainly banks and other brokers, but also companies holding taxable securities with a book value of more than CHF 10 million (holding companies). The rates applicable on the purchase price are:■ 0.15% in respect of Swiss securities; and■ 0.3% in respect of foreign securities.The Insurance Premium Tax is levied on certain insurance premiums. The taxable person is the Swiss insurance company or the holder of a policy taken from a foreign insurance company. The standard rate is 5% of the premium. Life insurance premiums – if taxable – are taxed at 2.5%.


Switzerland introduced Value Added Tax in 1995 and as of 1st

January 2018 the standard rate applicable is 7.7%, the reduced rate (e.g. medicine, newspapers, books and food) is 2.5% and the lodging services rate is 3.7%. VAT is only levied at the federal level and the system of tax is similar to the one of VAT in the European Union.


The Swiss VAT system largely follows the 6th VAT Directive of the European Union. As of 1st January 2012, taxpayers have the possibility to request a VAT audit by the federal administration. This is especially interesting in cases of the purchase and sale of enterprises.Taxable transactionsThe following transactions are subject to VAT:■ supply of goods and services in Switzerland; and■ import of goods or services.Taxable personsA taxable person is any person, irrespective of legal form, that carries on a business and makes supplies on Swiss territory through business or has its own registered office, domicile or permanent establishment in Switzerland. Taxable persons may file an application for exemption if they have a turnover below CHF 100,000. Moreover, all persons (including private individuals) receiving services from non-Swiss service providers with a total value exceeding CHF 10,000 annually must pay VAT (to be declared in the so-called “reverse charge procedure”). Furthermore, any person importing goods for private use for a value in excess of CHF 300 is subject to VAT at the border. Finally, a partial VAT reform, aiming to remove competitive disadvantages between foreign and domestic companies, entered into force on 1st January 2018. The main modification consists of foreign businesses (not established in Switzerland), supplying goods to Switzerland or providing end users with telecommunication and electronic services, with a global turnover of over CHF 100,000 becoming subject to VAT in Switzerland. Up until that date, foreign businesses were exempt from VAT if they generated less than CHF

abuse provision. In 1967, Switzerland enacted unilateral rules to avoid treaty-shopping with the “Abuse Decree”. This Abuse Decree contains a number of tests that must be fulfilled by every Swiss-resident company in order to be eligible for treaty benefits. In 1998, facilitations were introduced for holding companies, active companies and publicly quoted companies. In August 2010, the criteria to qualify for an active company were relaxed.With the entry into force of the MLI, Switzerland is expected to adapt the title and preamble of the Swiss tax treaties to the minimum standard. Further, it has opted for the Principal Purpose Test (“PPT”) rule alone, which provides that a benefit under a tax treaty shall not be granted if obtaining that benefit was one of the principal purposes of an arrangement or transaction. Concomitantly, the Abuse Decree was partially repealed and became an ordinance.


Treaties supersede Swiss domestic law in the Swiss legal system, whether existing when the treaty took effect or was introduced subsequently. However, some domestic law provisions, such as the Abuse Decree, may limit the application of provisions of treaties.


Companies are considered to be resident in Switzerland and therefore, subject to unlimited tax liability if their statutory seat or effective administration is in Switzerland. The statutory seat is determined by the place in which the company is registered. The effective place of management is determined through the Supreme Court’s case law and it is where the company has its effective and economic centre of activity. Otherwise put, where its day-to-day management is.

2 Transaction Taxes


The transfer of Swiss-situated real estate is regularly subject to a cantonal or communal Real Estate Transfer Tax (see section 8 hereunder).Furthermore, based on the Swiss Stamp Duties Act, the following stamp duties are levied by the Federation:■ Securities Issuance Stamp Tax.■ Securities Transfer Stamp Tax.■ Insurance Premium Tax.The Securities Issuance Stamp Tax is a stamp duty levied on the issue (primary market) of certain Swiss securities – mainly shares and similar participating rights in corporate entities – as well as on equity contributions to such corporate entities. The taxable person is the company or the person issuing the securities or benefitting from the equity contribution.The rate is 1% of the capital contribution. However, the capital created or increased by a corporation or a limited liability company is exempt from the issuance stamp tax, up to the amount of CHF 1 million. Furthermore, certain transactions, especially in the case of restructuring, are exempt from tax. Rescue companies created for restructuring purposes are exempt from issuance stamp tax, as are capital increases and additional contributions, provided previously


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The consumption of certain alcoholic beverages, tobacco and mineral oil, as well as emissions of carbon dioxide and heavy traffic, are subject to state levies. The taxes are included in the retail price and are not disclosed to the end-user.



Profit distributions made by Swiss corporations, limited liability companies and co-operatives are subject to withholding tax (“WHT”). WHT is levied on interest, annuities, profit sharing and all other income derived from shares, social participations in limited liability companies and co-operatives, participation certificates or profit sharing certificates, issued by a person who is domiciled in Switzerland. Distributions made by partnerships are not considered as taxable dividend distributions. Profit distributions are defined as any benefit which may be financially quantified and which is made to the creditor or shareholder in excess of the paid-in nominal capital. They include ordinary dividend distributions, liquidation proceeds, stock dividends and constructive dividends (hidden profit distributions).No WHT is levied on dividend payments out of so-called capital contribution reserves created from earlier capital contributions of shareholders. The applicable WHT rate is 35%, whether paid to a Swiss-resident or non-resident recipient.Swiss-resident recipients can normally obtain a full refund of dividend WHT, provided they have properly reported the gross amount of the dividend received as taxable income and claim the refund within a period of three years. Moreover, inter-group companies under certain conditions may apply for the notification procedure on intra-group dividends to the parent company, so that the WHT is not paid and reclaimed.Non-resident recipients may apply for a full or partial refund of dividend WHT pursuant to the provisions of an applicable treaty.On most inter-company cross-border dividend payments, Swiss-based companies with substantial foreign shareholders may apply for a reduction of the WHT at source and the Swiss company has to pay the non-refundable WHT only. However, before the due date of dividend payment, the paying Swiss company has to file a request for the application of the notification procedure with the Federal Tax Administration (“FTA”).The permission to pay dividend without WHT, if applicable, is granted on the basis of form 823B or 823C. This form has to be signed by both companies and has to be stamped by the State of residence of the parent company. The dividend payment must be notified to the Swiss federal tax administration within 30 days from the due date of the dividend. In case of refusal of the notification procedure, the 35% WHT due on dividend distributions will be withheld by the Swiss company and be paid to the FTA. The foreign (parent) company may reclaim all or part of the WHT, based on the applicable double taxation treaty.As per the amended Withholding Tax Act which entered into force on 15th February 2017, the following regulations were adopted (i) non-compliance with the 30 days filing requirement will not result in

100,000 of turnover per year from taxable supplies in Switzerland. As of 1st January 2019, foreign mail-order companies will have to charge VAT to their customers in Switzerland if their turnover for small, import tax-free consignments is over CHF 100,000 annually.VAT exemptions and zero-rated transactionsArticle 21 of the VAT Act provides a list of certain activities to be exempt from VAT. Notably: hospital and medical care; education (school, courses, etc.); cultural activities (theatre, museum, libraries, etc.); insurance, reinsurance and social insurance transactions; granting and negotiation of credits; transactions in shares and other securities; real estate transfers; and letting and leasing of real estate (in general), etc. Input taxes in respect of exempt transactions listed in article 21 of the VAT Act are not deductible. In order to avoid competitive disadvantages, a taxable person may, however, opt for VAT in certain cases as per article 22 of the VAT Act and be able to deduct input taxes in these cases.Article 23 of the VAT Act provides a list of “zero-rated” transactions for the effective use or enjoyment of outside Switzerland (destination principle). Examples of activities that are allowed zero rates are the export of goods and services outside Switzerland, transit goods, and supplies in the field of international air transport. The fact that no VAT is due on the respective activities does not affect the deduction of input taxes.


The VAT Act in principle grants deductibility for all VAT due or paid in respect of goods and services accumulated for the purpose of entrepreneurial activities (“input taxes”). Where a taxpayer has taxable and tax-exempt turnover (see question 2.3 above), he must reduce the input tax recovery proportionally. For smaller businesses, special rules apply. They may opt for a lump-sum method, whereby reduced VAT rates for the calculation of tax due take input tax into account.For private goods, it is possible to proceed with a so-called fictitious input tax deduction (with the exception of – starting 1st January 2018 – collection pieces, for which a special procedure will apply). Self-consumption of goods or services is calculated as a simple correction to the input tax and is not included in the calculation of the turnover.


Under Swiss VAT legislation, the head offices and permanent establishment are treated as separate taxpayers. Therefore, intracompany supplies of services are probably subject to Swiss VAT. Article 13 of the Swiss VAT Act permits group taxation (including the Swiss permanent establishment of a foreign entity). Legal entities with their register office or permanent establishment in Switzerland, which are closely associated with one another under the common management of a single legal entity, may apply as a single taxable person.


No, there are no other transaction taxes apart from real estate transfer taxes (please see question 2.1 and section 8).


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As per the circular letter n°6, for a company the maximum debt allowed must not exceed the aggregate value of the following assets (valued at their fair market value):■ cash: 100%;■ accounts receivable: 85%;■ inventory: 85%;■ other current assets: 85%;■ bonds in CHF: 90%;■ bonds in foreign currency: 80%;■ quoted shares: 60%;■ non-quoted shares: 50%;■ investments in subsidiaries: 70%;■ loans: 85%;■ furniture and equipment: 50%;■ property, plant (commercially used): 70%;■ other real estate: 80%; and■ intellectual property rights: 70%.Further, as per the same circular letter financial companies can have the maximum debt/equity ratio of 6:7 of the total assets (fair market value).


As a principle, the thin capitalisation rules are only applicable to debt advanced by shareholders or related parties. However, if debt is advanced by a third party, but guaranteed by related parties, the thin capitalisation rules could apply nevertheless.


The provisions of the Abuse Decree Circular of 1962 with regard to debt-to-equity ratios, as well as maximum rates allowed for remuneration in the form of interest, are generally not applicable since the Abuse Decree Circular of 1999.In addition to the thin capitalisation rules mentioned above, the FTA publishes maximum rates allowing for the interest not to be considered a hidden profit distribution (deemed dividend).Otherwise, there could be provisions in the applicable double taxation treaty regarding beneficial ownership.


Switzerland does not levy any WHT on property rental payments, whether paid to a resident or non-resident person. However, to the extent that the rental payments do not follow the “arm’s length” principle, they will be re-qualified as hidden dividends if paid to a shareholder or a related party. Consequently, such rental payments would not be deductible for the paying company, and would be subject to the 35% Swiss WHT like any other dividend.

denial of the notification procedure, (ii) no interest of late payment will apply, and (iii) late filing of declaration and notification forms result to a maximum administrative fine of CHF 5,000.


Switzerland does not levy WHT on royalties, whether paid to a resident or non-resident person. However, to the extent that the royalties do not follow the “arm’s length” principle, they will be re-qualified as hidden dividends if paid to a shareholder or a related party to the shareholder. Consequently, such royalties would not be deductible for the paying company. In addition, they are subject to the 35% Swiss WHT like any other dividend.


Withholding TaxThe Swiss WHT is levied on interests from bonds issued by a Swiss resident and on interests paid on Swiss bank deposits. However, Switzerland does not levy any WHT on private and commercial loans (including inter-company loans).The definition of a bond according to Swiss WHT law is rather extensive and includes any bonds emitted by a Swiss resident, offered to more than 10 non-banks under similar conditions or to more than 20 non-banks under different conditions. Further, the definition of a bank according to the WHT law includes anyone who publicly offers to receive interest-bearing deposits from more than 100 clients.In this context, please note that intra-group loan-relationships/deposits neither qualify as bonds, nor as bank deposits for the above calculation purpose. In other words, they do not have to be taken into account when calculating the 10, 20 and 100 limit, respectively unless a bond is issued by a foreign group-company, guaranteed by a Swiss group-company, and the funds are repatriated in Switzerland.Tax at Source on Mortgage Secured LoansNon-resident recipients of interest paid on a loan which is secured by mortgages on Swiss real estate, are subject to federal and cantonal taxes levied at source on gross income. The federal tax is 3%, while the cantonal taxes vary between 13% and 21%.


In Switzerland, thin capitalisation rules are embodied in the circular letter n°6 issued by the Federal Tax Administration on 6th June 1997. The circular sets out safe harbour rules that require a minimum equity ratio for each asset class. Interest paid by a Swiss-resident payer is normally not subject to WHT. However, to the extent that interest is paid on amounts of debt exceeding the maximum debt allowed according to the circular letter, it is re-qualified as a hidden dividend, if paid to a shareholder or a related party. Consequently, such interest is not deductible for the paying company and is subject to the 35% Swiss WHT like any other dividend. However, the rules set by the FTA are safe harbour rules and allow for the taxpayer to prove that different “arm’s length” debt-to-equity ratios and interest rates apply.


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rules; for instance, if there is a registration of private expenses of a shareholder or a fictitious loss. Second, tax adjustments aiming at ensuring compliance with the periodicity principle; for instance, if provisions without commercial justification are created. Third, tax adjustments aiming at preserving the system, because Switzerland loses its taxing rights, particularly in case of transfer abroad (liquidation fiction).It should be added that transfer pricing adjustments will be made when group internal transactions do not meet the “arm’s length” standard.


There are no tax consolidation rules with regard to corporate profit tax. Thus, each company is taxed as a separate taxpayer. Mergers and other transactions of two or more companies are disregarded if the only goal is to combine the tax base of the companies involved and to set off taxable profits with losses of other companies.With regard to VAT, a VAT group consisting of closely associated legal entities, partnerships and individuals who have their domicile or corporate seat in Switzerland can be treated as a single tax-liable entity. Consequently, intra-VAT group transactions are not subject to Swiss VAT (even if accounted by the VAT group leader).


In Switzerland, losses from seven financial and tax years preceding the current tax period may be deducted to the extent they could not be included in the computation of taxable net profit of those years. This rule applies regardless of the shareholder; thus, tax losses do survive a change of ownership.In case of restructuration, tax losses should survive in principle. If, through the merger of a parent company and its subsidiary, losses are transferred to the parent company, they may be taken into account, even if the parent company has already made depreciation expenses on the participation or provided remediation services.In case of a financial reorganisation scheme, losses lying further back can also be credited with rescue contributions aimed at equilibrating an adverse balance.However, this rule does not apply in cases of abuse. If an economically sound company transfers, by means of contribution in kind, all of its operating assets to an over-indebted company without any entrepreneurial reason, the operation is considered abusive and the deduction of the losses is not admitted.


Whether profits are retained or distributed, they are subject to the same annual corporate profit tax. In the canton of Appenzell-Innerrhoden, however, distributed profits are taxed at a lower rate at the cantonal level.When the company distributes its profits (other than distributions from capital contribution reserves – see question 3.1), it must withhold a 35% WHT, which is fully or partly refundable depending on the country of residence of the beneficiary.


Switzerland does not have a formal transfer pricing legislation, however, all related party transactions with Swiss entities must respect the “arm’s length” principle as well as tax avoidance. The Swiss authorities normally deal with transfer pricing issues by applying these principles. Swiss tax authorities follow the OECD transfer pricing guideline. When the transfer price does not correspond to the “arm’s length” price, a hidden profit distribution is assumed and taxable income is adjusted as per article 58 of the Federal Income Tax Act. Circulars and circulars letters have been issued by the FTA implicitly or explicitly referring to the determination of transfer pricing. For example, circular letter n°4 from 19th March 2004 states that the “arm’s length” principle is also applicable when choosing the method of determination of mark-ups, and that implies for financial services or management functions that “cost plus” is not an appropriate method (or only in very exceptional cases). On a yearly basis, FTA publishes a Circular letter regarding the interest rates for inter-company loans in Swiss Francs and a Circular letter regarding the interest rates for inter-company loans in foreign currencies. The interest rates vary per currency.



Corporate profits are taxed at the federal, cantonal and communal level. The corporate profits tax is itself deductible from the taxable corporate profits resulting to the statutory rates being higher than the effective tax rates. At the federal level, the statutory corporate profits tax rate is 8.5%, corresponding to an effective tax rate of 7.83%.The cantonal tax rates vary from canton to canton. A corporation is liable to corporate profits tax in each canton where it has a permanent establishment or a piece of real estate. Some cantons foresee a progressive tax rate, others foresee a flat rate. In addition to this initial tax rate, most of the cantons foresee cantonal and communal tax multipliers. These multipliers vary from year to year depending on the financial needs of the local authorities.For 2017, effective corporate profits tax rates are (federal, cantonal and communal tax included):■ Geneva: 24.16%.■ Lucerne: 12.32%.■ Zug: 14.60%.■ Zurich: 21.15%.


The tax base is the annual profit as reported in the commercial accounts. This tax base is subject to few adjustments.


There are three categories of adjustments. First, tax adjustments aiming at ensuring compliance with Swiss mandatory accounting


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Favourable tax treatment is also available for qualifying participations transferred to group companies abroad; the group holding or sub-holding company must be incorporated in Switzerland.b. Calculation of tax reliefCompanies with qualifying capital gains may reduce their corporate income tax by reference to the ratio between net earnings on such participations and total net profit. The following formula must be applied in each tax period, to determine the amount of the tax relief available:Tax relief = A × B / CWhere:A = corporate income tax;B = net qualifying capital gain; andC = total net profit.The amount of net-qualifying capital gain is determined as follows:= gross qualifying capital gain – (financing costs + administrative costs).Financing costs are defined as interest on loans and other costs which are economically equivalent thereto. They are generally attributed to qualifying capital gains by reference to the ratio between the book value of the qualifying participation and total assets.Administrative costs are usually fixed at 5% of gross dividend income (unless actual proven administration costs are lower).


According to the provisions of the Merger Law, a company can transfer certain business assets and investments to Swiss group companies without realising capital gains. Hence, hidden reserves available on such assets can be rolled over also for tax purposes. In addition, in some cantons, hidden reserves available on real estate can be rolled over to a new piece of real estate replacing the original piece sold (i.e. the capital gain is not taxed, but can be deferred for tax purposes in the case of replacement of certain pieces of real estate). Finally, in the canton of Geneva, the gain realised on real estate is subject to the special tax, but the amount is then credited against the tax on corporate profits.Cantons that subject corporations to this special tax foresee the tax deferral on real estate by analogy to the generally applicable set of rules. Therefore, the tax deferral is available whether or not the capital gain is taxed according to the special tax or the corporate profit tax.A taxation of a capital gain generated by the sale of a non-current business can be postponed if a replacement asset is acquired that can be depreciated accordingly. The same applies for shareholdings of at least 10% held for at least one year. In this context, however, the participation reduction may apply alternatively. Finally, capital losses are recognised immediately, whether or not the company acquires similar assets in replacement.


Switzerland does not levy WHT on the proceeds of selling a direct or indirect interest in local assets or shares.


Companies are subject annually to capital tax, which, is levied at a cantonal and communal level. It is based in the company’s net equity (i.e. paid-in capital, open reserves and retained profits). The amount subject to tax may also be increased by the debt re-characterised as equity in the application of the Swiss thin capitalisation rules (see question 3.4 above). The tax rate depends on the canton and community of domicile but in general varies between 0.01% and 0.5%. Some cantons foresee a different tax rate for holding companies or other tax-privileged companies. For example, in Geneva the maximum rate of tax is 0.2% and for holding companies only 0.03%. Again, cantonal and communal multipliers will apply. However, please note that these cantonal preferential tax regimes will be soon abolished (please refer to question 10.1). The cantons may opt for crediting corporate income taxes to the capital taxes levied in their territory. Hence, companies generating enough profit will not have to pay capital tax additionally. Loss-making or only low profit-making companies continue to be subject to capital tax (to some extent).There may be, at the cantonal level, certain other taxes payable depending on the canton. Thus, certain cantons may levy a tax on real estate situated in such cantons. In the canton of Geneva, there is a “professional tax” which is calculated as a percentage of turnover, rent paid and number of employees.

5 Capital Gains


In general, no special set of rules for taxing capital gains and losses exists. Capital gains form part of taxable profit; capital losses are tax-deductible. Two exceptions to the general rule exist: (i) participation reduction; and (ii) replacement of certain assets, both of which will be analysed hereafter.


If a corporation realises a capital gain on the sale of a qualifying participation, it is entitled to a participation reduction.a. Capital gains for which relief is availableTo qualify for relief on capital gains, a Swiss company must make a profit on the sale of a participation which represents at least 10% of the share capital of another company which it has held for at least one year.Losses incurred as a result of the sale of qualifying participations remain tax-deductible.A capital gain is defined as the difference between the proceeds from the sale of a qualifying participation and the acquisition cost of the investment. Hence, any amount of previously tax-deductible depreciation or provision on the participation is not taken into consideration to calculate the amount of gain which can benefit from the relief. In addition, revaluation gains from participations do not qualify.


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establishments of foreign companies and of taxable income/capital of foreign permanent establishments of Swiss companies. Accordingly, Swiss double taxation treaties normally contain a corresponding reservation in favour of the indirect method.Special rules apply with respect to the profit allocation of permanent establishments of banks and insurance companies.A branch is subject to the same profits tax and capital tax as a Swiss company, i.e. there is no special branch profits tax. There is no WHT or other special tax on profit repatriations from the branch to its head office.


A branch would not benefit from any tax provisions of tax treaties entered into by Switzerland, as it is not a resident of Switzerland pursuant to Swiss domestic law.


The remittance of profits by a Swiss branch to a foreign head office is not subject to WHT or any other tax.

7 Overseas Profits


Swiss tax law generally provides for the exemption of profits generated in non-Swiss enterprises, permanent establishments and related to real estate located abroad.A Swiss enterprise may compensate losses of a permanent establishment abroad with profits generated in Switzerland if the State in which the establishment is located has not already taken account of those losses for tax purposes. As soon as assumed losses can be offset in the non-Swiss branch, the Swiss corporate income tax basis is increased accordingly. The provisions of the tax treaties remain applicable.


The taxation of dividends received will depend on the importance of the participation held.At the federal and cantonal levels, the participation reduction regime applies, so that the effective tax rate applicable to the dividends received is proportionately reduced as per the ratio of the net dividend income over the total net taxable income, provided the local company holds at least 10% of the participation or participation rights with a market value of at least CHF 1 million (see also question 5.2 above).At the cantonal level only, privileged tax status as a holding company is available in cases where the participation or the income therefrom represents at least two-thirds of the total assets or of the income. Such holding companies (without commercial activity in Switzerland) do not pay profit tax at the cantonal level. The special status of holding companies will be abolished sometime in the future due to Projet fiscal 17 (see question 10.1 below).



Securities issuance stamp tax is levied upon the creation or increase of the par value of participation rights (see question 2.1 above). The participation right can take the form of shares of Swiss corporations, limited liability companies (“LLCs”), co-operatives, as well as profit sharing certificates and participation certificates. A contribution to the reserves of the company (even though the share capital is not increased) made by the shareholders, as well as the transfer of the majority of shares of a Swiss company that is economically liquidated, are also subject to the tax. The securities issuance stamp tax is levied at a flat rate of 1%. It is only levied to the extent that the share capital of the company exceeds CHF 1 million. Special rules apply when shares are newly issued in the course of reorganisations, mergers, spin-offs and similar transactions. Such types of transaction are normally exempt from the 1% tax.Securities issuance tax is not levied on the capital allocated to a branch.


A resident subsidiary is taxed on its profit and equity (income allocated to foreign permanent establishments and real estate are exempted). A Swiss permanent establishment of a non-Swiss headquarters is taxed in Switzerland on the profit and equity allocated to such permanent establishment, usually following the accounts of such permanent establishment.The issuance of nominal capital of a resident subsidiary and any contribution to the equity of a resident subsidiary is subject to issuance stamp tax at 1% (a threshold of CHF 1 million for capital increases applies), whereas equity allocated to a permanent establishment is not subject to issuance stamp tax.A resident subsidiary whose assets, as per the last balance sheet, consist of taxable securities in excess of CHF 10 million, qualifies as a stockbroker liable to transfer stamp tax on the transfer of securities where he acts as an intermediary or party to such a transaction (see the answer to question 2.1). Branches do not qualify as stockbrokers merely by holding taxable shares.A WHT is imposed on dividends paid by a resident subsidiary, whereas no such WHT applies on profit repatriations to the non-Swiss head office for branches. In contrast to resident subsidiaries, branches are not entitled to invoke tax treaties, since branches are not considered to be resident in Switzerland, pursuant to Swiss domestic law (see also the answer to question 6.5).


A foreign entity is liable to Swiss corporate profit tax on profits and equity attributable to the Swiss permanent establishment. In general, taxable income of permanent establishments is determined on the basis of its separate financial statements as if it were a corporate entity separate from its head office (direct method).In the past, the indirect method was preferred for both the determination of taxable income/capital of domestic permanent


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real estate. Income arising from real estate is therefore attributed to the fund as a taxable legal person and taxed under corporate income tax.



In Switzerland, anti-avoidance rules are not contained in a specific act. Through the years the Federal Supreme Court developed a general tax avoidance theory. The application of this theory, applied by all Swiss courts and tax authorities, has the consequence that tax authorities have the right to tax the taxpayer’s legal structure based on its economic substance if the following conditions are met: (i) the taxpayer’s legal structure is unusual, inappropriate or inadequate to its economic purpose; (ii) tax considerations are deemed to be the only motive for the transaction; and (iii) the transaction effectively leads to significant tax savings to the extent that it would be accepted by the tax authorities.


Tax planning is generally admitted by Swiss tax law provided that the taxpayer does not commit any abuse of law or tax avoidance (please note that it is not considered a criminal offence). In order to remove the uncertainties regarding the tax consequences of a planned transaction, as the abuse of law concept is very large, the taxpayer may request an advance tax ruling. The tax administrations are willing to discuss, in advance, specific questions (law or facts) on taxation. While doing this, the tax consequences of the planned activities can be defined in a binding tax ruling – the principle of protection of good faith applies.


It should be noted that tax avoidance, which is described as the choice of an unusual, inadequate or abnormal structure or transaction made for the sole purpose of saving taxes, is not a punishable offence under Swiss law. The taxpayer will merely be asked to pay taxes in accordance with the economic substance of the structure or transaction (including possible late interest).On the other hand, tax evasion (the non-disclosure of taxable items) and tax fraud (the use of forged, falsified or inaccurate documents) are both criminal offences. Tax evasion may result in a fine for the taxpayer. The representative of a taxpayer who instigates, assists, commits or participates in tax evasion may also be fined, irrespective of the fine incurred by the taxpayer, and may be jointly and severally liable for the unpaid tax. Tax fraud is punishable by fine or imprisonment; anyone who instigates or participates as an accomplice of the taxpayer may also be punished.


While there is no normalised programme for co-operative compliance in Switzerland, cooperation between taxpayers and tax authorities


Switzerland does not have any “controlled foreign company” legislation.



The transfer of Swiss-situated real estate, commercial or otherwise, is regularly subject to a cantonal or communal Real Estate Transfer Tax. The applicable tax rates vary from canton to canton. Normally they range between 1% and 3% of the transfer value of the real estate. However, some cantons do not levy this transfer tax (e.g. the canton of Zurich). Both residents and non-residents are subject to this tax.Further, the capital gain resulting from the disposal of real estate in Switzerland is subject either to a special tax on real estate capital gains or to the ordinary tax on benefits. The cantons are free to choose one or the other taxation method for cantonal and communal tax purposes. The cantons choosing the special tax on real estate capital gains generally set an increasing tax scale relating to the amount of the capital gain, but decreasing relating to the holding period. Both residents and non-residents are subject to this tax on the disposal of real estate.At the federal level, the capital gain resulting from the disposal of commercial real estate in Switzerland is only subject to the ordinary tax on benefits. A taxable gain at the federal level, however, occurs where the real estate sold has been held by a corporate non-resident or where the real estate formed part of the Swiss permanent establishment of a non-Swiss-resident individual.


In most cantons, a formal transfer of real estate, commercial or otherwise, is subject not only to the Real Estate Transfer Tax, but also to a so-called “economic change of ownership” which is the case when shares in a real estate company are transferred.An economic change of ownership does also trigger the taxation of the capital gains in the same way as the direct transfer of real estate (with either the special tax or the ordinary tax on benefits).In most of the cantons, only the transfer of all or the majority of shares in a real estate company triggers taxation. However, some cantons do also tax the transfer of minority holdings (e.g. the canton of Geneva).


Switzerland does not have a special tax regime for REITs.Special rules, however, exist for Swiss real estate funds with direct ownership of real estate. In general, collective investment of capital is treated as transparent. Therefore, the income and capital of the funds are directly attributed to investors. As to real estate funds with direct ownership of real estate, the fund is treated as non-transparent with respect to income generated from direct ownership of Swiss


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None of Switzerland’s foreseeable legislative reforms intend to go beyond the minimum standards in the OECD’s BEPS reports.


The CbC Act came into force on 1st December 2017. According to the said Act, parent entities of multinational enterprises residing in Switzerland with more than CHF 900 million consolidated revenue in the financial year preceding the reporting year or surrogate parent entities must comply with the Country-by-Country reporting obligations and provide the Federal Tax Administration with the report. This report will not be published. The first financial year the Country-by-Country report must be filled is on or after 1st January 2018 depending on the entities’ chosen financial year dates and it will be exchanged with partner countries beginning 2020.


Currently, Switzerland maintains preferential profit taxation for holding companies, domiciliary companies and mixed companies. However, as mentioned in question 10.1 they will be abolished. Replacement measures could include a mandatory patent box for cantons. The canton of Nidwalden, as of 2011, has a “licence box rule”. The net licensing income resulting from the right to use intellectual property (“IP”) rights is taxed separately at an overall effective 8.8% tax rate. The licence box rule only applies for companies having their domicile or branch in the canton of Nidwalden, and is only granted upon request.



Switzerland has not taken any unilateral action with regards to the taxation of digital economy. The State Secretary for International Finance has been working intensively on the taxation of the digital economy and performed an analysis on the subject. Switzerland holds the opinion that it is necessary to favour multinational approaches, which tax profits in the jurisdiction where added value is generated and which do not cause double or over taxation and that measures outside the scope of double taxation agreements are to be avoided.


No official announcement has been issued by the authorities on the subject.

is excellent. In particular, a taxpayer may request a tax ruling to clarify the tax consequences of a planned structure or transaction. This possibility derives from the practice of the tax authorities, as Swiss law does not refer to tax rulings (with the exception of Article 69 of the VAT Act).A tax ruling is not intended to result in a reduction of tax, but to provide legal certainty regarding the application of the law. In accordance with the principle of protection of good faith, a tax ruling is binding upon the tax authorities if certain criteria are met.



Switzerland had elaborated the Corporate Tax Reform Act III, which aimed to strengthen the tax competitiveness of Switzerland and resolve the tax dispute with the EU, as well as align with the standards resulting from the new OECD principles. However, the Reform project was submitted to popular vote and dismissed by Swiss voters on 12th February 2017. A replacement project, called Projet fiscal 17, is currently under development.The said project has the same purpose as the Corporate Tax Reform Act III. It includes among others, the abolition of the special tax status companies at cantonal level as well as a few tax practices at federal level (i.e. finance branch and principal company treatment) along with transitional measures for up to five years and introduction of higher taxation of dividends for qualifying shareholders of individuals. Concomitantly, various measures had been designed to maintain the attractiveness of the Swiss Tax System such as: a proposed general reduction of cantonal corporate income taxes; the introduction of a mandatory patent box regime and optional R&D super deduction both at cantonal level and in the canton of Zurich; and the introduction of a notional interest deduction on surplus equity. If no referendum is called, this should come into full force in 2020 but needs to be implemented in each canton separately. In order to be in line with the minimum standard of the International Exchange of Country-by-Country Reports (“CbC Reports”) of Action 13 of the BEPS project, Switzerland, in January 2016, signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (“CbC-MCAA”). The Swiss Parliament, further, adopted the Federal Act on the International Automatic Exchange of Country-by-Country Reports (“CbC-Act”) as well as the Ordinance on International Automatic Exchange of Country-by-Country Reports (“CbC-Ordinance”). All three came into force as of 1st December 2017.As of January 2017, Switzerland, being in line with Action 5 of the BEPS project, introduced the spontaneous exchange of information in tax matters through the adoption of CMAAT as well as by revising the Swiss Federal Act on Tax Administrative Assistance Act (“TAAA”) and the Ordinance on International Administrative Assistance in Tax Matters (“TAAO”). All three above entered into force on 1st January 2017. It should be noted that certain reservations were made limiting the taxes covered for exchange only to Federal, Cantonal and Communal direct taxes, WHT and capital gain on real estate taxes. Indirect taxes such as stamp duties and value added taxes are excluded.Finally, as mentioned at question 1.1, Switzerland signed the MLI on 7th June 2017.


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With over 200 lawyers and offices located in Geneva, Zurich and Lausanne, Lenz & Staehelin is the largest law firm in Switzerland. It has a long tradition of international practice and is ranked amongst the leading firms in all areas of business law. Its clients include national and foreign individuals and corporations, based either in Switzerland or abroad. Fully independent, Lenz & Staehelin has developed successful and longstanding relationships with leading foreign law firms; thus it is ideally positioned to assist clients in cross-border transactions. The firm is known for its high professional standards, in particular for its dedication to providing clients with personalised advice and for the degree of excellence required from its people. Lenz & Staehelin provides legal advice in English, French, German, Italian, Russian and Spanish.

Prof. Pascal Hinny is a specialist in the field of national and international tax planning for multinational groups of companies (including M&A, restructurings, recapitalisation, financing, relocation and private equity). He advises regularly on international and domestic transactions, including public tender offers and private equity buy-outs.

Pascal studied law at the University of St. Gallen, where he also gained his Ph.D. degree on his thesis: “Tax treatment of trademarks in a multinational group of companies”. He is a lawyer and certified tax expert. He holds an LL.M. degree from the London School of Economics.

Since 2002, Pascal he has been a full professor of tax law at the University of Fribourg. He chairs the Swiss Association of Tax Law Professors and is the Swiss delegate to the International Fiscal Association (“IFA”) Permanent Scientific Committee. He regularly speaks at national and international tax conferences.

Pascal speaks English, French and German.

Pascal HinnyLenz & StaehelinBrandschenkestrasse 248027 ZurichSwitzerland

Tel: +41 58 450 80 00Email: [email protected]: www.lenzstaehelin.com

Jean-Blaise Eckert is a partner at Lenz & Staehelin and co-head of the tax group. His practice areas include tax, private clients, contract law and commercial.

He speaks French, English and German. Jean-Blaise studied law at the University of Neuchâtel and was admitted to the Bar of Neuchâtel in 1989 and to the Bar of Geneva in 1991. He studied business administration at Berkeley, Haas Business School, where he acquired an MBA in 1991. He received his diploma as a Certified Tax Expert in 1994 and is a Certified Specialist in Inheritance Law.

Jean-Blaise is considered as a leading lawyer in Switzerland. He advises a number of multinational groups of companies as well as HNWIs. He sits on the board of a number of public and private companies. Jean-Blaise is a frequent speaker at professional conferences on tax matters. Jean-Blaise is Secretary General of the International Fiscal Association (“IFA”).

Jean-Blaise EckertLenz & Staehelin Route de Chêne 30 1211 Genève 6Switzerland

Tel: +41 58 450 70 00Email: [email protected]: www.lenzstaehelin.com


Chapter 34

Slaughter and May

Zoe Andrews

William Watson

United Kingdom

the Dividends, Interest or Royalties article may provide that the UK will not give up its taxing rights if, broadly, the main purpose or one of the main purposes of the creation or assignment of the relevant shares, loan or right to royalties is to take advantage of the article.The BEPS project proposed, as a minimum standard, that countries adopt a “principal purpose test” (“PPT”) that is very similar to the anti-avoidance rule already seen in the UK’s treaties, a US-style limitation on benefits test, or a combination of both. Like most other countries, the UK favours the PPT.


The UK’s General Anti-Abuse Rule (the “GAAR”, discussed in question 9.1 below) can, in principle, apply if there are abusive arrangements seeking to exploit particular provisions in a double tax treaty, or the way in which such provisions interact with other provisions of UK tax law.


There are two tests for corporate residence in the UK. The first is the incorporation test. Generally (that is, subject to provisions which disapply this test for certain companies incorporated before 15 March 1988), a company which is incorporated in the UK will automatically be resident in the UK.Secondly, a company incorporated outside the UK will be resident in the UK if its central management is in the UK. This test is based on case law and focuses on board control rather than day-to-day management, though its application will always be a question of fact determined by reference to the particular circumstances of the company in question.Both tests are subject to the tie-breaker provision of an applicable double tax treaty. If the tax treaty treats a company as resident in another country and not as a UK resident, the company will also be treated as non-UK resident for domestic UK tax purposes. It is notable that the treaties which the UK has renegotiated in the past few years generally do not contain the standard tie-breaker based on the company’s “place of effective management” (“POEM”). As a result, the tax treaty status of a company which is managed in the UK but incorporated, for example, in the Netherlands, will be uncertain pending agreement between the two revenue authorities (“mutual agreement procedure” (“MAP”)). The UK Government has said it will propose similar provisions in its bilateral negotiations in the



The United Kingdom has one of the most extensive treaty networks in the world, with over 130 comprehensive income tax treaties currently in force. One of the consequences of an exit from the European Union (assuming the UK loses the benefit of the Parent-Subsidiary and Interest and Royalties Directives and repeals the UK legislation implementing them) will be greater reliance on the UK’s treaty network to provide exemption from withholding taxes. In some cases there will still be tax leakage, such as on dividends received in the UK from Germany and Italy and royalties paid from the UK to Luxembourg (see question 3.2 below).


They generally follow the OECD model, with some inevitable variation from one treaty to the next. As part of the OECD’s BEPS project (see question 10.1 below), changes were proposed to the definition of “permanent establishment” (“PE”) in Article 5 of the Model Convention. However, the UK will not apply to its existing treaties the changes extending the definition to “commissionaire” (and similar) arrangements. This is because of the risk that this extension could lead to a proliferation of PEs where there is little or no profit to attribute to any of them.


Yes. A tax treaty must be incorporated into UK law and this is done by way of a statutory instrument. A treaty will then enter into force from the date determined by the treaty and will have effect in relation to the taxes covered from the dates determined by the treaty.The UK’s diverted profits tax (discussed at question 10.1 below) was deliberately engineered as a new tax so as to fall outside the legislation which incorporates tax treaties into UK law.


In general, the UK has avoided wide limitation on benefits articles and prefers specific provision in particular articles. For example,


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accordance with the nature and tax status of the supplies that the person intends to make.Input tax on supplies wholly used to make taxable supplies is deductible in full. Input tax wholly used to make exempt or non-business supplies is not deductible at all. Where a taxable person makes both taxable and exempt supplies and incurs expenditure that is not directly attributable to either (for example, general overheads), the VAT on the expenditure must be apportioned between the supplies.The basis on which input tax can be recovered continues to be a vexed topic, generating some important judicial decisions.


The UK permits VAT grouping but not “establishment only” VAT grouping. Under the UK’s VAT grouping rules, where a foreign company is eligible to join a UK VAT group registration and does so, the entirety of that company’s activities are then subsumed within the UK VAT group registration, rather than solely the activities of that company’s UK branch. Please also see question 4.4 below.


Stamp duty land tax (“SDLT”)SDLT is a tax on transactions involving immovable property and is payable by the purchaser. The top rate of SDLT on commercial property is 5% and applies where (and to the extent that) the consideration exceeds £250,000. (For transactions involving residential property, the rate can in some cases be as much as 15%.) The standard charge on the rental element of a new lease is 1% of the net present value (“NPV”) of the rent, determined in accordance with a statutory formula, rising to 2% on the portion of NPV above £5 million.From 15 April 2015, SDLT ceased to apply to land and buildings in Scotland; in its place is a new Land and Buildings Transaction Tax, which has a similar scope to SDLT. This was provided for in the first piece of tax legislation from the Scottish Parliament in 300 years, the Land and Buildings Transaction Tax (Scotland) Act 2013.From April 2018, a new Land Transaction Tax replaced SDLT in Wales.Stamp duty reserve tax (“SDRT”)SDRT is charged on an agreement to transfer chargeable securities for money or money’s worth (whether or not the agreement is in writing). Subject to some exceptions, “chargeable securities” are (principally) stocks or shares issued by a company incorporated in the UK, and units under a UK unit trust scheme. SDRT is imposed at the rate of 0.5% of the amount or value of consideration, though the rate is 1.5% if UK shares or securities are transferred (rather than issued) to a depositary receipt issuer or a clearance service and the transfer is not an integral part of the raising of share capital. UK legislation still purports to apply the 1.5% charge whenever UK shares or securities are issued or transferred to a depositary or clearance service. However, the charge is not collected by Her Majesty’s Revenue and Customs (“HMRC”) because it has been found to be contrary to EU law (the Capital Duties Directive). In the Autumn 2017 Budget, the Government confirmed that this practice will continue after the UK leaves the EU in 2019 notwithstanding the Capital Duties Directive will no longer apply.

future and has agreed to the replacement of POEM with MAP under Article 4 of the Multilateral Convention to implement the BEPS treaty changes.

2 Transaction Taxes


Stamp duty is a tax on certain documents. The main category of charge takes the form of an ad valorem duty, at 0.5% of the consideration, on a transfer on sale of stock or marketable securities (or of an interest in a partnership which holds such stock or securities). In practice, stamp duty has little relevance if the issuer of the stock or securities is not a company incorporated in the UK.The UK’s Office of Tax Simplification (“OTS”) published a report in July 2017 on digitising and modernising the stamp duty process the core recommendations of which the Government responded positively to. Some of the changes proposed in the report would be very welcome. Inevitably, though, it also suggests making the stamp duty charge mandatory, ending the current position under which a purchaser that never needs to rely on the document in question, can, in some circumstances, ignore the charge. Please see question 2.6 below for details of the stamp duty land tax (or the equivalents in Scotland and Wales) that applies to land transactions in the UK.


The UK has had VAT since becoming a member of the European Economic Community in 1973 and the UK VAT legislation gives effect to the relevant EU Directives. There are three rates of VAT:■ the standard rate of VAT is 20% and applies to any supply of

goods or services which is not exempt, zero-rated or subject to the reduced rate of VAT;

■ the reduced rate of VAT is 5% (e.g. for domestic fuel); and■ there is a zero rate of VAT which covers, for example, books,

children’s wear and most foodstuffs.Whilst the fundamental VAT rules within the UK may not change much upon its exit from the EU (not least because VAT has generated over 20% of all UK tax receipts over the last seven years), transactions in both goods and services between the UK and the other 27 EU countries are likely to be affected significantly.


The exclusions from VAT are as permitted or required by the Directive on the Common System of VAT (2006/112/EC) (as amended) and some examples of exempt supplies are:■ most supplies of land (unless the person making the supply,

or an associate, has “opted to tax” the land);■ insurance services; and■ banking and other financial services.


Input tax is only recoverable by a taxable person (a person who is, or is required to be, registered for VAT). Input tax is attributed in


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legislation implementing the Interest and Royalties Directive does not apply, the rate of withholding tax on “yearly” interest which has a UK source and is paid to a non-resident is generally 20%.There is no withholding tax, however, where interest is paid on quoted Eurobonds; nor, since 1 January 2016, on interest paid on private placements – a form of selective, direct lending by non-bank lenders (such as insurers) to corporate borrowers. And in order to make the UK wholesale debt markets more competitive, the Government introduced, from April 2018, a new exemption for debt traded on a multilateral trading facility operated by a recognised stock exchange in an EEA territory.


The UK has a thin capitalisation regime which applies to domestic as well as cross-border transactions. A borrower is considered according to its own financial circumstances when determining the amount which it would have borrowed from an independent lender. The assets and income of the borrower’s direct and indirect subsidiaries can be taken into account to the extent that an unconnected lender would recognise them, but the assets and income of other group companies are disregarded.


There are no statutory safe harbour rules. Historically, HMRC adopted a rule of thumb that a company would not generally be regarded as thinly capitalised where the level of debt to equity did not exceed a ratio of 1:1 and the ratio of income (“EBIT”) to interest was at least 3:1. HMRC’s current guidance moves away from this to apply the arm’s length standard on a case-by-case basis and sets out broad principles that should be considered; and the ratio cited most often is debt to EBITDA (earnings before interest, tax, depreciation and amortisation).


Yes. A company may be thinly capitalised because of a special relationship between the borrower and the lender or because of a guarantee given by a person connected with the borrower. A “guarantee” for this purpose need not be in writing and includes any case in which the lender has a reasonable expectation that it will be paid by, or out of the assets of, another connected company.


The UK has introduced an EBITDA-based cap on net interest expense as recommended in the OECD report on BEPS Action 4; this took effect from 1 April 2017 which was, extraordinarily, more than six months before the relevant legislation was enacted. A fixed ratio rule limits corporation tax deductions for net interest expense to 30% of a group’s UK “tax EBITDA” (so excluding, for example, non-taxable dividends); there is also a group ratio rule based on the net interest to EBITDA ratio for the worldwide group. A consequence of the new 30% EBITDA cap is the repeal of the UK’s previous interest restriction rule known as the worldwide debt cap, although a rule with “similar effect” has been integrated into the new interest restriction rules to ensure that a group’s net UK

SDRT liability is imposed on the purchaser and is directly enforceable. Where a transaction is completed by a duly stamped instrument within six years from the date when the SDRT charge arose, there is provision in many cases for the repayment of any SDRT already paid or cancellation of the SDRT charge.


Customs duties are generally payable on goods imported from outside the EU and, depending on the terms of the UK’s exit from the EU, could start to apply to imports from the EU. However, the European Union (Withdrawal) Act 2018 will incorporate the latest EU customs code into UK law for the transitional period. Excise duties are levied on particular classes of goods (e.g. alcohol and tobacco). Insurance premium tax is charged on the receipt of a premium by an insurer under a taxable insurance contract. Environmental taxes include the following: landfill tax; aggregates levy; climate change levy; and a carbon reduction charge.



In most cases, no withholding tax is imposed on dividends paid by a UK resident company. Dividends deriving from the tax-exempt business of a UK Real Estate Investment Trust (“REIT”) are, however, subject to withholding tax at the rate of 20% if paid to non-resident shareholders (or to certain categories of UK resident shareholder); this may be reduced to 15%, or in a few cases less, by an applicable double tax treaty.


In the absence of a double tax treaty and provided that the UK legislation implementing the Interest and Royalties Directive (2003/49/EC) does not apply, the rate of withholding tax on most royalties is 20%. There is no withholding tax on film and video royalties.The UK legislation implementing that Directive provides that there is no withholding tax on the payment of royalties (or interest) by a UK company (or a UK PE of an EU company) to an EU company which is a “25% associate”. The exemption does not apply to the extent that any royalties (or interest) would not have been paid if the parties had been dealing at arm’s length. An EU company for these purposes is a company resident in a Member State other than the UK.There must be a risk that this UK legislation will be repealed in light of Brexit.Finance Bill 2019 is expected to include a new withholding tax in respect of royalty payments made to low or no tax jurisdictions in connection with sales to UK customers. The rule, which will also apply to payments for certain other rights, will apply regardless of where the payer is located.


In the absence of a double tax treaty and provided that the UK


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and deductions may then be allowable. For example, in the case of most plant or machinery, capital allowances on a reducing balance basis (at various rates depending on the type of asset and the level of expenditure incurred – the rules are not very generous) are substituted for accounting depreciation.UK tax legislation has been amended to deal with various issues arising from companies adopting International Accounting Standards for their accounts and, in certain circumstances, related adjustments are required for tax purposes. Changes will be made to the UK’s tax legislation to deal with the impact of changes in International Financial Reporting Standard 16 (leasing) in order to preserve the current tax treatment of leases.Since autumn 2015, a revised set of rules governing the tax treatment of corporate debt and derivative contracts has been in place. The revised regime includes a broad anti-avoidance provision which may lead to an increase in the circumstances in which the taxation of such financial instruments deviates from their accounting treatment.


Yes. The UK does not permit group companies to be taxed on the basis of consolidated accounts, but the grouping rules achieve a degree of effective consolidation for various tax purposes. A group consists, in most cases, of a parent company and its direct or indirect subsidiaries, but the exact test for whether a group exists depends on the tax in question.Group relief groupLosses (other than capital losses) can be surrendered from one UK resident group company to another UK resident group company. Losses can also be surrendered by or to a UK PE of a non-UK group company. A UK PE of an overseas company can only surrender those losses as group relief if they are not relievable (other than against profits within the charge to UK corporation tax) in the overseas country. Similarly, a UK company can surrender the losses of an overseas PE if those losses are not relievable (other than against profits within the charge to UK corporation tax) in the overseas country.The UK legislation permits group relief to be given in the UK for otherwise unrelievable losses incurred by group members established elsewhere in the EU, even if they are not resident or trading in the UK. However, the applicable conditions are very restrictive, so in practice UK companies can rarely benefit from this rule. It remains to be seen whether it will be repealed after Brexit in any event, as it was only introduced to comply with EU law.Please also see question 4.5 below as regards a legislative change which allows the surrender of carry-forward losses. Capital gains groupThere is no consolidation of capital gains and losses, but it is possible to make an election for a gain (or loss) on a disposal made by one capital gains group member to be treated as a gain (or loss) on a disposal by another group member.Capital assets may be transferred between capital gains group members on a no gain/no loss basis. This has the effect of postponing liability until the asset is transferred outside the group or until the company holding the asset is transferred outside the group. When a company leaves a capital gains group holding an asset which it acquired intra-group in the previous six years, a degrouping charge may arise. However, in many cases, the degrouping charge will be added to the consideration received for the sale of the shares in the

interest deductions cannot exceed the global net third-party interest expense of the group.


In principle, such payments are subject to withholding tax (by the tenant or agent) at 20%, being the basic rate of income tax in the UK. However, the non-resident can register as an overseas landlord under the Non-resident Landlord Scheme and then account for income tax itself (again at 20%). Most commercial landlords that are non-resident opt for registration under this scheme.One notable consequence of the reductions in the rate of corporation tax in recent years (see question 4.1 below) is that a UK corporate landlord may be paying less tax on UK source rent than a non-resident landlord. This disparity is to be removed from 6 April 2020, however, when it is proposed that non-UK resident companies carrying on a UK property business will be brought within the scope of corporation tax. Accordingly, from 6 April 2020 there will not be any withholding tax on property rental payments because non-resident landlords will be completing a corporation tax self-assessment return instead.


Yes. The UK transfer pricing rules apply to both cross-border and domestic transactions between associated companies.If HMRC do not accept that pricing is at arm’s length, they will raise an assessment adjusting the profits or losses accordingly. It is possible to make an application for an advance transfer pricing agreement which has the effect that pricing (or borrowing) in accordance with its terms is accepted as arm’s length.In cross-border transactions, the double taxation caused by a transfer pricing adjustment can be mitigated by the provisions of a tax treaty.Transfer pricing is also on the BEPS radar, of course, and changes to the OECD Transfer Pricing Guidelines are under way.



The current Government continues to reduce the headline rate of tax, as part of a package of tax reforms designed to enhance UK competitiveness. From a starting point of 28% in 2010 it had fallen to 19% by 1 April 2017, and the Government has said it will fall to 17% in 2020. Banks, however, are an exception; from 2016 they have paid an 8% surcharge on top of the headline rate of corporation tax.


In general terms, tax follows the commercial accounts subject to adjustments.


Certain items of expenditure which are shown as reducing the profits in the commercial accounts are added back for tax purposes,


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There are special regimes for the taxation of certain types of activity or company, such as oil exploration (profits from which are subject to a “supplementary charge”, the rate of which is currently 10%) and UK REITs (which are not generally taxed on income or gains from investment property).

5 Capital Gains


Corporation tax is chargeable on “profits”, which includes both income and capital gains. There is, however, a separate regime for computing capital gains. This contains more exemptions, but also has the effect that capital losses can only be used against gains, not against income.


Yes. A substantial shareholdings exemption (“SSE”) allows trading groups to dispose of trading subsidiaries without a UK tax charge. The SSE is narrower and more complex than the participation exemption found in some other countries, though some of the original restrictions have been removed (for disposals made on or after 1 April 2017).Capital gains realised on the disposal of assets by non-residents are not generally subject to corporation tax unless the assets were used for the purposes of a trade carried on through a UK PE, as noted in question 6.3 below. However, from 6 April 2019 new provisions to be included in Finance Bill 2019 will charge non-UK resident companies corporation tax on their gains from disposals of interest in UK land.


There is rollover relief for the replacement of certain categories of asset used for the purposes of a trade. Rollover is available to the extent that the whole or part of the proceeds of disposal of such assets is, within one year before or three years after the disposal, applied in the acquisition of other such assets.It is a feature of the UK’s rules that the replacement assets have to remain within the UK tax net. In 2015, a similar requirement was held by the CJEU to be a restriction on freedom of establishment (European Commission v Germany (C-591/13)): the Court ruled that the taxpayer should be able to choose between immediate payment or bearing the administrative burden of deferring the tax. With the UK preparing to exit the EU, however, it seems unlikely that the UK will change its rules to permit a deferral.


This occurs only in very specific circumstances; one example is on the sale of UK patent rights by a non-resident individual who is subject to UK income tax on the proceeds of the sale (or by a non-resident company which is subject to UK corporation tax, if the buyer is an individual).

transferee company and will then be exempt under the substantial shareholding regime (see question 5.2 below for details of this regime).Stamp duty and SDLT groupsTransfers between group companies are relieved from stamp duty or from SDLT where certain conditions are met.VAT groupTransactions between group members are disregarded for VAT purposes (although HMRC have powers to override this in certain circumstances). Broadly, two or more corporate bodies are eligible to be treated as members of a VAT group if each is established or has a fixed establishment in the UK and they are under common control. The eligibility criteria for the UK’s VAT grouping rules are, however, the subject of a current consultation. It is proposed to allow non-corporate entities (such as partnerships and individuals) who have a business establishment in the UK and control a body corporate to join a VAT group, subject to certain conditions. Please also see question 2.5 above.


Tax losses may survive a change of ownership but, like many other jurisdictions, the UK has rules which can deprive a company of carry-forward losses in certain circumstances following such a change. The policy objective is to combat loss-buying but the rules can easily apply where there is no tax motivation for the change in ownership.Significant changes have been made to the carry-forward loss regime, again with retrospective effect to 1 April 2017. On the positive side, where the conditions are met the changes enable carried-forward losses incurred on or after 1 April 2017 to be carried forward and set off against other income streams and against profits from other companies within a group; this is more flexible than the old rules, although the new flexibility is substantially restricted where there is a change in ownership of the company with losses. The negative aspect of the changes is that the amount of taxable profit that can be offset by carried-forward losses is restricted to 50%, though this only applies to taxable profits in excess of £5 million (calculated on a group basis). Unlike the first measure, this applies to historic losses, not just those incurred on or after 1 April 2017. There are different restrictions for banks.


No, it is not.


Business rates are payable by the occupier of business premises based on the annual rental value. The rate depends on the location of the business premises and the size of the business. Business rates are a deductible expense for corporation tax purposes.An annual tax on enveloped dwellings (“ATED”) is payable by companies and certain other “non-natural persons” if they own interests in dwellings with a value of more than £500,000. There are reliefs available, including where the dwelling is being or will be used for genuine commercial activities.


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Unilateral tax credit relief may be allowed for tax paid outside the UK in respect of the income or chargeable gains of a UK branch or agency of a non-UK resident person if certain conditions are fulfilled. Tax payable in a country where the overseas company is taxable by reason of its domicile, residence or place of management is excluded from relief.


No, it would not.

7 Overseas Profits


As a general rule, and subject to tax treaty provisions, the UK taxes the profits earned in overseas branches of UK resident companies. A UK company can, however, elect for the profits (including capital gains) of its overseas branches to be exempt from UK taxation. The downside of such an election is that the UK company cannot then use the losses of the overseas branch. An election is irrevocable and covers all overseas branches of the company making the election.


Foreign dividends and UK dividends (other than “property income dividends” from a UK REIT) are treated in the same way. They are generally exempt in the hands of a UK company, subject to some complex anti-avoidance rules and an exclusion for dividends paid by a “small” company which is not resident in the UK or a “qualifying territory”.


It does, though the UK’s current CFC regime has a more territorial focus than its predecessor. Under the revised rules, profits which arise naturally outside the UK are not supposed to be caught. There are also various exclusions and exemptions. These include a finance company partial exemption (“FCPE”) which (while the main rate of corporation tax is 19%) results in an effective UK corporation tax rate of 4.75% on profits earned by a CFC from providing funding to other non-UK members of the relevant group. Indeed, in some instances such profits will not be caught by the CFC charge at all. The outcome of the European Commission’s investigation into whether the FCPE constitutes unlawful State Aid is eagerly awaited; see also William Watson’s introductory chapter.A change that took effect from 8 July 2015 adds a punitive element to the new regime: a group which has losses can no longer use them against a CFC charge. This reduces the attractiveness of the FCPE for groups with carried-forward losses. A couple of aspects of the UK’s CFC rules will be revised to ensure that the rules are fully compliant with the EU Anti-Tax Avoidance Directive (“ATAD”).





Yes: a UK resident subsidiary will pay corporation tax on its worldwide income and gains unless it makes the election described in question 7.1 below, whereas a UK branch is liable to corporation tax only on the items listed in question 6.3. Subject to the point immediately below, the charge to UK corporation tax imposed on a non-resident company currently applies only where the non-resident company is trading in the UK through a PE; this means that a branch set up for investment purposes only, and not carrying on a trade, is not subject to UK corporation tax, though certain types of income arising in the UK − notably rent and interest − may be subject to income tax through withholding (at 20%). The exception results from a legislative change made in 2016. A non-resident company can now be subject to corporation tax even where it does not have a PE in the UK, if it is nonetheless trading “in” the UK and the trade consists of “dealing in or developing” UK land.From 6 April 2019, non-UK resident companies will be charged corporation tax on their gains from direct and indirect disposals of interests in UK land (where certain conditions are met (see question 8.1 below)).


Assuming that the local branch of a non-resident company is within the UK statutory definition of “permanent establishment” (which is based on, but not quite the same as, the wording of Article 5 of the OECD Model Convention), it will be treated as though it were a distinct and separate entity dealing wholly independently with the non-resident company. It will also be treated as having the equity and loan capital which it would have if it were a distinct entity, which means that the UK’s thin capitalisation rules will apply to it.Subject to any treaty provisions to the contrary, the taxable profits of a PE through which a non-resident company is trading in the UK would comprise:■ trading income arising directly or indirectly through, or from,

the PE;■ income from property and rights used by, or held by or for,

the PE (but not including exempt distributions); and■ capital gains accruing on the disposal of assets situated in the

UK and effectively connected with the operations of the PE.


The UK domestic legislation does not give treaty relief against UK tax unless the person claiming credit is resident in the UK for the accounting period in question. This means that the UK branch of a non-resident company cannot claim treaty relief.


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reasonably be regarded as a reasonable course of action (the justly maligned “double reasonableness” test)? This is to be assessed “having regard to all the circumstances”, including consistency with policy objectives, whether there are any contrived or abnormal steps and whether the arrangements exploit any shortcomings in the relevant provisions.As predicted, the GAAR has had little impact on corporate taxpayers, as they had already begun to adopt a more conservative approach to tax planning; and the 60% penalty will doubtless prove a strong incentive for taxpayers to settle future cases before they are referred to the GAAR Panel.The ATAD includes an anti-avoidance rule which is broader than the UK’s GAAR but the UK has not yet shown any signs of implementing the EU GAAR.


The UK has disclosure rules which are designed to provide HMRC with information about potential tax avoidance schemes at an earlier stage than would otherwise have been the case. This enables HMRC to investigate the schemes and introduce legislation (often a new “targeted anti-avoidance rule”) to counteract the avoidance where appropriate.The Government sees these mandatory disclosure rules as the answer to Action 12 of the BEPS project (that taxpayers be required to disclose their aggressive tax planning arrangements).


Yes: the Finance Act 2017 brought in new rules under which advisers and others who “enable” the implementation of “abusive tax arrangements” can be penalised if those arrangements are ineffective.The Government has also co-opted third parties in the fight against tax evasion. From 30 September 2017, the Criminal Finances Act 2017 introduces two new corporate offences of failure to prevent the facilitation of UK or foreign tax evasion. This will hold organisations to account for the actions of their employees and other persons performing services for or on behalf of the organisation (so potentially including any contractor or sub-contractor) unless the organisation can show that it has reasonable procedures in place to prevent these offences being committed.The Government intends to implement the EU intermediaries disclosure rules which provide for the mandatory disclosure of cross-border “potentially aggressive tax planning arrangements” by intermediaries (EU Directive 2018/882).


Yes. HMRC have encouraged co-operative compliance for a number of years; it goes hand in hand with HMRC’s risk assessment strategy and enables HMRC to concentrate resources on the higher risk, less co-operative taxpayers. It initially led to an improved relationship between taxpayers and HMRC and, while it may not result in lower tax liabilities, it does reduce compliance costs. More recently, though, there has been a perception that HMRC has become more likely to litigate even where the taxpayer is co-operative.



Under current law, non-residents are not generally taxed on the disposal of commercial real estate in the UK that is held as an investment. However, from 6 April 2019, non-UK resident companies will be subject to corporation tax on their gains from direct and indirect disposals of interests in UK land (whether commercial or residential) where certain conditions are met.


Not currently but from 6 April 2019 non-resident companies will become subject to a charge to corporation tax on the disposal of an interest in a property-rich entity in certain circumstances.


Yes. Since 2007, the UK’s REIT regime has enabled qualifying companies to elect to be treated as REITs. The conditions for qualification include UK residence, listing (on a main or secondary stock market), diversity of ownership and a requirement that three-quarters of the assets and profits of the company (or group) are attributable to its property rental business.The aim of the regime is that there should be no difference from a tax perspective between a direct investment in real estate and an investment through a REIT. Accordingly, a REIT is exempt from tax on income and gains from its property rental business but distributions of such income/gains are treated as UK property income in the hands of shareholders and, as noted in question 3.1 above, are liable to 20% withholding tax (subject to exceptions).



Although a GAAR was enacted in the UK for the first time in 2013, it may be some time before the UK courts are asked to make sense of it. One reason for this is that, before invoking the GAAR, HMRC must ask an independent advisory panel (the GAAR Panel) for its opinion as to whether the GAAR should apply (though it can use a GAAR Panel opinion in one case to counteract “equivalent arrangements” used by other taxpayers). The GAAR Panel opinions to date have all been in HMRC’s favour. The other reason is the massive financial deterrent to challenging HMRC’s application of the GAAR. If the GAAR applies, HMRC can counteract the tax advantage by the making of “just and reasonable” adjustments. Taxpayers who enter into arrangements that are counteracted by the GAAR are liable to a penalty of 60% of the counteracted tax unless they “correct” their tax position before the arrangements are referred to the GAAR Panel.The GAAR contains two tests: are there arrangements which have as their main purpose securing a tax advantage; and if so, are they arrangements the entering into or carrying out of which cannot


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DPT, discussed in question 10.1, the Government rushed through a corporate interest restriction (question 3.7), whereas the report on BEPS Action 4 had recommended that reasonable time be given to entities to restructure existing financing arrangements before interest restriction rules come into effect.


The Government has previously spoken out in favour of public CBCR, though the OECD has subsequently expressed concern that it would do more harm than good if only some jurisdictions require public reporting, and there is a lack of consistency in what has to be reported. The Government has said it is disappointed with the lack of progress towards international agreement on public reporting and, while the UK legislation contains a power to switch on public reporting, this is unlikely to be used before a multilateral agreement is reached.


Until 30 June 2016, the UK had a patent box regime which allowed an arm’s length return on IP held in the UK to qualify for a reduced tax rate of 10% even if all the associated research and development (“R&D”) activity was done outside the UK. In light of BEPS Action 5, IP which was already in the patent box on 30 June continues to benefit from the old rules for five years. IP not already in the patent box on that date qualifies only to the extent it is generated by R&D activities of the UK company itself, or by R&D outsourced to third parties; and acquired IP and IP generated by R&D outsourced to associates are no longer eligible for the patent box.Where IP has been generated from a combination of “good” and “bad” expenditure, a fraction of the patent income qualifies for the patent box and, in calculating this, there is a 30% uplift for “good” expenditure, to soften the impact of these rule changes. Depending on the deal negotiated with the EU, Brexit may lead to a further relaxation of the new rules: departure from the EU might enable the UK to treat all R&D outsourcing within the UK as “good” expenditure, without fear of violating EU Treaty freedoms and State aid rules.



Not yet. The UK is keen to engage with the EU and the OECD on this issue with a view to agreeing a reform of the international tax rules to reflect the value of user participation. In a March 2018 position paper, the Government stated that in the absence of reform of the international rules, interim measures such as revenue-based taxes must be considered. The Government thinks there are benefits to implementing interim measures on a multilateral basis and intends to work closely with the EU and international partners on this issue. The position paper explained that the Government continues to refine its position so we have not heard the last on this yet.




The UK was the first country to commit formally to implementing the country-by-country template, and regulations have been in effect since March 2016.The UK, controversially, pre-empted the BEPS project and introduced, with effect from 1 April 2015, an entirely new tax – the “diverted profits tax” (“DPT”) – which is intended to protect the UK tax base. It has two main targets: where there is a substantial UK operation but sales to UK customers are made by an affiliate outside the UK, in such a way that the UK operation is not a PE of the non-UK affiliate; and where the UK operation makes deductible payments (e.g. royalties for intellectual property (“IP”)) to a non-UK affiliate, these are taxed at less than 80% of the rate of corporation tax and the affiliate has insufficient “economic substance”. As a deterrent, the rate applicable to the “diverted” profits is 5% higher than the rate at which tax would otherwise have been payable.The UK has modified its patent box regime in response to Action 5 (Countering Harmful Tax Practices) (see question 10.4 below).Anti-hybrids legislation has been in effect from 1 January 2017 (see question 10.2 below). These rules are being revised to comply fully with ATAD.Legislation to implement Action 4 (Deductibility of Interest) (see question 3.7 above) was included in Finance (No.2) Act 2017, with retrospective effect from 1 April 2017.The UK has ratified the Multilateral Convention and notified most of its treaties to the OECD so that (subject to the relevant treaty partner’s agreement) the modifications to the UK’s treaties required by BEPS can be made.


Yes. The first example of a measure not required by the OECD BEPS reports is the DPT (see question 10.1 above).The second example is the UK’s extension of royalty withholding tax. In particular, this will now effectively have extra-territorial scope in some circumstances: where the way in which sales are made in the UK creates an actual PE or, in DPT terms, an “avoided” PE, IP royalties paid out of (say) the European hub for sales activities will be treated for the purposes of UK withholding tax as having been paid out of the UK, to the extent it is “just and reasonable” to do so. A further extension of royalty withholding tax is planned for inclusion in Finance Bill 2019. If enacted, this will require deduction of income tax at source in respect of royalty payments made to low or no tax jurisdictions in connection with sales to UK customers. The rules, which will also apply to payments for certain other rights, will apply regardless of where the payer is located.A third example is the anti-hybrids regime. The UK has implemented very broad rules which, because of the absence of a motive test or a UK tax benefit test, means that third-party, commercially motivated transactions are potentially within scope.There has also been a tendency for the Government to accelerate the introduction of measures; besides its pre-emptive strike with


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Slaughter and May is a leading international law firm with a worldwide corporate, commercial and financing practice. Our highly experienced Tax group deals with the tax aspects of all corporate, commercial and financial transactions. We provide pan-European tax advice via the Best Friends Tax Network*. Alongside a wide range of tax-related services, we advise on:

■ structuring of the biggest and most complicated mergers & acquisitions and corporate finance transactions;

■ development of innovative and tax-efficient structures for the full range of financing transactions;

■ documentation for the implementation of transactions, to ensure that it meets tax objectives;

■ tax aspects of private equity transactions and investment funds from initial investment to exit; and

■ tax investigations and disputes from initial queries to litigation or settlement.

“They are absolutely excellent, they are very easy to work with and they are very pragmatic in their advice.” – Chambers UK, 2018

“Additionally, market sources are quick to note the quality of deals which the firm is involved in: ‘They have multinational companies in their clientele with complex cross-border issues’.” – Chambers Global, 2018

“Stellar UK practice utilising its broad European ‘best friends’ network of firms to provide cross-border tax advice. Provides sophisticated expertise on high-profile M&A and financing transactions. Growing presence in contentious tax issues. Also offers tax consultancy advice, with particular strength in transfer pricing matters, as well as tax litigation.” – Chambers Europe, 2017

*The Best Friends Tax Network comprises BonelliErede (Italy), Bredin Prat (France), De Brauw Blackstone Westbroek (the Netherlands), Hengeler Mueller (Germany), Slaughter and May (UK) and Uría Menéndez (Spain and Portugal).

Zoe Andrews is a senior professional support lawyer in the Slaughter and May Tax Department, covering all aspects of UK corporate tax and international tax developments affecting the UK. Particular areas of interest in recent years have included BEPS and the development of FATCA and other automatic exchange of information regimes.

Zoe AndrewsSlaughter and MayOne Bunhill RowLondonEC1Y 8YYUnited Kingdom

Tel: +44 20 7090 5017Email: [email protected]: slaughterandmay.com

William Watson joined Slaughter and May in 1994 and became a partner in the Tax Department in 2004. His practice covers all UK taxes relevant to corporate and financing transactions. Particular areas of interest include real estate and the oil & gas sector; however, William also has extensive experience more generally of mergers & acquisitions, demergers and other corporate structuring, debt and equity financing and tax litigation.

William is listed as a leading individual in the Tax section of Chambers UK, 2018 and Chambers Europe and Chambers Global, 2018. He is also listed in the International Tax Review’s Tax Controversy Leaders Guide, 2018 and in Who’s Who Legal, 2018 and is recommended for both Corporate Tax and Tax Litigation & Investigations in The Legal 500, 2018.

William WatsonSlaughter and MayOne Bunhill RowLondonEC1Y 8YYUnited Kingdom

Tel: +44 20 7090 5052Email: [email protected]: www.slaughterandmay.com


UK officials were party to the initial joint statement made with France, Germany, Italy and Spain that they welcomed the

Commission’s proposals and intend to study them. Since then, however, a number of other Member States (particularly Ireland and the Nordic countries) have spoken out against the digital services tax proposal and it is not clear that the UK continues to support it.


Chapter 35

Wachtell, Lipton, Rosen & Katz

Jodi J. Schwartz

Swift S.O. Edgar

USA


To take effect, treaties must be ratified by a two-thirds vote of the Senate (one house of the U.S. legislature) and must be effective in accordance with the laws of the other contracting state. Although historically tax treaties have not been controversial, recently treaty ratification in the Senate has been limited, and none of the tax treaties or protocols amending tax treaties pending before the Senate since 2010 has been ratified.


Yes. The U.S. model treaty introduced a limitation on benefits article in 1981. The content of the article in actual treaties varies, but the negotiating position of the United States reflected in the 2016 U.S. model treaty is to include robust limitations on benefits, including: a dedicated article; a “triangular” permanent establishment provision in the general scope article that denies treaty benefits to residents of one state that earn income generated in the other contracting state through a permanent establishment in a third state if certain other conditions are met; limitations that apply to entities expatriated from the U.S. in order to remove incentives for corporate “inversions”; and limitations on the availability of treaty benefits for income earned by a resident that benefits from a “special tax regime” (a jurisdiction that meets certain requirements and has been identified through diplomatic channels as problematic).Furthermore, regulations and generally applicable doctrines of tax law could apply to recharacterise transactions designed to take advantage of favourable treaty rules in accordance with what the U.S. Internal Revenue Service (“IRS”) or a court deems to be the appropriate tax result (see question 9.1).


Yes. Although the main source of U.S. federal tax law, the Internal Revenue Code of 1986 (as amended, the “Code”), provides that it must be applied “with due regard to any treaty obligation of the United States”, it also states that neither treaties nor domestic legislation have preferential status. In practice, courts, the IRS and practitioners generally interpret the U.S. tax laws to be consistent with tax treaties; nevertheless, federal (not state or local) law may supersede previously ratified treaties. For example, notwithstanding



The United States has 58 income tax treaties in force, covering 66 countries (nine countries succeeded to the treaty with the U.S.S.R.). The United States’ income tax treaty network covers most of the world’s major economies, including every member of the European Union other than Croatia, and every member of the G-20 other than Argentina, Brazil and Saudi Arabia. There are few treaties with nations in Africa (Egypt, Morocco, South Africa and Tunisia) and South America (Trinidad and Tobago and Venezuela). Several agreements – replacing existing treaties (Hungary and Poland), entering into a tax treaty for the first time (Chile and Vietnam), or amending current treaties (Japan, Luxembourg, Spain and Switzerland) – have been signed but not ratified by the U.S. Senate. The prospects for ratification are uncertain (see question 1.3).


The United States has followed its own model convention since 1976, revised approximately every 10 years, most recently in February 2016. Significant differences between the U.S. and OECD models include the definition of residence for treaty purposes and the application of the treaty to state and local income taxes. In the U.S. model, a business organisation that is resident in both contracting states (for example, because it is incorporated in the United States and managed in another contracting state) is considered a resident of neither state and thus ineligible for treaty benefits. In contrast, the OECD model provides that such an entity’s place of effective management would determine its residency. The U.S. model treaty also differs from the OECD standard in that the U.S. model only applies to U.S. federal income taxes and does not preempt state and local tax laws.Despite these differences, the U.S. and OECD models have historically influenced one another. Accordingly they have much in common, and American courts have relied on OECD commentary in interpreting U.S. tax treaties. Consistent with certain recommendations stemming from the OECD-G20 BEPS initiative, the US model treaty includes a limitation on benefits provisions (which have long had a place in U.S. tax treaties) and a statement of intent in the preamble that the treaty’s purpose is not to create opportunities for tax evasion.


USA

Wachtell, Lipton, Rosen & Katz USA

resident of neither. Not all U.S. treaties in force follow the U.S. model treaty in this respect, and some provide tie-breaking rules to determine residency or allow the contracting states to reach mutual agreement with respect to residence.

2 Transaction Taxes


There are generally no U.S. federal documentary taxes. Some state and local jurisdictions have documentary and transfer taxes, especially in the real estate context.


No. The closest existing analogue is sales and use tax, which is imposed at the state and local level on retail purchases of goods and some services, and is generally not applicable to business combinations and other major corporate dispositions. There are also federal excise taxes on the purchase of a limited set of goods and services (e.g., gasoline and airplane tickets).


There is no VAT in the United States.


There is no VAT in the United States. Sales and use taxes are imposed on consumers and are generally not recoverable.


This is not applicable in the United States.


State and local taxes vary extensively by jurisdiction, and companies that operate throughout the United States often devote significant resources to state and local tax planning. The most significant transaction taxes applicable to companies are often state taxes imposed on the transfer of real property. State and local taxes incurred in a taxpayer’s trade or business are generally deductible for U.S. federal income tax purposes.


Federal indirect taxes narrowly apply to the purchase of a small range of goods and services. There is a broader assortment of specialised state and local indirect taxes, including, for example, insurance premium taxes, hotel occupancy taxes, and taxes on the sale of tobacco products beyond the federal excise tax on the same products. These taxes vary significantly by jurisdiction.

treaty provisions to the contrary in place before its enactment, a 1996 amendment to the Code provides for taxation of certain former citizens and long-term residents for 10 years following their expatriation. One potential conflict that has not been litigated arises in the context of “inversions”: if the requirements of the Code are met, the United States treats corporations that invert to non-U.S. jurisdictions as U.S. corporations for all purposes of the Code, which could conflict with tax treaties that look to legal place of residence or place of management to determine tax residency. Additionally, tax doctrines developed by courts can recharacterise transactions to yield different results from what would obtain upon a literal application of the Code and a tax treaty (see question 9.1).Last, it is uncertain whether a tax treaty could violate the U.S. Constitution, which would control in the event of a conflict regardless of when the treaty entered into force. Although U.S. courts have generally taken a broad view of both Congress’s taxing power and the President’s treaty power, the U.S. Supreme Court has recently imposed restrictions on congressional authority and arguably has signalled a willingness to limit the treaty power as well.


The test for determining what tax laws apply to a company depends on the form of the company. For U.S. federal income tax purposes, a business organisation generally is classified as a corporation, a partnership, or an entity disregarded as separate from its owner. If the company has more than one owner, it will be treated either as a corporation or a partnership; if only one owner, a corporation or a disregarded entity. Many business organisations, formed under U.S. or non-U.S. law, may elect to be classified as a corporation or a disregarded entity or a corporation or a partnership (depending on the number of owners).A company treated as a corporation for U.S. federal income tax purposes will be a “domestic” corporation and hence subject to U.S. federal income tax of its taxable income regardless of source if it is organised or created under the laws of the United States, one of the 50 states or the District of Columbia. A corporation will also be treated as a domestic corporation if it has engaged in an inversion transaction, which generally occurs when a non-U.S. corporation acquires a domestic corporation and the former shareholders of the domestic corporation own 80% or more of the acquirer, calculated according to detailed rules that generally operate to increase the ownership percentage of the former shareholders of the domestic corporation. A corporation that is not domestic is foreign and is subject to special provisions of the Code that generally provide more limited taxation than that imposed on domestic corporations.With limited exceptions, partnerships are not subject to U.S. federal income tax directly; rather, each partner is subject to tax with respect to its allocable share of the income of the partnership (in a manner that depends on the residence of the partner and the activities of the partnership). Where the partnership is organised for the most part does not matter for purposes of calculating U.S. federal income tax liability. Finally, disregarded entities are not subject to U.S. federal income tax (but may be subject to employment and/or excise taxes).The residence of individuals and business organisations, to the extent relevant for treaty purposes, is governed by the relevant treaty and may be based on place of organisation or management. The U.S. model treaty looks to liability for taxation by reason of domicile, residence, citizenship, place of management, place of incorporation, or similar criterion to determine residency, and if a company is a resident of both contracting states, it is treated as a


USA


be recharacterised as equity. This test generally considers a variety of facts and circumstances (e.g., form of the instrument, sum certain payable on a fixed maturity date, creditor’s rights, etc.), but a borrower’s capitalisation is one of the most important factors. If an instrument is recharacterised as equity, “interest” payments on such instrument are not deductible to the borrower and are treated (including for withholding purposes) as distributions to the holder.In October 2016, the IRS adopted regulations that can recast debt of U.S. issuers owed to or funded by related parties where the creditor is not a U.S. entity, removing one of the key incentives for expatriating (or “inverting”) U.S. corporations. The rules are highly complex and initially required detailed documentation in order to have intercompany debt respected as such. The Treasury Department has proposed revoking the documentation requirements and provided that taxpayers may rely on such proposal; the Treasury Department continues to study the issues addressed by the documentation rules and has stated that it will replace them with more streamlined rules when its study is complete.


This is not applicable in the United States.


Although the interest deduction limitation described in question 3.4 above does not specifically address the consequences of guarantees, a guarantee of debt of a thinly capitalised subsidiary could implicate the economic substance doctrine (see question 9.1), with the result that the guarantor is treated as the borrower and payments by the subsidiary to the lender are treated as dividends to the guarantor or an affiliate of the guarantor followed by an interest payment by the guarantor.


Payments of interest by a U.S. corporation to a related non-U.S. party may give rise to the base-erosion and anti-abuse tax (see question 10.1).


Yes. Rental income is FDAP and generally treated the same way as other forms of FDAP discussed in questions 3.1 and 3.2.


Yes. Intercompany transactions generally must reflect arm’s-length terms, and there are detailed Treasury regulations specifying available methodologies for meeting this standard. Additionally, taxpayers must prepare and maintain contemporaneous documentation to support their transfer pricing practices. If an intercompany transaction does not appropriately reflect the income of the parties, the IRS has broad authority to reallocate tax items to achieve appropriate results. Particular scrutiny typically applies to transfer pricing arrangements that result in deductions taken in



Yes. A 30% withholding tax applies to fixed, determinable, annual or periodic income (“FDAP”) of non-U.S. persons earned from U.S. sources other than income of tax-exempt persons or income that is effectively connected with a U.S. trade or business (or, if required by an applicable income tax treaty, is attributable to a U.S. permanent establishment). Dividends from a U.S. corporation paid to a non-U.S. shareholder are FDAP, as are certain “dividend equivalents” that are economically similar to dividends but use different legal forms. Treaties may reduce or eliminate this tax.


Yes. Royalties are generally FDAP and are accordingly treated similarly to dividends (see question 3.1). Under some treaties, withholding rates applicable to royalties vary depending on the industry (e.g., film or television) or type of property (e.g., patents or copyrights) generating them.


Yes. Interest is also FDAP (see question 3.1).Treaties may reduce or eliminate the withholding tax applicable to payments of interest, and, unlike dividends and royalties, “portfolio interest” is exempt from withholding tax. Portfolio interest is interest paid on a registered (as opposed to a bearer) obligation to a recipient who certifies on an applicable IRS form provided to the payor of interest that the recipient is a non-U.S. person. The portfolio interest exemption is not available to certain significant shareholders, with respect to contingent interest determined by reference to certain items specified in the Code and regulations (e.g., receipts, profits or dividends of the debtor or a related person), banks receiving interest on ordinary-course loans, and “controlled foreign corporations” receiving interest from related persons, each as determined under specific and detailed rules enumerated in the Code and regulations.


Business interest (any interest paid or accrued on indebtedness properly allocable to a trade or business) deductions may not exceed the sum of business interest income (interest includible in a taxpayer’s gross income properly allocable to a trade or business) and 30% of a taxpayer’s “adjusted taxable income” (generally, earnings before interest, taxes, depreciation and amortisation for taxable years beginning before January 1, 2022, and earnings before interest and taxes thereafter). Interest deductions disallowed under this rule can be carried forward indefinitely. Moreover, this rule does not affect holders of debt, who may still benefit from the portfolio interest exemption from the U.S. withholding tax with respect to such interest (if the requirements are otherwise met, see question 3.3).In addition, courts have long employed a multi-factor test to evaluate whether a purported debt instrument qualifies as such for U.S. federal income tax purposes or should, based on its substance,


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Because non-U.S. companies are not (with some very limited exceptions) “includible corporations”, these rules do not allow for relief for losses of overseas subsidiaries.Some, but not all, states have similar consolidated return regimes.


The availability of tax losses following an ownership change is limited in order to prevent trafficking in such losses. Generally speaking, following an ownership change, the amount of losses that may be utilised per year is limited to the value of the stock of the corporation with the loss as of the date of the ownership change multiplied by the “long-term tax-exempt rate”, which is based on the market rate of interest on long-term federal bonds. As of November 2018, the long-term tax-exempt rate is 2.43%. Net operating losses (i.e., the excess of allowable deductions over taxable income) generated in a taxable year beginning after December 31, 2017 and not used in a given year may be carried forward indefinitely; such losses generated in prior years may be carried forward until the loss expires (generally, 20 years after it was generated). Any losses carried forward are added to the losses otherwise available under the general rule, and in no case may the deduction for net operating losses generated in a taxable year beginning after December 31, 2017 exceed 80% of a taxpayer’s taxable income for the year. For corporations with assets that, taken together, have a basis that is less than their fair market value at the time of the ownership change (i.e., corporations with a “net unrealised built-in gain”) at the time of the ownership change, this limitation is increased to the extent they recognise (or are deemed to recognise) built-in gains during the five years after an ownership change. An “ownership change” for these purposes is defined under a complex statutory and regulatory regime, but very generally means a change of more than 50% ownership of the stock of a given corporation measured over a three-year testing period.


Taxation of distributed, as opposed to retained, profits generally differs in who bears the tax, not necessarily the amount of tax imposed. Widely held corporations are taxed on income regardless of whether it is retained or distributed, but shareholders are subject to a second level of income tax on dividends from corporations, and corporations are not entitled to deduct amounts paid as dividends (i.e., there is no integration). Partnerships, S Corporations (generally, corporations with fewer than 100 domestic shareholders and a single class of stock that elect S Corporation status) and entities disregarded for U.S. federal income tax purposes are not normally subject to federal income tax. Rather, taxable income of such entities is subject to tax at the owner level regardless of whether the relevant business organisation retains or distributes profit. REITs and regulated investment companies are generally subject to tax only on retained earnings, and their shareholders are only subject to tax on distributed earnings. The applicable rate of tax depends on the identity of the taxpayer and, in the pass-through context, the activity giving rise to the income.“Personal holding companies”, i.e., corporations majority-owned by five individuals or fewer and that earn mostly passive income, are subject to an additional 20% tax on their undistributed earnings.Corporations formed or availed of for the purpose of avoiding shareholders’ income tax are subject to a 20% tax on accumulated taxable income (as defined in the Code).

the United States and income earned offshore. Significant penalties may be levied on taxpayers who fail to comply with U.S. transfer pricing rules.



The top marginal U.S. federal corporate income tax rate is 21%. State and local governments tax corporate income at varying rates, such that the typical top marginal rate on a corporation doing business in all 50 states is 25.84%, according to the OECD.


The tax base for U.S. federal income tax purposes is taxable income, rather than accounting profit subject to adjustments. Income is defined broadly under the Code as “income from whatever source derived”. To calculate taxable income, taxpayers apply several exclusions and deductions. For example, interest income from municipal bonds may be excluded from taxable income, and business expenses are typically deductible. Not all exclusions from taxable income are relevant to determining accounting profit, and many deductions, notably depreciation and amortisation methods prescribed by the Code, do not reflect generally accepted accounting principles or international financial reporting standards. Generally speaking, accounting principles are meant to result in financial statements that reflect when income is earned, while tax accounting is meant to comply with the varied purposes of the Code: generating revenue for the government and incentivising certain taxpayer behaviours to support legislative policy goals. Naturally, several differences arise from these varied goals.




Yes. Domestic corporations that are members of an “affiliated group” may file a consolidated U.S. federal income tax return. An affiliated group consists of one or more chains of “includible corporations” (with limited exceptions, domestic business organisations treated as corporations for U.S. federal income tax purposes) connected through stock ownership with a common parent corporation. The common parent must itself be an includible corporation and own at least 80% of the stock (by vote and value) of the includible corporation(s) at the top of the chain(s), and at least 80% of the stock (by vote and value) of all the includible corporations in the chain(s) (other than the common parent) must also be owned by one or more of the other includible corporations. The consolidated return regulations are some of the most detailed and complex U.S. tax rules, but, generally speaking, affiliated corporations that file a consolidated return are taxed as one taxpayer until a corporation leaves the group, at which point gain or loss from prior intercompany transactions that was deferred during consolidation generally must be recognised.


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Generally, there is no U.S. withholding tax on the gross proceeds of sales of capital assets. However, as discussed in Section 8, under certain circumstances, the Foreign Investment in Real Property Tax Act requires withholding on the sale by a non-U.S. person of an asset (including shares of certain companies) treated as a United States real property interest. Additionally, beginning in 2019, the United States is scheduled to require “FATCA” withholding on the gross proceeds of sales by foreign financial institutions and non-financial foreign entities that fail to comply with certain information reporting requirements.



None at the federal level. Some states impose registration or filing fees upon the formation of a subsidiary, but these are generally not significant.


There is no difference for U.S. federal income tax purposes in the tax treatment of a “branch” – i.e., a segment of a company’s business that is not held in a legal form separately from the company engaged in that business – and a domestic or non-U.S. business organisation that is disregarded for U.S. tax purposes as separate from its owner by virtue of the U.S. “check the box” rules. Disregarded entities (regardless of their domicile) and branches are both ignored for U.S. federal income tax purposes.However, there is a significant difference in the taxation of a branch (or disregarded entity) and a regarded U.S. subsidiary of a non-U.S. corporation. A “branch profits tax” of 30% (or lower rate specified by an applicable income tax treaty) is imposed on foreign corporations’ earnings and profits that are effectively connected with the conduct of a U.S. business or, if required by an applicable treaty, attributable to a permanent establishment in the United States (“ECI”). This tax is imposed on the “dividend equivalent amount” of a foreign corporation’s ECI (generally, ECI for a taxable year reduced by any increase (or increased by any decrease) in the foreign corporation’s U.S. assets net of U.S. liabilities) whether earned directly, through a branch, or through a disregarded subsidiary. The branch profits tax is in addition to the tax imposed at the graduated corporate rates on a foreign parent’s net ECI as if the foreign corporation were a U.S. taxpayer. If, instead of a branch or disregarded subsidiary, the foreign entity has a domestic corporate subsidiary, the branch profits tax will not be imposed on the foreign parent (assuming it has no ECI from another source); instead, the subsidiary is taxed directly as a U.S. person and dividends paid by the subsidiary to the non-U.S. parent will be subject to U.S. withholding tax.The purpose of the branch profits tax is to put on equal footing dividends from regarded U.S. subsidiaries and cash flow from branches and disregarded subsidiaries that generate ECI. Without the branch profits tax, cash flow from branches and disregarded subsidiaries would itself be disregarded (and not subject to U.S. withholding tax), and the foreign parent would pay only one level


Companies engaged in certain activities may be subject to federal excise taxes (on, e.g., the sale of alcohol, tobacco or firearms). Additionally, employers are liable for a social security tax of 6.2% on wages up to $128,400 per employee and a 1.45% Medicare tax on all wages; these same amounts are also levied on employees but collected by the employer via withholding, and employees are also responsible for an additional 0.9% Medicare tax collected by withholding on wages above $200,000 (for single taxpayers). There is also a small unemployment tax imposed on employers.Federal estate and gift taxes are beyond the scope of this chapter. They generally do not concern publicly traded corporations, but may be relevant to closely held entities and are important to high-net-worth individual owners of business organisations. State and local taxes are beyond the scope of this chapter, too, but it should be noted that each U.S. state has its own taxing regime, and several municipalities do as well. The types and rates of these taxes vary significantly, and some can be significant depending on the relevant industry, e.g., hotel occupancy or insurance premium taxes.

5 Capital Gains


Yes. Long-term capital gains of certain non-corporate taxpayers, including individuals, are taxed at preferential rates. The deductibility of capital losses is subject to limitations. Capital losses may only offset capital gains, and capital losses of corporations may only be carried back three years or forward five years.


No. The sale of stock is generally subject to capital gains tax. Non-U.S. shareholders are generally not subject to capital gains tax on the gross proceeds of the sale of property (including stock) unless such proceeds are effectively connected with the conduct of a U.S. trade or business (or, if required by an applicable income tax treaty, are attributable to a U.S. permanent establishment of the business) or the property sold is a United States real property interest (see Section 8). There is, however, a limited participation exemption for dividends received from certain non-U.S. corporations (see question 7.3).


Generally, taxpayers are required to recognise gain or loss on a sale or other disposition for U.S. federal income tax purposes. Exceptions exist for “like kind exchanges”, by which a taxpayer can defer recognition of gain or loss by disposing of commercial real estate not held for sale and using the proceeds of such disposition within 180 days to acquire property of a like kind, and other transactions that satisfy specific requirements of the Code where Congress has determined that deferral of gain or loss is appropriate, e.g., corporate “reorganisations” or contributions by shareholders to controlled corporations.


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If the local and non-resident companies are treated as corporations for U.S. federal income tax purposes and the local company owns less than 10% (by vote or value) of the stock of the non-resident company, income of the non-resident company is generally not taxed to the U.S. owner unless and until the income is distributed. At that time, the distribution is includible in the U.S. owner’s taxable income, though any withholding tax imposed may be able to be reduced by a credit for foreign taxes paid.For dividends received after December 31, 2017, if the local company owns 10% or more (by vote or value) of the stock of the non-resident company, dividends on stock held for the required holding period (generally, 365 days within the two-year period beginning one year before the stock becomes ex-dividend) from the non-resident company are eligible for a 100% dividends-received deduction; however, if the non-resident company is a “controlled foreign corporation”, the 10% U.S. shareholders will be subject to the rules discussed below at question 7.3. To account for the fact that prior to December 31, 2017, corporations were not taxed on earnings from non-resident corporate subsidiaries until such earnings were repatriated, Congress imposed a one-time “transition tax” pursuant to which 10% U.S. shareholders of controlled foreign corporations and any other foreign corporation which has one or more than one 10% U.S. corporate shareholder must include in income their pro rata share of such corporations’ accumulated earnings and profits since 1987. 10% U.S. shareholders will generally be required to pay a tax of 15.5% on accumulated earnings attributable to the foreign corporations’ cash positions and 8% on other amounts.Another important exception to the general rule of deferral arises in the context of “passive foreign investment companies” (“PFICs”). A PFIC is, generally speaking, a foreign corporation that earns 75% or more of its income from passive sources or 50% or more of the assets of which, by value, generate passive income (measured annually). A U.S. owner may elect to defer his, her or its share of tax on the PFIC’s earnings until distribution or until the shareholder sells part or all of his, her or its stake. However, such deferral comes at a cost, as the deferred income will be treated as ordinary income rather than capital gain and interest is charged on the tax imposed on the distribution or gain from sale, as if the shareholder had underpaid tax. This interest regime can only be avoided by electing current taxation of the PFIC’s ordinary income and net capital gain or marking to market the value of the company’s shares each year.If the non-resident company is disregarded as separate from its owner for U.S. federal income tax purposes, its income is taxed currently to its owner and any dividend from it is disregarded. If the entity is treated as a partnership, then generally it also passes through its income to its owners and a distribution in itself is not a taxable event.


Yes. If more than 50% of the voting power or the value of a non-U.S. business organisation taxable as a corporation for U.S. federal income tax purposes is owned (directly, indirectly or constructively) by “United States shareholders”, the non-U.S. entity is a controlled foreign corporation (“CFC”) for U.S. federal income tax purposes. United States persons who own, directly or indirectly, more than

of tax on its U.S. ECI, while earnings of a U.S. corporate subsidiary would be taxed once at the U.S. corporation level and once at the parent level when distributed as a dividend (see question 3.1).


If a foreign corporation has a local branch that is disregarded for U.S. federal income tax purposes, no tax is imposed on the branch; rather, the foreign corporation is subject to (a) a tax on the foreign corporation’s ECI at the graduated rates applicable to U.S. taxpayers, and (b) the 30% branch profits tax described above in question 6.2. ECI is net income derived from the conduct of a U.S. trade or business (or income that a corporation elects to treat as so derived). A treaty may lower the tax rate and/or cause tax to be imposed only on income attributable to a permanent establishment of a foreign corporation.


A U.S. branch that is disregarded as separate from its owner for U.S. federal income tax purposes is neither a resident of the United States nor subject to U.S. tax, and accordingly is not itself eligible for treaty benefits. An entity organised in a jurisdiction that has a treaty with the United States and that has a U.S. branch that results in income to the parent taxable by the United States may be entitled to treaty relief pursuant to the terms of an applicable treaty.


No. Generally, the “dividend equivalent amount” of income earned through a branch is taxed as described in question 6.2, and no additional tax is imposed on the remittance of profits by the branch to the non-U.S. corporation that holds it by withholding or otherwise.

7 Overseas Profits


If a non-U.S. branch is either not an entity or is an entity that is disregarded as separate from its owner and the applicable owner is a U.S. corporation, then yes. The U.S. federal income tax is a worldwide tax (with limited territorial aspects, see question 7.2) and is imposed on income earned by U.S. taxpayers from any source, domestic or not.A corporation for which a check-the-box election to be disregarded is not made (or that is not eligible to check the box) and that is not organised under the laws of the United States or one of its political subdivisions, is not subject to current U.S. federal income tax, but its U.S. shareholders may be, depending on the assets and income of the corporation, if it is a “passive foreign investment company” (see question 7.2) or a “controlled foreign corporation” (see question 7.3).


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Yes. Provided they meet the detailed qualification, income and asset tests described below, REITs are not subject to the double-taxation regime that characterises the U.S. federal income tax applicable to corporations generally. Specifically, taxable income that is distributed by a REIT to its shareholders on a current basis is generally not subject to U.S. federal income tax on the REIT level. Additionally, dividends from REITs are not deductible by corporations that receive them. As a result of these rules, REITs function in some ways like partnerships or entities disregarded as separate from their owners: they generally pass their income through to their owners. A general summary of the most important rules for REIT qualification and operation is provided below; these are subject to exceptions, safe harbours and detailed qualifications in complex provisions of the Code and Treasury Regulations.To qualify as a REIT, an entity must be a corporation, trust or association that (a) but for the REIT provisions, would be taxable as a corporation for U.S. federal income tax purposes, (b) is beneficially owned by at least 100 persons, (c) is not more than 50% (by value) owned by five individuals or fewer, and (d) meets two “gross income” tests and six “gross asset” tests.The gross income tests require that at least (a) 75% of a REIT’s income must come from real property, and (b) 95% of its income (towards which the 75% described in clause (a) counts) must generally be passive in nature or derive from gains on the sale of passive assets. The gross asset tests generally require that at least 75% of the value of a REIT’s total assets be represented by real estate assets, cash and government securities, and they limit the value of the REIT’s assets attributable to debt instruments and other securities to preclude the ability to use the REIT form for abuse. Finally, a REIT will not be able to take advantage of the favourable tax regime the Code otherwise provides unless it distributes to its shareholders 90% of its taxable income (subject to certain adjustments) minus certain non-cash income.



Although there is no overarching statutory or regulatory anti-abuse rule, courts have developed many generally applicable doctrines, notably the “sham transaction”, “substance over form”, “economic substance” and “step transaction” doctrines, which police transactions with forms that, if respected, would yield inappropriate tax results. Courts and the IRS also apply presumptions in interpreting the tax laws that prevent (arguably) improper or abusive results under the Code and regulations, such as the rule that only in the presence of a “clear declaration of intent by Congress” will two tax deductions for one economic loss be sustained. Usually these doctrines apply to deny tax benefits to taxpayers that would result from a literal application of the Code and regulations to the taxpayer’s chosen form of transaction, though in some circumstances a taxpayer may use these doctrines to avoid inappropriately harsh tax consequences notwithstanding the form of

10% of the voting power or value of a CFC must include their pro rata share of the CFC’s “Subpart F income” and “global intangible low-taxed income” (“GILTI”) for a given year. Subpart F income is generally income from passive sources (dividends, interest, royalties, rents, insurance income, capital gains, etc.). GILTI is generally the excess of a United States shareholder’s pro rata share of net “tested income” (gross income of a CFC reduced by, among other things, U.S. source income effectively connected with the conduct of a trade or business in the United States, Subpart F income, dividends received from related persons and deductions (including taxes) properly allocable to such gross income) over a 10% deemed return on the CFC’s “qualified business asset investment” (the average of a CFC’s aggregate adjusted bases of depreciable tangible property used in the CFC’s trade or business that gave rise to tested income). U.S. corporations may deduct 50% of their GILTI inclusions until 2025, when the deduction is scheduled to decrease to 37.5%.



Yes. Under the Foreign Investment in Real Property Tax Act (“FIRPTA”), a non-U.S. owner’s disposition of a United States real property interest (a “USRPI”) generally is subject to U.S. federal income tax at the rates generally applicable to U.S. persons. USRPI is broadly defined and includes real property (including commercial real estate as well as mines, wells and other natural deposits) located in the United States, and any interest (other than solely as a creditor) in a domestic corporation that was, at any point during the five-year period ending on the disposition, a United States real property holding corporation (“USRPHC”). A USRPHC is a corporation with U.S. real property equal to 50% or more of the fair market value of all its real property and other assets used or held in its trade or business, and U.S. corporations are presumed to be USRPHCs unless the taxpayer demonstrates otherwise.FIRPTA requires withholding by the buyer of 15% of the fair market value of the USRPI disposed of. Buyers are entitled to require sellers to certify that they are either U.S. persons or not selling a USRPI. Withholding is not, however, required on the acquisition of stock of a publicly traded U.S. corporation or partnership (with exceptions for the acquisition of substantial interests in publicly traded entities).In addition, “qualified foreign pension funds” – generally, regulated non-U.S. retirement funds to which contributions are deductible or the income of which is subject to tax at a reduced rate – are exempt from FIRPTA.


Yes. As discussed above, the disposition of a USRPI (including a share of a domestic USRPHC) is taxable, and the disposition of an interest in a pass-through entity (e.g., a partnership) will be taxable to a non-resident to the extent the gain is attributable to a USRPI held by the partnership.


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Phase”, when taxpayers transparently cooperate with the IRS and resolve issues before returns are filed (and are assured that the IRS will not challenge such returns); and the “Compliance Maintenance Phase”, when the IRS adjusts its level of review based on its experience with the taxpayer in the CAP Phase.Additionally, the IRS administers the Advanced Pricing Agreement (“APA”) programme, which allows the IRS and a taxpayer, and if applicable a treaty jurisdiction’s competent authority, to enter into an agreement concerning transfer pricing methods.CAP and the APA programme do not result in the reduction of a tax; rather, the purpose of CAP is to identify potential issues early and resolve them prior to filing tax returns, decrease the length of audit cycles, and allow for real-time review of transactions through a transparent dialogue with the IRS, while the APA programme is meant to avoid complex disputes among the interested parties. Both programmes share the objective of saving taxpayer and IRS resources.



Although not necessarily responsive to the BEPS project, the United States has recently enacted a Base Erosion and Anti-Abuse Tax (“BEAT”), which is, very generally, 10% of the excess of taxable income (without regard to (1) tax benefits from certain “base erosion” payments, and (2) a portion of net operating losses calculated based on the amount of base erosion tax benefits relative to certain other tax benefits) over regular tax liability (less certain credits). In 2025, the BEAT is scheduled to increase to 12.5%, and the regular tax liability will be calculated net of all tax credits. Base erosion payments are deductible payments (including interest), purchases of deductible or amortisable property and certain reinsurance payments, in each case, by U.S. persons to related non-U.S. persons.Additionally, the Treasury Department and the IRS have taken some steps to implement BEPS recommendations. As discussed above at question 1.2, the most recent model income tax treaty includes limitation on benefits provisions and a statement of intent in the preamble that the treaty’s purpose is not to create opportunities for tax evasion. Also, the IRS has promulgated country-by-country regulations consistent with the BEPS recommendations.


No. It is unlikely that any laws implementing BEPS will be passed in the near future, and to the extent the IRS is empowered to make BEPS-compliant regulations, it is not anticipated that they will go beyond the OECD’s recommendations.


No. Although the IRS has promulgated regulations requiring country-by-country reporting to the IRS, such reporting will be confidential, consistent with the confidential nature of most U.S. taxpayer information.


a given transaction. In each case, the form chosen by a taxpayer is presumed respected and will usually only be overlooked if the chosen form does not reflect economic reality, and generally all facts and circumstances are taken into account before recharacterising a transaction. Congress has codified the economic substance doctrine, and a 20% penalty is imposed on transactions that do not change a taxpayer’s pre-tax economic position in a meaningful way when the taxpayer has no substantial purpose for the transaction other than federal income tax effects. This penalty is increased to 40% if the transaction is not adequately disclosed. Additionally, there are civil and criminal penalties for failure to comply with tax laws and a broad range of statutory and regulatory provisions that target specific perceived abuses such as engaging in transactions identified by the IRS as tax avoidance schemes, trafficking in tax losses, establishing inappropriate transfer pricing schemes, abusing the interest deduction for intercompany debt, and combining with a foreign corporation in order to redomicile a U.S. corporation outside the country.


Yes. Certain categories of transactions have been designated as “reportable transactions”. These include “listed transactions”, which are specific arrangements that the IRS has identified as tax avoidance schemes (or transactions that are substantially similar to these), “transactions of interest”, which have the potential for tax avoidance but the IRS lacks sufficient information to determine whether they should be listed transactions, deals that require the taxpayer to keep the tax treatment confidential, and certain other transactions. Such transactions must be reported to the IRS, and the failure to report listed transactions carries more severe penalties than failure to report other reportable transactions.


Yes. The reportable transactions described in question 9.2 must be reported to the IRS by any “material advisor” with respect to such transactions. A material advisor is a person who provides any material assistance or advice with respect to organising, promoting, selling, insuring, or carrying out any reportable transaction and who earns $50,000 (or more) from such assistance or advice if substantially all the tax benefits from the transaction redound to individuals’ benefit, or who earns $250,000 (or more) from such assistance if the beneficiaries are not individuals.Additionally, federal criminal law generally punishes any accomplice to a crime as a principal offender.


Yes. Since 2005, the IRS has administered the Compliance Assurance Process (“CAP”), which is available to publicly traded taxpayers (or privately held ones that provide quarterly audited financial statements to the IRS) with at least $10,000,000 in assets. The CAP proceeds in three phases: the “Pre-CAP Phase”, when the IRS and taxpayers close ongoing examinations and the IRS determines whether the taxpayer is eligible for CAP; the “CAP


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Wachtell, Lipton, Rosen & Katz is one of the most prominent business law firms in the United States. The firm’s pre-eminence in the fields of mergers and acquisitions, takeovers and takeover defence, strategic investments, corporate and securities law, and corporate governance means that it regularly handles some of the largest, most complex and demanding transactions in the United States and around the world. The firm also handles significant white-collar criminal investigations and other sensitive litigation matters, and counsels boards of directors and senior management in the most sensitive situations. It features consistently in the top rank of legal advisors. Its attorneys are also recognised thought leaders, frequently teaching, speaking and writing in their areas of expertise.

Jodi J. Schwartz focuses on the tax aspects of corporate transactions, including mergers and acquisitions, joint ventures, spin-offs and financial instruments. Ms. Schwartz has been the principal tax lawyer on numerous domestic and cross-border transactions in a wide range of industries. She was elected partner in 1990.

Ms. Schwartz is recognised as one of the world’s leading lawyers in the field of taxation, including being selected by Chambers Global Guide to the World’s Leading Lawyers, Chambers USA Guide to America’s Leading Lawyers for Business, International Who’s Who of Business Lawyers and as a tax expert by Euromoney Institutional Investor Expert Guides. In addition, she is a member of the Executive Committee and past chair of the Tax Section of the New York State Bar Association, and also is a member of the American College of Tax Counsel.

Jodi J. SchwartzWachtell, Lipton, Rosen & Katz51 West 52nd StreetNew York, NY 10019USA

Tel: +1 212 403 1212Email: [email protected]: www.wlrk.com

Swift S.O. Edgar is an associate in Wachtell, Lipton, Rosen & Katz’s tax department.

Mr. Edgar received an A.B. cum laude with high honours in Classics from Harvard College in 2007 and a J.D. from Columbia Law School in 2013, where he was a Harlan Fiske Stone Scholar and a James Kent Scholar and an Essays and Reviews Editor for the Columbia Law Review.

Before joining Wachtell Lipton, Mr. Edgar clerked for the Honorable Cynthia M. Rufe of the United States District Court for the Eastern District of Pennsylvania and for the Honorable Thomas L. Ambro of the United States Court of Appeals for the Third Circuit.

Swift S.O. EdgarWachtell, Lipton, Rosen & Katz51 West 52nd StreetNew York, NY 10019USA

Tel: +1 212 403 1398Email: [email protected]: www.wlrk.com


No. The Code does have certain preferential provisions applicable to specific activities and industries (for example, a research and development tax credit, the REIT rules discussed above, accelerated depreciation for certain kinds of property, etc.), but these are more limited in their operation than patent boxes and are not typically described as preferential tax regimes.



No. Although the United States has taken steps to remove incentives for shifting income offshore, the government opposes proposals to

tax digital companies specifically. For tax years beginning after December 31, 2017, the United States allows a deduction in respect of “foreign derived intangible income” (“FDII”), which is an amount that exceeds a deemed return on a domestic corporation’s tangible assets. The FDII regime is meant to encourage U.S. corporations to keep intangible assets (and related income) in the United States.The GILTI inclusion (see question 7.3) and BEAT (see question 10.1) generally expand the tax base to limit strategies for shifting income outside the country, but such strategies do not solely involve digital (or even intangible) activities and/or properties.


No. The United States opposes proposals to tax digital companies specifically.


Chapter 36

Eric Silwamba, Jalasi and Linyama Legal Practitioners

Joseph Alexander Jalasi

Mailesi Undi

Zambia

2 Transaction Taxes


No, there are not.


Yes, VAT is charged at either 0% (zero-rated) or 16% (standard-rated). Please note the proposed budget changes for the fiscal year 2019 indicate that Zambia will reintroduce Sales Tax in 2019. At the time of publication of this article the Sales Tax Act had not yet been enacted but is projected to take effect in April 2019.


Yes, VAT is charged at the standard rate on all supplies of goods and services that are not exempt or zero-rated. The Value Added Tax Act, Chapter 331 Volume 19 provides for a schedule of exempt or zero-rated supplies and imports.


Yes, VAT is recoverable as a claim subject to restriction set out in the VAT (General) Rules, e.g. a claim must be made within three months of the date of invoice; the time limit and invoice on which a claim has to be made must comply with the VAT Rules.Businesses that provide partially exempt supplies can only claim input tax credit to the extent of their taxable supplies, i.e. they can only claim and recover VAT on their purchases partially according to approved apportionment bases.


Yes, the Value Added Tax Act states that two or more companies incorporated in Zambia are eligible to be treated as a recognised group if:(a) one of them controls the others;



As at 11 October, 2018 Zambia had signed 24 double tax treaties.


They generally follow the OECD Model, however, some have variations.


Yes, Section 74 of the Income Tax Act gives power to the President to enter into double tax treaties. The treaties are incorporated into national law by Statutory Instruments which are a form of delegated legislation.


Zambia has a general anti-avoidance rule in its tax law and general anti-abuse provisions are present in most tax treaties.


A double tax treaty once incorporated by way of Statutory Instrument becomes part and parcel of Zambian domestic law.


A company is said to be resident if it is incorporated or formed under the laws of Zambia or if the place of central management and control of the person’s business or affairs is in Zambia.


Zam

bia

Eric Silwamba, Jalasi and Linyama Legal Practitioners Zambia


Our law is silent on this.


There are none.


Yes and it is charged at the rate of 10%.


Yes, it does.



The standard rate of Corporate Tax on profits is 35%. However, income from the agriculture sector and non-traditional exports (all exports except copper and cobalt) is levied at 15%, companies listed on the Lusaka Stock Exchange are taxed at the rate of 33%, while telecommunication companies with an income exceeding K250,000 are taxed at 40%.


Yes, it is.


■ Deductions are limited to expenditure actually incurred wholly and exclusively for the purposes of the business.

■ Wear and tear allowances replace accounting depreciation.■ Foreign exchange gains and losses are only taxable/deductible

if revenue in nature and only when realised.■ There are limitations on the deductions for bad and doubtful

debts.■ There is no deduction of expenditure and losses specifically

listed at Section 44 of the Income Tax Act.


No, there are not.

(b) one person, whether a company or an individual, controls them all; or

(c) two or more individuals carrying on a business in partnership control them all.


Yes, apart from VAT, there is Withholding Tax (WHT), Property Transfer Tax (PTT), Mineral Royalty, and Customs and Excise Duty.


Customs and Excise Tax.



Yes, at the rate of 15% (proposed to be 20%, effective as of 1 January 2019. This is subject to the existence of a double tax treaty.


Yes, at the rate of 20%.


Yes, at the rate of 15% (proposed to be 20% from 1 January 2019).


Yes – for mining companies there is a debt-to-equity ratio of 3:1 on interest deductions.A new thin capitalisation limit on interest deductions, for interest amounts exceeding 30% of EBITDA has been proposed effective as of 1 January 2019. Our law also requires that the transaction is undertaken at an arm’s length rate by reference to:(a) the appropriate level or extent of the issuing company’s

overall indebtedness;(b) whether the amount issued would have been provided as a

loan on an arm’s length basis; and (c) the rate of interest and other terms that would apply to such

an arm’s length loan.


There are none.


Zam

bia



The rules are the same for branches and companies. However, where the branch is established by an entity that is established in a jurisdiction with whom Zambia has a Double Taxation Agreement, then the specific rules in that Double Taxation Agreement that govern profit attribution to branches would apply.


Yes, it would.


Yes – there is a 15% WHT (proposed to be 20% from 1 January 2019) on remittance of branch profits.

7 Overseas Profits


Zambia principally operates a source-based system for the taxation of income. Income deemed to be from a Zambian source is generally subject to Zambian Income Tax. However, residence of a person/entity in Zambia will widen the scope of taxation to include interest and dividend income from abroad. Consequently, Zambian residents will also be subject to Income Tax on interest and dividends from a source outside Zambia.


Yes, it is.


Zambia does not have a controlled foreign company regime.



Yes – the disposal is subject to Property Transfer Tax and Value Added Tax.


Yes, any transfer in interest in a lease of more than five years would be subject to Property Transfer Tax.


Yes. However, Part IV (Sections 30) of the Income Tax Act only allows deduction of losses brought forward from the same source, provided that a loss can only be carried forward for a period of five years.


No. There is, however, a 15% WHT imposed on profit distributions.


No, except for normal statutory imposts such as local authority rates.

5 Capital Gains


There is no Capital Gains Tax in Zambia. However, there is PTT which is charged on the realisable value of the property being transferred.









There are none.


No, the same rates apply. There is, however, a proposal to increase the withholding tax rate on profit repatriation by branches from the current 15% to 20%, effective as of 1 January 2019.


Zam

bia


This information is not yet available in the Public Domain.


Yes – in practice the Zambia Revenue Authority requests for Country by Country reports when undertaking a Transfer Pricing Audit.


No, it does not.



No, it has not.


No, it does not.



Yes – income from the rental of real property is subject to a turnover tax at the rate of 10%.



Yes, this is provided for under the provisions of Section 95 of Income Tax Act.


Yes, related-party transaction disclosure is required.


Yes, Section 95 of the Income Tax Act.


Zambia does not have a system of private and public binding rulings or co-operative compliance arrangements.



Yes; The Income Tax (Transfer Pricing) Rules, Interest Deduction Restrictions and Section 95 of the Income Tax Act on anti-avoidance. Zambia has joined the inclusive framework.


Zam

bia


ERIC SILWAMBA, JALASI AND LINYAMA Legal Practitioners is a Zambian Law Firm. The firm has been in existence for over 30 years as Eric Silwamba and Company. In 2013 it was rebranded to ERIC SILWAMBA, JALASI AND LINYAMA Legal Practitioners following the admission to partnership of Joseph Jalasi and Lubinda Linyama. It has developed over the years to the level of being among the top law firms in Zambia. The firm has represented multinational Companies in respect of issues relating to Value Added Tax, Income Tax, Customs and Excise Tax. Their clientele varies from multinationals in the Telecom, Mining, Agriculture, Banking and Energy Sectors.

In May 2017, the firm expanded its international footprint by being admitted to the Dentons NextLaw Referral Network. The International Network will enhance the firm’s service delivery with regard to serving multijurisdictional clients.

The renowned Chambers and Partners (https://chambers.com) describes the firm as follows:

“ERICSILWAMBA,JALASIANDLINYAMALegalPractitionersisaZambianLawFirm.ThefirmhasbeeninexistenceforoverthirtyyearsasEricSilwamba and Company. In 2013 it was rebranded to ERIC SILWAMBA, JALASI AND LINYAMA Legal Practitioners following the admission to partnershipofJosephJalasiandLubindaLinyama.IthasovertheyearsdevelopedtothelevelofbeingamongthetoplawfirmsinZambia.Thefirmoffersboutiquestylelegalservicestoitsclients.Thefirmhasalsopublishedanumberofinternationalarticlesinareasitspecialisesin.Thefirmpublished articles in the International Comparative Legal Guides with respect to the Zambian mining law, energy, commercial real estate, litigation and dispute resolution. See https://www.iclg.com/firms/eric-silwamba/joseph-alexander-jalasi-jr and https://www.iclg.com/firms/eric-silwamba/lubinda-linyama.”

The World Legal 500 (https://www.legal500.com/firms/53500-eric-silwamba-jalasi-and-linyama-legal-practitioners/57583-lusaka-zambia) describes the firm as follows:

“Eric Silwamba, Jalasi and Linyama Legal Practitioners is regarded by some as ‘the best in the country for dispute resolution’, with Eric Silwamba singledoutasa‘veryexperiencedlitigator’.Thefirmalsohousesrobustcorporateandcommercialexpertiseandisroutinelyinvolvedinbankingandfinance,projectdevelopmentandminingmatters.OtherkeynamesincludeJosephJalasi,whoisrecommendedfortaxissues,andLubindaLinyama.”

Joseph is the Head of Tax, Mining, Corporate, and the Banking and Finance Department. He has several years of experience in litigation and over 18 years’ experience in tax practice. He served as the Registrar of the Revenue Appeals Tribunal, now renamed as the Tax Appeals Tribunal, for seven years. He has successfully argued and settled a number of multi-million dollar tax disputes. Joseph served as Chief Policy Analyst Legal Affairs in the President’s Office under the late President Levy Mwanawasa. He also served as legal advisor to former President of Zambia, Rupiah Banda.

Mr Jalasi’s expertise in tax practice in Zambia is also recognised in The Legal 500.

Chambers and Partners describe Mr. Jalasi as follows:

“Joseph Jalasi is noted for his work on banking and finance, and environmental litigation. He has a strong reputation and is considered by commentators to have had “considerable success in commercial litigation and constitutional law matters”.”

Joseph Alexander JalasiEric Silwamba, Jalasi and LinyamaLegal Practitioners No. 12 at William Burton PlaceChilekwa Mwamba RoadOff Lubu/Saise Roads, Longacres Lusaka, Zambia

Tel: +260 211 256530Email: [email protected]: www.ericsilwambaandco.com

Mailesi is the firm’s Associate and specialises in Dispute Resolution, Taxation and Corporate work. She is an upcoming tax litigation lawyer and has had several appearances before the Tax Appeals Tribunal. She has advised several multi-national Clients on various taxation matters including Transfer Pricing and Value Added Tax.

Mailesi Undi Eric Silwamba, Jalasi and LinyamaLegal Practitioners No. 12 at William Burton PlaceChilekwa Mwamba RoadOff Lubu/Saise Roads, Longacres Lusaka, Zambia

Tel: +260 211 256530Email: [email protected]: www.ericsilwambaandco.com


NOTES


NOTES


NOTES

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Email: [email protected]

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