Double Tax Treaties: Asia & Europe

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Double Tax Treaties: Asia & EuropeSeptember 18 12:00 – 12:45 BST

John Timpany, KPMGRoy Saunders, IFS Consultants

Register at: https://www.brighttalk.com/webcast/11641/123471


Benefits and Limitations of Key Double Tax Treaties for Asian and European Business Structuring

Roy Saunders, IFS ConsultantsJohn Timpany, KPMG China

The material contained herein is not intended to provide and should not be relied upon for accounting, legal or tax advice.

www.istructuring.comwww.istructuring.com

Agenda

• Hong Kong

• Applying tax treaties in Asia

• European Union

• Applying tax treaties in the EU


Introducing Hong Kong to the world of international business structuring

• Low rate “simple” tax system

• Purely territorial

• No tax on capital gains

• Stable tax law and administration

• Rule of law respected

• Common law based legal system

• Free flow of capital / people / information

• Primary platform for inbound and outbound Chinese investment


Hong Kong

Hong Kong CoInvestment Assets

Non-DTT StatesDividends: 0% WHT;Royalties: 4.95% WHT(if IPRs used in HK)Interest: 0% WHT

• 16.5% Corporate Tax• Profits (incl. interest, royalties)

taxed on the basis of territoriality• DIPN-21 on Locality of Profits• No tax on capital gains• No VAT

• Dividends fully exempt• Capital gains exempt unless

reclassified as trading profits

DTTs

• 28 effective DTTs, primarily withAsia and the EU

• Best in class treaties with China,Indonesia and Japan

• Good treaties for accessing Europe(Luxembourg, UK)

• Canada


Hong Kong source rules

• Only Hong Kong sourced profits taxable• Dividends location of payer (local dividends exempt)

• Interest; “provision of credit” or “operations” test

• Gains on securities; location of exchange or place where contracts to acquire / dispose are effected

• Royalties; location of use of the IP

• Trading profits; sourced where contracts to acquire / dispose are effected

• With relatively simple structuring holding companies will pay no tax in Hong Kong


Singapore

Singapore CoInvestment Assets

Non-DTT StatesDividends: 0% WHTRoyalties: 10% WHTInterest: 15% WHT

• 17% CT• Tax imposed on income accruing in

and derived from Singapore, orreceived in Singapore from outsideSingapore

• No capital gains tax• Special regimes for inter alia

Approved Securities Company, FundManagement, OperationalHeadquarters, Insurance, Treasury,Global Trading Companies, AircraftActivities

• Dividends exempt• Foreign branch profits exempt• Foreign-sourced service income exempt

PROVIDED

• Headline foreign tax is 15%; and• Foreign income subject to tax; and• IRAS is satisfied that the tax exemption

would be beneficial to the resident

Companies engaged in substantial businessactivities overseas which are unable to qualifyfor the exemptions may be offeredconcessionary treatment

DTTs

• 69 comprehensive, 8 limited(shipping/air transport) DTTs

• Most of Asia-Pacific and the EU• Remittance clauses in many treaties


Asian double tax treaties: benefits and limitations

• Use of treaties can provide significant savings on income and gains

• Beneficial Ownership tests • Novel interpretations

• Administrative pre-clearance of treaty claims• China; Notice 124 / 601• Indonesian; DGT 1• Korea

• Conduit Companies• Obtaining residency certificates


European double tax treaties: benefits and limitations

• Purpose of double tax treaties• Limitation of Benefits• Beneficial Ownership Test• Conduit Companies


Netherlands

Dutch Co

CT: 20%/25% (>€200k)Investment Company

IP Company

Shipping activities

EU Non-EU

Innovation box: 5% on royalties/gains• Self-developed patents post 31/12/09;• Qualifying R&DRoyalties conduit• Subject to minimal foreign WHT and 0%

WHT;• Min. spread subject to a Ruling.

Tonnage tax on maritimeshipping activities by NLcompanies and PEs of foreigncompanies.

Taxable income calculatedaccording to net tonnage.

>5%

Full participation exemption• Predominant motive test; failing

which• Asset test — 50%+ non-portfolio

assets; and• Subject to tax — 10%.Rulings available

Dividends / gains fully exempt

Interest, royalties: 0% WHT;

Dividends: 15%, subj. to DTT

WHT subject to EU Tax Directives


Luxembourg

Luxembourg Co

CT: 29.22%

SOPARFIregime

IPRs

EU Non-EU

Exempt dividends and gains from:• EU resident company, covered

under Parent Subsidiary Directive; or

• Foreign company subject to at least 10.5% tax, held for 12 months; and

• Either 10% share capital or acquisition price ≥€1.2 mil (≥€6 mil for gains).


Int, royalties, liq. proceeds: 0% WHT;Dividends: 15%; 0% if:• paid to EEA/CH/DTT co liable to at least

10.5% tax; and• holds 10% shares OR acqd. shares €1.2

mil. and held for 1 year.


CT 5.76% (80% exemption) on qualifyingIP royalties/gains + net wealth taxexemption• Software ©, patents, tm, domain

names, created / acquired post 31 Dec 07;

• Related expenses must be activated in the balance sheet;

• Not acquired from an associated company.

80% CT exemption on qualifying IPRs

Securitisation Vehicle (SV)

(société de titrisation)

• Corporate entity or fund that securitises underlying assets;

• Fully liable to tax and benefitting from DTTs, hw distributions treated as an expense – an agreed return for the assets securitised;

• No wealth tax• Assets’ “compartments” shielded from

creditors’ claims and allowing channelling of returns to specified investors.


Cyprus

Cyprus CoInvestment AssetsInternational Shipping

activities

EU Non-EU

Tonnage tax – no tax onincome, gains and nostamp duty

Foreign dividends fully exempt , if:• Subsidiary pursues active business

(>50% investment activities); and• Liable to min. 5% tax;Foreign gains fully exempt


Interest, dividends: 0% WHT;Royalties: 5/10% WHT; 0% if IPRsnot used in Cyprus


• 12.5% CT with 80% exemption forIPR profits;

• Profits from foreign PEs exempt(same test as for dividends), hwlosses are allowed.

• Inward and outward corporatemigration

• Low taxable margins subject torulings


Malta

International Shipping activities

IP Company

Investment assets

International Aviation activitiesOwnership, lease,

operation

Malta Co

• 35% CT, however 5%effectively

• Remittance basis of taxationfor res. non-dom companies

• Inward and outward corporate migration

• DTT with Hong Kong signedyet not ratified

Tonnage tax – no tax onincome, gains and no stampduty

• Remittance basis of taxationeven if income arises inMalta;

• Only resident not domiciledcompanies

Malta Hold Co

Foreign Hold Co

(domestic reliefs / EU Directives)

0% WHT — dividends, interest, royalties

Refund of 6/7ths of CT


United Kingdom

UK Co

CT: 20/21% Investment Company

IP activities

Shareholder Non-EU

Patent box (effective from 1 April 2013):• 10% on royalties/gains from “qualifying patents”;• Patents registered with IPO, EPA, certain EEA StatesRoyalties conduit• Royalties from IPRs not exploited in the UK liable to

tax only on the minimal margin

Substantial shareholding exemption• Holding of at least 10% of shares,

entitled to at least 10% of the profits available for distribution, entitled to at least 10 per cent of the assets on a winding up.

• 12 months holding period• Sole trading company / trading

group condition

Non-SMEs• Distribution is in an “exempt class”;• Not a non-dividend distribution, e.g.

Interest;• No tax deduction for dividends paid.

SMEs• Payer resident in a DTT State;• No tax deduction for dividends paid;• Dividends not paid under a tax

advantage scheme.

Dividends fully exempt

Dividends: 0% WHT;

Int., royalties: 20%, subj. to DTT and EU Tax Directives

Gains on sale of shares exempt in the hands of non-residents

£10 mil @ 10% tax under Entrepreneurs’ relief

Trading companyGain on sale of shares exempt under SSE


Which location is best?

• The choice will depend on a number of factors including: • Nature/location of business operations• Target entities – Asian or European• Trading or Passive activities• Substance required• Where are the shareholders?• Investment strategy• Financing requirements• Exit strategy


Beneficial ownership– court cases

• Indofoods v JP Morgan

• Prévost Car

• MIL Investments

• Velcro Canada Inc

• Four necessary elements to consider– possession, use, risk, and control

• The corporate veil is not to be pierced unless the corporation has ‘absolutely no discretion’ with regard to the use of the funds.


Beneficial ownership –burden of proof• Who has the legal right to receive income from the company?

• Does the recipient of income from the company have exclusive possession and control of income received?

• Is income received comingled with other monies in the recipient’s account and exposed to currency fluctuation risk?

• Does interest earned on income received belong to the recipient?

• Does the recipient of income have to seek instructions in dealing with the funds received?

• Did the amount of the income received from the company differ from the amount paid out to third parties?


Limitation of Benefits• 1962 Federal Decree in Switzerland

• Remittance provisions in treaties

• 1992 US LOB provision in Dutch/US treaty

• 1994 Anti-treaty shopping law in Germany

• US Double tax treaties general LOB provisions

• 2014 OECD BEPS initiative


Impact of Future Changes : BEPS and the OECD approach• Greater transparency

• Will increase the trend towards alignment of holding structures and business operations

• Will the changes actually shift tax revenue to the growing emerging economies?



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• To create an international organisation with branches throughout the world dedicated to advancing the practice of international business structuring across multiple disciplines.

• To promote the practice of international business structuring as transparent, effective and professional without the aggressive tax connotations currently perceived by the public.

• To create a community where professionals at all levels learn from each other and have access to worldwide knowledge and contacts opening up professional and commercial opportunities for all .

• To professionalise the practice of International Business Structuring.

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Double Tax Treaties: Asia & Europe