Eighth Edition - Association of Corporate Counsel

Corporate Tax

2020Contributing Editor: Sandy Bhogal

Eighth Edition

Global Legal InsightsCorporate Tax

2020, Eighth EditionContributing Editor: Sandy BhogalPublished by Global Legal Group

GLOBAL LEGAL INSIGHTS – CORPORATE TAX2020, EIGHTH EDITION

Contributing EditorSandy Bhogal, Gibson, Dunn & Crutcher UK LLP

Head of ProductionSuzie Levy

Senior EditorSam Friend

Sub EditorMegan Hylton

Group PublisherRory Smith

Chief Media OfficerFraser Allan

We are extremely grateful for all contributions to this edition. Special thanks are reserved for Sandy Bhogal of Gibson, Dunn & Crutcher UK LLP for all of his

assistance.

Published by Global Legal Group Ltd.59 Tanner Street, London SE1 3PL, United KingdomTel: +44 207 367 0720 / URL: www.glgroup.co.uk

Copyright © 2020Global Legal Group Ltd. All rights reserved

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ISBN 978-1-83918-061-3ISSN 2051-963X

This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations. The information contained herein is accurate as of the date of publication.

CONTENTS

Preface Sandy Bhogal, Gibson, Dunn & Crutcher UK LLP

Andorra Jose María Alfin Martin-Gamero, Marc Urgell Díaz & Júlia Pons Obiols,

Cases & Lacambra 1

Australia Andy Milidoni & Prashanth Kainthaje, Johnson Winter & Slattery 6

Brazil Leandro Chiarottino, Erika Tukiama & Fernanda Lima,

Chiarottino e Nicoletti Advogados 20

Canada Adrienne Oliver & Barry Segal, Norton Rose Fulbright Canada LLP 28

France David Sorel & Laura Bernardini, Lacourte Raquin Tatar 36

Germany Jörg Schrade & Martin Mohr, CMS Hasche Sigle 44

India Lokesh Shah & Devashish Poddar, L&L Partners Law Offices 54

Indonesia Mulyono, Mul & Co 66

Ireland Andrew Quinn, Lynn Cramer & Niamh Cross, Maples Group 74

Israel Boaz Feinberg, Tadmor Levy & Co. 85

Italy Marco Lantelme, BSVA Studio Legale Associato

Mario Miscali, Studio Miscali 89

Japan Akira Tanaka & Fumiaki Kawazoe, Anderson Mōri & Tomotsune 102

Luxembourg James O’Neal, Inès Annioui-Schildknecht & Rui Duarte, Maples Group 108

Netherlands IJsbrand Uljée & Peter van Dijk, BUREN N.V. 119

Spain Ernesto Lacambra & David Navarro, Cases & Lacambra 126

Switzerland Susanne Schreiber & Elena Kumashova, Bär & Karrer Ltd. 138

United Kingdom Sandy Bhogal & Barbara Onuonga, Gibson, Dunn & Crutcher UK LLP 156

USA Myra Sutanto Shen, Michelle Wallin & Derek E. Wallace,

Wilson Sonsini Goodrich & Rosati, P.C. 178

PREFACE

This is the eighth edition of Global Legal Insights – Corporate Tax. It represents the views of a group of leading tax practitioners from around the world.

One consistent trend across each jurisdiction is the evolving nature of tax rules which impact cross-border arrangements, and the ongoing uncertainty that this creates. BEPS implementation is now well into the domestic implementation phase and transfer pricing is now a mainstream aspect of tax planning.

We also see renewed effort to reach an international consensus on taxation of the digital economy, with increasing concern that further delay will prompt unilateral domestic action across the OECD. This has prompted reaction from the US government in particular, and it was recently announced that the US would not be taking part in negotiations relating to ‘Pillar One’ – which broadly proposes changes to traditional nexus rules for allocating taxing rights, enabling a portion of the revenue generated from digital services to be taxed in the jurisdiction in which they are used. The US stated that they were stepping away from talks as the OECD was not making headway on a multilateral deal on digital services taxation. In addition, tax compliance and information reporting are entering a new phase, as DAC 6 will be implemented across the EU.

The impact of COVID-19 will inevitably add to the complex international tax landscape. The long-term impact of the lockdown restrictions and the fiscal measures taken by governments worldwide remains to be seen; however, it is likely that tax policy will play an important role in revitalising the economy.

Authors were invited to offer their own perspective on the tax topics of interest in their own jurisdictions, explaining technical developments as well as any trends in tax policy. The aim is to provide tax directors, advisers and revenue authorities with analysis and comment on the chosen jurisdictions. I would like to thank each of the authors for their excellent contributions.

Sandy Bhogal Gibson, Dunn & Crutcher UK LLP

GLI – Corporate Tax 2020, Eighth Edition 1 www.globallegalinsights.com

© Published and reproduced with kind permission by Global Legal Group Ltd, London

AndorraJose María Alfin Martin-Gamero, Marc Urgell Díaz & Júlia Pons Obiols

Cases & Lacambra

Key developments

As the Andorran direct corporate tax system has been recently implemented (before January 1st 2011, Andorra did not have any corporate tax laws), we are going to briefly summarise the most important rulings that regulate the corporate tax system which entered into force in 2011. The Andorran tax system depends on the definition of residence. Residence is based on the following criteria that must be considered globally: a corporation is resident in the Principality of Andorra if it: (i) is incorporated under Andorran law; (ii) has its corporate address there; or (iii) is effectively managed from there. The effective general tax rate in Andorra is 10% over the tax profit, but there is a special tax rate for collective investment vehicles, which is 0%. Likewise, there is a special effective tax rate of 2% (this is the result of a deduction over the tax basis) for the companies as follows: (i) international trading companies; (ii) financial intragroup companies; and (iii) intellectual and industrial property management companies. Nevertheless, these special regimes have been amended or eliminated according to the Draft Bill of amendment of Act 95/2010, December 29th, regulating the corporate income tax that was approved as law on April 19th 2018 by the General Council of Andorra. Actually, the international trading companies and financial intragroup companies regimes have been eliminated and they will be gradually reduced by the end of financial year 2020. The regime regulated for holding companies (the subsidiaries could be either resident or non-resident) is still very attractive, since the tax rate for profits distributed by the subsidiaries in the form of dividends or the capital gains arising from the sale of the shares of subsidiaries is 0%. Nevertheless, the new law establishes that the non-resident subsidiary must be subject to a tax rate of at least 40% of the Andorran corporate tax rate or must be resident in a country which has a double tax treaty in force with Andorra. As a consequence of this efficient corporate tax system, we have seen certain movements of businesses or companies to Andorra, especially companies related to some specific sectors that do not need a significant physical presence or a factory for manufacturing activities, such as computer software companies, internet-related companies, intellectual property or other similar businesses. Likewise, we have seen movements of individuals or executives with the aim of managing groups of operational companies located in several countries within the European Union through Andorran holding mother companies. The introduction of the principle of tax neutrality (“rollover regime”) in the Andorran tax system was approved by Act 17/2017, October 20th on corporate restructuring partially amending the Corporate Income Tax Act, the Personal Income Tax Act, and the Capital



Cases & Lacambra Andorra

Gains Act in relation to real estate transactions. The aforesaid law is creating opportunities for local companies or individuals to take decisions about corporate reorganisations, contributions in kind, mergers, scissions, and acquisitions. Andorra regulates the possibility of applying a tax credit to losses with future tax profits within 10 years after the losses were originated.At present, Andorra has not yet introduced any “controlled foreign company regime” for companies. That means that the profit not distributed to the Andorra mother company or to the individual shareholder by the subsidiaries is not taken into account when calculating the business profit and the taxable base. Another important point to note is the internal treatment of the international double tax relief. The regime allows the application unilaterally of a total exemption over the tax withheld at the source up to the limit of the internal tax rate (10%). Another important key feature of the Andorran corporate tax system is the Pyrenean country’s definitive stance towards tax transparency. This is a development of the decision taken by Andorra to join the common reporting standard of the OECD for the automatic exchange of tax information in April 2014, which was realised through an agreement executed with the European Union in February 2016 for the automatic exchange of tax information and the corresponding internal law, which entered into force on January 1st 2017. The main domestic laws regulating the tax regime of the Andorran resident companies are as follows:• Corporate Income Tax Act, December 29th 2011 (Llei de l’impost de societats, 10/95,

de 29 de desembre).• Decree developing the Corporate Income Tax, September 23rd 2015 (Decret de 23 de

setembre de 2015 del reglament de l’impost de societats). • Act of October 20th 2017 approving the principle of tax neutrality on corporate

restructurings (Llei 17/2017, de 20 d’octubre, de règim fiscal d’operacions de reorganització empresarial I de modificació de les lleis de l’impost de societats; llei del impost sobre la renta de les persones físiques; llei de societats anònimes i limitades i llei de l’impost sobre les plusvàlues en les transmissions immobiliàries).

• International treaty with the European Union implementing the automatic exchange of tax information by means of an amendment to the Tax Savings Agreement for payments in the form of interests executed between Andorra and the European Union dated February 26th 2016.

• Act on automatic exchange of Tax Information, November 29th 2016 (Llei d’intercanvi automàtic d’informació fiscal de 29 de novembre de 2016).

• International Double Tax Treaty with Luxembourg, July 2nd 2014. • International Double Tax Treaty with Spain, January 5th 2015. • International Double Tax Treaty with France, July 1st 2015. • International Double Tax Treaty with United Arab Emirates, July 28th 2015.• International Double Tax Treaty with Portugal, September 27th 2015. • International Double Tax Treaty with Liechtenstein, September 30th 2015. • International Double Tax Treaty with Malta, September 20th 2016. • International Double Tax Treaty with Cyprus, May 18th 2018.

BEPS

Andorra assumed the BEPS commitment on October 15th 2016 and has already implemented the relevant actions through Act 6/2018, amending the Corporate Income Tax Act, approved by the General Council (Andorran Parliament) on April 19th 2018.




The commitment to these minimum standards determines that Andorra has given its consent to the following points:• Meeting the minimum standards on tax treaty shopping.• Implementing a country-by-country reporting system on transfer pricing.• Imposing limits on the benefits of preferential tax regimes.• Implementing the mutual agreement procedure in its tax treaties.• The inclusion of Andorra in the BEPS Project will be subject to a peer-to-peer review

process in order to commit to the implementation of the BEPS minimum package in Andorra.

This minimum package encompasses the following BEPS Actions: • Action 1: address the tax challenges of the digital economy.• Action 2: neutralise the effects of hybrid mismatch arrangements.• Action 3: strengthen controlled foreign company rules.• Action 4: limit base erosion via interest deductions and other financial payments.• Action 5: counter harmful tax practices more effectively, taking into account transparency

and substance.• Action 6: prevent treaty abuse.• Action 7: prevent the artificial avoidance of permanent establishment status.• Actions 8–10: assure that transfer pricing outcomes related to intangibles are in line

with value creation.• Action 11: establish methodologies to collect and analyse data on BEPS and the actions

to address it.• Action 12: require taxpayers to disclose their aggressive tax planning arrangements.• Action 13: re-examine transfer pricing documentation.• Action 14: make dispute resolution mechanisms more effective.• Action 15: develop a multilateral instrument. In essence, Andorra will have to: (i) develop standards in relation to the remaining BEPS issues; (ii) review and be reviewed during the implementation of these standards; and (iii) support developing countries with the implementation of the same.

Holding companies (foreign securities holding companies)

The Andorran tax regime for holding companies is quite attractive for several reasons, which can be summarised as follows: • The domestic tax rate for holding companies, whose corporate purpose is participation

in the capital of subsidiaries, is 0%, both for income coming from dividends and capital gains arising from the sale of shares of subsidiaries. Nevertheless, the non-resident subsidiary must be subject to a minimum tax rate of at least 40% of the Andorran ordinary tax rate or must be resident in a country with a double tax treaty in force with Andorra.

• There is neither a minimum threshold of participation nor a minimum period of holding, which is a major difference compared to neighbouring countries.

• Andorra is currently signing double tax treaties with many relevant jurisdictions. This means that Andorra will not be discriminated against in the future with high withholding rates applicable to countries which do not have double tax treaties in force.

Industry sector focus

The tax industry has been focused on the following:• Banking, investment entities, portfolio management companies and financial advisors.• Tobacco manufacturing and distribution.




• Property and real estate.• Asset financing.• Familiar groups of companies.• Intellectual and industrial management companies. • Software, computer and internet companies.

News on the measures arising from the COVID-19 pandemic with tax consequences applicable in 2020

The prepayment corresponding to the Corporate Income Tax 2020, which must be paid up to September 1st of each tax year, taking into account an amount equal to 50% of the tax due the last financial year, has been reduced to 20% of the tax due on the last financial year. (Nonetheless, this is a temporary measure that will be amended at the moment of termination of the law of emergency.)This specific prepayment calculation for 2020 was introduced by the Law on exceptional measures in relation to the COVID-19 pandemic (Llei 3/2020, del 23 de març, de mesures excepcionals i urgents per la situació d’emergència sanitària causada per la pandèmia de SARS-CoV-2).

The year ahead

Andorra is very advanced in the negotiations for a potential agreement of association with the European Union. The European Union has already communicated that they will respect the low tax rates of Andorra due to its particularities, and the VAT-harmonised system will not be applied to Andorra. This means that Andorra will continue to be an attractive jurisdiction with very low tax rates. Likewise, Andorra will benefit from the application of the most important principles of the European Union, such as: the freedom of movement of companies and individuals; the principle of freedom of movement of capital; the freedom of movement of individuals and workers; and the other freedoms regulated in the Treaty of the European Union. In principle, we do not expect significant tax reforms in the year ahead after the implementation of the “rollover tax regime” and the implementation of BEPS into the internal tax system.



Jose María Alfin Martin-GameroTel: +376 728 001 / Email: [email protected] María Alfin is a Partner of Cases & Lacambra, leading the Tax practice in the Principality of Andorra. He is a member of: the Barcelona and Andorra Bar Associations; the Spanish Association of Tax Advisors (AEDAF); the Andorra Association of Tax Advisors (AATF); and the International Fiscal Association (IFA). Jose María Alfin is specialised in estate planning, international and local tax, banking and financial law and has extensive experience advising: family offices; HNWI; and companies and enterprises, both locally and internationally. He is a regular speaker on banking, compliance, financial and tax matters in law and business schools. Additionally, he is the external correspondent for Andorra in relation to tax, social security and investment matters for the top international tax online magazine IBFD (International Bureau of Fiscal Documentation).

Marc Urgell DíazTel: +376 341 474 / Email: [email protected] Marc Urgell is a Senior Tax Associate at Cases & Lacambra in the Principality of Andorra. He has solid experience in tax and corporate matters with a keen focus on cross-border operations. He has advised important multinational groups in Andorran tax matters and has worked on international tax planning for Spanish and Andorran companies. He also has experience advising high-net-worth individuals and family business groups.He is a lecturer in tax master programmes in tax planning in Spain and Andorra, and is a regular speaker at conferences on tax matters.

Cases & LacambraC/ Manuel Cerqueda i Escaler 3-5, AD 700 Escaldes-Engordany, Andorra

Tel: +376 728 001 / URL: www.caseslacambra.com


Júlia Pons Obiols Tel: +376 605 695 / Email: [email protected]úlia Pons is a Tax Associate at Cases & Lacambra in the Principality of Andorra. She is a lawyer in Spain and tax advisor in Spain and Andorra. She has experience in tax and corporate matters, advising multinational groups and family business groups in national and cross-border operations. She also has experience advising high-net-worth individuals and tax planning for Spanish and Andorran residents.



AustraliaAndy Milidoni & Prashanth Kainthaje

Johnson Winter & Slattery

Overview of corporate tax work over last year

Types of corporate tax workMuch of corporate tax work in the years 2019–20 continues to be in advising and assisting corporates with their tax reporting obligations and international tax arrangements. In July 2019, the Australian Taxation Office (“ATO”) released its Interim Findings Report from its review and audit of the Australian subsidiaries of significant global entities (groups with a global turnover of more than A$1 billion) as part of its Top 100 programme. The focus of this review is tax risk and governance, misalignment of tax and accounting results, and ensuring the correct amount of tax on profit from Australian-linked businesses is being recognised.Following audit or risk review activity, or as a result of more guidance issued by the ATO, Australian subsidiaries of multinational enterprises (“MNEs”) applying for Advanced Pricing Arrangements (“APAs”) also continued through 2019–20. These applications have become more involved than they once were, requiring the applicant subsidiary to devote significant resources to complying with the greater information and economic pricing analysis burden that an APA process now requires. There continues to be significant corporate tax work from the private sector’s involvement in delivering Federal and State Government’s infrastructure programmes.Significant deals and themesTransfer pricing Since the Senate Committee Hearing on Multinational Tax Avoidance and the Government’s adoption of a range of integrity measures aimed at significant global entities (“SGEs”), the ATO continues to gather industry information from its review of SGEs. Embedded royaltiesThe ATO has provided its view on the related issue of embedded royalties in payments under cross-border supply contracts. Through TA 2018/2, the ATO indicated two main concerns: (1) That arrangements between related parties were not being conducted in accordance

with the arm’s length principle, meaning that Australian entities were gaining a tax advantage through inflated deductions or the reduction of profit by not recognising the value added to transactions by Australian counterparties.

(2) That withholding tax on royalties was being avoided by entities disguising royalty payments as payments solely for a tangible good or service.



Johnson Winter & Slattery Australia

Inbound distributorsIn March 2019, the ATO released its view on the profit mark-ups for certain related party transactions pursuant to inbound distribution arrangements. PCG 2019/1 is a guide for Australian entities predominantly involved in the distribution of goods purchased from related foreign entities for resale. The ATO recognises four categories of inbound distributors: life sciences; information and communication technology; motor vehicles; and a general distributors category. An entity’s earnings before interest and tax (“EBIT”) will be compared to its sales to calculate a profit percentage. This profit percentage is then compared to ATO profit markers for the relevant category of entity. An entity will then be classed into either a high-, medium-, or low-risk zone. Under the “general distributors” category, low-risk entities will have an EBIT margin of above 5.3%, medium-risk entities between 2.1–5.3%, and high-risk entities below 2.1%. A high-risk zone inbound distributor can expect the ATO to apply increased compliance activities through audits or risk reviews. The ATO warns no “safe harbour” is created by the low-risk zone, and entities must still apply appropriate transfer pricing methodologies. Superannuation guarantee paymentAustralia’s compulsory superannuation and pension income system continues to attract the spotlight of its regulators, with specific attention paid to Australian employers complying with their obligations to contribute to their employee’s superannuation and pension fund.Throughout 2019–20, the ATO and Australian public have continued to place notable attention upon ensuring superannuation guarantee payments have been correctly paid by employers. As a way of encouraging self-reporting, the Australian Government passed the Treasury Laws Amendment (Recovering Unpaid Superannuation) Bill 2019 which provides for a “superannuation guarantee amnesty”. This scheme will provide employers a “one-off opportunity to correct past unpaid superannuation amounts without incurring administration charges of penalties of up to 200% of the superannuation charge”. Employers who wish to self-report previous non-compliance must do so before 7 September 2020 to be eligible for amnesty consideration.DemergersWe have recently seen some high-profile demergers within Australia, including the demerger of United Malt Group Limited (“UMG”) by GrainCorp Limited (see CR 2020/24), the demerger of Castile Resources Pty Ltd by Westgold Resources Limited (see CR 2020/6), the demerger by Cardno Limited of Intega Limited, and the demerger of WOTSO Limited by BlackWall Limited (see CR 2020/10). In March 2019, the ATO released a draft TD 2019/D1 that sets out what constitutes “restructuring” for the purposes of subsection 125-70(1) of the Income Tax Assessment Act 1997 (Cth) (“ITAA 1997”). The recent TD 2019/D1 has indicated a broader interpretation of “restructuring” than previously indicated. TD2019/D1 has yet to be finalised and no expected date for this has been released by the ATO.Of particular note is an example provided by the ATO that contradicts its previous stance on the availability of demerger tax relief where the demerger involves the “sale of new interests via a sale facility” (“Post-Demerger Sale Facility”). Although ATO ID 2003/1053 was withdrawn on 19 February 2010, it found that the use of a Post-Demerger Sale Facility was consistent with sections 125-70(1)(c) and 125-70(2) of the ITAA 1997. Despite the ATO’s reasoning that this withdrawn publication was a “straight application of the law”, a similar




facility is used in Example 5 of TD 2019/D1 which is deemed to be inconsistent with these conditions. Although TD 2019/D1 provides guidance on how the ATO will award demerger relief, the inconsistency justifies cautionary restructuring if the relief is sought. Private equity The private equity (“PE”) sphere of the Australian marketplace continues to retain significant cash reserve levels. Despite this, the economic uncertainty driven by COVID-19 has reduced deal flow across the globe. This has resulted in a large number of PE houses adopting a renewed focus on their current portfolio by seeking term extensions for maturing funds, modelling downside scenarios and optimising cost structures in preparation for a prolonged downturn. While adjusting to the market, PE funds should remain aware of two significant changes in tax legislation that have affected PE transactions since 1 July 2019:• Existing tax exemptions for foreign pension funds and sovereign wealth funds are now

limited to passive income and portfolio investments (typically interests of less than 10%).• A minimum 30% withholding tax on trading income converted to passive income

distributed by a managed investment trust and as part of a stapled structure.

Key developments affecting corporate tax law and practice

Domestic case law developmentsGlencore International AG v Commissioner of Taxation [2019] HCA 26 (14 August 2019)In October 2014, the plaintiff, Glencore group, engaged a law practice in Bermuda to provide legal advice with respect to the corporate restructure of Australian entities within the Glencore group. In November 2017, papers from the Bermuda law practice (“Panama Papers”) were stolen from the law firm’s electronic file management systems and provided to the International Consortium of Investigative Journalists. The ATO came into possession of the documents relevant to the Glencore group’s restructure. The issue before the Court was whether legal professional privilege (“LPP”) found an actionable right to restrain the use and recover of privileged documents, as distinct from an immunity from the exercise of powers which would otherwise compel the disclosure of privileged communications. In rejecting Glencore’s submissions, the High Court held that LPP is confined to an immunity from the exercise of powers which compels the disclosure of privileged documents. Glencore submitted that common law should be developed to extend LPP to become an actionable right, for the furtherance of the public interest. However, the Court rejected Glencore’s submission and stated that the development of the law can only proceed from settled principles. Glencore’s case sought to transform the nature of the privilege from an immunity into an ill-defined cause of action which may be brought against anyone with respect to documents that may be in the public domain.The High Court of Australia noted that whilst equity will restrain an apprehended breach of confidential information and will do so with respect to documents that are the subject of LPP and are confidential, equity will also restrain third parties if their conscience is relevantly affected. However, the High Court of Australia also noted difficulties where the documents had entered the public domain with there being no allegation concerning the ATO’s conduct.BHP Billiton Limited v Commissioner of Taxation [2020] HCA 5 (11 March 2020)The appellant, BHP Billiton Ltd (“BHP Ltd”), is an Australian incorporated company that is part of one of the few dual-listed company (“DLC”) arrangements in the world (the other party being BHP Billiton Plc (“BHP Plc”)).1 BHP Billiton Marketing AG (“BMAG”) was a




Swiss company, where 58% of shares were indirectly held by BHP Ltd, and the other 42% by BHP Plc. BMAG purchased commodities from the Australian subsidiaries of BHP Ltd and BHP Plc for sale into export markets and derived income from those sales. The Commissioner issued amended assessments to the appellant BHP Ltd incorporating this income.There was no dispute that BMAG’s income from the sale of commodities it purchased from BHP Ltd’s Australian subsidiaries was “tainted sales income” to be included in the assessable income of BHP Ltd under the controlled foreign corporation rules. The question was whether BMAG’s income from the sale of commodities it purchased from BHP Plc’s Australian entities was also to be included in the assessable income of BHP Ltd under the controlled foreign corporation. That depended upon whether BHP Plc’s Australian entities, the sellers of the commodities to BMAG, were “associates” of BMAG for the purposes of the controlled foreign corporation rules. Relevantly, this required a consideration of whether BMAG was a company “sufficiently influenced” by the other entity under section 318(2)(e) of the Income Tax Assessment Act 1936 (Cth) (the “1936 Act”). The Court agreed with the Commissioner that it was.The definition of “sufficiently influenced” under section 318(6)(b) of the 1936 Act does not require the company to be in the “effective control” of the other entity, and includes influence falling short of control by “majority voting power”. Influence can be asserted through communication of wishes, which are neither directions nor instructions.The relevant factual considerations that led the High Court to its conclusion were:(a) that BHP Ltd and BHP Plc together had 100% shareholding in BMAG; (b) that the DLC Structure and DLC Structure Principles required BHP Ltd and BHP Plc to

act as a “single unified economic entity”;(c) the existence matching dividend and voting arrangements; and(d) that the Group Level Documents issued by BHP Ltd and BHP Plc defined a governance

model and control requirements which applied to BMAG.Burton v Commissioner of Taxation [2019] FCAFC 141 (22 August 2019) The appellant was an Australian tax resident individual, who paid US tax on capital gains from investments he made in the US. Under Australian tax law, the capital gain was reduced by 50% and taxed at the individual’s marginal tax rate (rather than the entirety of the gain being taxed at a concessional rate for capital gains). The Commissioner allowed a tax offset of 50% of the US tax he paid, under the foreign income tax offset (“FITO”) under section 770-10 of the ITAA 1997. The appellant submitted he was entitled to the full tax offset, or alternatively a full credit pursuant to article 22(2) of the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (“Convention”).In respect of the FITO claim, the majority of the Full Federal Court held that Division 770 confines the amount of foreign tax paid that counts towards an Australian tax offset for an amount included in the appellant’s assessable income. It is not payable for income that is excluded by the statute. The appellant’s capital gains in question were not included in his assessable income for the purposes of the ITAA 1997. Moreover, the object of Division 770 is not to relieve double taxation in the abstract, but rather “where” the circumstances in section 770-5 exist. Steward and Jackson JJ rejected the appellant’s submission that article 22(2) of the Convention requires Australia to allow full credit on the US tax paid. According to Steward, the starting point is the identification of what income Australia taxes, which for capital gains tax is a 50%




discount. The allowable credit is the US tax paid in respect of that Australian taxable income. In this case, the credit is 50% of the capital gains tax, which is consistent with Division 770.Corporate residencyAn Australian tax-resident company can be incorporated in Australia, or not be incorporated in Australia if it carries on business in Australia with either central management and control in Australia or its voting power controlled by shareholders who are residents of Australia. Most of Australia’s tax treaties include a tie-breaker rule for dual-residency, usually by reference to the place of effective management, though this will be modified/removed for some treaties pursuant to the OECD Multilateral Instrument (“MLI”).The ATO has updated its guidance on the meaning of these tests in TR 2018/5 and PCG 2018/9, following the HCA decision in Bywater Investments Limited v Commissioner of Taxation (2016) 260 CLR 169.Consolidation regimeIn March 2018, the Federal Government introduced amendments to Australia’s tax consolidation regime. The new laws provide certainty to multiple-entry consolidated groups in relation to how the integrity measures affect the tax cost-setting rules and calculation of allocable cost amounts for entities that join or leave the group.Hybrid mismatch rulesThis year, Australia joined the United Kingdom and New Zealand with the commencement of Australia’s hybrid mismatch rules.Australia’s hybrid mismatch rules apply to certain payments made after 1 January 2019 and to income years commencing on or after 1 January 2019, irrespective of whether the underlying arrangement was entered into before or after that date. Whilst the existence of a “payment” underpins the operation of Australia’s hybrid mismatch rules, the term is deceptively narrow. In addition to capturing transfers of cash and non-cash benefits, the decline in value of an asset, an amount that represents a share in the net loss of a transparent entity (such as a partnership), and accrued amounts, can also be caught.Broadly, the rules seek to neutralise deduction/non-inclusion and deduction/deduction outcomes. It also applies to neutralise “imported hybrid mismatches”, whereby a deductible payment made by an Australian taxpayer is shielded from tax directly or indirectly by a hybrid arrangement entered into elsewhere within the corporate group. Neutralising a mismatch can involve a deduction being denied in Australia. However, and perhaps more alarmingly, the measures can result in amounts being deemed to be included assessable income. These rules pose significant challenges for both private and in-house tax practitioners. Not only do the rules require knowledge about the operation of foreign tax regimes, but also an intimate knowledge of intra-group arrangements that exist within a corporate group, even if there is no obvious direct link with Australia. The latter may prove to be a particular challenge for Australian companies in foreign multinational groups as the rules assume a level of knowledge and intimacy with the rest of the group’s tax affairs which, in practice, may not exist. Perhaps the only respite, albeit a temporary one, is that Australia’s imported hybrid mismatch rule will only apply to non-structured arrangements from income years commencing on or after 1 January 2020 (which is intended to align with the European Union’s introduction of hybrid mismatch rules). Finally, whilst Australia’s hybrid mismatch rules generally follow the OECD model that came out of BEPS, with measures including amendments that deny imputation (i.e. franking) benefits on distributions that are deductible in a foreign jurisdiction and also deny




access to Australia’s participation exemption for distributions that are deductible in a foreign jurisdiction, there is one uniquely Australian feature to the Australian hybrid mismatch rule. The unique feature (and key departure from the OECD model) is the inclusion in Australia’s hybrid mismatch rules of a targeted integrity measure, which will have a significant impact on intra-group financing arrangements within a multinational group. Very broadly, the integrity rule has the potential to deny deductions on interest payments (or amounts in substitution for interest) and payments under derivative financial arrangements that are not subject to foreign income tax in at least one jurisdiction at a tax rate of more than 10%. Accordingly, groups with special purpose financing vehicles in low-tax jurisdictions will need to carefully analyse their existing funding structures.Significant global entityOn 25 May 2020, the Treasury Laws Amendment (2020 Measures No. 1) Bill 2020 (Cth) received royal assent. The Act amends the ITAA 1997 by extending the definition of SGE and introduces the new concept of a country-by-country reporting entity (“CBCRE”). In respect of the SGE amendments, the regime will apply to groups of entities headed by an entity other than a listed company in the same way as it applies to groups headed by a listed company. In respect of the CBCRE amendments, an entity is considered a CBCRE for a period if it is a country-by-country reporting parent for the period, or if it is a member of a country-by-country reporting group and another member of that group is a country-by-country reporting parent.Hybrid mismatchThe Commonwealth Parliament has introduced (but not yet passed) the Treasury Laws Amendment (2020 Measures No. 2) Bill 2020 (Cth), which amends the hybrid mismatch rules by clarifying the operation of the hybrid mismatch rules in a number of instances, clarifying such matters including: that the rules apply to trusts and partnerships; the circumstances in which an entity is a “deducting entity”; that foreign income tax generally does not include foreign municipal or State taxes; and that the rules apply in the same way to multi-entry consolidated (or “MEC”) groups as they apply to tax consolidated groups. The Bill will also seek to widen the rules to apply to certain financing arrangements that have been designed to circumvent the operation of the hybrid mismatch rules and to allow, in respect of distributions made on Additional Tier 1 capital instruments which give rise to a foreign income tax deduction, franking credits on those distributions, and in turn to include the amount of any deduction to be included in the assessable income of the entity making the distribution.Thin capitalisationThe thin capitalisation rules have been amended to deny foreign investors from taking advantage of “double-geared” structures, which seek to convert active business income to interest income (subject to a lower withholding tax rate). These structures were achieved by “layering” multiple flow-through entities, each of which issued debt against the same underlying asset, allowing investors to gear higher than the thin capitalisation limits intended. The “associate entity” provisions in subdivision 820-I of the ITAA 1997 were intended to prevent these double-gearing arrangements by requiring the grouping of associate entities when working out each entity’s debt limit. Prior to 1 July 2019, an entity would only be an “associate” if the interest held in an underlying trust or partnership was 50% or more. Since 1 July 2019, however, an entity will be an associate if the other entity holds 10% or more in the underlying trust or partnership.




An integrity measure has also been included through the operation of sections 820-905(2B)(b) and 820-905(2C) of the ITAA 1997, which treat the holdings of two or more related entities holding less than 10% to be associates if it is reasonable to conclude that one of the entities did so for the principal purpose of ensuring the other entity or entities would not be an associate. On 13 September 2019, the Treasury Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2019 (Cth) received its royal assent. A key feature of the Bill is its amendments to the ITAA 1997 to strengthen Australia’s thin capitalisation rules, including enforcing the requirement to use the asset, liability and equity values as displayed in the financial statements, removing the option for entities to value their assets specifically for thin capitalisation purposes, and ensuring that non-ADI foreign-controlled Australian tax consolidated groups and multiple-entry consolidated groups that have either foreign investments or operations are treated as both outward investing and inward investing entities, where appropriate.Foreign citizen stamp dutyStates generallyForeign buyers (depending on how “foreign person” is defined) may pay the following foreign surcharge duty in addition to transfer duty in respect of the purchase of mainly residential property:• 8% (in New South Wales and Victoria);• 8% or 1.5% (in Tasmania, after 1 April 2020, depending on whether the property is

residential or primary production property);• 7% (in Queensland, Western Australia and South Australia); or• 0% (in the Australian Capital Territory and Northern Territory).BEPSBEPS and OECD Multilateral Instrument Australia remains committed to the BEPS Action Plan and has now implemented recommendations from BEPS Actions 2, 5, 8–10, 13, 14 and 15.Australia ratified the MLI on 26 September 2018 and, by virtue of domestic legislation that received royal assent and became law on 24 August 2018, the MLI entered into force in Australia on 1 January 2019. It is expected that the MLI will modify 32 of the 45 bilateral tax treaties currently in force with Australia. Key MLI positions Australia has adopted include the fiscally transparent entity provisions, the principal purpose test, and the mandatory binding arbitration articles (subject to certain conditions). Mischaracterised arrangements and schemes – Taxpayer Alert 2020/2The ATO issued TA 2020/2 on 25 May 2020 in respect of arrangements that exhibit the following features: an Australian entity is unable to obtain capital from traditional sources; a foreign investor either already participates in the management, control or capital of the Australian entity at the time of the investment, or begins to; the investment has features not consistent with vanilla debt or equity investments; and the investment may provide the foreign investor with direct exposure to the economic return from a particular business or assets exploited therein.The main risk areas that the ATO states may arise in these arrangements include the failure to comply with interest or dividend withholding tax obligations, the generation of a tax deduction in Australia and no corresponding taxation of the gain made from the arrangement by the foreign investor, the arrangement being improperly characterised as debt when it should be




characterised as equity pursuant to Australian debt/equity rules, and the failure to report and disclose related party dealings for the purposes of Australia’s transfer pricing regime.

Tax climate in Australia

Prior to COVID-19, Australia’s economy had already been slowing, with the Federal Government continuing its work to reduce the tax gap and to achieve what had been a pre-COVID-19 budgeted operating surplus of approximately A$7.1 billion for the 2019–20 year. The ATO estimates that the net income tax gap for large corporate groups was A$2 billion in 2016–17, which is equivalent to 4%, down in percentage terms from A$1.8 billion in 2015–16, which was equivalent to 4.4%. Due to the community perception of large MNEs and pressure to build confidence in the community, MNE tax compliance remains high on the ATO’s agenda. The ATO is also turning greater attention to the black (or cash) economy to reduce the small business income tax gap, estimated at A$11.1 billion, equivalent to 12.5% in 2016–17. With Australia expected to enter its first technical recession in 29 years as a result of COVID-19 and the budgeted surplus transmogrified into a record deficit of A$64.9 billion as at 31 May 2020, it appears inevitable that the ATO’s focus on MNEs and reducing the tax gap will continue. For example, the ATO, which administers Australia’s COVID-19 wage subsidy scheme, has already flagged it will be auditing businesses that have utilised the scheme. Corporate tax reliefAustralia continues to implement its plan to gradually lower the corporate tax rate for corporate entities who meet the aggregated turnover threshold and have no more than 80% base rate entity passive income. The plan commenced from the 2016 income year, before which time all corporate entities were subject to a tax rate of 30%. From the 2020–21 income year, the corporate tax rate for entities with aggregated turnover under A$50 million, and no more than 80% base rate entity passive income, is 26%. By the 2021–22 income year, this rate will be down to 25%. All other corporate entities remain subject to a corporate tax rate of 30% in Australia. Instant asset write-offThe instant asset write-off provisions in the ITAA 97 allow small businesses to write off assets in the first year in which they are used or installed ready for use provided that the cost of the asset is below the threshold and the business is eligible by having less than the determined aggregated turnover amount. In the days following the announcement of Australia’s 2019 Federal Budget (“2019 Budget”), the Treasury Laws Amendment (Increasing and Extending the Instant Asset Write-Off) Act 2019 was passed to expand and extend to 30 June 2020 the availability of instant asset write-offs. In response to the economic impacts of COVID-19, the royal assent of the Coronavirus Economic Response Package Omnibus Bill 2020 (Cth) resulted in an increase to the cost threshold, below which small businesses are able to access an immediate deduction for depreciating assets and certain related expenditure. The threshold for each asset increased from A$30,000 to A$150,000 with the eligibility of businesses expanded to cover those with an aggregated turnover of less than A$500 million, whereas previously the instant asset write-off was only available to businesses with a turnover of less than A$50 million. Whilst these changes were initially intended to last from 12 March 2020 until 30 June 2020, the Federal Treasurer announced on 9 June 2020 that the relief would remain in place until 31 December 2020.To supplement the activity surrounding the use of the instant asset write-off by small businesses, on 4 April 2019, the ATO issued TR 2019/1 which sets out guidance on when a company is considered to be carrying on a “small business entity” within the meaning of




section 328-110 of the ITAA 1997. The ruling considers the application of the use of passive assets to generate profit, particularly the holding of assets such as property or shares by a company in order to derive an income stream and for capital gains.ATO Tax Avoidance TaskforceAs part of the 2019 Budget, the Government announced it will provide additional funding of A$1 billion over four years from 2019–20 to extend the operation of the ATO’s Tax Avoidance Taskforce. The Tax Avoidance Taskforce was established in 2016 and undertakes compliance activities targeting MNEs, large public and private groups, trusts and high-wealth individuals. The Government has noted that the funding will allow the Taskforce to expand its activities, including increasing its scrutiny of specialist tax advisors and intermediaries that endorse tax avoidance schemes and strategies. The ATO reports that the Taskforce’s compliance activities have generated A$3.4 billion in tax labilities and collected A$2 billion from large public groups, MNEs, wealthy individuals and private groups. Client legal privilegeIn recent years, the ATO has become increasingly sceptical about client legal privilege (“CLP”) claims. At the Australian Tax Institute’s 34th National Convention, held in March 2019, Commissioner Chris Jordan stated that the ATO “[will] be taking a tougher stance in the future” due to rising concerns that CLP is being relied on to “cheat the system” and conceal contrived tax arrangements. These sentiments were repeated by Second Commissioner Jeremy Hirschhorn later that year who, in a paper delivered to large market tax advisory firms, stated: “[I]t has become evident that our understanding of what documents are subject to

LPP significantly differs to some taxpayers and their advisers. Having a lawyer sign an engagement letter and/or the final deliverable, or be copied into an email, are not sufficient for clients to be able to claim privilege if the document is not part of the provision of independent legal advice by that lawyer.”

Mr Hirschhorn noted that the ATO was seeing blanket claims for privilege in about 20% of audits of large companies and that, when challenged, the “vast majority” of documents are ultimately produced and in many cases, the documents were (in the ATO’s view) never subject to CLP.In a sign that the ATO may be becoming increasing frustrated with advisors, it was reported in June 2020 that the ATO had commenced legal action against a big four accounting firm and its client in connection with CLP claims. APAs and MAPsThe ATO continues to encourage taxpayers to enter in APA and mutual agreement procedures (“MAPs”) in respect of the international tax arrangements with their related parties. All of Australia’s treaties in its treaty network contain a MAP provision. On 30 August 2018, the Stage 1 MAP Peer Review Report for Australia was published (as part of the BEPS Action 14 peer review and monitoring process, which was launched by the OECD in October 2016). The report found that Australia’s treaty network was not yet fully compliant with the BEPS Action 14 minimum standards. The report also observed that there is limited guidance on the availability of MAPs in Australia, although it should be acknowledged that the ATO has been updating its website guidance on MAPs (as recently as 12 May 2020).The economic implications of COVID-19 may require certain taxpayers to revisit their transfer pricing arrangements, including any APAs that are in operation. In relation to APAs, the ATO has acknowledged that the impact of COVD-19 may result in critical assumptions




in APAs being breached and has encouraged impacted taxpayers to proactively engage with the ATO, with possible outcomes including renegotiating the affected APA, or suspending or modifying it for a set period. For taxpayers who are in the process of applying an APA, the ATO has stated it will continue to work on those APAs where the applicant’s economic performance is not significantly impacted by COVID-19. However, if COVID-19 has had a significant impact, the ATO will discuss with the affected taxpayer suspending or ending their case. Disclosure requirements and tax governanceTax Transparency CodeIn February 2019, the Board of Taxation released a consultation paper which provided a post-implementation review of the Tax Transparency Code (“TTC”), as well as some proposed changes to the current framework. These included changes to minimum standards and best practice, the inclusion of a “basis of preparation statement”, and reconciliation between reports produced under the TTC and the ATO annual corporate tax transparency disclosures. Justified Trust Program and risk ratingsThe ATO continues to employ the Justified Trust Program to the top 100 and top 1,000 taxpayers simultaneously. The year of 2019 is the final one in which the ATO will apply risk categorisations to the top 100. The three tiers of categorisation are (from low to high): key taxpayer; key taxpayer with significant concerns; and higher risk. The ATO has stated that it will provide further guidance on the 2020 approach to top 100 risk ratings “shortly”, although it has not done so at the date of writing this chapter.The ATO has expanded its Justified Trust approach to high-wealth private groups with the introduction of the “Top 500 private groups tax performance program”, which involves regular one-on-one engagements between the ATO and the top 500 private groups. The Top 500 program is an expansion of what was previously known as the “Top 320 program”. The program includes, but is not limited to, private groups with a turnover of A$350 million or more, or A$500 million or more of net assets, or A$100 million in turnover and A$250 million in assets. The ATO has stated that it will use data matching and analytic models to “detect relationships in private groups between the controlling individual and associated entities” and “risk-assess compliance behaviours at a holistic, group level”.2

Reportable tax position (“RTP”)Since 30 June 2019, the ATO no longer issues notifications to taxpayers required to lodge an RTP. The task of assessing the necessity of lodgement now rests with the taxpayer. In most cases, public and multinational companies that satisfy the following criteria are required to lodge an RTP:• having a public company or a foreign-owned company; and• having total business income of A$250 million or more in the current tax return, or

being part of a public or foreign-owned economic group with a total business income of A$25 million or more in the current or immediately prior year.

The requirement to lodge an RTP schedule is being expanded to private groups from the 2021 income year. The ATO has stated that it will be notifying large private companies whether they are required to lodge the schedule in the 2021 income year or not. Private companies that are not notified will not be required to lodge an RTP schedule this year. Country-by-country (“CbC”) reportingThe ATO continues to enforce obligations on “CbC reporting entities” as a means to successfully implement CbC reporting (Action 13 of the BEPS Action Plan). The obligations include providing a CbC report, Master file and Local file.




Tax authorities sharing information globally In addition to standard information-sharing practices, the ATO has played a significant role over the past year as part of the J5. The J5 is a team of tax authorities from Canada, USA, the Netherlands, the UK and Australia which aims to combat international tax evasion and money laundering. The ATO notes that it is estimated that more data was exchanged between the J5 in the past year than the previous 10 years combined.An example of Australia’s continual pursuit for international congruency of both tax cooperation and enforcement is the Treasury Laws Amendment (International Tax Agreements) Bill 2019 (Cth) which received its royal assent on 28 November 2019. This Bill amended the International Tax Agreements Act 1953 (Cth) to give force of law to the Convention between the Government of Australia and the Government of the State of Israel for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance.

Developments affecting attractiveness of Australia for holding companies

Australia has three key measures in its domestic tax law which are intended to make Australia a more attractive jurisdiction for holding companies. These have not changed.First, non-deductible dividends derived by Australian tax resident companies obtain the benefit of a participation exemption where the Australian tax resident company holds at least 10% of the foreign resident company. Second, Australia has a participation exemption in respect of capital gains derived from capital gains tax events with respect to shares held by Australian tax resident companies in foreign resident companies where the Australian tax resident company holds at least 10% of the foreign tax resident company. The participation exemption is reduced to the extent that the foreign tax resident company is not carrying on active business. Third, Australian domestic tax law provides “conduit foreign income” rules (or “CFI rules”). Under the CFI rules, dividends paid out of profits sourced from dividends and capital gains that obtain the benefit of the participation exemptions are not subject to Australian dividend withholding tax.


E-commerce/digital economyDigitalisation and e-commerce are increasingly enabling firms to play a significant economic role in Australia despite having a limited physical presence within the jurisdiction. In an attempt to address this evolving business practice, a Treasury Discussion Paper titled “The digital economy and Australia’s corporate tax system” was released in October 2018. Amongst other things, the paper indicates that legislative and policy changes are required to address the nature of this industry through mechanisms such as the recent introduction of BEPS reporting. Concurrently, the Multinational Anti-Avoidance Law (“MAAL”), which took effect from 1 January 2016, acts as another form of integrity measure within Part IVA of the 1936 Act. MAAL only applies to foreign entities that are considered SGEs which have significant activity in Australia, and seeks to prevent artificial structures and arrangements that result in the avoidance of a taxable presence in Australia. The “look through” provisions, which allow for the assessment of the intent behind certain arrangements, are particularly noteworthy.It should be noted that the ATO has been operating the Tax Avoidance Taskforce across the past four years. The ATO notes that it has been “focusing on the e-commerce and digital economy industry”.




PharmaceuticalThe ATO is continuing to engage in a broad review of the tax compliance and transfer pricing practices of the pharmaceuticals industry. This is focused on related party financing, thin capitalisation, intellectual property migration, consolidation, business restructures, and research and development. In developing their conclusions about the industry, the ATO has indicated that it will engage in a series of audits as well as working with organisations through advance pricing arrangement discussions. Diverted profits tax came into effect on 1 July 2017, ultimately imposing a tax rate of 40% on amounts of diverted profits. It is aimed at arrangements where profits made in Australia are diverted to a tax jurisdiction where the tax rate is less than 24%. Businesses need to consider their status as SGEs as well as the structuring of their arrangements to determine whether these provisions would apply.Energy and resourcesIn Australia, the tax landscape in the energy and resources industry is heavily influenced by the Energy and Resources Working Group. This is a group comprised of representatives of tax professional bodies, resource industry associations and the ATO.In Australia, there exists a regime of fuel tax credits which allows businesses to claim credits for the fuel tax, whether it be excise or customs duty that is inherently included in the price of fuel used in business activities. This is caveated by certain requirements under the scheme, including that the business must be registered for Goods and Services Tax (“GST”) and that it does not apply to fuel used by light vehicles on public roads. The amount of fuel tax credit available is calculated by multiplying the number of eligible litres of fuel by the applicable rate. This applicable rate changes twice a year in both February and August based on the consumer price index. The Petroleum Resource Rent Tax (“PRRT”) is a tax on profits generated from the sale of oil and gas products which are referred to as Marketable Petroleum Commodities (“MPCs”). PRRT arises in situations in which a project has recovered all eligible expenditure, including certain exploration costs resulting in a certain threshold rate of return on these outlays. The amount of PRRT paid is reduced by the amount of royalties and excise paid in the relevant State and Federal jurisdictions. From 1 July 2019, changes will be made to this regime, including removal of onshore projects from its hold. Note that these projects will still be subject to the applicable State royalties. Given the volatility of commodity prices, the ATO has flagged an intention to enter into Annual Compliance Arrangements (“ACAs”) and APAs.Financing arrangementsFollowing an Australian Full Federal Court’s decision in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (2017) 251 FCR 40, the ATO has published further guidance setting out its views on the transfer pricing issues associated with financing arrangements. Recently, the ATO has issued:• PCG 2017/4 in relation to cross-border related party financing arrangements and related

transactions. An updated version of this PCG has been issued as a draft for public comment until 31 August 2018;

• PCG 2017/8 in relation to the use of internal derivatives by multinational banks;• TD 2018/D6, concerning the interaction between Australia’s transfer pricing provisions

in subdivision 815-B and debt/equity characterisation rules in Division 974 of the ITAA 1997; and




• TR 2019/D2 (yet to be finalised), which provides updated guidance on the “arm’s length debt test” (“ALDT”) in the thin capitalisation provisions, including discussion on how the ALDT interacts with the transfer pricing rules.

On 28 August 2019, the ATO released draft PCG 2019/D3 which builds on the ATO’s views on the ALDT outlined initially in TR 2019/D2. Namely, PCG 2019/D3 provides a framework for risk assessment which can be used to gauge the ATO’s compliance approach to the ALDT in low-risk circumstances.HubsOffshore hubs remain a key focus of the ATO in the context of transfer pricing and international risk. On 11 October 2018, the ATO updated PCG 2017/1 by publishing a new schedule focused on Australian tax risk assessment for offshore non-core procurement arrangements. PCG 2017/1 was originally released in January 2017 with initial guidance focusing on marketing hubs.

The year ahead

The Federal Budget 2020–21 has been delayed by the Federal Government due to the impacts of COVID-19. It will be handed down on 6 October 2020 with an initial economic and fiscal outlook provided by the Federal Treasurer on 23 July 2020. The Federal Treasury has announced that the debt ceiling has been lifted from A$600 billion to A$850 billion to provide greater bandwidth to deal with the social and economic fallout from COVID-19.The greater investment encouraged by this additional Government spending is complimented by the reduction in the income tax rate for base rate entities (corporate entities) in 2020–21 down to 26% with a turnover of less than A$50 million. The Federal Government has already announced that this rate will be further reduced down to 25% in the 2021–22 financial year.In July 2019, the Federal Government passed personal income tax cuts which will phase in over three stages from 1 July 2018 to 1 July 2024. By 1 July 2024, the income tax scales applying to the taxable income of individuals will be streamlined. The four tax brackets that currently apply will be reduced to three tax brackets with the 37% bracket being abolished, leaving taxable income in the range of A$41,000 to A$200,000 being subject to a 32.5% tax rate.

Acknowledgments

The authors acknowledge the contribution made by Julian Wan, Nathan Ricardo, Jared McLachlan and Gina Joseph in compiling this chapter.

* * *

Endnotes1. The group is now known as BHP Group Limited and BHP Group Plc.2. https://www.ato.gov.au/Business/Privately-owned-and-wealthy-groups/What-you-

should-know/About-privately-owned-and-wealthy-groups/Private-group-approach/.



Johnson Winter & SlatteryLevel 25, 20 Bond Street, Sydney NSW 2000, Australia

Tel: +61 2 8274 9555 / URL: www.jws.com.au

Andy MilidoniTel: +61 2 8274 9579 / Email: [email protected], Partner at Johnson Winter & Slattery, is a tax lawyer specialising in all aspects of taxation, revenue law, trust law and international tax law.He advises on the tax implications of corporate mergers, business and significant asset sales, acquisitions and restructures, managed investment schemes and stapled structures, funds management, the taxation of trusts, corporate debt and equity management and employee share schemes.Andy advises on the establishment and taxation treatment of inbound and outbound investment vehicles including Australian managed investment trusts, limited partnerships and unincorporated joint ventures, employee share and option schemes, and share loan schemes. He also advises on Australia’s transfer pricing regime as it applies to public and private groups.He also acts for clients in applying for rulings from the ATO and in negotiating settlements with the ATO related to tax audits and tax disputes.

Prashanth KainthajeTel: +61 2 8274 9584 / Email: [email protected], Partner at Johnson Winter & Slattery, has specialised in tax for over 10 years and advises on all areas of Federal and State Australian tax law.He advises on a variety of corporate and financing transactions including acquisitions and divestments, demergers, capital management initiatives, tax effective financing, the formation of funds, inbound and outbound investments, corporate restructures and employee share and option schemes and executive remuneration.Prashanth represents clients in disputes with the Australian Taxation Office and other revenue authorities and seeks rulings on behalf of clients.He is ranked as a leading tax lawyer by Chambers Asia-Pacific who has a “highly innovative and very detailed approach” and ability to “keep all the various perspectives in mind”.




BrazilLeandro Chiarottino, Erika Tukiama & Fernanda Lima

Chiarottino e Nicoletti Advogados


Types of corporate tax work, significant deals and themesThe occurrence of successive economic crises, starting with the subprime mortgage collapse in 2008 and followed by other major local crises stemming from the anti-corruption car-wash operation, have changed the nature of deals and corporate reorganisations over the last decade in Brazil. Share deals and international business expansion projects gave room to distressed asset deals (mainly involving real estate), funds structuring and securitisation, financing arrangements and debt restructuring. Notwithstanding the still ongoing instability, the year of 2019 was, however, surprisingly marked by: (i) an increased number of M&A deals in the Brazilian Stock Exchange (more than 1,200); and (ii) a shy recovery of outbound investments targeting Latin American and European markets in some specific sectors, such as the agribusiness, cosmetics and technology industries. In 2019, Brazilian M&A deals represented 85% of the total deals closed in Latin America, and a better growing scenario was expected for 2020, had it not been for the outbreak of the new coronavirus pandemic. The most active sectors in M&A over the last 12 months include technology, services, energy, food, healthcare and real estate. Under the current economic environment, some decisions issued in 2019 by the Administrative Board of Tax Appeals (Conselho Administrativo de Recursos Fiscais – CARF) made noise in the market as they brought additional unfavourable clarification on the Board’s interpretation of the tax impacts attributable to funds structuring and corporate reorganisations carried out with a tax optimisation purpose. In one of such decisions issued in June (Decision No. 2401-006.611/2019), a fund structuring commonly used in M&A transactions was rejected by CARF under the argument of tax planning. According to the Board, the taxpayer carried out an artificial reduction of the capital gains tax due upon the sale of his equity interest in a Brazilian company when, days after signing the sale and purchase agreement, and before delivering the target company to the buyer, the seller transferred the company to a fully-owned investment fund which, in turn, “sold” the company to the other party. Pursuant to Brazilian tax rules, income and gains earned by funds upon the disposal of assets held thereby are tax neutral and taxation on the gain is deferred to the moment of redemption of the fund’s quotas. The fund, in this case, was regarded as unnecessary and, according to the Board, the transfer of the target company to the fund lacked business purpose since, besides this deal, no other investment was made or pursued by the fund. According to tax authorities, the fund: (i) neither had control over nor proved to effectively



Chiarottino e Nicoletti Advogados Brazil

manage its portfolio; and (ii) had no purpose other than receiving and passing the target company forward to the buyer. This decision, together with another one issued in March (Decision No. 2301-005.933/2019), contradicted a previous stand taken by the same Board, issued at the end of 2018 (Decision No. 2202-004.793/2018), whereby its members ruled that the fund under analysis had a business purpose as it was primarily used to concentrate the equity stakes in the target company, held at the time by different parties (the taxpayer and another independent third party), before selling it to the purchaser. The transfer of the target company to the fund was, in the case at hand, considered legitimate. Unfavourable decisions surrounding this subject are, unfortunately, in line with a trend of Brazilian lawmakers in putting more obstacles to those taxpayers willing to use funds structuring for tax purposes. Not long ago, Brazilian law determined that contributions of assets to certain types of funds should be made at fair market value and the corresponding capital gains tax, if any, had to be immediately paid upon such transfer. In the same direction, the Legislative Branch continued in 2019 to maintain its efforts to pass bills to subject FIPs (private equity funds) to the same tax treatment applicable to legal entities and, therefore, to terminate with exemptions and tax deferrals currently available to such funds. In relation to other types of corporate restructurings, unfavourable decisions were also issued by CARF in 2019. Among the cases involving the preparation of the Group for an asset deal, the court analysed one in which target assets were transferred, by way of a capital reduction, from the legal entity to its individual shareholder to be subsequently sold to independent third parties. Capital gain is taxed at lower rates at the level of individuals. In Decision No. 1301-003.728/2019, the Board ruled against the taxpayer and concluded for the maintenance of the tax assessment as the capital reduction was regarded, in that specific case, as having been carried out with the sole purpose of saving tax as it occurred after the alienation of the assets. Notwithstanding such negative precedent, case law ruling such matter is still favourable to taxpayers and decisions issued in previous years may continue to be used to defend the procedure. According to such former favourable decisions, capital reductions, at book value, have legal grounds and, as long as they do not frustrate creditors rights, they must be accepted even if followed by a sale transaction. Notwithstanding the shy recovery of outbound investments in 2019, case law deciding on the Brazilian controlled foreign corporation (CFC) rules versus the application of article 7 (business profits) of international double tax treaties had no further significant developments. The scenario remains unfavourable and CARF keeps determining taxation in Brazil on accrued and still non-distributed profits earned by controlled or affiliate companies residing in treaty countries. Pursuant to article 7, profits of a foreign controlled or affiliate company are taxable only in their country of residence, and the country of the investor (Brazil, in this case) is then forbidden to tax them before any actual distribution. On January 17, 2019, the CARF Superior Chamber (CSRF) analysed a very important case (Decision No. 9101-003.973/2019) and ruled that profits of a Dutch company controlled by a Brazilian company shall be taxed in Brazil on December 31 of the year in which they are accounted abroad, irrespective of any actual distribution. Tax authorities and courts unfortunately use different arguments to empty article 7 of the treaties, among which stands out the argument that profits earned by a company abroad, when simply recognised in the accounts of the Brazilian parent company, through the application of the equity pick-up method, become profits of the Brazilian investor and are no longer under the treaties’ protection. This stand is against international standards for the interpretation of tax treaties, but so far no progress has been made in getting the issue back on track.





Domestic – cases and legislationOn October 11, 2019, the Brazilian Federal Revenue Service (RFB) enacted Normative Ruling 1,911 (IN 1,911) which consolidated almost all Brazilian legislation governing the Program of Social Integration (PIS) and the Contribution for the Financing of Social Security (COFINS) until July 19, 2019. In addition to several laws and decrees about the matter, IN 1,911 put together more than 50 PIS and COFINS Normative Rulings and revoked several other of RFB’s acts. Aimed at solely simplifying the application and the interpretation of the PIS and COFINS legislation, IN 1,911 was successful in not substantially innovating or extrapolating pre-existing laws; however, it caused a lot of noise when it included a ruling in such RFB’s regulation, issued in 2018 by the General Tax Coordination (COSIT) (Internal Ruling No. 13/2018), regarding the so-called “ICMS in the PIS and COFINS taxable bases”. Such act contradicts the 2017 Federal Supreme Court (STF) decision on the matter and significantly reduces the taxpayer’s ability to benefit from STF’s favourable decision. After 20 years of dispute, on March 15, 2017, the STF, on the Extraordinary Appeal (RE) No. 574,706 (with recognised general repercussions and erga omnes effects), decided that the State Value-Added Tax (ICMS) that is: (i) levied on domestic sales of goods; and (ii) included in the sale prices of the company, must be excluded from the relevant revenues for the purpose of calculating PIS and COFINS, which are due over companies’ gross revenues. According to the STF: (a) the ICMS that is part of the sales price is not a revenue of the company, but rather an amount that is received by the company to be passed forward to the government; therefore, it cannot be interpreted as “revenue” for PIS and COFINS purposes; and (b) the amount of ICMS to be excluded from PIS and COFINS bases corresponds to the ICMS due on sales (which are mentioned in the relevant company’s invoices) and not to the ICMS actually paid by the company (i.e., the ICMS due, net of ICMS credits/inputs). If COSIT’s understanding prevails, several companies will have no ICMS amount to exclude, as many of them suffer from ICMS credit accumulation. Despite the STF’s decision, COSIT clarified that the ICMS eligible for tax exclusion relates to the ICMS actually paid. This understanding reopens disputes on the matter. Amounts involved are indeed very significant and clarification is expected to be given soon upon the analysis of a motion filed by the Attorney General of the National Treasury (PGFN) to request: (i) the modulation of the legal effects of the STF’s decision (i.e., legal effects only for the future and not for the past), taking into consideration the great potential impact this could have on the Public Treasury; and (ii) clarification on the amount of ICMS that taxpayers are allowed to exclude (the ICMS due or the ICMS actually paid). Following the ICMS, taxpayers started to discuss the possibility of excluding other taxes from the PIS and COFINS taxable bases, but the outcome is still unclear as the financial impacts coming from another favourable decision are very significant.

BEPS

Following unilateral initiatives taken by several countries, most of them from Europe, Brazil has been studying the possibility of creating a specific tax for digital services. The mere thought of this possibility has already caused a reaction from the United States Trade Representative, which recently announced the beginning of investigations in Brazil under Section 301 of the 1974 Trade Act. This reaction from the U.S. follows investigations put in place by Americans against other countries, such as the one opened in 2019 targeting




France, and which made the French government rethink its attempt to tax the giant U.S. tech companies, in order to avoid customs surcharges on French exports to the U.S. As regards Brazil, penalties could also include a different result in its application to become an Organisation for Economic Co-operation and Development (OECD) member, which is still under analysis and pending final decision. Discussions surrounding fairer taxation on digital services is the core subject of BEPS Action 1 – Tax Challenges of the Digital Economy. Under this Action, OECD member states have been discussing alternatives to split the tax collection over profits earned by tech companies, most of them based in the United States and without a physical presence in the countries where end-users (of such technology) are located. According to jurisdictions suffering from the digital presence of such tech companies, local taxation should exist in those situations in which it could be demonstrated that end-users located therein aggregate value to the digital platforms, therefore being a relevant element to attract to this country the right to tax over income arising from the corresponding digital services (digital intermediation, online advertising and data transmission). Debates result from the current format of tax laws (including international treaty rules) that only reach income earned by companies physically located in the relevant jurisdiction. This is not the case in Brazil, as Brazilian tax rules impose taxation at source, upon payments and remittances made abroad, irrespective of whether the foreign company is physically established in the Brazilian territory. In practice, what we see is that many of the U.S. giants are already established and fully taxed in Brazil, as the complexities and high bureaucracy of the country prevent foreigners from doing business in Brazil without a local subsidiary. Taxation in Brazil applicable to remittances abroad under the nature of digital services is controversial and, most of the time, considerably heavy (reaching almost 50%). In addition, tax deductions of payments made to foreign related parties are limited either by Brazilian transfer pricing or royalty rules. In such scenario, an important decision issued by COSIT (Internal Ruling No. 182/2019) in May 2019 brought considerable relief to Brazilian companies remitting royalties (for the right to distribute/trade software in Brazil) to their foreign indirect parent companies. Pursuant to article 71 of Law No. 4,506/1964, royalty payments to parent companies abroad are fully non-deductible. For several years, taxpayers were in doubt whether the wording of such law covered all parent companies abroad or only the direct partners of the Brazilian company. Attempts of taxpayers in the past to clarify this issue had not reached the desired comfort until Ruling 182 was issued. According to such decision, tax authorities took the stand that payments to indirect controllers may be deducted, as the term “partners” used in such law only refers to individuals or companies, domiciled in the country or abroad, who hold a corporate interest in the Brazilian company. Amidst so many challenges, the issuance of such a decision shall definitely be celebrated.

Tax climate in Brazil

The past 12 months started with a very optimistic scenario and then Brazil, as every country in the world, was hit by another global sanitary and economic crisis caused by the new coronavirus pandemic. The Brazilian tax reform was, therefore, postponed so that Congress could work on the approval of emergency measures against the disease.




Nevertheless, some progress was witnessed before the spread of COVID-19, arising from efforts by the Federal Government to: (a) increase market freedom and competition; and (b) reduce State intervention, which included some important privatisations. Effective efforts were also made to comply with several OECD demands, aiming at Brazil’s acceptance as a member. In summary, Brazil was the non-member country that adhered or requested adherence to the greatest number of the OECD’s instruments (146 in total). Among such instruments, one relates to Brazil’s decision to follow the OECD’s guidelines to offer national treatment to multinationals doing business in the country. An important issue that affects tax rules in Brazil is the adaptation of the Brazilian transfer pricing rules to the OECD’s guidelines. This means a huge modification in domestic tax rules and, up to now, we only have Brazil’s commitment to analyse modifications, with no further developments. Additionally, Brazil is concluding procedures to put in place new commercial agreements (such as the EU-Mercosur Trade Agreement), renegotiating international double tax treaties, and participating in several of the OECD’s committees, such as the Global Tax Forum and the Working Group on Bribery in International Business Transactions. On September 20, 2019, the Federal Government enacted the Economic Freedom Law (Law No. 13,874/2019) which, in a nutshell, aimed at reducing the day-to-day bureaucracy and enhancing legal certainties in the conduction of business in the Brazilian market. Among other results, this Law allowed limited liability companies (Ltda.) to be wholly owned entities, permitting the entrepreneur to hold the totality of a limited liability company’s quotas, with no need to comply with the minimum amount of capital stock (100 minimum wages, approximately BRL 100,000 or USD 20,000) required for the incorporation of an individual limited liability company (EIRELI). Moreover, such Law restricted the interpretation as to the cases of disregard of an Ltda.’s legal personality (which, pursuant to the Civil Code, is possible in cases of abuse of legal personality, misuse of purpose or confusion of the company and the partners’ assets). Pursuant to this Law, the mere expansion or change of the original purpose of the specific economic activity of the legal entity does not constitute a deviation of purpose. Law No. 13,874: (i) brought legal definitions for “patrimonial confusion” (when assets of the company are repetitively used to pay partner’s liabilities and vice versa, or when assets and liabilities are transferred from one to another side without any consideration), and “misuse of purpose” (when legal entities are used with the aim of harming creditors or performing illicit acts); and (ii) clarified that corporate disregard can only be applied in exceptional cases and only affects assets belonging to partners and managers, directly or indirectly, benefitting from the abuse.

Developments affecting attractiveness of Brazil for holding companies

Since the migration from a territorial to a worldwide taxation basis, Brazil has put aside its attractiveness for holding companies. Unlike other jurisdictions, the country offers no participation exemption regimes but, on the contrary, imposes taxation on profits earned by controlled and affiliate companies located overseas, with very limited treaty protection (alien profits are commonly taxed in Brazil on an accrual basis, notwithstanding article 7 of an existing treaty that could, in theory, prevent taxation on still non-distributed profits). Brazilian CFC rules apply regardless of the nature of the income (active or passive) and the location of the foreign subsidiary (tax haven or not).




In addition, rumours indicate that: (i) distribution of dividends will soon be taxed again in Brazil, at rates ranging from 15% to 25%; and (ii) Brazil’s intent to become an OECD member will give cause to the start of more renegotiations of tax treaties which, as a consequence, may end up with: (a) the suppression of current treaty benefits (by eliminating exemption on dividends received and matching credits rights); and/or (b) the increment of requirements for parties residing in a member state to claim for treaty advantages (e.g., inclusion of treaty shopping provisions, anti-abuse rules or limitation on benefits clauses).


In addition to the tech sector, another segment of the Brazilian economy drew our attention in 2019: the agribusiness sector. According to studies carried out by the Center for Advanced Studies in Applied Economics (CEPEA) (available at: https://www.cepea.esalq.usp.br/br/pib-do-agronegocio-brasileiro.aspx, on June 21, 2020), in 2019, the agribusiness represented 21.4% of Brazil’s total GDP. A relevant representative of a sector, which is the base of the whole economy, puts a lot of weight and responsibility in the hands of those deciding on the grating and/or suppression of tax incentives related to such business, as any changes in the tax legislation impact not only that particular sector, but also: (a) the country; and (b) overseas, if we consider that much of our production is destined for exports (SANT’ANA, Fabio. Os incentivos fiscais do Convênio ICMS 100/1997 para o Agronegócio. Available at: https://www.linkedin.com/pulse/os-incentivos-fiscais-do-conv%C3%AAnio-icms-1001997-para-o-fabio-sant-ana, June 19, 2020). One great incentive benefitting the agribusiness comes from the so-called ICMS Agreement 100/1997. In very few words, ICMS is a State Value-Added Tax levied on a non-cumulative basis over import and/or domestic sale of goods. ICMS due on sales (output ICMS) may be reduced by ICMS credits taken on purchases (input ICMS). Agreement 100 allows States to grant different incentives, such as: (i) the reduction in the ICMS taxable basis in interstate sales transactions; and (ii) the exemption on transactions carried out internally, within one State’s territory. The combination of such incentives may give cause to situations in which a taxpayer, for instance, purchases inputs, with or without a tax base reduction, and sells products with an exemption. In such cases, article 5 of such Agreement allows States to permit taxpayers to maintain input ICMS credits even when subsequent sales are exempt. As of April 30, 2019, companies based in the State of São Paulo suffered with an ICMS burden increase with the enactment of Decree No. 64,213/2019, which revoked the above-mentioned right to maintain the ICMS credit (provided in article 41, §3°, Annex I of the São Paulo ICMS Regulation). This Decree took the sector by surprise and determined that ICMS credits on agricultural inputs must be written off whenever subsequent sales are exempt. Effects are expected to be significant, even if we consider the existence of many companies in an ICMS credit accumulation situation. Other States, such as the State of Mato Grosso do Sul, also followed this path and determined the write-off of credits. The year of 2020, however, brought some good news to the agricultural field when, on February 12, STF decided, in two different cases (ADI 4735 and RE 759244), that the tax immunity provided by the Brazilian Federal Constitution (article 149, §2°, Annex I) reaches not only direct exports made by Brazilians (when the latter sell products directly to someone abroad), but also indirect exports, made by Brazilians through the use of intermediaries in Brazil (e.g., trading companies). According to this immunity, “exports” can neither be taxed by social contributions nor by any economic domain intervention contributions (CIDE).




According to the Supreme Court, the transaction carried out internally with Brazilian trading companies has the same final intent than those carried out directly with a foreign party. The tax immunity granted to “exports” has the only purpose of relieving the tax burden applied to sales destined to the foreign market and making Brazil more competitive abroad. Under such interpretation, trading companies started 2020 with great news.

The year ahead

Considered a priority of the Brazilian government in 2019, the tax reform, although still under the spotlight, gave room in 2020 to some isolated bills that returned to the agenda due to the new coronavirus pandemic. As per the tax reforms, five distinct initiatives are currently in the making, two of which (one by the House of Representatives and another by the Senate) were more deeply debated in the last few months. Regardless of the authorship of the proposal, all of them aim at simplifying the Brazilian tax system by instituting new taxes and extinguishing others. No reduction of tax burdens is expected, and the desired tax simplification may take longer to be accomplished as long-term transition periods (from 10 to 15 years) for the whole implementation process are provided in all proposals. The main topics included in each of them are: • PEC No. 45/2019 (House of Representatives): (i) replacement of three federal taxes

(IPI, PIS and COFINS), one State tax (ICMS) and one municipal tax (ISS) by one unified tax named Goods and Services Tax (IBS); and (ii) creation of one federal selective tax to be levied on certain goods and services, the consumption of which is to be discouraged (alcohol, cigarettes, etc.); and

• PEC No. 110/2019 (Senate): (i) replacement of nine different taxes (IPI, PIS, PASEP, COFINS, CIDE-fuels, IOF, ICMS, ISS and Education Wage) by a State Value-Added Tax named Goods and Services Tax (IBS); (ii) absorption of CSLL by IRPJ; and (iii) creation of a federal selective tax to be levied on goods and services, the consumption of which is to be discouraged, and also on some other essential ones, such as electricity and telecoms.

As mentioned, the pandemic stimulated legislators to bring back discussions on those isolated bills that could be faster approved and, consequently, could provoke additional tax collections in the short term. These are the main subjects brought back to the agenda: • Bill No. 250/2020 (ITCMD): this Bill proposes the raise of the Inheritance and Gift Tax

rate from 4% to 8% and the priority direction of the funds for the health sector. Among other bills being analysed, there is Bill No. 1,315/2019 which proposes progressive rates, ranging from 3% to 8%.

• Bill No. 4,242/2019 (IRRF on dividends): this Bill proposes the reintroduction of the dividends tax on dividends distributed to legal entities or individuals, resident or non-residents, out of profits ascertained as of January 2020. This specific Bill proposes a rate of 1%, but rumours indicate that the government plans to tax at higher rates (from 15% to 25%). The capitalisation of profits, generated as of 1996, is permitted, without taxation, and shareholders may benefit from the increment of their acquisition cost, for tax purposes, provided that: (i) no capital reduction has occurred in the five years prior to the capitalisation; and (ii) no capital reduction or liquidation of the company occurs within the subsequent five years.

• Bill No. 183/2019 (IGF): this Bill proposes the creation of a Wealth Tax to be charged on fortunes exceeding BRL 22.8 million (USD 4.6 million), at progressive rates, ranging from 0.5% to 1%. This specific Bill proposes the creation of IGF for only two years.



Leandro Chiarottino Email: [email protected] Leandro has solid experience in major M&A, corporate reorganisation, foreign investments and wealth planning. During his career, Leandro has advised clients in over 50 major negotiations with Brazilian and foreign companies (both closed and publicly traded), including US, British and Italian enterprises, in a number of industries, such as food & beverage, textile, agribusiness and the sugar/alcohol sector, fuels, paper & pulp, power, financial services, and technology.

Erika Tukiama Email: [email protected] Erika has solid experience in general tax consultancy and in matters related to cross-border transactions, national and foreign corporate reorganisation, application of international treaties, foreign investments in Brazil (inbound) and Brazilian investments abroad (outbound). She is also: (a) a teacher of tax law and business structuring, as well as of international digital law, at FASM, and of negotiation of international treaties at the Brazilian Tax Law Institute (IBDT); (b) director and member of the Tax Committee of the Brazilian E-commerce Association (ABCOMM); (c) a member of the Tax Study Group of New Technologies at Fundação Getúlio Vargas (FGV); and (d) an author of books and a speaker at several domestic and international conferences.

Chiarottino e Nicoletti AdvogadosAvenida Juscelino Kubitschek, 1700, 11th floor, 04543, Vila Olímpia, São Paulo/SP, Brazil

Tel: +55 11 2163 8989 / URL: www.chiarottino.com.br


Fernanda Lima Email: [email protected] After working for the last 20 years in important multinationals (Louis Dreyfus Company, Avon, Pirelli and Cargill), Fernanda has built solid experience in State and Federal tax incentives and customs law. She is also an expert in indirect tax consultancy, as well as tax on corporate structuring, supply chain and import and export operations.



CanadaAdrienne Oliver & Barry Segal

Norton Rose Fulbright Canada LLP


Types of corporate tax workCanadian M&A activity was strong in 2019, but deal value and volume dropped compared to the prior year. Overall deal value was approximately USD160 billion (down 6% from 2018) and deal volume was 1,816 (down 20%). Notably, average deal size rose by approximately 25%. Transactions in technology, healthcare and the industrial sectors drove a significant proportion of the M&A activity. The continued political and economic uncertainty involving Canada’s trade with the United States and China, including tariffs and concern regarding the (ultimately) successful negotiation of the United States-Mexico-Canada Agreement, or USMCA, was undoubtedly a drag on the Canadian economy and transactions in this period.Private equity transactions proved to be a bright spot in the last year, with significant transactions by Power Corporation, Brookfield Asset Management, and CPP Investments, among others.Activity in the cannabis sector shifted dramatically in 2019 and 2020 as compared to 2018, during which the legalisation of recreational cannabis fuelled a flurry of acquisitions and buoyant share prices. Renewed focus on valuations, regulatory issues, and liquidity problems resulted in a market correction that slowed M&A and caused many companies to withdraw from or renegotiate deals that had not closed. The end of 2019 into 2020 showed companies in this sector engaging in debt restructuring, and beginning in March there was a spike in COVID-19-related filings for creditor protection. Significant deals and themesM&A/private equity/real estateSome of the main themes in 2019/2020 include the importance of private equity and real estate in the M&A context. As noted above, this period saw significant M&A activity transactions by private equity players, many of which were structured to accommodate the tax objectives of the target and shareholders. Deals illustrating these trends included the following: Power Corporation of Canada (PCC) acquired the 35% interest in Power Financial Corporation (PFC) that was held by the public for total consideration of approximately CAD8 billion. In addition to shares of PCC, a nominal amount of cash (CAD0.01 per share) was paid as to preclude, or “bust”, the automatic rollover that would otherwise apply on the acquisition of shares of a taxable Canadian corporation in exchange for shares of another taxable Canadian corporation. Certain eligible holders (generally, Canadian residents, and non-residents for which the PFC shares were “taxable Canadian property”) were permitted to make an election with PCC that would permit a tax-deferred transaction. As a result, PCC acquired the stake in PFC at a higher aggregate tax cost than if the automatic election had applied.



Norton Rose Fulbright Canada LLP Canada

Dream Global REIT was acquired by Blackstone for cash consideration of CAD6.2 billion. This transaction was structured as an acquisition of all of Dream Global REIT’s subsidiaries and assets by affiliates of real estate funds managed by Blackstone. On closing, the REIT unitholders received a portion of their share of the cash consideration, with the balance being paid by a special distribution and on the redemption of the REIT units. The REIT was expected to realise capital gains and income on the sale; however, an offsetting deduction would be available to the extent of such gains and income payable to its unitholders in the year, such that the REIT would not expect to be liable for tax as a result of the sale of its assets. Canadian resident unitholders would generally be subject to Canadian tax on the gains and income paid or made payable to them by the REIT. Unitholders of the REIT that were not resident in Canada would be subject to Canadian withholding tax on the amounts paid to them by the REIT.An entity, majority-owned by the Public Sector Pension Investment Board (PSPIB), indirectly acquired all of the real estate assets indirectly owned by Starlight U.S. Multi-Family (No.1) Value-Add Fund (the Fund) for approximately USD239.6 million. The Fund was a limited partnership formed under the Limited Partnerships Act (Ontario) for the primary purpose of indirectly acquiring, owning and operating a portfolio of value-added, income-producing rental properties in the U.S. multi-family real estate market. Pursuant to the transaction, the purchaser indirectly acquired the Fund’s portfolio of U.S.-based properties. The Fund’s unitholders received – before deducting U.S. taxes that were required to be paid in connection with the transaction – a cash distribution for each unit held. Following the distribution, all outstanding units of the Fund were cancelled and the Fund was dissolved. As the assets of the Fund were held through a series of partnerships, the gains and any income arising on the sale of the real estate portfolio were allocated to the unitholders of the Fund and subject to Canadian tax in their hands. Subject to certain anti-avoidance rules, to the extent U.S. taxes were payable by any of the partnerships as a result of the disposition and allocated to the unitholders as partners of the Fund, foreign tax credits should be available to offset a portion of the Canadian taxes payable. Growth of RWI/tax insurance marketThe Canadian market for representation and warranty insurance (RWI) has grown significantly in the past few years, in step with the prevalence of these policies in the U.S. This past year saw RWI become common practice. This can change the approach of vendors and purchasers to allocating tax risk in a purchase agreement.The standard suite of tax representations, which are typically adopted in mid-market or larger North American transactions, are covered by a typical buy-side RWI policy. These would usually pertain to the target’s (and its subsidiaries’) tax filings being correct, complete and made in a timely manner, the payment of taxes being made when due, the establishment of adequate reserves or accruals for taxes, due compliance with withholdings for employees and non-residents, proper collection and remittance of sales taxes, confirmation that there are no outstanding tax deficiencies, audits or controversies, and the absence of any liability to file returns or pay taxes in other jurisdictions. In Canada, it is also customary to provide for a set of more tailored tax representations, which may cover topics such as the application of debt forgiveness rules, whether target property is “taxable Canadian property” and certain potential adverse tax implications resulting from transactions with non-arm’s length persons. In most cases it will be necessary for the insurer to verify that proper tax diligence was performed by the buyer and/or its advisors and that the perceived risk is low before agreeing to include any of these items




in the package of covered representations. The RWI policy will also generally cover a “standard” pre-closing tax indemnity for taxes of the target (and its subsidiaries) that are not already taken into account in the purchase price or included in the final statement of liabilities delivered at closing of the transaction. Transfer pricing issues, forward-looking representations, any known or disclosed material tax liabilities, tax liabilities arising from a pre-closing reorganisation, and sales taxes payable on the transaction, are all typically excluded from coverage under Canadian RWI policies. A more recent option in the Canadian market is specialised tax insurance, which is offered either in conjunction with an RWI policy or on a stand-alone basis. If offered together with an RWI policy, tax insurance may cover material risks that were identified in transaction due diligence and excluded from the general coverage, potential tax risks associated with the transaction itself (such as withholding taxes potentially applicable to the payment of the purchase price), or issues arising in either a pre-closing reorganisation to be undertaken by the sellers or a post-closing restructuring plan of the buyer. These policies may also be offered outside the context of a transaction, generally in connection with a planned (or sometimes completed) internal restructuring and occasionally with respect to an impending or in-progress audit by a tax authority. These policies are generally restricted to coverage for specific discernible tax law risks and for protection against the application of both general and specific anti-avoidance provisions, but are not usually offered to insulate against fact-driven challenges by a tax authority (such as for valuation risk or the correctness of a transfer pricing study).


Domestic – legislative changesSeveral important tax proposals were advanced in 2019:Foreign affiliate dumpingThe foreign affiliate dumping (FAD) rules are intended to preserve the Canadian tax base by limiting opportunities for a foreign-controlled corporation resident in Canada (CRIC) to invest in foreign subsidiaries of the CRIC in a manner that permits the foreign shareholder to extract surplus from Canada without Canadian withholding tax. Prior to the 2019 federal budget, the FAD rules applied only in respect of CRICs that are controlled by a non-resident corporation (or by a related group of non-resident corporations).In 2019, the FAD rules were extended to CRICs that are controlled by a non-resident individual, a non-resident trust, or a group of non-resident persons that do not deal with each other at arm’s length (which may be comprised of corporations, individuals and/or trusts). The FAD rules are a disincentive to using Canadian entities as a vehicle to hold shares of subsidiary corporations. The expansion of the FAD rules in 2019 only serves to make Canada a less attractive holding jurisdiction. Where a Canadian corporation is acquired by a non-resident, the FAD rules provide further impetus to effect a post-closing reorganisation to strip shares of foreign subsidiaries out from the Canadian target. If there is an inherent gain on the shares of the subsidiaries, such a reorganisation can generally be effected tax-efficiently only where a “bump” of the tax cost is available. Limitation of employee stock optionsIn 2019, proposals were announced that will affect the way some corporations compensate employees. Generally, stock options can be structured so that the employee is subject to income tax, at the time the option is exercised, on 50% of the difference between the fair




market value of the stock at the time the option is exercised and the option price. These rules effectively provide “capital gains-like treatment” on the exercise of an employee stock option, rather than a full income inclusion. The Canadian government has stated that the public policy rationale for preferential tax treatment of employee stock options is to support younger and growing Canadian businesses and that employee stock options should not be used as a tax-preferred treatment method of compensation for executives of large, mature companies. While no legislation has yet been introduced, the federal budget proposed to introduce new limits on the use of the current employee stock option tax regime to address this perceived inequality, noting this is more in line with the tax treatment in the United States. A CAD200,000 annual cap on employee stock option grants that may receive tax-preferred treatment will be imposed on employees of larger, long-established firms. The cap is proposed to be based on the fair market value of the underlying shares at the time that the option is granted. No annual cap would be imposed on start-ups and growing Canadian businesses.Implementation of these rules, and further guidance regarding which corporations will be impacted, was deferred to the 2020 federal budget, which has itself been deferred due to the pandemic.Cross-border securities lending arrangementsThe Canadian federal tax legislation provides rules relating to securities lending arrangements (SLAs). The general purpose of these rules is to put the lender in an SLA in the same tax position as if the securities had not been lent. The legislation currently contains rules that determine the character of any dividend compensation payment made by a Canadian resident to a non-resident under an SLA for purposes of the withholding tax rules in Part XIII of the legislation. If the SLA is “fully collateralised”, the dividend compensation payment is treated as a dividend and is subject to dividend withholding tax. If not “fully collateralised”, the payment is treated as interest, which in most cases is not subject to withholding tax if paid to an “arm’s length” person. Due to a concern that non-residents who are share lenders are entering into transactions that skirt the application of the SLA rules in order to avoid withholding tax (either on the basis that the transaction is not an SLA or, if an SLA, is not fully collateralised), proposals were introduced that all dividend compensation payments made under an SLA to a non-resident in respect of a share of a Canadian corporation will always be treated as a dividend. Such payments will therefore always be subject to dividend withholding tax. This change will also apply to dividend compensation payments under a “specified securities lending arrangement”. Further rules were announced that will ensure the appropriate withholding tax rates, including under applicable treaties, will apply to compensation payments under an SLA.JurisprudenceThe most notable tax cases in this period have provided certainty to taxpayers and tax planners. Examples include: (1) In Macdonald v. The Queen (2020 SCC 6), the Supreme Court of Canada provided

important guidance on the taxation of derivative contracts for Canadian tax purposes. The issue was whether the taxpayer could deduct, as income losses, the cash settlement payments he made under a forward contract. This turned on whether the purpose of the forward contract was to hedge a financial risk or “a speculation”. Consistent with prior case law, the Supreme Court held that gains and losses arising from hedging derivative contracts take on the character of the underlying asset, liability or transaction being




hedged. In contrast, speculative derivative contracts are characterised on their own terms, independent of an underlying asset or transaction.

The Supreme Court stated that a hedge is generally a transaction that mitigates risk, while speculation is the taking on of risk with a view to earning a profit. While the taxpayer testified at trial that he intended the forward contract to be a speculative venture, a majority of the Supreme Court held that the taxpayer’s settlement payments were on a capital account because the forward contract hedged the ownership risk of a capital property of the taxpayer. Effectively, the Supreme Court considered the purpose of the transaction (determined objectively) to be more important than the taxpayer’s subjective intention in this context (although the Supreme Court did concede that subjective intention “may sometimes be relevant”).

As the Supreme Court hears few tax cases, this case provides welcome certainty in an underdeveloped area of law.

(2) In The Queen v. Alta Energy Luxembourg S.a.r.l. (2020 FCA 43, aff’g 2018 TCC 152), the Federal Court of Appeal (FCA) reconfirmed that the Canadian tax authorities must clear a high bar to successfully assert that the domestic “general anti-avoidance rule” (GAAR) can be applied to deny treaty benefits on the basis of treaty shopping.

Alta Energy was a private U.S.-based company engaged in resource exploration. It established a Canadian subsidiary to acquire an interest in a Canadian resource deposit. Alta Energy determined that holding the Canadian subsidiary directly would potentially give rise to adverse U.S. tax consequences. As a consequence, ownership of the Canadian subsidiary was transferred to a Luxembourg holding company, the taxpayer in this case.

It was ultimately determined that the Canadian subsidiary should be sold, and the taxpayer realised a gain of over CAD380 million. The taxpayer took the position that the gain was exempt under Article 13 of the Canada-Luxembourg tax treaty. The Canada Revenue Agency assessed the taxpayer on the basis that benefits under the treaty were not available, including under GAAR because the transfer of the subsidiary to the taxpayer was abusive treaty shopping.

As in an earlier FCA decision (The Queen v. MIL (Investments) S.A (2020 FCA 43, aff’g 2018 TCC 152), the FCA in this case concluded that if a taxpayer is a resident of a treaty jurisdiction for purposes of the treaty, that taxpayer should be entitled to the benefits of the treaty absent a specific avoidance or limitation regime contained within the treaty. On that basis, there should be little (if any) scope for the application of GAAR in treaty shopping cases. The comfort provided by this decision is, however, tempered by the uncertainty introduced by the new MLI, as discussed below.

BEPS

Multilateral instrument: The multilateral instrument, or MLI, has potentially significant implications for taxpayers who rely on the provisions of one of Canada’s many bilateral tax treaties. On June 21, 2019, the Department of Finance (Canada) announced royal assent of Bill C-82, the Multilateral Instrument in Respect of Tax Conventions Act, which brings the MLI into Canadian law. The MLI generally requires signatories to adopt certain “minimum standards” for international tax treaties, and allows signatories to adopt certain other optional provisions, each of which will affect the application and interpretation of existing tax treaties. At the time of signing the MLI in June 2017, Canada originally agreed to the minimum standards as required under the MLI regarding treaty abuse and dispute settlement, as well as an optional




provision concerning binding arbitration between treaty partners. At the time of signing the MLI, Canada reserved on the rest of the MLI’s provisions. This was a common approach by parties to the MLI, as once a country agrees to the optional provisions, it cannot later choose not to have the optional provisions apply or otherwise opt out of such optional provisions.Under Bill C-82, Canada removed its reservation to certain additional optional provisions. These additional provisions could have a significant impact on treaty benefits between Canada and other countries that have signed the MLI and have agreed to remove the same MLI reservations. Specifically, the three primary additional provisions agreed to by Canada will:• Impose a 365-day holding period for shares of Canadian companies held by non-

resident companies for purposes of the reduced withholding rate on dividends. • Impose a 365-day test period for non-residents who realise capital gains on the disposition

of shares or other interests that derived their value from Canadian immovable property.• Incorporate the MLI provision for resolving dual-resident entity cases. Notwithstanding Bill C-82 receiving royal assent, the timing for the MLI to apply to Canada’s bilateral tax treaties remains uncertain and subject to a number of factors. For the MLI to apply to a particular bilateral tax treaty, (i) both parties to the particular tax treaty must be signatories to the MLI and formally list the other treaty partner (thereby, “matching”), and (ii) both parties to the tax treaty must pass domestic implementing legislation and notify the OECD of its successful passage. Only after these requirements are met, and following the prescribed waiting periods, will the MLI modify a particular bilateral tax treaty. The MLI comes into force, and then becomes effective, a predetermined period after Canada deposits its domestic legislation (i.e., Canada’s instrument of ratification) with the OECD. Canada deposited its legislation with the OECD in August 2019 and as a result, the MLI entered into force in Canada on December 1, 2019, and will modify treaties for countries with which Canada has matched (and which have also passed their own domestic implementing legislation and notified the OECD on or before August 31, 2019), effective January 1, 2020, for withholding taxes, and for taxation years starting on or after June 1, 2020, for all other taxes.Although Canada listed 75 countries as having “covered tax agreements” when it signed the MLI, not all of those countries have “matched” with Canada. The United States is notably not a party to the MLI, thus the MLI will not affect the treaty between Canada and the United States.

Tax climate in Canada

U.S. tax reform has eliminated the long-standing corporate tax rate advantage that Canada had over the United States. While, pre-pandemic, the Canadian government would have been required to consider adjusting Canadian corporate tax rates to be more competitive, the current deficit projections (CAD343 billion as of the July 8, 2020 financial update) may present a significant hurdle to rate reductions. The fiscal and economic challenges driven by the pandemic and economic stimulus measures have upended the government’s tax policy planning. It is certainly possible that revenue-raising measures will be considered, including tax rate increases, increases to the capital gains inclusion rates, and increases to sales taxes such as the federal goods and services tax and provincial equivalents. However, these measures must be balanced with the goal of economic recovery and the possibility of further stimulus.




Developments affecting attractiveness of Canada for holding companies

Legislative changes affecting holding companies in particular – As discussed above, the FAD rules reduce the attractiveness of a Canadian corporation as a vehicle to hold non-Canadian assets, where the Canadian corporation is controlled by non-residents of Canada. MLI – It will be important to evaluate the impact of the MLI on current and proposed structures involving Canadian entities. Until there is a body of law and administrative policy on the interpretation and application of the MLI, it may be difficult to provide certainty with respect to the availability of treaty benefits under tax treaties with Canada’s major trading partners.



Norton Rose Fulbright Canada LLP222 Bay Street, Suite 3000, P.O. Box 53, Toronto, ON, M5K 1E7, Canada

Tel: +1 416 216 4000 / Fax: +1 416 216 3930 / URL: www.nortonrosefulbright.com

Adrienne OliverTel: +1 416 216 1854 / Email: [email protected] Oliver is a tax partner in the Toronto office of Norton Rose Fulbright Canada LLP. Her practice involves all aspects of tax planning and implementation, primarily in the corporate tax field. She has participated in structuring major public and private transactions, reorganisations and financings, and has also acquired significant experience in international tax planning and public capital market transactions. Ms. Oliver has acted for clients in a diverse range of industries, including some of Canada’s most respected corporations. She has recently acted in takeover, spinoff, joint venture and restructuring transactions. In addition, Ms. Oliver has acted for major North American financial institutions and other issuers in connection with both domestic and cross-border debt or equity securities offerings.

Barry SegalTel: +1 416 216 4861 / Email: [email protected] Segal is a tax partner in the Toronto office of Norton Rose Fulbright Canada LLP. He has a diverse tax practice which includes public and private M&A, debt restructurings, corporate reorganisations, structuring private equity investments, advising domestic and cross-border investment funds, and international tax planning for Canadian and foreign corporations. He also acts as counsel on federal and provincial tax audits and appeals.




FranceDavid Sorel & Laura Bernardini

Lacourte Raquin Tatar


In 2019, the worldwide mergers and acquisitions (M&A) market suffered a 7% decrease in value and a 10% decrease in volume in comparison with 2018 (source: Refinitiv). However, and notwithstanding this decline, 2019 remains the third-strongest year in terms of value and the fourth-strongest year in terms of transaction volume over the last 10 years. The other clear trend is the 27% decrease in the number of cross-border transactions in comparison with 2018 (source: Refinitiv). The rise of trade tensions notably between the United States and China, and to some extent the implementation of Brexit in the United Kingdom, seem to have encouraged companies to undertake domestic transactions instead of carrying out cross-border transactions. However, such statement does not entirely hold true for France. The acquisition of Tiffany & Co. by LVMH (USD 16.2 billion) and the merger between PSA Peugeot and Fiat Chrysler (USD 30.7 billion), both carried out in 2019, underlined the fact that France remained strong on the M&A market. With such transactions, France is second behind the United States in terms of M&A transactions carried out abroad. As in 2018, the main objectives of French groups with important investment capacities were to consolidate and expand their international presence.It is expected that in 2020, the worldwide M&A market (including French M&A transactions) will be negatively impacted by the COVID-19 sanitary crisis. However, such conclusion can only be drawn at the end of the year.


Implementation of DAC 6 into French legislationIn October 2019, Directive 2018/822 on the mandatory disclosure and automatic exchange of cross-border tax arrangements (referred to as DAC 6) was transposed into French law. Subject to the COVID-19 time extension mentioned below, the Directive became effective on 1 July 2020. It will require intermediaries (or taxpayers where there are no reporting intermediaries) to disclose certain information on cross-border arrangements that are considered to be potentially aggressive (being specified that such information will be exchanged between the EU Member States).Details regarding the information that must be reported have been provided for in Decree n°2020-270 of 17 March 2020. French administrative guidelines commenting on DAC 6 have also been released, on 24 April 2019 (see the following French administrative guidelines, BOI-CF-CPF-30-40-10-20200429 to BOI-CF-CPF-30-40-30-20200924).1



Lacourte Raquin Tatar France

As transposed into French law, an arrangement will be reportable under DAC 6 to the extent that (i) it meets the definition of a cross-border arrangement (i.e. it involves more than one Member State or a Member State and a third country), and (ii) it contains at least one of the hallmarks referred to in Annex IV of the Directive (which, alongside opaque arrangements, mainly tackles double deductions, conversions of taxable income into tax-exempt income and certain defined transactions that are mainly tax-motivated).As regards deadlines and further to the COVID-19 sanitary crisis, DAC 6 was amended on 24 June 2020 in order to offer the possibility for EU Member States to postpone the deadlines to report cross-border tax arrangements by six months (the entry into force in the EU of DAC 6 remains unchanged). As part of the debate of the Third Amending Finance Law for 2020 (which is now being held in the French National Assembly), the French Government introduced an amendment to benefit from this extension of time. If this amendment is adopted by French Parliament, the deadline to disclose cross-border arrangements would be postponed as follows:• cross-border arrangements, the first step of which was implemented between 25 June

2018 and 1 July 2020: the deadline for filing should be postponed to 28 February 2021 (versus 31 August 2020); and

• cross-border arrangements for which the event causing a filing requirement occurs as from 1 July 2020: they would have to be disclosed within a 30-day period which would begin as from 1 January 2021.

Failure to comply with DAC 6 filing requirements entails the application of penalties up to EUR 10,000 for each failure (with a maximum of EUR 100,000 per year for any given person).In practice, given that the definition of “mainly tax-motivated arrangements” is and will certainly remain unclear, DAC 6 filing requirements are expected to have a significant impact on the relations between taxpayers and intermediaries in the coming years. Also, it is important to note that there still are questions as to whether banks may qualify as intermediaries or not under DAC 6. If it were the case, DAC 6 could possibly have a negative impact on the financing of cross-border transactions in France.

Tax climate in France

Through 2019/2020, France has maintained its efforts to promote tax transparency and to combat tax evasion and fraud. This is mainly shown by the quick transposition of DAC 6 into French domestic law, in October 2019 (see above: “Key developments affecting corporate tax law and practice”).This trend is also illustrated by the 2020 Finance Law (adopted at the end of 2019) which:• for a three year-period, authorised the French tax authorities (FTA) and the French

customs and indirect taxation authorities to collect data on online platforms (such as social networks and online sale platforms), by using computerised and automated processes; and

• implemented the EU Anti-Tax Avoidance Directive n°2017/952 (commonly referred to as ATAD 2) into French domestic law to tackle “hybrid instruments” and “hybrid entities” (see below: “Industry sector focus”).

By adopting such measures, France pursues its plan which consists of strongly fighting tax fraud and evasion, and aggressive tax planning.Based on a recent survey carried out by EY, it seems that France’s attractiveness has not been negatively affected by the intensification of repressive tax measures in France. However, such trend should be confirmed at the end of the year by taking into consideration the incidence of the COVID-19 sanitary crisis (source: France’s Attractiveness Survey 2020, EY).




Developments affecting attractiveness of France for holding companies

The 2020 Finance Law does not contain major corporate tax reforms in comparison with the 2018 and 2019 Finance Laws. Measures adopted by the 2020 Finance Law mainly aim at amending existing tax regimes. We, however, outline the following reforms that could impact the attractiveness of France for holding companies.CIT rates applicable to large companiesThe 2018 Finance Law had programmed a gradual decrease of the standard corporate income tax (CIT) rate from 2019 to 2022. The pace of this decrease has been modified by the 2020 Finance Law for companies having a turnover of more than EUR 250 million:• for fiscal years starting on or after 1 January 2020: the CIT rate will be 31% for the

fraction of taxable income that exceeds EUR 500,000 (instead of 28%); and• for fiscal years starting on or after 1 January 2021: the CIT rate will be 27.5% (instead

of a 26.5% CIT rate as provided for in the 2018 Finance Law). As from 1 January 2022, the CIT rate should be set to 25% for all companies (including large companies).Extension of the tax neutral regime provided for in article 210 A of the FTC to mergers and divisions carried out without any exchange of sharesLaw n°2019-744 of 19 July 2019 on the simplification of company law (commonly referred to as the Soilihi Law) extended the simplified legal regime of mergers (which only applied to absorptions of 100% held companies) to (i) mergers implemented between sister companies that are wholly owned by a same entity, and (ii) divisions of companies made to the benefit of entities owned by the same shareholder. Under this simplified regime, such transactions may now be implemented without any exchange of shares.The 2020 Finance Law also extended the benefit of the tax neutral regime provided for by the EU Merger Directive (2009/133/EC) to these simplified restructuring transactions. Subject to certain conditions, they may now benefit from the French tax neutral regime of mergers provided for in article 210 A of the French tax code (FTC), effective as from 21 July 2019 (i.e. the date on which the Soilihi Law came into force).This simplification is quite noteworthy given that further to the reform, it will no longer be necessary to compute the fair market value of the shares of merged and divided sister companies. It should simplify the carrying out of restructuring transactions within French groups.Partial repeal of the ruling requirement that was applicable to transfer losses in case of a mergerAs a rule, under the tax neutral regime of mergers and divisions of companies, tax losses and carry-forwards of non-deductible financial expenses (together referred to as tax losses) of an absorbed or transferring entity can be passed on to the absorbing or beneficiary entity only to the extent a favourable tax ruling is obtained from the FTA.The 2020 Finance Law repeals the requirement for a ruling from the FTA when the following cumulative conditions are met:• the amount of transferred tax losses is lower than EUR 200,000;• such tax losses do not arise from the management of shares or interest by holding

companies or from the management of real estate assets; and• the period during which these tax losses were realised did not see the absorbed entity

transfer or cease its business.




Extension of the regime allowing for a spread of taxation of certain capital gains in case of transfer of assets within the EUUnder existing French tax rules, the taxation of unrealised capital gains on assets that are transferred from France to another EU Member State or to certain EEA States as part of a transfer of a registered office or a permanent establishment may be spread over a period of five years.In order to bring the French exit tax regime into compliance with article 5 of the first Anti-Tax Avoidance Directive (commonly referred to as ATAD 1), the 2020 Finance Law extended the above-mentioned regime to simple transfers of assets from France to EU or EEA Member States (i.e. even if such transfers are not made as part of a transfer of registered office or permanent establishment). This new rule applies to transfers of isolated assets carried out from France and an EU/EEA Member State during fiscal years beginning on or after 1 January 2020.Such a measure illustrates the approach adopted in the 2020 Finance Law, which consists of adopting measures to comply with EU legislation or the Organisation for Economic Co-operation and Development (OECD) recommendations.


M&A – Private equityAdjustments to interest deduction rules (ATAD 1)As a reminder, as part of the transposition of ATAD 1, the 2019 Finance Law had introduced a set of rules limiting the deductibility of financial expenses, effective as of 1 January 2019 (see the seventh edition of Global Legal Insights – Corporate Tax).As a result, and pursuant to ATAD 1 rules, the deductibility of net financial expenses incurred by entities that are liable to French CIT is limited: • to the higher of 30% of their so-called “fiscal EBITDA” (i.e. taxable income before

interest, tax, depreciation and amortisation restated with certain tax-exempt items) or EUR 3 million for entities whose related party debts do not exceed 1.5 times the amount of their shareholders’ equity; and

• in proportion to the amount of their related party debts, to the higher of 10% of their “fiscal EBIDTA” or EUR 1 million for entities whose related party debts exceed 1.5 times the amount of their shareholders’ equity.

The 2019 Finance Law had also enacted specific rules for entities that are part of consolidated groups. In addition to the above ratios, such entities can, in certain cases, benefit from a safe harbour clause allowing an additional deduction equal to 75% of the net financial expenses not deducted pursuant to the above limitation rules.Effective for fiscal years closed on 31 December 2019 or later, the 2020 Finance Law adjusted the above-mentioned interest deduction rules by creating an additional 75% deduction for so-called “autonomous companies”. Autonomous companies are defined as companies that are not part of a consolidated group in the meaning of article 212 bis VI 2° of the FTC, and that do not have a permanent establishment outside of France or an associated company in the meaning of ATAD 1. They will be able to deduct 75% of the net financial expenses they are not allowed to deduct under standard ATAD 1 rules (i.e. 30% of the EBITDA or EUR 3 million).Implementation of ATAD 2 into French domestic legislationAs detailed in the seventh edition of Global Legal Insights – Corporate Tax, ATAD 1 has been amended by EU Directive n°2017/952 dated 29 May 2017 (i.e. ATAD 2).




The 2020 Finance Law transposed the provisions of ATAD 2 into French law. ATAD 2 is designed to tackle hybrid instruments and hybrid entities. It provides for a complex set of rules that eliminate the French tax impacts of “hybrid mismatch arrangements” arising from different legal characterisations (between Member States of the EU or with third jurisdictions) of an instrument or an entity between two jurisdictions. Subject to a few specific exceptions, these rules generally apply to payments made between related/affiliated entities only (including between a registered office and one of its permanent establishments, or relations between several permanent establishments of the same entity).There are seven types of hybrid mismatch arrangements concerning either a double deduction situation or a deduction without inclusion situation. For example, the following situations are considered “hybrid mismatch arrangements” for the purpose of ATAD 2 rules:• payments giving rise to a deduction of the same payment, expenses, or losses in the

residence State of the payor and in another country; • payment under a financial instrument giving rise to a deductible expense in the

jurisdiction of the payor without inclusion in the taxable income of the beneficiary, where such mismatch is attributable to the differences in the tax characterisation of the instrument or the underlying payment; or

• deduction of an expense in the jurisdiction of a payor without inclusion of the income in the taxable results of the beneficiary as a result of the laws of the jurisdiction of the beneficiary treating such payment as not includible (i.e. disregarded payment).

The 2020 Finance Law transposed these new rules in articles 205 B, 205 C and 205 D of the FTC:• where a double deduction is evidenced: the jurisdiction of the beneficiary may deny the

deduction of the payment, or if not, the jurisdiction of the payor shall have the right to deny the deduction; and

• where a payment is deducted in a jurisdiction without inclusion of the corresponding income in the other jurisdiction: the jurisdiction of the payor must deny the deduction, or if not, the jurisdiction of the beneficiary shall have the right to tax the income up to the deduction obtained in the jurisdiction of the payer.

These new rules apply to fiscal years starting on or after 1 January 2020, except for certain specific arrangements (i.e. so-called “reverse hybrids”), which will apply to fiscal years starting on or after 1 January 2022.Due to the implementation of ATAD 2, the traditional requirement for a creditor of interest to pass a subject-to-tax test in order for the debtor to be allowed to deduct such interest in France has been repealed.Adjustment of the branch tax (article 115 quinquies of the FTC)Under article 115 quinquies of the FTC, profits realised in France by non-resident companies are deemed to be distributed outside France and are therefore subject to the dividend withholding tax (WHT) referred to in article 119 bis 2 of the FTC.2 WHT is provisionally calculated on the fraction of profits made in France. However, a concerned non-resident company may ask for an adjustment of such WHT in two specific cases:• if the amount of distributions made to the shareholders of the non-resident entity is

lower than the amount of profits realised in France; and• if the non-resident company is able to prove that all or part of such sums were paid to a

French resident person or company.In such cases, the excess amount of WHT is refunded to the non-resident company.




The 2020 Finance Law added a new case of refund of the above-mentioned WHT in cases where the non-resident company (located in an EU or EEA Member State) proves that its French profits have not been transferred out of France. This rule is in line with a recent decision of the French Administrative Supreme Court dated 10 July 2019 (decision n°412581, Cofinimmo) in which the Supreme Court concluded that the traditional French branch tax regime (provided for in article 115 quinquies of the FTC) violated the EU’s freedom of establishment principle.Intellectual propertyPrecisions concerning the patent box regimeAs a reminder, until 31 December 2018, income and capital gains arising from patents were taxed at a reduced CIT rate of 15% regardless of whether the corresponding research and development (R&D) expenses were incurred in France or not.The 2019 Finance Law modified the French patent box regime in line with the OECD’s “nexus approach” 3 (BEPS Action 5) (see the France chapter in the seventh edition of Global Legal Insights – Corporate Tax). As from 1 January 2019, net income and capital gains realised on patents (patentable inventions for small- and medium-sized companies under certain circumstances) and software protected by copyright are taxed, under certain conditions,4 at a preferential 10% tax rate and determined by the application of a “modified nexus approach”.The 2020 Finance Law amended the French patent box regime in two ways:(i) it specified that when qualifying assets are held by companies that are not subject

to CIT (i.e. partnerships), the 10% tax rate applies to the share of income owned by corporate partners or individual partners performing their professional activities within the entity under article 156 I-1° bis of the FTC (i.e. partners that personally, directly, and continually participate in the company’s business); and

(ii) it states that positive net income realised by a loss-making entity (entreprise déficitaire) from the disposal, license or sub-license of qualifying assets that are subject to the 10% rate may be offset by operating losses of the same fiscal year.

The two above-mentioned measures apply to fiscal years ending on 31 December 2019 or later.

The year ahead

Review of the Country-by-Country Report 2020The BEPS Action 13 Report established new transfer pricing documentation rules, including a Country-by-Country Report (a CBC Report) which requires multinational companies to provide annually, and for each tax jurisdiction in which they do business, the amount of revenue, profit before tax and income tax paid and accrued, alongside other information relevant to a high-level risk assessment. Contained in EU Directive n°2016/881 of 25 May 2016 (commonly referred to as DAC 4), the CBC Report was introduced in France by the 2016 Finance Law. As required under the BEPS Action 13 Report, the OECD held a public consultation meeting on the 2020 review of the CBC Report. Initially planned for 17 March 2020, the public consultation was cancelled due to the COVID-19 sanitary crisis and rescheduled for 12 and 13 May 2020. The consultation was an opportunity for stakeholders to review the CBC Report standard directly with the OECD Secretariat and the implementation of such mechanism to date.




During the public consultation, the business community expressed notably their concerns about issues concerning the scope and the content of the CBC Report. One of the main concerns shared by the stakeholders was the need for CBC Report data to remain limited to tax authorities and to serve only as a high-level risk assessment tool. In response to comments made by business speakers, the OECD Secretariat provided assurances that if any changes to the existing CBC Report standard are to be made, sufficient time will be provided for companies and tax administrations to prepare themselves for the proposed reform. To date, no change concerning the CBC Report has occurred.

* * *

Endnotes1. These administrative guidelines are subject to a public consultation until 31 May 2020

but may be relied upon when the final guidance is issued.2. The WHT rate amounts to 28% as of 2020, to 26.5% as of 2021, and to 25% as of 2022,

when the receiving entity is a company. However, note that under the 2020 Finance Law, companies with a minimum turnover of EUR 250 million (i.e. large companies) are subject to a 31% WHT rate for the fraction of taxable profits that exceeds EUR 500,000 as of 2020 (and to a 28% WHT rate for the first EUR 500,000), to a 27.5% WHT rate as of 2021 and to a 25% WHT rate as of 2022.

3. Such method consists of apportioning the tax benefits that may be obtained by a taxpayer in relation to the exploitation of a patent or similar intangible assets to the amount of R&D expenses incurred in the State of residence of such taxpayer.

4. To benefit from the 10% tax rate, taxpayers are required to submit documentation that tracks R&D expenditures, and justify the determination of the taxable result that is eligible for the 10% reduced rate upon the request of the FTA.



David SorelTel: +33 1 58 54 40 00 / Email: [email protected] Sorel mainly advises listed companies, institutional investors and French and international investment funds in connection with M&A and investment transactions. He also assists clients in restructuring transactions and joint ventures.David Sorel joined the Tax department of Lacourte Raquin Tatar in 2017. After beginning his career at Ernst & Young in 2005, he joined CMS Bureau Francis Lefebvre, and then in 2010, joined Allen & Overy.A lawyer since 2005, he earned a post-graduate degree (DEA) in tax law from the Université de Paris II Panthéon-Assas and a second post-graduate degree (DESS) in international taxation from the Université de Paris II Panthéon-Assas in partnership with the French business school, HEC. Since 2010, he has taught real estate taxation in the financing and real estate investment law Master 2 programme at the Université de Cergy-Pontoise.

Laura BernardiniTel: +33 1 58 54 40 00 / Email: [email protected] Bernardini has been an associate at Lacourte Raquin Tatar since January 2017. She mainly advises French and foreign investment funds, institutional investors, and multinational groups. She regularly works on all taxation issues relating to acquisitions, restructurings and real property transactions. She speaks French and English and is admitted to the Paris Bar (2017). She has a Master’s degree in tax and business law from Paris Dauphine University (2013).

Lacourte Raquin Tatar36 rue Beaujon, 75008 Paris, France

Tel: +33 1 58 54 40 00 / Fax: +33 1 58 54 40 99 / URL: www.lacourte.com




GermanyJörg Schrade & Martin Mohr

CMS Hasche Sigle


Types of corporate tax workUntil the beginning of the COVID-19 crisis at the end of February 2020, the M&A market was booming due to low interest rates and a stable economic environment. In addition, various multinational enterprises (MNEs) required specific tax advice to finish corporate reorganisations and the carve-out of business units. However, as a result of the COVID-19 crisis, the M&A market has since largely collapsed. Financing and restructuring issues have come into focus.Work on tax reporting and compliance together with the incorporation of tax compliance management systems and on transfer pricing has further become more notable. Investigations by public prosecutors of and press reports about illicit tax structures also continue to be major topics in the tax market.Significant deals and themesAs usual, M&A transactions in 2019/20 were not solely driven by tax issues. However, old and new tax challenges were of course debated. In particular with family-owned businesses, the handling of the trade tax credit in the case of the sale of partnership interests during the calendar year continues to be an ongoing structuring issue in practice.M&A• Technology company Siemens carves out and spins off part of its energy business,

giving its shareholders a direct share in the new Siemens Energy company with a subsequent IPO in October 2020.

• Car manufacturer Volkswagen IPOs truck and bus manufacturer Traton and sells gear and drive technology manufacturer Renk; Traton acquires truck manufacturer Navistar.

• Chemical company BASF sells construction chemistry business and pigment business.• Chemical company Bayer sells veterinary medicine business.• Steel processing company ThyssenKrupp sells elevator business.• Private equity fund KKR acquires majority stake in publishing company Axel Springer

with subsequent delisting.• Perfume and cosmetics company Coty carves out cosmetics company Wella and sells

majority stake.• Private equity funds EQT and OMERS acquire telecommunications company Deutsche

Glasfaser.• Sensor solutions company AMS acquires lighting company Osram.• Online marketplace company Scout24 sells car platform AutoScout24.



CMS Hasche Sigle Germany

FinancingFinancing transactions encompass acquisition and project financing, including rescue financing such as a capital increase in state-owned NORD/LB, and innovative forms of financing such as green bonds, smart bonds and tokenisations. Due to COVID-19, German state-owned bank KfW finances many crisis-torn enterprises among various sectors, and a new federal Economic Stabilisation Fund (Wirtschaftsstab-ilisierungsfonds) as well as corresponding smaller funds by single federal states (e.g. BayernFonds) have been established with special tax features (tax exemption of funds, no taxable event for real estate transfer tax purposes, preservation of tax losses).Real estate transactions• Merger of commercial real estate companies TLG IMMOBILIEN and Aroundtown.• Telecommunications company Telefónica Deutschland sells towers to Telxius Telecom.• Real estate investment company Commerz Real acquires “Millennium Portfolio” for its

real estate fund Hausinvest.• Real estate investment company Invesco acquires Frankfurter office complex “Die Welle”.Transfer pricingTransfer pricing has been dominated by intra-group financing aspects (including treasury functions, financial guarantees, captive insurance, determination of risk-free/adjusted rate of returns) and the attribution of income from intangibles pursuant to the development, enhancement, maintenance, protection and exploitation of intangibles (DEMPE) concept by the OECD. Further, country-by-country reporting and income attribution to permanent establishments are continuously developing.Tax disputesCriminal proceedings against bank employees and lawyers regarding cum/ex transactions and refund of dividend withholding taxes as well as civil law-based damages and compensation claims.Criminal proceedings against lawyers and taxpayers regarding “gold finger” transactions with mainly gold trading in London in order to reduce the effective tax rate in Germany. The fiscal court of Stuttgart contradicts allegations of tax evasion.


Domestic – casesWith its decision of 27 February 2019, the German Federal Fiscal Court has put its case law on the default of cross-border group loans to the detriment of the taxpayers on a new footing. Cross-border group loans shall no longer be examined for purposes of their arm’s length character not only in terms of their amount, but also in terms of their general settings, e.g. if the loan is secured or not. The German Federal Fiscal Court1 confirmed and strengthened this decision with three further decisions on 19 June 2019. The lack of loan collateral shall generally be one of the “conditions” not at arm’s length within the meaning of sec. 1 para. 1 German Foreign Tax Act. The same shall be true in the context of art. 9 para. 1 OECD Model Tax Convention. Even the granting of unsecured loans by third parties to the group parent company shall not be suitable to justify an unsecured loan granted to a (subsidiary) company. The arm’s length comparison must be based on the specific (subsidiary) company taking out the loan – and in particular its earnings situation – and therefore the fact that the lack of collateralisation of claims is customary in the group cannot justify the specific loan’s arm’s length character. Contrary to older case law, even the OECD Model Tax Convention,




in particular art. 9 para. 1, does not limit the scope of the domestic adjustment mechanism of sec. 1 para. 1 German Foreign Tax Act to so-called price adjustments, but also allows the neutralisation of the profit-reducing derecognition of a loan claim or a write-down in this respect. As a result, this jurisdiction will probably lead to increased non-recognition of impairments in connection with cross-border group loans for tax purposes.With its decision of 14 August 2019,2 the German Federal Fiscal Court decided that jouissance rights only result in payments within the meaning of sec. 20 para. 1 no. 1 German Income Tax Act if the holder of the jouissance rights cumulatively participates in both the profit and the liquidation proceeds (so-called investment-like jouissance rights). Participation in the liquidation proceeds shall be based on the final liquidation assets within the meaning of sec. 11 German Corporate Income Tax Act, i.e. on the participation in any (additional) liquidation proceeds and the associated participation of the holder of the jouissance rights in the hidden reserves, but not on the profit-dependence of the jouissance rights distributions, the position of a sole shareholder, the long term of the jouissance rights, or on a conversion right of the holder of the jouissance rights to acquire company shares, even if its exercise is probable. In the absence of participation in either the profit or the liquidation proceeds, the income from the jouissance rights is income pursuant to sec. 20 para. 1 no. 7 German Income Tax Act. Why is this classification of relevance? Because income falling within the scope of sec. 20 para. 1 no. 1 German Income Tax Act is generally tax-exempt as regards corporate taxpayers, where this is not the case for income falling within the scope of sec. 20 para. 1 no. 7 German Income Tax Act.With its seven decisions of 21 August 2019,3 the German Federal Fiscal Court has ruled on the interpretation of sec. 6a German Real Estate Transfer Tax Act – the exemption from real estate transfer tax for intra-group restructuring – and rejected thereby the German tax authorities’ mostly restrictive view. Such exemption shall, e.g. apply if a dependent company is merged with a controlling company. The fact that the controlling company is no longer able to hold a share in the subsidiary after the merger for reasons of conversion law and that, consequently, the “association” between the applicant as controlling company and the real estate-owning subsidiary as dependent company was terminated by the merger, is not detrimental. Further, the German Federal Fiscal Court held that both the term “controlling enterprise” used in the tax exemption and the range of transformation transactions covered by the tax exemption are to be understood in a broad, taxpayer-friendly way.With its decision of 28 November 2019,4 the German Federal Fiscal Court ruled in a generally taxpayer-friendly way on the prerequisite and limits of the extended trade tax reduction. According to such reduction, a landlord can reduce its trade tax burden on income from letting and leasing of real estate to nil, provided that it exclusively manages its own property and leaves it for use. Oftentimes this prerequisite is hard to meet – particularly given that already the additional letting and leasing of operating facilities is regarded as harmful to the extended trade tax reduction. The German Federal Fiscal Court held in this regard that, if a contract for the lease of land with a building yet to be constructed provides that the expenses attributable to operating equipment are to be borne by the lessee and operating equipment is not to be co-let, a harmful co-letting of operating equipment is not already to be assumed in case the expenses attributable to operating equipment are not deducted but are included in the construction costs of the building. The question of whether operating equipment is the subject of a lease agreement must be assessed according to criteria under civil law. In a nutshell: with this decision, the German Federal Fiscal Court simply clarifies that operating equipment for civil and tax purposes can be technically and effectively excluded from rental, which is quite an important statement for real estate companies.




With its decision of 19 July 2019, the Fiscal Court of Cologne5 delivered a landmark judgment with regard to cum/ex transactions. The court very clearly decided that the multiple refund of a capital gains tax that has only been withheld and paid once is out of the question. This court procedure is regarded as a model for a large number of comparable refund disputes currently still pending before the German Federal Central Tax Office. In the opinion of the Fiscal Court of Cologne, in the case of an off-market short sale, the share purchaser does not become the beneficial owner of the shares to be delivered to him later already by concluding the purchase agreement. He is therefore not entitled to a credit for the capital gains tax withheld and paid in respect of the dividend. The multiple reimbursement of capital gains tax withheld and remitted only once is out of the question. The Fiscal Court has allowed the appeal to the Federal Fiscal Court.With its decision of 28 January 2020, the Fiscal Court of Hesse6 ruled for the first time on a cum/cum transaction and held that it was abusive. In the case of cum/cum transactions, shares of foreign shareholders are sold or loaned to domestic companies, mostly banks, before the dividend record date and are transferred back after the dividend record date with the aim of avoiding the lump-sum taxation of foreign dividend income provided for by law. The Fiscal Court has allowed the appeal to the Federal Fiscal Court.Domestic – COVID-19 tax measuresIn reaction to the COVID-19 pandemic, Germany has introduced a number of measures to boost the economy, protect taxpayers’ liquidity, and grant administrative relief also in the field of taxation. Taxpayers have been granted extensions for the filing of tax returns, payments have been suspended or deferred and prepayments adjusted. The amount of tax losses carried back for corporate income taxes has been increased from EUR 1 million to EUR 5 million and can be used already in assessment periods 2019. Movable fixed assets are subject to an accelerated (degressive) depreciation and the deductible for trade tax add-back has been increased to EUR 200,000. Further, VAT has been temporarily reduced from 19% to 16% (and in case of restaurant and catering services even 5%) and from 7% to 5%. The time period for retroactive transformations has been prolonged from eight to 12 months. Special COVID-19 payments to employees are tax-exempt up to EUR 1,500 and employers’ supplementary payments in the case of short-time allowance (Aufstockungsbetrag Kurzarbeitergeld) are also tax-exempt.Transposition of ATAD into domestic lawOn 10 December 2019, the German Federal Ministry of Finance (BMF) published a draft bill for the transposition of the EU Anti-Tax Avoidance Directives (ATAD) 2016/1164 and 2017/952 into domestic law. This draft was updated on 24 March 2020. Key elements include new limitations of tax deductions and exemptions in case of hybrid mismatches, amendments of existing exit taxation and entanglement rules, amendments of the controlled foreign company taxation rules, amendments of transfer pricing rules with respect to financial relationships as well as a legal basis for advanced pricing agreements. It is not yet clear whether the draft bill will be enacted in its current version. The new controlled foreign corporation (CFC) rules will replace the existing control concept, potentially increasing the number of taxpayers falling within the scope of the CFC regime. In deviation from ATAD I, the conceptual design of the existing list of activities that are considered to generate active income will be maintained and types of income not covered by the list are considered passive. The current threshold of 25% for the determination of low taxation will be maintained (at least until the end of 2020) while awaiting the outcome of the Pillar Two discussions at OECD level on the minimum taxation, resulting in neighbouring countries that lowered their corporate tax rate being affected.




The temporal application of the new rules varies: the new rules on hybrid mismatches are expected to apply as from 1 January 2020; whereas the new CFC, exit taxation and transfer pricing rules are expected to apply only from 1 January 2021 onwards.Transposition of DAC 6 into domestic law regarding reporting of cross-border tax arrangementsWith effect from 1 January 2020, the German Legislator transposed EU Directive 2018/822 on disclosure requirements for cross-border tax arrangements (DAC 6) into German law. The initial intention to also introduce reporting obligations for domestic tax arrangements has not been implemented. The German transposition largely adheres very closely to the requirements of the Directive; secs 138d to 138k have been added to the German Fiscal Code. As a consequence, intermediaries and users are generally required to report relevant cross-border tax arrangements electronically to the Federal Tax Office (BZSt), starting from 1 July 2020 onwards within a general notification period of 30 days. However, the recently adopted EU Directive 2020/876 grants, as a reaction to the COVID-19 pandemic, an option to defer the DAC 6 reporting time limits by six months. Contrary to expectations, the German Federal Minister of Finance announced on 6 July 2020 that Germany will not make use of this option, but it does not seem impossible that this decision may change again due to public pressure.Regarding cross-border tax arrangements whose first step was implemented in the transition period after 24 June 2018 and before 1 July 2020 (historical cases), which are foreseen to be notified in accordance with DAC 6 as well, the notification deadline is 31 August 2020 (without taking into account any possible postponement due to COVID-19). However, any failures with regard to the notification of historic cases are not subject to fines of up to EUR 25,000 which would otherwise be imposed.In order to provide further guidance in relation to the new notification obligations, the German Federal Ministry of Finance already published a draft application letter in March 2020 and has announced that it will publish the final version in July 2020. Such letter shall in particular foresee a white list of non-reportable tax structures.Transposition of Multilateral Instrument into domestic lawIn May 2020, a draft bill on the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting of 24 November 2016 (MLI Implementation Act) was published. However, the impact of the MLI will be rather limited. Based on a draft bill of May 2020, only a few double tax treaties will be amended. Further, its application will have limited scope as Germany did not opt for the new OECD rules on the taxation of permanent establishments (including dependent agents).OECD developments and impact on German tax lawIn January 2020, members of the OECD/G20 Inclusive Framework on BEPS affirmed their commitment to reaching an agreement on a consensus-based solution with regard to Pillar One (revised nexus and profit allocation rules) and Pillar Two (global minimum taxation) and to agree on a tax regime for the taxation of digital services by the end of 2020. An outline of the architecture of a Unified Approach on Pillar One as the basis for negotiations has therefore been agreed upon, and the progress made on Pillar Two has been welcomed. In February 2020, the OECD presented its preliminary economic analysis and impact assessment on the Pillar One and Pillar Two proposals. The OECD estimates that global corporate income tax revenues will increase by 4% if both Pillars are implemented, equalling USD 100 billion annually. However, it appears that the negotiations are not proceeding at the pace that the OECD expected in January 2020 and an extension into 2021 is becoming more likely. In




May 2020, the OECD Centre for Tax Policy and Administration decided not to convene the entire Inclusive Framework in July 2020 for approval. It indicated that it remains committed to delivering an agreed proposal to the G20 finance ministers in October 2020 to be agreed at the G20 Leaders’ Summit in Riad, Saudi Arabia in November 2020. However, the concept is likely to be partial in nature, pursuing a staggered process continuing into 2021. Further, the USA paused its participation in OECD meetings and announced reservations with respect to Pillar One. The success of the OECD/G20 project to reach a global agreement within a reasonable time period will influence tax legislation both in Germany (e.g. CFC rules) and at EU level (e.g. introduction of a digital services or advertising tax).On 11 February 2020, the OECD published its “Transfer Pricing Guidance for Multinational Corporations and Tax Administrations”. This guidance can be used as an interpretative aid to determine whether intra-group financial transactions are in line with the arm’s length principle. Regarding art. 9 para. 2 OECD Model Tax Convention, the statements of the guidelines can be helpful in determining arm’s length terms, especially in the context of a mutual agreement procedure.

Tax climate in Germany

Germany generally provides a stable tax climate. Tax authorities take part in a continuous dialogue with taxpayers/advisors and are open for timely tax audits, allowing greater certainty for the taxpayer in a shorter period of time. However, cooperativeness by tax authorities is not the same across Germany and differs between federal states; it also much depends on past compliance by the taxpayer with tax laws and the responsiveness to the tax authorities’ requests of information. Generally, tax compliance systems become increasingly relevant and tax filing and documentation has become more digital, which allows the tax authorities to apply and improve automated analysis. On the other hand, loopholes for doubtful tax structuring have been reduced to a large extent in recent years and the tax authorities as well as criminal prosecutors have become fiercer in tax accusations and court proceedings for implemented tax structures (e.g. cum/ex and cum/cum transactions) accompanied by the creation of new tax reporting obligations for the future (e.g. DAC 6). Such developments lead to a general adjustment of boundaries between permitted and abusive tax structuring and will influence corporate tax law advice in light of criminal and civil law risks.

Developments affecting attractiveness of Germany for holding companies

Germany has a good tax treaty network with other jurisdictions and generally exempts 95% of dividend payments and capital gains from corporate income and trade tax. However, due to several specific provisions that shall counter international profit shifting and shall avoid abusive tax structuring, Germany is generally not regarded as the number one choice for establishing the group parent company of MNEs. The planned reform of the German CFC rules will probably increase this perception.Recent decisions of the German Federal Fiscal Court add further colour regarding Germany’s attractiveness for holding companies in both a positive and negative sense. (1) With its decision series in 2019, the German Federal Fiscal Court has put its case law on the default of cross-border group loans to the detriment of the taxpayers on a new footing (see above for details). (2) With its decision of 12 February 2020,7 the German Federal Fiscal Court has ruled that the taxable services rendered by a holding company to its subsidiaries do not, in principle, have to be of a particular quality (e.g. in the sense of an “intervention”) to




establish its status as entrepreneur for VAT purposes. This decision is particularly relevant for the right of a holding company to deduct input VAT.Not least because of these circumstances, and given that Germany is not regarded as the most attractive place for IPOs, nowadays it can be observed that promising German start-ups and biotech companies often seek a flip into a Dutch BV/NV by means of a tax neutral share exchange or change of legal form in order to have the shares in the Dutch BV/NV listed on Nasdaq or another stock exchange. However, this also means that the start of business operations in a German corporate structure does not prevent future adjustments also with an international investor/shareholder base.


In general, it can be observed that, in the market, there is a trend to cooperate in the field of electronic mobility, battery and hydrogen storage and artificial intelligence across industries and with competitors. The automotive sector is probably facing its greatest upheaval, whereas the IT, real estate and renewable energy sectors are booming. Of course, all this requires targeted tax support.Not least because of these new developments, Germany is quite keen to improve internationally competitive framework conditions for companies in order to strengthen Germany as a business location, in particular to enhance the attractiveness of the location for new settlements and investment decisions. To get closer to this goal, the Research Allowance Act (Forschungszulagengesetz) was recently enacted and came into force on 1 January 2020. Such Act is an ancillary tax law to the Income Tax Act and the Corporation Tax Act and is equally applicable to all taxable companies regardless of their size, the respective profit situation and the purpose of the company. The tax support relates to research and development projects in the categories of basic research, industrial research and experimental development, and is calculated on the basis of wage costs for research personnel and contract costs for commissioned projects. In addition, expenses incurred by the self-researching entrepreneur may also be taken into account. Funding is provided in the form of a research allowance and amounts to 25% of a maximum assessment basis of generally EUR 2 million; however, this amount has been enhanced to EUR 4 million until 31 December 2025 in the course of the COVID-19 crisis. The research allowance will be credited against the next tax assessment and paid if it exceeds the assessed tax. There is actually a legal claim to the research allowance – provided that all requirements are met. Although the Research Allowance Act is open for every company of every size, it is mainly aimed at small- and medium-sized enterprises (SMEs).Additionally, it worth mentioning as regards sectors that the real estate sector is facing greater challenges due to new proposed legislation. As in 2019, the German Legislator continues to pursue the goal of making it more difficult to structure share deals that are exempt from real estate transfer tax. A reduction of the currently relevant acquisition thresholds from 95% to 90% or even 75% is being considered in Germany. In addition, retention periods shall be increased from five to 10 years and observation periods regarding changes in ownership shall be introduced for corporations, as already in place for partnerships. The reform project is still concrete but has been temporarily suspended due to political disputes. It is, however, expected that a new legislative proposal will be presented at the end of 2020. Further, challenges for the real estate sector are stemming from the newly introduced reform of the property tax law. The Federal Constitutional Court ruled on 10 April 20188 that the property tax law must be modernised. Against this background, the Federal Legislator introduced




an amended Property Tax Act at the end of 2019 which does, however, contain an opt-out clause for German Federal States. The opt-out clause enables German Federal States to enact and apply their own calculation mechanism deviating from the one proposed by the Federal Legislator. A couple of German Federal States have already announced that they will make use of this opt-out clause. There is a risk of a patchwork.

The year ahead

In 2019, the German government announced reforms of the German Foreign Tax Act (transposing ATAD) and the German Real Estate Transfer Tax Act. At the beginning of July 2020, the reforms are still in draft/discussion status and Germany faces an infringement procedure initiated on 30 January 2020 due to untimely implementation of the ATAD into German law. Whereas the ATAD implementation can be expected in 2020, it is questionable whether the real estate transfer tax reform will be implemented in 2020, since the draft bill for a reform of the Real Estate Transfer Tax Act has even been revoked with the intention of evaluating alternative concepts but currently with no apparent consensus between the governing parties. However, pursuant to comments from officials of the German Federal Ministry of Finance, the real estate transfer tax legislative process shall continue after the pandemic crisis. Additional corporate tax reforms under discussion concern the choice of taxation regime for partnerships (transparent vs. opaque) and the replacement of the prerequisites for the establishment of a VAT group.COVID-19 measures have been widely implemented (see above) and will be applied until the end of 2020, or for a potentially shorter time period. Depending on the development of the COVID-19 pandemic, some measures might be prolonged. New COVID-19 interim aids for SMEs have to be applied digitally with the support of a tax advisor, chartered accountant or auditor.It is expected that insolvency proceedings and restructurings will increase after the expiration of the – COVID-19 contingent – temporary suspension of the obligation to file for insolvency applications (prolongation possible), which will result in increased tax planning in the context of restructurings (e.g. debt-equity swaps) or acquisitions from an insolvent estate.Further, corporate taxpayers might be affected if the Corporate Liability Act (Verbands- sanktionengesetz) is enacted as expected, since tax offences will also be encompassed. Although the new sanctions will be applicable only after a transition period of (pursuant to the current draft) two years, taxpayers would be well advised to make the respective preparations and adjust their compliance organisation and tax compliance management systems.On an international level, Brexit might become challenging in particular with respect to import/export turnover taxes and customs duties as from 1 January 2021 onwards upon expiry of the transition period in case no agreement is reached between the EU and Great Britain. As a precautionary measure, Germany implemented some tax-specific Brexit rules, safeguarding the current status to the benefit of the taxpayer even in case of a hard Brexit with no treaty.The reporting deadlines for cross-border (tax) arrangements following DAC 6 are handled differently in the EU Member States, since not every EU Member State has opted for the six-month postponement offered by EU Directive 2020/876 due to the COVID-19 pandemic. Pursuant to a statement of an official spokesperson of the Federal Ministry of Finance on 6 July 2020, Germany will surprisingly not opt for such postponement of reporting deadlines, contrary to most other EU Member States. If that turns out to be true, intermediaries and users expecting to be exempt in Germany from its reporting obligations by relying on submission obligations in another EU Member State will have to report




in Germany, provided and as long as the other EU Member State postpones the relevant reporting deadline. However, in mid of July 2020, whether the postponement option shall be used or not is still being intensively discussed within the tax administration due to severe concerns from various associations, organisations and some German Federal States – we await the outcome of such discussion. At least, the technical functionality of the reporting system with different reporting possibilities (individual data transmission via the online portal of the Federal Tax Office, XML web upload and electronic mass data interface) shall be available on time.Driving forces in politics for 2020/21 will be the positioning of the different parties for the elections of German parliament in Autumn 2021. Further, effective 1 July 2020, Germany took over the six-month presidency of the Council of the EU. On its tax agenda is the taxation of the digital economy and the exchange of information on data of digital platforms (DAC VII). In particular, the EU-wide coordination and unification on the EU’s approach on the taxation of the digital economy (including a digital services/advertising tax) is expected to gain importance as a result of the announced reservations of the USA with respect to Pillar One and Apple’s win of the Irish state aid case before the European General Court. Further, the implementation of a financial transaction tax, a common consolidated corporate tax base (CCCTB) and a code of conduct on corporate taxes, will be on the agenda.

* * *

Endnotes1. Federal Fiscal Court of 19 June 2019, I R 5/17, BFH/NV 2020, 183; I R 32/17, BFH/

NV 2020, 255; I R 54/17, IStR 2020, 230.2. Federal Fiscal Court of 14 August 2019, I R 44/17, DStR 2020, 1307.3. Federal Fiscal Court of 21/22 August 2019, II R 15/19 (II R 50/13), II R 15/19, II R

50/13, BFH/NV 2020, 442; II R 16/19 (II R 36/14), II R 16/19, II R 36/14, BFH/NV 2020, 445; II R 17/19 (II R 58/14), II R 17/19, II R 58/14, BFH/NV 2020, 459; II R 18/19 (II R 62/14), II R 18/19, II R 62/14, BFH/NV 2020, 463; II R 19/19 (II R 63/14), II R 19/19, II R 63/14, BFH/NV 2020, 448; II R 20/19 (II R 53/15), II R 20/19, II R 53/15, BFH/NV 2020, 452; II R 21/19 (II R 56/15), II R 21/19, II R 56/15, BFH/NV 2020, 456.

4. Federal Fiscal Court of 28 November 2020, III R 34/17, DStR 2020, 781.5. Fiscal Court of Cologne of 19 July 2019, 2 K 2672/17, EFG 2020, 367.6. Fiscal Court of Hesse of 28 January 2020, 4 K 890/17, juris.7. Federal Fiscal Court of 12 February 2020, XI R 24/18, DStR 2020, 1190.8. Federal Constitutional Court of 10 April 2018, 1 BvL 11/14, 1 BvL 12/14, 1 BvL 1/15,

1 BvR 639/11, 1 BvR 889/12, BVerfGE 148, 147.



CMS Hasche SigleLennéstraße 7, 10785 Berlin, Germany

Tel: +49 30 20360 0 / URL: www.cms.law

Jörg SchradeTel: +49 89 23807 380 / Email: [email protected]örg Schrade advises international companies and financial investors on all aspects of German and international tax law, with a focus on M&A transactions, corporate reorganisations, cross-border activities, financing and tax audits.Prior to joining CMS in 2018 as a partner in the Munich office, Jörg worked for the international law firms Linklaters and Milbank as well as for the global technology company Siemens in global tax planning.Jörg studied Law and Economics at the University of Augsburg (Germany), Lund University (Sweden) and Pepperdine University (USA) and has been admitted as tax advisor since 2013.

Martin MohrTel: +49 711 9764 488 / Email: [email protected]. Martin Mohr advises on all aspects of German and international tax and accounting law with a focus on M&A transactions, venture capital investments, restructurings and financings. He also concentrates on special tax issues in the context of audits and tax disputes as well as on tax compliance.After having worked for more than six years for the international law firm Hengeler Mueller in Frankfurt and Düsseldorf as a certified lawyer and tax advisor, Martin joined CMS as a counsel in 2017. He also spent nine months with the top-tier US law firm Cravath, Swaine & Moore LLP in New York City.Martin is co-founder and co-head of the Southwest Germany division of the International Fiscal Association (IFA) which was established at the end of 2017.




IndiaLokesh Shah & Devashish Poddar

L&L Partners Law Offices


The World Economic Outlook update of January 2020 published by the International Monetary Fund had estimated the global output to grow at 2.9% in 2019, declining from 3.6% in 2018. The year 2019 was the year of greatest concern for the global economy since the global financial crisis of 2009. Amidst a weak environment for global manufacturing, trade and demand, the Indian economy slowed down with gross domestic product growth moderating to 4.8% in the first half of year 2019–20, lower than 6.2% in the second half of year 2018–19. Having recognised the financial stress built up in the economy, the Indian Government took significant steps during the period of July 2019 to January 2020 towards speeding up the insolvency resolution process under the Insolvency and Bankruptcy Code and the easing of credit, particularly for stressed real estate and non-banking financial companies. At the same time, critical measures were undertaken to boost investment, particularly under the National Infrastructure Pipeline.1

However, the world economy as well as the Indian economy now faces a significant setback due to the ongoing Coronavirus (“COVID-19”) pandemic. The COVID-19 pandemic has had far-reaching consequences beyond the spread of the disease itself. As the effect of the pandemic spreads around the globe, concerns have shifted from supply-side manufacturing issues to decreased business in the services sector. India’s growth in the fourth quarter of the fiscal year 2020 went down to 3.1% according to the Ministry of Statistics.2 However, there seems to be light at the end of the tunnel. The Government of India from time to time has announced several measures to boost the declining economy. The unemployment rate in India moved to its pre-lockdown level of 8.5% in the week ending June 21, 2020 from the peak rate of 23.5% in April and May 2020 after the nationwide lockdown was imposed, resulting in job losses for millions of workers.3 As per Government data, early green shoots of revival have also begun to emerge in the agriculture, manufacturing and services sectors towards the end of June 2020.4

In July 2019, the Union Budget was presented by the Finance Minister of India with the aim of making India a $5 trillion economy. Thereafter, considering the economic conditions, a slew of fiscal measures was announced by way of an ordinance in the month of September 2019 (with further amendments in December 2019). The Government thereafter presented the Union Budget 2020 in the month of February 2020. The Union Budget 2020 was woven around three prominent themes:5

• Aspirational India, in which all sections of society seek better standards of living, with access to health, education and better jobs.

• Economic development for all, indicated in the Indian Prime Minister’s exhortation of “Sabka Saath, Sabka Vikas, Sabka Vishwas”. This would entail reforms across swathes



L&L Partners Law Offices India

of the economy. Simultaneously, it would mean yielding more space for the private sector. Together, they would ensure higher productivity and greater efficiency.

• Caring Society, i.e. both humane and compassionate. The present Indian Government presented the Union Budget 2020 with a motive of Antyodaya, i.e. upliftment of the weakest section of society.

Tax issue in significant M&A deal

An interesting development in M&A from an income tax point of view in India which reached the tax court is summarised below. Tiger Global/Flipkart/WalmartThe year 2018 saw one of the biggest M&A deals in India where Walmart Inc. paid approximately $16 billion for an initial stake of about 77% in Flipkart. Among various selling shareholders, Tiger Global (one of the largest private equity funds), sold its stake held by entities incorporated in and resident of Mauritius.Based on the information available in the tax ruling, Tiger Global International II Holdings, Tiger Global International III Holdings and Tiger Global International IV Holdings (“Tiger Entities”) are private companies incorporated in and tax residents of Mauritius. These Tiger Entities invested in the shares of Flipkart Private Limited, a company incorporated in Singapore (“Flipkart Singapore”). Flipkart Singapore had in turn invested in multiple Indian companies, thereby deriving its value substantially from assets located in India. As a part of the transaction with Walmart, Tiger Entities agreed to sell its stake to an independent buyer based in Luxembourg.Tiger Entities had approached Indian income tax authorities to obtain a NIL withholding tax certificate, in respect of the proposed transfer of shares to Walmart. The income tax authorities held that Tiger Entities were not eligible to claim the benefits of the India-Mauritius tax treaty and hence, denied their NIL withholding application. Tiger Entities thereafter filed an application before the Authority for Advance Ruling (“AAR”) to determine whether sale of shares of Flipkart Singapore would be chargeable to tax in India under the India-Mauritius tax treaty.The AAR, in its detailed order dated March 26, 2020, rejected the application filed by Tiger Entities principally on the ground that the transactions entered by Tiger Entities were designed to avoid tax.Certain key observations of the AAR are summarised below:• Based on the financial statements of Tiger Entities, the AAR noted that Tiger Entities

had not made any investments other than that in Flipkart Singapore. On this basis, the AAR rejected the contention of Tiger Entities that Mauritius was its preferred jurisdiction due to its comprehensive treaty network with various countries, not just India. The AAR further noted that the real intention of Tiger Entities was to avail the benefit of the India-Mauritius tax treaty.

• Further, referring to the minutes of the Board meetings, the AAR observed that the key decisions were taken by a non-resident director and not by the Mauritian companies themselves.

• The AAR observed that the “control and management of Tiger Entities does not mean the day-to-day affairs of their business but would mean the head and brain of these companies”. In the present context, the AAR ruled that the head and brain of these companies was the non-resident, US-based director.




• The AAR observed that authority to operate the principal bank account was also with the US-based director. He was also the authorised signatory for Tiger Entities’ immediate parent company in the US.

• The AAR observed that it is not the holding structure alone that would be relevant to determine the applicability of India-Mauritius tax treaty benefits. The holding structure, coupled with prima facie management and control of the holding structure, would be relevant factors for determining the design for avoidance of tax. Based on facts discussed by the AAR, it held that the real management and control of Tiger Entities was not with their respective Board of Directors but with an individual (the US-based director). Tiger Entities were only a “see-through entity” to avail the benefits of the India-Mauritius tax treaty.

• Tiger Entities were selling shares of Flipkart Singapore and not directly of a company in India. Flipkart Singapore in turn derived its value substantially from assets located in India. On these facts, the AAR held that since Tiger Entities sold shares of Flipkart Singapore (and not directly of an Indian company), it would not be eligible to claim the benefits of the India-Mauritius tax treaty. The AAR observed that the intention of the India-Mauritius tax treaty was to exempt capital gains income in respect of investments by Mauritian companies in Indian companies. It was never the intention of the legislature to exempt capital gains income in respect of investment in companies not resident in India, even though such companies (such as Flipkart Singapore) may be deriving its value substantially from assets located in India.

The ruling from the AAR again introduces ambiguity in respect of Mauritian companies claiming tax exemption upon exit from investments in India. The ruling is likely to increase scrutiny by the tax authorities while granting India-Mauritius tax treaty benefits. There could also be a possibility of tax authorities scrutinising past exits where the time limit to undertake a scrutiny audit is not yet complete.However, one should keep in mind that ruling from the AAR is binding on the applicants (those who approached the AAR) and the jurisdictional tax authority. Further, the ruling is based on the facts applicable to specific cases before it. Taxpayers will need to consider the existing and settled jurisprudence in availing benefits of the India-Mauritius tax treaty based on various circulars and judicial precedents, including the ruling from the Supreme Court of India in the case of Azadi Bachao Andolan6 (which granted the benefit of the India-Mauritius tax treaty).


Domestic taxRationalisation and reduction of corporate tax ratesIn an important development to attract foreign investment, particularly investment in the manufacturing sector, the Finance Minister introduced the Taxation Laws (Amendment) Ordinance, 2019 (“Ordinance 2019”) in September 2019 to reduce the corporate tax rate. The reduced tax rate is applicable to companies not availing specified tax exemptions and deductions. The Ordinance 2019 was replaced by the Taxation Laws (Amendment) Act, 2019 (“Amendment Act”) in December 2019.7 The Ordinance 2019 and subsequently the Amendment Act were focused around boosting investor confidence in India and attracting more investments in India by providing reduced tax rates and ease of compliances.Concessional tax rate of 22% for domestic companiesAs per section 115BAA of the Income Tax Act, 1961 (“IT Act”), as introduced by the Amendment Act, any domestic company (i.e. a company incorporated in India) may opt




for the concessional tax rate of 22% (plus a surcharge of 10% and a health/education cess of 4%), as against the current applicable rate of 30% (plus applicable surcharge and cess). Thus, the effective tax rate for domestic companies under section 115BAA, once opted for, shall be reduced to 25.17% as against a maximum rate of 34.95%. This amendment effectively reduced the tax rate for domestic companies by almost 10%.The reduced rate will be available subject to certain conditions, such as not availing specific tax deductions/exemptions and no carry forward or set-off of unabsorbed depreciation in relation to specified tax incentives. Further, companies opting for the concessional tax rate would be exempted from the provisions relating to the minimum alternate tax (“MAT”). MAT was originally introduced in India to collect tax from companies on their book profits, which were not liable to pay tax under the provisions of the IT Act owing to tax concessions.MAT rate reductionThe Amendment Act reduced the applicable MAT rate from 18.5% to 15%.Concessional tax rate of 15% for new manufacturing domestic companiesThe Indian Government’s motive of “Make in India” was further boosted by introducing a tax rate of 15% under section 115BAB of the IT Act. Under the new scheme, any domestic company incorporated in India on or after October 1, 2019 and engaged solely in the business of manufacturing or production of any article or thing shall have the option of paying tax at a concessional rate of 15% (plus a surcharge at the rate of 10% and a health/education cess at the rate of 4%). Accordingly, the effective tax rate for such companies shall be 17.16%. This benefit of a lower tax rate shall be available to all domestic companies that commence manufacturing or production on or before March 31, 2023 and that do not avail any specified tax exemption/incentive.The new tax rate for manufacturing companies has given a significant boost to commence/expand local manufacturing in India. The tax rate of 15% is a massive reduction from the original applicable corporate tax rate of 30% and is likely to invite a number of foreign players to commence manufacturing in India.A comparison of corporate tax rates across a few countries of the world is given below:8

Country Rate (%)India 15*

Russia 15.5United Kingdom 19

Vietnam 20USA 21

Indonesia 25China 25

Philippines 30France 31

Bangladesh (non-publicly traded) 35

*The lowest rate applicable for domestic manufacturing companies (excluding surcharge and cess).

Abolition of dividend distribution tax (“DDT”)Dividend distributed by an Indian company was liable to DDT (payable by the company) at a rate of approximately 20.56%. Dividend income thereafter was exempt in the hands of shareholders, except a certain category of Indian shareholders who were liable to pay a 10% tax on dividend received in excess of INR 1 million.




In order to increase the attractiveness of the Indian equity market, reduce the cascading effect of DDT and to provide relief to a large class of investors in whose case dividend income was taxable at a rate lower than the rate of DDT, the Finance Act, 2020 abolished DDT with effect from April 1, 2020. Dividend income shall now be taxable in the hands of the recipient shareholders at their applicable rate.The key beneficiaries of this amendment are likely to be foreign companies and non-residents who receive dividend income from Indian companies. This is due to the fact that tax treaties with most countries limit the taxation on dividends between 5% to 15%. For example, companies in the US, Mauritius, Singapore, UK, etc., who have subsidiaries in India and are eligible to avail the benefit under the tax treaties, will be liable to pay tax on dividend income at a lower rate prescribed in the respective tax treaty.Vivad se VishwasIn the recent past, the Indian Government has taken several measures to reduce tax litigations. In the Union Budget 2019, the “Sabka Vishwas Scheme” was brought in to reduce litigation in indirect taxes. It resulted in settling over 189,000 cases. Currently, a large number of disputes related to direct taxes are pending at various levels of adjudication, from Commissioner (Appeals) level to Supreme Court. These tax disputes consume a large amount of resources both of the Government and of the taxpayer, as well as depriving the Government of the timely collection of revenue. As of February 2020, there were approximately 483,0009 direct tax cases pending in various appellate forums, i.e. Commissioner (Appeals), Income Tax Appellate Tribunal (“ITAT”), High Court and Supreme Court.With these facts in mind, an urgent need was felt to provide for the resolution of pending tax disputes which will not only benefit the Government by generating timely revenue, but also the taxpayers as it will bring down mounting litigation costs, and efforts can be better utilised for expanding business activities. Therefore, there was a need to develop a scheme similar to the indirect tax Sabka Vishwas Scheme, for reducing litigations even in direct taxes.Hence, the “Vivad se Vishwas” Scheme (“VSV”) was introduced for direct taxes. The Direct Tax Vivad se Vishwas Act, 2020 (“VSV Act”) was enacted on March 17, 2020 under which the declarations for settling disputes are currently being filed. Under the VSV Act, a taxpayer would be required to pay only the amount of the disputed taxes and will get a complete waiver of interest and penalty, provided he pays within the specified time frame (now extended to December 31, 2020 due to COVID-19). The taxpayer can also settle the disputed case after the aforesaid specified time frame; however, the aforesaid taxpayer will also be required to pay an additional 10% of the disputed tax.Further, the VSV Act provides for immunity from prosecution to the taxpayer in relation to tax arrears for which declaration is filed under VSV, and in whose case an order is passed by the revenue authorities that the amount payable under the VSV Act has been paid by the declarant taxpayer. Further, on intimation of payment by the taxpayer of the amount calculated under VSV, the revenue authorities shall withdraw their own appeals/cases which are currently pending before any appellate forum or court. Also, any amount paid in pursuance of a declaration made under VSV shall not be refundable under any circumstances. It is pertinent to note that where only notice for the initiation of prosecution has been issued without prosecution being instituted, the taxpayer is eligible to file declaration under the VSV Act. However, where the prosecution has been instituted with respect to any year, the taxpayer is not eligible to file declaration for that year under the VSV Act, unless the prosecution is compounded before filing the declaration.




The VSV Act is a one-time window open for taxpayers to address and resolve their long-pending tax disputes. The specified time frame for payment of a disputed tax amount (without any additional payment) is December 31, 2020. Further, there will be a final date, which will be notified soon by the Indian Government, post which the VSV Act will no longer be available for taxpayers.International taxThe Organisation for Economic Co-operation and Development (“OECD”)’s 15 Action Plans addressing Base Erosion and Profit Shifting (“BEPS”) included various recommendations with respect to domestic laws as well as tax treaty provisions. A number of these Actions require changes across existing bilateral tax treaties across various countries, which could take decades altogether. In order to overcome the mammoth task of amending the existing tax treaties, Action Plan 15 examined if a single multilateral instrument can be used to amend the existing network of bilateral tax treaties incorporating the BEPS recommendations. India ratified10 the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”), which was signed by the Indian Finance Minister in Paris on June 7, 2017. On June 25, 2019, India deposited the Instrument of Ratification to OECD, Paris along with its Final Position in terms of Covered Tax Agreements, Reservations, Options and Notifications under the MLI, as a result of which MLI entered into force for India on October 1, 2019 and its provisions were made effective on India’s Double Taxation Avoidance Agreements from financial year (“FY”) 2020–21 onwards.

Domestic – cases and legislation

Vodafone Idea Limited – Supreme Court of India – Income Tax RefundsIn a recent judgment passed by the Apex Court of India on April 29, 2020, Vodafone Idea Limited was denied a refund of more than INR 40 billion (approximately). Up until FY 2015–16, based on provisions contained in Indian tax laws, the Income Tax Department had the power to withhold the processing of income tax returns (and consequently, tax refunds) of a person in India if the scrutiny proceedings had been initiated, even if there was no reasonable ground. However, this law was amended and the bar on the processing of returns was removed for subsequent years (i.e. FYs 2016–17 onwards). Also, the powers of the Income Tax Department were modified to the extent that tax refunds can now be withheld (after the processing of income tax returns) only if, due to substantial reasons, the refunds are likely to adversely affect revenue.Before the aforesaid judgment of the Apex Court, the Delhi High Court11 held that income tax authorities have the discretion to process or not to process income tax returns. Accordingly, the provisions relating to the non-processing of income tax returns would not automatically apply, on mere initiation of scrutiny proceedings. However, the Apex Court interpreted the law in its stricter sense and held that initiation of scrutiny proceedings is sufficient to withhold the processing of returns for FYs prior to 2016–17. Also, for FY 2016–17 onwards, the Apex Court was of the opinion that refunds were correctly withheld by the Indian Income Tax Department on reasonable grounds.The aforesaid judgment of the Apex Court comes as a vexatious precedent and would become a challenge for the companies in India that have legacy issues (currently being disputed before various courts in India), and due to these ongoing issues, their cases are picked up for scrutiny time and again. The income tax authorities at lower levels in some cases resort to such practices of withholding refunds by showing an enormous amount of additions to the taxable income of the companies during scrutiny proceedings.




BEPS and India’s digital tax journey

Significant economic presenceOECD BEPS Action Plan 1: Addressing Tax Challenges in the Digital Economy, dealt with tax-related challenges in the digital economy. BEPS Action Plan 1 recognised that the digital economy posed challenges that the traditional nexus-based approach to taxation could not resolve. It clearly stated that it is important to examine how enterprises in the digital economy add value and earn profits, since this determines the need to change the existing tax framework to address the specific features in the sector and prevent BEPS. BEPS Action Plan 1 analysed various potential options to address the challenges. These included the “Equalisation Levy”, which was implemented in India in 2016, and a new economic-based nexus in the form of a “Significant Economic Presence” (“SEP”), which was implemented in India in 2018. The Finance Act, 2018 introduced the concept of SEP in section 9 of the IT Act. It provided that the SEP of a non-resident in India will constitute its business connection in India. However, the SEP provisions are now deferred and are expected to be made effective from April 1, 2022.Introduction of withholding tax in relation to payments by e-commerce operators to sellers or service providers on the digital platformThe Finance Act, 2020 in India widened the tax net by bringing transactions between e-commerce operators and e-commerce participants within the scope of withholding tax provisions. The law provides that e-commerce operators shall pay withholding tax at a rate of 1% (on gross amount of sale/service) for sale of goods or provision of services facilitated by it through its digital or electronic facility or platform. For the purpose of these provisions, the e-commerce operator is deemed to be the person responsible for paying to the e-commerce participant.An “e-commerce operator” (may be a resident or a non-resident) is a person who owns, operates and manages a digital platform for e-commerce. An “e-commerce participant” is a person resident in India selling goods/providing services, including digital products, through a digital platform for e-commerce. These withholding tax provisions were originally intended to apply from April 1, 2020. The applicability has now been deferred to October 1, 2020.Equalisation Levy 2020/Expanded LevyTechnology, considered to be a factor of production, has been adopted in virtually all sectors of the economy in order to enhance productivity, enlarge market reach, and reduce operational costs. The adoption of technology is demonstrated by the spread of broadband connectivity in businesses which, in almost all countries of the OECD, is universal for large enterprises and reaches 90% or more even in smaller businesses. The advent of technology and process of globalisation has merged the digital and traditional economies into one. Large-scale adoption of technology has enabled multinational enterprises (“MNEs”) to operate their businesses across the world without any physical presence, or minimal presence, in other jurisdictions. Therefore, there arose a need to deal with the challenges in taxation posed by digitalisation.India has been a front runner in levying tax on digital transactions by amending the domestic tax law. One of the key amendments was the introduction of Equalisation Levy in 2016 (“2016 Levy”). Initially, during the Union Budget proposals of 2020 (Finance Bill, 2020) announced in February 2020, the Indian Government did not alter the scope of 2016 Levy. However, while the Finance Bill was being passed by Parliament in March 2020, the Government of India expanded, albeit substantially, the scope of Equalisation Levy (“Expanded Levy”).




Expanded Levy will be chargeable at the rate of 2% on the amount of consideration received or receivable by an “e-commerce operator” from “e-commerce supply or services” made, provided or facilitated by it. “E-commerce operator” means a non-resident who owns, operates or manages a digital or electronic facility or platform for the online sale of goods or online provision of services, or both. “E-commerce supply or services” is defined to mean:• online sale of goods owned by the e-commerce operator;• online provision of services provided by the e-commerce operator; or• sale or services facilitated by the e-commerce operator.Expanded Levy will apply when e-commerce supply or services are made, provided or facilitated by an e-commerce operator to:• persons resident in India;• non-residents under “specified circumstances”, such as: sale of advertisement which

targets an Indian customer or a customer who accesses the advertisement through an IP address located in India; or sale of data collected from a person resident in India or from a person who uses an IP address located in India; or

• a person who buys goods or services through an IP address located in India.The definitions of e-commerce operator and e-commerce supply or services in Expanded Levy is wide enough to cover a large portion of online transactions. In fact, the definition travels beyond the normally understood connotation of B2B sales, trading, distribution arrangements and intra-group transactions, which are now likely to be covered within Expanded Levy. In today’s world, a significant portion of transactions are undertaken online. In fact, traditional brick-and-mortar businesses also have online facilities for accepting orders or processing payments. All such businesses are now likely to be covered within Expanded Levy, even though they may traditionally not be undertaking actual online sales or providing online services.

Tax climate in India

Advance Pricing Agreement (“APA”)As per the Central Board of Direct Taxes (“CBDT”) Press Release dated October 1, 2019, CBDT signed the 300th APA during the month of September 2019. This is a significant landmark for India’s APA Programme, which is currently in its eighth year. The APA Scheme continues to make good progress in providing tax certainty to MNEs. It reflects the Government’s commitment towards fostering a non-adversarial tax regime.Faceless e-Assessment SchemeThe e-Assessment Scheme, 2019 was notified on September 12, 201912 and provided for a new scheme for making assessments by eliminating the interface between the Income Tax Officer and the taxpayer, optimising the use of resources through functional specialisation and introducing the team-based assessment. Further, the faceless assessment in the Income Tax Department was launched by inaugurating the National e-Assessment Centre (“NeAC”) on October 7, 2019 in New Delhi.13

Under the e-Assessment Scheme, 2019:• There would be state-of-the-art digital technology for risk management by way of an

automated examination tool, Artificial Intelligence and Machine Learning, with a view to reviewing the scope of discretion of the officers of the Income Tax Department.




• The e-Assessment Scheme introduces the concept of team-based assessment with dynamic jurisdiction, bringing about transparency, efficiency and standardisation of procedures by eliminating the human interface between the taxpayer and the Income Tax Department.

• There would be an NeAC in Delhi to be headed by the Principal Chief Commissioner of Income Tax.

• Eight regional e-Assessment Centres in Delhi, Mumbai, Chennai, Kolkata, Ahmedabad, Pune, Bengaluru and Hyderabad, which would comprise an Assessment unit, a Review unit, a Technical unit, and Verification units.

• Cases for specified work shall be assigned by the NeAC to different units by way of automated allocation systems.

Transparency and efficiency would lead to reduced litigation. Functional specialisation would lead to certainty in tax matters which would lead to increased ease of doing business. Adoption of a risk-based and focused approach in team-based assessment is expected to standardise procedures by eliminating human interface. The grievances of over-pitched assessment by the taxpayers is likely to be greatly reduced, and better assessment of income is expected to lead to greater revenue mobilisation and thus greater resources for undertaking welfare work for the people of India.Further, apart from certain exceptional circumstances, the CBDT had directed for scrutiny proceedings to be conducted electronically in its entirety, through the national e-filing portal.14

Eliminating interface between the taxpayer and the Commissioner of Income Tax (Appeals)Similar to faceless assessments, in order to take the reforms to the next level and to eliminate human interface, the Finance Act, 2020 empowered the Central Government of India to notify the Faceless Appeal Scheme in the appellate function of the department between the taxpayer appellant and the Commissioner of Income Tax (Appeals). The Government has proposed to formulate a scheme and eliminate the interface between the taxpayer and the Commissioner of Income Tax (Appeals), i.e. the first level appellate authority. The aforesaid scheme will save effective man-hours for companies and also help to reduce compliance and cost of litigation.COVID-19-related reliefsConsidering the severe impact of COVID-19 on the taxpayers, the Indian Government has announced a slew of measures.15 Some of the key measures are summarised below:• The withholding tax rates for all non-salaried payment to residents, and tax collected at

source rate, have been reduced by 25% of the specified rates for the period FY 2020–21.• The due dates for various income tax returns and tax audits have been extended.• The date for making payment without additional costs under VSV has also been extended.Further, on June 24, 2020, CBDT, the Apex tax administrative body, provided certain additional reliefs and relaxations by extending a number of deadlines to March 31, 2021. This brings a significant relief to taxpayers as it minimises the tax compliance burden.

Other developments

Raising of monetary limit for filing of appealTo effectively reduce taxpayer grievances/litigation and help the Income Tax Department focus on litigation involving complex legal issues and high tax effects, the monetary thresholds for the filing of departmental (revenue) appeals have been raised from INR 2 million to INR 5 million for appeal before the second level appellate authority, i.e. the ITAT, from INR 5 million to INR 10 million for appeal before the High Court, and from INR 10 million to INR 20 million for appeal before the Supreme Court of India.




Expeditious refundCBDT issued corporate tax refunds amounting to INR 116 billion to 102,392 taxpayers between April 1, 2020 and May 21, 2020.16 The refund process has been expedited specifically during the COVID-19 pandemic to ensure timely cashflow in the hands of taxpayers.Tax collectionThe net direct tax collection for FY 2019–20 was less than the net direct tax collection for FY 2018–19.17 However, the fall in the collection of direct taxes is considered by the Government to be temporary in nature due to the historic tax reforms undertaken and much higher refunds issued during FY 2019–20. Direct tax collection in India during FY 2019–20 was grossly impacted due to a reduction of the corporate tax rate for all existing domestic companies from 30% to 22%, incentives for new manufacturing domestic companies with a reduced tax rate of 15%, and a reduction in the MAT rate from 18.5% to 15%. The revenue impact of these reforms has been estimated at INR 1.45 trillion (approximately).

The year ahead

India has been a front runner in introducing digital tax in all its possible forms. Specifically, in the context of Expanded Levy introduced from April 2020, non-resident e-commerce operators have been caught off guard, more so since it has been introduced at a time when they are also battling the fallout from the COVID-19 pandemic. Given that there are more questions to be addressed in order to operationalise the law, stakeholders are eagerly waiting for the Government to issue clarification with regard to exemptions, double taxation, applicability in respect to services provided to parent companies, etc.The year ahead looks promising since the Government has introduced a number of tax concessions to attract foreign investment. The reduced corporate tax rate of 15% for manufacturing companies is a welcome move and is likely to accelerate progress on the “Make in India” initiative of the country.The Government has been focusing on reducing the long-drawn litigation in the country. The introduction of the Vivad se Vishwas Scheme is likely to result in the speedy and timely settlement of some of the outstanding litigations. The Government has undertaken a massive exercise to move tax compliance, including scrutiny audits, from offline to online mode. This should result in the easing of undertaking compliance, quicker refunds, and aid in monitoring the progress of audit/litigation.

* * *

Endnotes1. Indian Economic Survey 2019–20.2. See https://www.livemint.com/news/india/covid-19-impact-india-gdp-growth-at-3-1-i

n-q4fy20-11590751970512.html.3. See https://economictimes.indiatimes.com/news/economy/indicators/unemployment-r

ate-falls-to-pre-lockdown-level-cmie/articleshow/76528571.cms.4. See https://economictimes.indiatimes.com/news/economy/indicators/govt-rbis-prompt

-policy-measures-helped-reinvigorate-economy-with-minimal-damage-finance-mi nistry-report/articleshow/76527633.cms.

5. Union Finance Minister’s Budget 2020 Speech: https://www.indiabudget.gov.in/doc/Budget_Speech.pdf.




6. Union of India vs Azadi Bachao Andolan (2003) (263 ITR 706) (SC).7. See http://egazette.nic.in/WriteReadData/2019/214648.pdf.8. See https://www.ey.com/Publication/vwLUAssets/ey-worldwide-corporate-tax-guide-

2019/$FILE/ey-worldwide-corporate-tax-guide-2019.pdf.9. Budget 2020–21 – Speech of the Finance Minister of India.10. As per the Indian Press Release dated July 2, 2019.11. Tata Teleservices Ltd. vs CBDT (2016) (386 ITR 30).12. Notification No. S.O. 3264(E) [NO. 61/2019 (F.NO. 370149/154/2019-TPL)] dated

September 12, 2019.13. Faceless Assessment – National E-Assessment Centre – CBDT Press Release dated

October 7, 2019.14. Circular No. 27/2019 [F.No. 225/249/2018-ITA.II] dated September 26, 2019.15. Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 dated

March 31, 2020.16. As per the Press Release dated May 22, 2020.17. As per the Press Release dated June 7, 2020.



Lokesh ShahTel: +91 98 7107 2739 / Email: [email protected] Shah is a Partner in the Direct Tax practice of L&L Partners. He specialises in transaction tax, international tax and transfer pricing.He is a Chartered Accountant and a Lawyer and has 16 years of extensive experience in advising several Indian corporates and multinational enterprises in interpretation and application of tax treaty provisions on a variety of complex transactions, structuring inbound and outbound investments, onshore and offshore private equity fund structures, and transactions involving acquisitions, joint ventures, sale, restructuring and/or divestments.He also co-leads the Start-ups and Private Client Practice, and is engaged in advising high-net-worth individuals on trust and estate planning.

Devashish PoddarTel: +91 97 9984 2926 / Email: [email protected] Poddar is a Tax Advocate, presently working with L&L Partners, New Delhi (formerly Luthra & Luthra Law Offices). He is currently working in the field of ‘Direct Taxation and other allied laws’. Prior to joining L&L Partners, New Delhi, Devashish was a Tax Consultant at EY (formerly Ernst & Young), a leading global professional services organisation.Devashish is also a Chartered Accountant and has advised many clients in the past, principally in the industry of telecommunications, technology, media and entertainment. He has worked with large Indian groups, advising them on long-term value creation, tax and structuring issues.

L&L Partners Law Offices1st and 9th floors, Ashoka Estate, 24 Barakhamba Road, New Delhi 110 001, India

Tel: +91 11 4121 5100 / URL: www.luthra.com




IndonesiaMulyonoMul & Co


IntroductionThe Indonesian legal system is primarily based on the civil law model of which the laws and regulations are codified into a set of hierarchical statutory instruments. The taxation laws are a subset of the national laws. Article 23A of the Constitution of the Republic of Indonesia of 1945 states that “[t]axes and other compulsory levies required for the needs of the state are to be regulated by Law”. There are currently around 11 key taxation laws in Indonesia. Under each of these laws, there are further implementing regulations issued by the government, the Ministry of Finance (“MoF”), and/or the Director General of Tax (“DGT”). For local taxes, the implementing regulations can be found in the Regional Government Regulation and the Governor/Regency Head Regulation. There are also DGT (circular) letters, which are not considered part of the formal laws, but in practice, they are generally followed by the tax officials.


Introduction of financial policy and systems stability measures for handling COVID-19 in the framework of facing threats that endanger the national economy and/or stability of financial systemsThe spread of the Coronavirus disease (“COVID-19”) was declared by the World Health Organization as a pandemic in most countries around the world, including Indonesia. This has had an impact, among other things, on slowing national economic growth, decreasing state revenue, and increasing spending and financing, so that various government efforts are needed to save the health of the people and the national economy. Based on the above, the government has published Government Regulation in place of Law Number 1 of 2020, which was later enacted as Law Number 2 of 2020, to address the above issue. In maintaining financial stability, a State Financial Policy has been prepared, covering state revenue policies including taxation policies, and state expenditure policies including regional financial policies and financing policies. Policies in the field of taxation in this law include:• adjustment of tax rates for domestic corporate taxpayer income and permanent

establishment;• taxation treatment in trading activities (e-commerce) through electronic systems

(Perdagangan Melalui Sistem Elektronik, or “PMSE”);



Mul & Co Indonesia

• extension of time for the implementation of rights and fulfilment of taxation obligations; and

• introduction of customs facilities in the form of exemption or relief of import duties in the context of handling emergency conditions and the recovery and strengthening of the national economy.

In this regulation, it is stated that there is a reduction rate for domestic corporate taxpayers and permanent establishment taxpayers. The corporate income tax rate is reduced to 22% applicable in 2020 and 2021, and 20% in 2022. For domestic taxpayers in the form of publicly listed companies, with the total number of shares being traded on a stock exchange in Indonesia of at least 40% and provided they meet certain requirements, a corporate income tax tariff of 3% lower than the above rate is applied. This law has also provided the legal foundation of Value-Added Tax (“VAT”) collection by the DGT for foreign traders, foreign service providers, and foreign organisers that conduct activities through PMSE. The implementing regulation of this provision is also introduced in an implementing regulation by the DGT in 2020. To facilitate the exercise of tax rights and/or fulfilment of tax obligations due to the COVID-19 pandemic, an extension of the time to exercise rights and fulfilment of various tax obligations has also been given, as stipulated in Article 8 of Law Number 2 of 2020. For example, the extension of individual income tax return submissions for a month without being imposed an administrative sanction, and the extension of tax objection letters for six months maximum.The MoF may also provide customs facilities in the form of exemption or relief of import duties in the context of handling the COVID-19 pandemic and/or facing threats that endanger the national economy and/or stability of the financial system. For example, exemption of VAT, import taxes, and other taxes for certain goods needed to tackle COVID-19.The implementation of the National Economic Recovery Program provides the framework for supporting state finances to save the national economy.

Introduction of tax incentives in response to the COVID-19 pandemic

The spread of COVID-19 requires a response from the government. The government needs to protect the health and safety of lives as well as business sectors. To respond to the impact of COVID-19 in Indonesia, the government must allocate a national budget, regional budgets, human resource support in the health sectors and support for the health equipment providers, and must ensure the stability of the stock market. Therefore, tax facilities are required to support these efforts. These tax facilities aim to support Indonesia and foster tax awareness and require a legal basis in the form of government regulation.The government has issued Government Regulation Number 29 of 2020 on Income Tax Facilities in the framework of handling COVID-19 (“PP 29”). Based on Article 2 of PP 29, the facilities of income tax include:• additional net income reduction;• donations that can be deducted from gross income;• additional income received or acquired human resources in the health sector;• income in the form of compensation and reimbursement for the use of property; and• repurchase of shares traded in the stock exchange.Income tax facilities related to handling COVID-19 in PP 29 are as follows:• Tax incentive for health equipment production and household health supplies. Domestic

taxpayers producing medical devices, antiseptic hand sanitisers, and disinfectants can receive an additional reduction in net income by 30% of the cost of production incurred.



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The health equipment includes hand sanitiser, disinfectant, surgical masks, personal protective equipment, surgical gloves, ventilators, and diagnostic test reagents.

• Donations in the handling of COVID-19. Taxpayers who make donations in response to the COVID-19 pandemic may account for donations as a deduction for gross income. The donations are given to the National and Regional Agency for Disaster Countermeasure, Ministry of Health, Ministry of Social Welfare, or another donation collection agency.

• Income tax incentive for healthcare professionals in charge of providing healthcare services for the handling of COVID-19. The honorarium and/or other remuneration from the government for healthcare professionals can receive such additional income in full, as it is subject to income tax at 0% rate.

• Tax incentive for provision of the property that is used in handling COVID-19. The taxpayers that rent land, buildings or other property to the government in order to handle COVID-19 and obtain rental income from the government can receive such income in full, as it is subject to income tax at 0% rate.

• Buyback stock on stock exchanges. In addition to providing facilities for the activities in the handling of COVID-19, the government also provides facilities to issuers who repurchase shares traded on the stock exchange (shares buyback) in order to maintain the stability of the stock market based on central government policy or the Financial Services Authority in the framework of the stabilisation of the stock market. The facility provided is a taxpayer who purchases back the shares until September 30, 2020, is deemed to continue to meet certain requirements to obtain a lower corporate income tax rate of 3% from the general corporate income tax rate.

Other incentives have been introduced by the MoF as stipulated by MoF Regulation Number 44/PMK.03/2020. The incentives introduced in this MoF Regulation are as follows:• exemption of employee income tax for companies in certain business sectors for

employees receiving a total salary of Rp 200 million;• exemption of final income tax for small- and medium-sized enterprises for the period

of April 2020 to September 2020;• reduction of monthly income tax instalments for certain business sectors to 30% for the

period of April 2020 to September 2020; • exemption of Article 22 import taxes for business in certain sectors, companies that receive

import facilities for export, and other export-oriented companies in bonded zones; and • faster restitution with the overpayment amount of Rp 5 billion for certain business

sectors, companies that receive import facilities for export, and other export-oriented companies in bonded zones.

Taxpayers need to submit a request through the DGT portal to obtain the above facilities. Further, the taxpayers also need to submit the realisation report of the above incentives using certain forms through the DGT portal. If the taxpayers do not submit such report, there is a risk that the taxpayers will not be given these tax incentives.In July 2020, MoF then issued a new MoF regulation which expands the type of industries to receive the above tax incentives. This MoF regulation also extends the period of tax incentives until December 2020.

A new tax implementing guidelines of trading activities through PMSE

Indonesian Government Regulation first defined PMSE in Article 1 paragraph (2) of Government Regulation Number 80 of 2019. PMSE is defined as trading transactions that are carried out through a series of electronic devices and procedures. PMSE can be carried out by business actors, consumers, personal, and state implementing agencies, in



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accordance with statutory provisions. Business actors include domestic business actors (domestic traders, domestic electronic trading providers, domestic intermediary facility providers), and overseas business actors (overseas traders, overseas electronic trading providers, overseas intermediary facility providers). However, based on Article 7 paragraph (1) of Government Regulation Number 80 of 2019 for overseas PMSE, business actors who actively make offers to consumers in Indonesia can be considered to meet physical presence criteria or be deemed a permanent establishment (“BUT”) in Indonesia, if it meets the permanent establishment criteria according to the Tax Treaty or Indonesian income tax law.Further, the MoF then issued MoF Regulation Number 48/PMK.03/2020 concerning Procedures for Appointment of Collectors, Collection, and Deposit, as well as Reporting Value-Added Tax on Utilization of Intangible Taxable Goods and/or Taxable Services from Outside the Customs Area within the Customs Area through PMSE. This regulation first defines a PMSE as one of the business methods in Indonesia and overseas, which is carried out through electronic systems and procedures.This MoF regulation has also introduced the specific criteria that can be used as a threshold for determining the existence of PMSE in the form of number of transactions, transaction value, number of shipping packages, and/or the amount of traffic or access. These criteria are further detailed in a DGT regulation.Furthermore, businesses that conduct business through PMSE can conduct their business through facilities that are made and managed directly by themselves or through facilities owned by the electronic commerce providers (“PPMSE”).Article 5 of PMK-48 states that there are specific criteria for purchasers of goods/service recipients for PMSE transactions, as follows:• residing or domiciled in Indonesia:

• the correspondence or billing address of the purchaser of the goods and/or the recipient of the service located in Indonesia; and/or

• the selection of country at registration on the website and/or system provided/determined by the PMSE VAT collector is Indonesia;

• the payments using debit, credit and/or other payment facilities provided by institutions in Indonesia; and

• conduct transactions using internet protocol addresses in Indonesia or use telephone numbers with Indonesian country telephone codes.

The PMSE VAT collection objects are intangible taxable goods utilisation (including the use of digital goods, for example, software, multimedia, electronic data), and/or taxable services utilisation (including the use of digital services, for example, software-based services).The VAT rate collected by the PMSE VAT collector is 10% of the tax base and is payable at the time of payment by the purchaser of goods and/or service recipients. The PMSE must pay the VAT at the latest at the end of the following month after the tax period ends and the VAT that has been paid must also be reported quarterly for the duration of three tax periods that are conducted no later than the end of the following month after the quarterly period ends by the PMSE. The report prepared by the PMSE must contain at least:• the number of goods buyers and/or service recipients;• the payment amount;• the amount of VAT collected; and• the amount of paid VAT,for each tax period.



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The above regulation will come into force on July 1, 2020, with the issuance of DGT Regulation Number PER-12/PJ/2020 (“PER-12”, which is derived from PMK 48/2020) on certain specific criteria that can be used as a threshold to determine the existence of a PMSE which includes the number of transactions, transaction value, number of shipping packages, and/or the amount of traffic or access.PER-12 has provided the specific threshold for a PMSE to be appointed as a VAT collector, which first includes the value of transactions with buyers in Indonesia exceeding Rp. 600 million in a year or Rp. 50 million in a month, and second, the amount of traffic or access in Indonesia exceeds 12,000 in a year or 1,000 in a month. The PMSE, as VAT collectors, will get a tax identification number from the DGT. A tax identification number is used for tax administration as identification or the identity of VAT collectors in exercising their rights and fulfilling their taxation obligations. The tax identification number is provided by the DGT by issuing a Registered Certificate and Tax Identity Number Card. The tax identification number can also be revoked in accordance with the provisions of the legislation in the field of taxation. The Registered Certificate contains information on the decision and date of appointment and explains the name, tax identification number, correspondence address, e-mail address, and categories of PMSE VAT collectors. Meanwhile, the Tax Identity Number Card has a form that resembles a tax identification number but is written in Indonesian and English. The card contains information about tax identification numbers, names, addresses, tax service offices, and registered dates.

Income tax facility for investment in specific business areas and/or in certain areas

Government Regulation Number 78 of 2019 (“GR 78”) is issued to encourage and increase direct capital investment activity, both in terms of economic growth and development of the business sector. GR 78 is also needed to provide legal certainty, improvement of the business climate for direct investment activities in certain areas of business and/or in certain areas, as well as equitable and accelerated development. There are 166 business activities that are covered in this Government Regulation to receive income tax facilities.The criteria of the domestic taxpayers that will receive such investment includes:• a high investment value or for export; • a large workforce absorption; or • a high local content.Further, Article 3 paragraph (1) of GR 78 states that income tax facility given to such taxpayers is in the form of:• net income reduction by 30% of the amount of capital investment in the form of fixed

assets, including land for main business activities, charged for six years each of 5% per year;

• accelerated depreciation of tangible fixed assets and expedited amortisation of intangible assets acquired in the framework of investment, in relation to the useful life and depreciation rate and amortisation rate;

• the imposition of income tax on dividends paid to the taxpayer abroad other than the permanent establishment in Indonesia by 10%, or the lower tariff according to the prevailing double taxation agreement; and

• longer compensation for longer than five years to 10 years.



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Tax examination abroad

As a further implementing regulation on the Exchange of Information of International Treaties, the DGT has issued a guideline for conducting tax examination abroad. Tax examination abroad is defined as the presence of representatives of the DGT in the context of searching and/or collecting information carried out by the tax authority of the partner country or partner jurisdiction, or vice versa, based on the agreement of both parties.Tax examination abroad includes overseas and domestic examination activities. Tax examination abroad is carried out as a follow-up exchange of information on request. The DGT is authorised to carry out reciprocal tax examination abroad with authorities in the partner country or partner jurisdiction, which is coordinated by the Director of International Taxation. The information requested through the tax examination abroad has the potential to resolve other taxation issues (if any). The partner country or partner jurisdiction to conduct the tax examination abroad is a country or jurisdiction that is bound by the Indonesian government in international agreements, both bilateral and multilateral. The intended international agreement is related to the exchange of information on matters relating to taxation.Some of the international agreements referred to include Tax Treaty agreements for the exchange of information regarding taxation needs (Tax Information Exchange Agreement), and conventions on joint administrative assistance in the field of taxation (the Convention on Mutual Administrative Assistance in Tax Matters).The DGT determines the team that will carry out the tax examination abroad by Decree of the DGT. The team consists of:• the Director of International Taxation or his representative;• a Tax Auditor;• a Tax Audit Officer;• an Investigator; and/or• a DGT employee. All information obtained and exchanged through the tax examination abroad is information that must be kept confidential in accordance with statutory provisions in the field of taxation and International Treaties. However, there are several challenges in implementing the tax examination abroad:• Not all countries have a tax examination abroad policy. To activate the tax examination

abroad, it requires an international agreement approved by both countries. Indonesia has signed and ratified the multilateral convention agreement on Joint Administrative Assistance in the Field of Tax (Convention on Mutual Administrative Assistance in Tax Matters). By signing this agreement, the DGT can find out which other countries have also signed the convention.

• The existence of several countries that only allow passive participation of tax inspectors of other countries in the tax examination abroad. This means that foreign auditors will be limited to make observations and only deal with state tax authority auditors with the source of evidence.

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting

Through Presidential Regulation Number 77 of 2019 concerning the Ratification of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base



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Erosion and Profit Shifting (“MLI”), Indonesia signed the MLI agreement in Paris, France on June 7, 2017 along with 47 other countries. This regulation is enacted as a continuation of Indonesia’s involvement in the MLI.The ratification of the regulation is expected to provide convenience for Indonesia in the context of determining taxes for multinational companies from the country concerned, as well as being the main law in combatting double taxation avoidance practices in the context of eroding the taxation base and shifting profits which are carried out simultaneously and efficiently. With this ratification, Indonesia can secure tax revenue by preventing tax avoidance through misuse of the Tax Treaty. The forms of avoidance that are often carried out by business entities include breaking up organisational functions, breaking contract time, contract engineering, and ownership engineering.The Multilateral Instrument is also a joint effort undertaken globally to prevent the practices carried out by taxpayers and business entities to divert profits and erode a country’s tax base, or Base Erosion and Profit Shifting. The development of the Multilateral Instrument can avoid the long and time-consuming negotiation process which has been seen in bilateral agreements. Concerning interactions between the Multilateral Instrument and the existing agreement, the Multilateral Instrument will provide a compatibility clause. The Multilateral Instrument contains a series of steps that will reduce the opportunity for multinational companies to avoid tax. This is related to topics such as hybrid mismatch, treaty abuse, increasing dispute resolution, and avoidance of permanent establishment status.

The year ahead

The COVID-19 pandemic has had a significant impact on the economy and, ultimately, on the taxation climate in Indonesia. The government has introduced various economic and tax incentives to the taxpayers. The tax incentives cover the reduction of the general corporate income tax rate for corporate taxpayers, as well as for publicly listed companies. Further, certain economic sectors have also been given specific incentives, such as a reduction in monthly tax instalments, employee income tax, import taxes, and VAT. As the introduction of the appointment of digital goods and service providers as VAT collectors, the DGT would like to strengthen and widen the VAT collection base, in particular for foreign taxpayers that do not have permanent establishments in Indonesia according to existing tax treaties or income tax law. As for the imposition of digital tax, Indonesia is expected to wait for the general consensus among G20 and OECD countries.

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Disclaimer

This chapter contains general information only. Mul & Co nor its professionals are, by means of this chapter, rendering other professional advice or services. This chapter is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. Mul & Co and its professionals shall not be responsible for any loss whatsoever sustained by any person who relies on this chapter.



Mul & CoJl. Pluit Raya 121 Blok A/12, Penjaringan, North Jakarta, 14440, Indonesia

Tel: +62 21 668 1998 / Fax: +62 21 668 1997 / URL: www.mul-co.com

MulyonoTel: +62 21 668 1998 / Email: [email protected] 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 working experience 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, telecommunications, 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.

Mul & Co Indonesia



IrelandAndrew Quinn, Lynn Cramer & Niamh Cross

Maples Group

Overview of corporate tax work over the last year

Financial servicesIreland is a leading European jurisdiction for the establishment of bond-issuing special purpose vehicles (“SPVs”), securitisation companies. In 2019, the Irish share of the number of Euro area “Financial and Vehicle Corporations” (“FVCs”) was 27.6%. FVCs are bond-issuing companies required to report to the European Central Bank.Ireland is also a leading domicile for internationally distributed investment funds. In 2019, the total funds assets under management in Ireland was €5.2 trillion, with the number of funds domiciled in Ireland being 7,707 and approximately €2 trillion held in these Irish domiciled funds.Mergers and acquisitions2019 was another strong year for M&A activity in Ireland with deals encompassing an Irish aspect totalling $44.5 billion, while M&A activity abroad rose 51% to $16.3 billion. Aircraft leasing and aviation financeIreland is a global centre for aircraft leasing with over 50 aircraft leasing companies based in Ireland, including 14 of the world’s top 15 lessors. Over the past 10 years, the commercial aviation industry has enjoyed sustained growth. However, 2020 is expected to be a challenging year for this industry worldwide as travel restrictions introduced as part of the response to COVID-19 have severely restricted operations. Intellectual propertyIreland is a leading location for the development, exploitation and management of intellectual property (“IP”). According to IDA Ireland, the number of global companies centralising their IP management in Ireland has made Ireland one of the largest exporters of IP in the world. Eight of the top 10 global technology companies, eight of the top 10 global pharmaceutical companies and 15 of the top 25 medical devices firms in the world are located in Ireland. In recent years, Ireland has attracted a range of innovative social media companies, including Google, Facebook, Twitter and LinkedIn, all of whom have established substantial operations in Ireland.Tax disputes2019 was a significant year for Ireland in the area of tax disputes. The Tax Appeals Commission (the “TAC”), which was newly reconstituted in 2016, made progress in dealing with a backlog of cases. The TAC closed 1,584 appeals during 2019 with the quantum of monies involved amounting to approximately €665 million. One hundred and twelve hearings are scheduled for 2020 with further hearings to be added during the year. As such, this represents a significant area of work for Irish tax practitioners.



Maples Group Ireland

Of particular note are the developments in the Perrigo tax case over the past year. This case arose out of a €1.64 billion assessment issued by the Irish Revenue Commissioners (“Revenue”) in 2018 against Perrigo Company plc. In February 2019, Perrigo brought proceedings in the Irish Commercial Court seeking judicial review of the decision by Revenue to raise that assessment. Those judicial review proceedings were heard remotely during the COVID-19 restrictions and at the time of writing, judgment on the case is awaited. The EU General Court determined on 15 July 2020 that Ireland did not give Apple illegal State Aid, so overturning the European Commission decision. This ruling may be appealed by the European Commission to the European Court of Justice.


COVID-19 pandemic responseAt the time of writing, Revenue has issued guidance on many tax issues arising from the COVID-19 pandemic and the restrictions introduced to reduce the spread of the disease. Among the measures introduced by Revenue are the following:• The suspension of the application of a surcharge for late corporation tax return filings for

accounting periods ending June 2019 onwards. The late filing will also not trigger any restriction of reliefs, such as loss relief and group relief, as would ordinarily be required.

• The suspension of Revenue’s debt collection and accrual of interest on late payments for the January–June Value-Added Tax (“VAT”) periods and February–June pay-as-you-earn (“PAYE”) (Employer) liabilities 2020.

• The filing deadline for all 2019 share scheme returns has been extended from 31 March 2020 to 30 June 2020.

• The 90-day employer filing obligation applicable to the Special Assignee Relief Programme (“SARP”) has been extended for a further 60 days.

• Cross-border workers relief will not be affected by employees being required to work from home in Ireland due to COVID-19. Similarly, Revenue will not enforce Irish payroll obligations where an employee relocates temporarily to Ireland during the COVID-19 period and performs duties for their employer from Ireland.

• Revenue will not strictly enforce the 30-day notification requirement for PAYE dispensations applicable to certain short-term business travellers.

• PAYE exclusion orders will not be adversely affected by an employee working more than 30 days in Ireland as a result of COVID-19.

• For the purposes of Irish tax residency rules, where a departure from Ireland is prevented due to COVID-19, Revenue will consider this force majeure for the purpose of establishing an individual’s tax residence position.

• For the purposes of corporate tax residence, Revenue will disregard presence of employees, directors, service providers or agents in Ireland or outside Ireland resulting from COVID-19-related travel restrictions. In these circumstances, Revenue has advised that the individual and company should maintain a record of the facts of the bona fide relevant presence in or outside Ireland.

• Following the adoption of Council Directive (EU) 2020/876 which allowed for the deferral of the exchange dates for DAC2, and the filing and exchange dates for DAC6, Revenue has confirmed that the deadline for filing DAC2 returns in respect of the 2019 reporting period is now deferred until 30 September 2020. This deadline will also apply for the filing of Common Reporting Standard and Foreign Account Tax Compliance Act returns. Finally, DAC6 reporting deadlines have been deferred by six months.




• Importation of goods to combat the effects of COVID-19 from outside the European Union (“EU”) without the payment of Customs Duty and VAT from 20 January 2020 to 31 July 2020.

OECD BEPS and domestic legislation

There have been significant developments in Irish corporate tax law on the international front this year. These developments have been motivated by the Irish Government’s continued commitment to the implementation of the reforms set out in “Ireland’s Corporation Tax Roadmap” which was published in September 2018. This roadmap laid out the next steps in Ireland’s implementation of its various commitments to international tax reform. Most significant is Ireland’s implementation of the reforms proposed as part of the OECD Base Erosion and Profit Shifting (“BEPS”) process, the EU Anti-Tax Avoidance Directive (“ATAD”) and the EU Directive on Administrative Cooperation. The most significant developments in Ireland’s implementation of these initiatives during 2019 and 2020 concerned the following:a) Transfer pricing rules.b) Anti-hybrid rules.c) DAC6 – Mandatory Disclosure Regime.d) Double taxation treaties.e) Extension of exit tax regime.Transfer pricing rulesFormal transfer pricing legislation (the “Irish TP Rules”) was introduced for the first time in Ireland in 2010 in respect of accounting periods commencing on or after 1 January 2011, for transactions the terms of which were agreed on or after 1 July 2010. A number of changes to the Irish TP Rules were introduced as part of the Finance Act 2019 and these apply from 1 January 2020. The changes bring the Irish TP Rules in line with the 2017 OECD Guidelines. The changes significantly broaden the scope of the Irish TP Rules and include an extension of the Irish TP Rules to non-trading and capital transactions. Additionally, arrangements predating 1 July 2010 are brought into scope for the first time. In order to fall within the Irish TP Rules, there must be an arrangement between associated parties involving the supply and acquisition of goods, services, money, intangibles or chargeable assets. The rules provide that in the case of a transaction where the amount paid to the supplier exceeds, or the amount received from the customer is less than, the arm’s length price, then the profits of the customer or vendor, respectively, will be calculated as though the price was an arm’s length price.The Irish TP Rules apply the arm’s length principle which is to be interpreted in accordance with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrators (the “OECD Guidelines”).The rules apply to both cross-border and domestic transactions. The Irish legislation contains rules to eliminate double counting where domestic transactions only are involved.The rules apply even where both parties are within the charge to Irish tax to ensure that the rules are not discriminatory from an EU law perspective. However, where the profits of one party are adjusted under the legislation, the rules provide that, where the other party is also within the charge to Irish tax, they can make an election to use the arm’s length price in the calculation of their profits so that the group is not disadvantaged.




Two persons are associated if one controls the other or both are controlled by the same person. The controlled person in each case must be a company. A company will be treated as controlled by an individual if the individual, together with relatives of that individual (i.e. husband, wife, ancestor, lineal descendant, brother or sister), control it.Although the legislation was extended to include small- and medium-sized enterprises (“SMEs”), this is subject to enactment under a Ministerial order. Accordingly, the new transfer pricing regime does not currently apply to enterprises that employ less than 250 employees, and have a turnover not exceeding €50 million, or total assets not exceeding €43 million in value.Anti-hybrid rulesIreland has implemented legislation to address hybrid mismatch arrangements as required by EU Council Directive (EU) 2017/952, amending Directive (EU) 2016/1164 (the “Anti-Tax Avoidance Directive II”). The Irish implementing legislation took effect from 1 January 2020 in respect of all payments made after that date. Grandfathering of historic structures was not introduced. A hybrid mismatch arrangement is a cross-border arrangement that generally involves a hybrid entity or hybrid instrument and results in a mismatch in the tax treatment of a payment across jurisdictions. Relationship between the partiesThe Irish legislation generally (other than with respect to withholding tax and tax residency forms of hybrid mismatch) only applies where the parties are (i) associated enterprises, (ii) head offices and permanent establishments, (iii) permanent establishments of the same entity, or (iv) parties to a structured arrangement. Broadly, enterprises will be associated where:a) one enterprise holds a certain percentage (25% or 50% depending on the particular

provision) of the shares, voting rights or rights to profits in the other enterprise, or if there is a third enterprise that holds an equivalent interest in both enterprises;

b) both enterprises are included in the same set of consolidated financial statements prepared under international accounting standards or Irish generally accepted accounting practice, or both enterprises would be included in the same set of financial statements if such statements were to be prepared in accordance with those accounting practices (this is subject to certain exceptions); or

c) one enterprise has significant influence in the management of the other enterprise, where significant influence means the ability to participate on the board of directors or equivalent governing body of that enterprise, in its financial and operating policy.

A structured arrangement is one where the mismatch outcome is priced into the terms of the arrangement or the arrangement was designed to give rise to a mismatch outcome. Forms of hybrid mismatchThe forms of hybrid mismatch that the legislation addresses are those arising by virtue of double deductions, permanent establishments, financial instruments, hybrid entities, withholding tax and tax residency.Broadly, where a payment has been “included” by a payee, such inclusion will generally mean that a hybrid mismatch does not arise. Payments are considered to be included where the payee is:• chargeable to tax on that payment (other than on a remittance basis);• exempt from tax on its profits or gains;




• established in a jurisdiction that does not impose tax on such payment; or• subject to a controlled foreign company charge or foreign company charge. ApplicationThe rules could apply whenever Irish companies make payments that give rise to a tax deduction in Ireland, but no other country taxes the associated receipt by reason of hybridity. If the hybrid rules apply to such a payment, the Irish company may be denied a tax deduction for the payment.EU DAC6 – Mandatory Disclosure RegimeIreland has implemented the EU DAC6 rules which require intermediaries and, in certain cases, taxpayers to notify tax authorities when they promote or, broadly, assist in implementing cross-border arrangements with particular tax “hallmarks”.An arrangement will be “cross-border” where it concerns either more than one EU Member State or one EU Member State and a third country (a non-EU Member State). A cross-border arrangement will be reportable if it falls within any one of the hallmarks set out in Annex IV of DAC6. Of the five categories of hallmarks, two have to also satisfy a “main benefit test” while the other three do not. The main benefit test will be met where obtaining a tax advantage (as defined in the Irish Finance Act 2019) is one of the main benefits that a person may reasonably expect to derive from the arrangement. Reporting obligations exist for intermediaries and, in certain cases, taxpayers. The term “intermediary” is very broad and can apply to a number of different participants in an arrangement. It includes anyone who designs, markets, organises or makes available or implements a reportable arrangement, or anyone who aids or assists with reportable arrangements and knows, or could reasonably be expected to have known, that they are doing so. This could include accountants, financial advisers, lawyers, in-house counsel and banks. If the arrangement is deemed to be reportable, the ensuing reporting obligation lies with all intermediaries involved in a transaction, unless an intermediary can prove that another intermediary involved has reported the arrangement. Disclosure need only be made once in respect of an arrangement. An intermediary is not required to report information with respect to which a claim of legal professional privilege could be maintained by the intermediary in legal proceedings. However, in such cases, the intermediary must, without delay, notify any other intermediary, or the relevant taxpayer if there are no other intermediaries, of the obligations imposed on the other intermediary/relevant taxpayer, as appropriate. The obligation may revert to the taxpayer in certain situations, including where all EU-based intermediaries invoke legal professional privilege.As originally implemented, reportable arrangements occurring between 25 June 2018 and 30 June 2020 were required to be reported no later than 31 August 2020. In addition, from 1 July 2020, reportable arrangements were intended to be reported within 30 days beginning:• from the day after the arrangement is made available for implementation;• from the day after the arrangement is ready for implementation;• from when the first step in the implementation has been made, whichever is first; or• from the day after the intermediary provided, directly or by means of other persons, aid,

assistance or advice.However, at the time of writing, as part of the response to COVID-19, the EU permanent Member State representatives on the Permanent Representatives Committee (“Coreper”)




reached an agreement for an optional six-month deferral for both reporting and information exchange under DAC6. Ireland has implemented this deferral with the following effect:• Reportable cross-border arrangements implemented between 25 June 2018 and 30 June

2020 should now be reported by 28 February 2021 (i.e. up to six months after the original deadline of 31 August 2020).

• Reportable cross-border arrangements occurring between 1 July 2020 and 31 December 2020 should now be disclosed within 30 days as from 1 January 2021.

• Reportable cross-border arrangements occurring on or after 1 January 2021 should also be disclosed within a 30-day period.

The Irish legislation provides for monetary penalties for non-compliance. The severity of penalties depends on the type of breach involved. Certain breaches by taxpayers and intermediaries carry a penalty of up to €4,000, with a further penalty of up to €500 per day for each day on which the failure continues. The Irish implementation of DAC6 is a significant new development potentially affecting many ordinary cross-border commercial transactions. Intermediaries and taxpayers will need to monitor transactions and assess whether they are reportable, particularly bearing in mind the complex legal interpretation of the legislation and potential exclusions.Double taxation treatiesOn 13 June 2019, Ireland signed a new treaty with the Netherlands which will replace the existing treaty on its entry into effect. Ireland and Switzerland signed a Protocol on 13 June 2019 amending the existing treaty and amending protocols. This was ratified by the Finance Act 2019.Negotiations have concluded for new treaties between Ireland and each of the following countries: Kenya; Kosovo; Oman; and Uruguay.In addition to the negotiation of new treaties, Ireland’s existing tax treaties will be modified by the operation of the OECD Multilateral Convention to Implement Tax Treaty Measures to Prevent BEPS (“MLI”). Ireland deposited its instrument of ratification of the MLI on 29 January 2019, which entered into force from 1 May 2019. The MLI operates so as to modify existing tax treaties, and how each treaty is modified depends on the method of implementation adopted by each contracting state. The key provisions in respect of Irish double tax treaties will be in relation to the tax treatment of transparent entities, dual resident entities, and the introduction of a principal purpose test (“PPT”). The PPT is significant and will essentially bring in a “business purpose” test that must be satisfied by a resident before it can be entitled to benefit from the treaty in question.Exit taxIreland introduced new “exit tax” rules for companies in the Finance Act 2018. The Finance Act 2019 extended those rules such that transfers by non-EU companies with a permanent establishment in Ireland will now also be captured. Previously, only companies resident in Ireland or another EU Member State were within scope.

Domestic tax court cases

Perrigo Company plcIt was announced in December 2018 that Revenue had assessed a subsidiary of Perrigo Company plc to a tax liability of €1.636 billion, not including potential interest or any applicable penalties. Perrigo has brought judicial review proceedings in respect of the Revenue assessment. Those judicial review proceedings were heard by the Irish High Court in June 2020 and, as at the time of writing, the written judgment of the Court is awaited.




The Revenue assessment related to the sale in 2013 by what was then known as Elan Pharma International of its interest in certain IP was treated by the Company as a trading transaction. Revenue, after reassessing the transaction, declared it should have been treated as a chargeable gain, which is subject to a higher tax rate. There has been significant public commentary on this matter given the size of the assessment and the broad application and significance of the tax position at issue.

European – Court cases and EU law developments

European Commission State Aid investigation – AppleThe European Commission decision relating to the Apple case was published on 19 December 2016. The investigation centred on whether Ireland allowed Apple to adopt a method of taxation that provided it with a competitive advantage and breached EU State Aid rules. The Commission concluded that this did occur, and ordered Ireland to recover approximately €13 billion, plus interest, from Apple.In coming to its decision, the Commission focused on the arm’s length principle and whether Ireland applied that principle in its taxation of Apple. The two Apple entities that were the primary focus of the decision were both non-Irish resident, but maintained an Irish branch. Under Irish law, at that time, only the profits derived from an Irish branch were subject to tax in Ireland. The Commission examined the profits which, in its view, should have been allocated to the branches under the arm’s length principle. The profits at stake were derived from the IP of the entities. Ireland had treated such profits as outside the scope of Irish taxation, on the basis that the entities were not resident in Ireland.As part of its decision, the Commission effectively determined that the absence of employees and verifiable activity in the head offices meant that a significant amount of that activity should be allocated to the Irish branches.The process could take a further three years before there is a final outcome.

Tax climate in Ireland

Ireland has a modern, open economy that attracts a significant amount of inward investment by multinationals and financial services businesses. Ireland has a 12.5% corporation tax rate for trading income on a regulated investment funds regime, a special purpose company regime that facilitates international financial transactions including securitisation and bond-issuance companies, a network of over 74 double tax treaties, broad withholding tax exemptions for outbound payments based generally on the EU or tax treaty residence of the recipient and a participation exemption for gains on shares. Ireland’s approach to international tax policy is one of full engagement, with international initiatives led by the OECD and the EU to combat tax avoidance and increase tax transparency. As set out above, Ireland is committed to the OECD BEPS global tax reform process and has implemented many of the BEPS recommendations.

Developments affecting the attractiveness of Ireland for holding companies

The Irish tax treatment of holding companies includes a participation exemption from capital gains, assuming certain conditions are met, and a 12.5% rate of corporation tax which applies to (a) dividends from other EU or treaty countries, or countries that have ratified the Convention on Mutual Assistance in Tax Matters which are sourced from trading activities, and (b) dividends from foreign portfolio companies (i.e. those in which




the Irish holding company has less than a 5% interest). Ireland also operates a foreign tax credit system which can eliminate or reduce any Irish tax liability on the receipt of foreign dividends depending on the amount of the credit.


SecuritisationIrish resident companies that hold and/or manage certain “qualifying assets” (which includes financial assets) and meet certain other conditions may be regarded as “qualifying companies” for the purposes of section 110 of the Irish Taxes Consolidation Act 1997 (“TCA”). The taxable profits of such companies under section 110 TCA are calculated as if they are trading entities, with the result that they can deduct funding costs, including interest swap payments, provided certain conditions are met. Any residual profit is liable to corporation tax at 25%. The nature of the regime has led to its use in a range of international finance transactions including repackagings, collateralised debt obligations and investment platforms. Certain changes to the regime were introduced in 2011 and again as part of the Finance Act 2019, which means that deductibility of funding costs may be restricted where interest is paid to certain persons.Investment fundsIreland offers an efficient, clear and certain tax environment for investment funds regulated by the Central Bank of Ireland known as the “gross roll-up regime”. As a general rule, investment funds (which fall within the definition of an “investment undertaking” for the purposes of section 739B TCA) are, broadly, not subject to tax in Ireland on any income or gains they realise from their investments, and there are no Irish withholding taxes in respect of distributions, redemptions or transfers of units by or to non-Irish investors, provided certain conditions are met. In particular, non-Irish resident investors and also certain exempt Irish investors must generally provide the appropriate Revenue approved declaration to the fund. Irish funds should therefore only be required to withhold investment undertaking tax on payments in respect of certain Irish investors.In addition, no stamp duty is payable in Ireland on the issue, transfer, repurchase or redemption of units in a regulated Irish fund. While Ireland has introduced a new tax regime for Irish real estate funds (“IREF”) holding Irish situate real estate which could entail additional withholding tax arising out of certain events, including distributions to investors, this does not affect the tax treatment discussed above where the investment fund does not hold Irish real estate assets.Finally, the provision of investment management services to a regulated investment fund is generally exempt from Irish VAT.Aircraft leasing and aviation financeIreland is a global hub for aviation finance with over 50 aircraft leasing companies based in Ireland, including 14 of the world’s top 15 lessors. Tax reform measures introduced as part of the BEPS programme will be relevant to this sector. For example, as set out above, the MLI will introduce a new PPT into Irish double tax treaties. This could deny a treaty benefit (such as a reduced rate of withholding tax) if it is reasonable to conclude, having regard to all facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.




While tax treaty access is key for aircraft lessors given the worldwide nature of their business, many would have substantial operations in Ireland so it is unlikely that the new PPT test would be an issue in that case.The EU ATAD interest limitation rules will also be a key consideration for any aircraft lessors. Aircraft lessors have traditionally utilised leverage to fund the acquisition of aircraft, so a restriction could be significant on the tax deductibility of those interest payments and lead to higher taxes.Real estateIREFs are regulated Irish funds investing in Irish property and related assets and are subject to specific tax treatment, including a potential withholding tax which applies on distributions from an IREF.The Finance Act 2019 contained further changes to the tax regime which applies to IREFs.The key points emerging from the Finance Act 2019 are as follows:a) The IREF can be subject to Irish tax if the amount of debt incurred exceeds 50% of the

cost of its IREF assets. There is relief where the debt incurred qualifies as third-party debt under the provisions.

b) The IREF can be subject to tax where it breaches certain ratio limits relating to the amount of its tax-adjusted interest expense. As above, there is a relief where the interest relates to debt qualifying as third-party debt.

c) The IREF can also be subject to tax where its accounts reflect a deduction for expenses or disbursements which are not wholly and exclusively laid out for the purposes of its IREF business.

The tax charge is a direct tax (rather than a withholding tax) of 20%. The computation of this tax charge is complex and will depend upon a number of factors.Additional anti-avoidance and compliance obligations were also introduced. Finally, the Irish Minister for Finance has noted that he will continue to review the tax treatment of IREFs and is open to further legislative amendments if he perceives the IREF regime is being used for ongoing tax avoidance. It would not be surprising if further changes are introduced.Intellectual propertyIreland is a leading location for the development, exploitation and management of IP. The 12.5% corporation tax rate on trading income, a 25% tax credit on the cost of eligible research and development activities, capital allowances on the cost of acquiring certain intangible assets and a large double tax treaty network to facilitate the flow of funds between Ireland and other countries, are all features of the Irish tax system that are relevant to a business with IP.

The year ahead

Ireland has a stable, competitive tax regime based on clear, long-established rules. International business has benefitted from this environment, hence the number of multinationals headquartered in Ireland and major investment funds that invest through Irish funds and investment companies. While it is a time of unprecedented change in the international tax environment, Ireland is keeping pace and adapting to these developments. While Ireland remains committed to its 12.5% tax rate and is indeed at the forefront of features such as the knowledge development box, it has also been among the first countries to implement OECD Country-by-Country Reporting, the MLI and other aspects of the OECD BEPS initiatives.




The Finance Act 2019 introduced many changes to the Irish tax landscape, including transfer pricing, DAC6 and anti-hybrid provisions. Guidance is expected to be published by Revenue in due course on each of these new provisions.As part of its implementation of EU ATAD, Ireland is running a public consultation on the introduction of interest limitation rules. The interest limitation rule in ATAD requires, broadly, EU Member States to limit tax deductions for net borrowing costs to 30% of a taxpayer’s earnings before interest, tax, depreciation and amortisation deductions (“EBITDA”), subject to certain exceptions. It is currently expected that the rules will be introduced by way of the Finance Act 2020 and implemented from 1 January 2021 or 2022.Final international recommendations on the taxation of the digital economy should be forthcoming from the OECD in 2020 under the so-called “BEPS 2.0 Project”. There may be further EU tax proposals throughout 2020–2021 on a range of tax issues, such as the common consolidated corporate tax base, financial transactions tax, digital sales tax and changes to the national veto system on direct tax matters. However, none of these proposals have unanimous support across the Member States, so compromise will be needed for these to progress any further.



Andrew Quinn Tel: +353 1 619 2038 / Email: [email protected] Andrew is Head of Tax at Maples and Calder, the Maples Group’s law firm. 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 Chair of the Irish Debt Securitisation Association, the industry group representing the Irish securitisation industry. Prior to joining the Maples Group, Andrew was a senior partner with a large Irish law firm, and before that a tax consultant with Ernst & Young. He has been recommended by a number of directories, including Chambers and Partners, The Legal 500, 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 multijurisdictional guide. Andrew is also the joint author of the book Taxing Financial Transactions, Irish Taxation Institute.

Lynn Cramer Tel: +353 1 619 2066 / Email: [email protected] Lynn is a partner at Maples and Calder, the Maples Group’s law firm. Lynn is a qualified solicitor in Ireland and an associate of the Irish Tax Institute with significant experience advising investment funds, SPVs and corporates on the Irish tax regime, with a particular focus on tax planning for international clients. She acts for a broad range of international clients including investment funds, asset managers, investors, international corporates, financial institutions and family offices. She has particular experience in advising investment funds, financial services clients, property funds and SPVs on all aspects of cross-border structuring, including advice on VAT and the establishment and financing of fund platforms.

Maples Group75 St. Stephen’s Green, Dublin 2, D02 PR50, Ireland

Tel: +353 1 619 2000 / URL: www.maples.com


Niamh Cross Tel: +353 1 619 2794 / Email: [email protected] Niamh is a lawyer with the Tax group at Maples and Calder, the Maples Group’s law firm and advises on a wide range of transactions including corporate, investment funds and financial services tax matters. Niamh has particular experience advising on carried interest structuring and financial services transactions.



IsraelBoaz Feinberg

Tadmor Levy & Co.


Types of corporate tax workOur tax department engages in various types of corporate tax work, including the following: • Representation of corporations and shareholders in front of the Israeli Tax Authorities

(ITA) and tax courts regarding international taxation issues, corporate tax, income tax, indirect taxes and real estate tax.

• Drafting tax legal opinions and memorandums.• Obtaining tax rulings and pre-rulings, including regarding withholding exemptions.• Tax assistance on M&A transactions.• Preparation of tax due diligence before acquisitions or investment rounds.

Significant deals and themes

M&AOur team secured a favourable ruling from the ITA regarding the taxation of a contingent value right issued to existing minority shareholders in a publicly traded company on NASDAQ. Our team represented numerous privately held companies in Israel to secure a valuable reorganisation ruling from the ITA.Corporate migrationOur team represented several Israeli companies in successful corporate inversions while transferring their shares to a new US holding company.Real estate transactionsOur team represented a US investment company with regard to tax issues relating to a USD 80 million real estate investment in Israel. Tax disputesOur team represents numerous Israeli corporations and shareholders before the assessment officers and state attorneys regarding various tax disputes.Withholding certificatesOur team represents numerous foreign investors in pursuit of exemptions/reduced tax rates on withholding requirements. Employee benefits and executive compsOur team represents many domestic and foreign companies with employees in Israel regarding equity-based incentives, including tax planning and representation with the ITA.



Tadmor Levy & Co. Israel


Domestic – cases and legislationIn the matter of Sakmesky held on February 26, 2019, the Jerusalem District Court determined that the shareholders of several “Family Companies” (flow-through entities for tax purposes) are not entitled to offset losses of one limited liability company against profits of another. In the matter of Rizman held on December 15, 2018, the Central District Court determined that in extreme cases, where there is a sale of shares of the company, the sale of reputation attached to the shareholder, the actual engine behind the success of the company, would also be taxed separately from the gain on the shares, which may bring about a reduction in the overall taxes levied on the shareholder for the sale.

BEPS

The BEPS rules are intended to bring a closer cooperation between countries in the field of international taxation, such as in BEPS Action 14: Making Dispute Resolution Mechanisms More Effective, which contains a Minimum Standard that seeks to improve the resolution of tax-related disputes between jurisdictions.BEPS Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting takes a similar approach.

Tax climate in Israel• The corporate income tax rate is 23%.• Capital gains tax for corporations is 23%.• The dividend tax rate is 30% for controlling shareholders and 25% for other shareholders.• Preferred income derived by preferred industrial and tech enterprises is subject to a

corporate tax rate of 6–7.5% in development area A, and elsewhere in Israel 6–16%, with no time limit. Dividends are taxed at 4–20%.

• The VAT standard rate is 17%.

Developments affecting attractiveness of Israel for holding companies

Legislative changes affecting holding companies in particularAs a result of the political crisis in Israel during 2019, there were no major legislative changes regarding taxes.

The year ahead

The Israeli government plans to pass several major legislative amendments to the Income Tax Ordinance and other tax-related legislation, which are long overdue and have not been pursued due to the political crisis in Israel during 2019. Payment of disputed taxes as a condition to allow an appeal on the tax decisionThe ITA has issued a draft amendment of legislation, subjecting a taxpayer to disputed taxes as a condition for allowing him to file an appeal against a tax determination given by the assessment officer. This is similar to rules applicable in Italy. Under the current law, filing an appeal by a taxpayer prevents the ITA from collecting a tax debt until a final verdict has been provided by the Court of Appeals. The ITA claims that the current situation allows many taxpayers, who do not necessarily have a valid claim against the tax determination, to defer the tax payment de facto for a considerable amount of time until the Court of Appeals




renders its verdict. Representatives of the professional bodies (the Israel Bar Association and the Institute of Certified Public Accountants in Israel) have vehemently objected the ITA’s intent to change the current situation, claiming it would be unconstitutional, as it causes disproportionate harm the property rights of taxpayers. Reform of the existing “Residency Tests”The ITA also intends to pass a major reform to the current Residency Test. Under the current law, there is an assumption (which may be refuted both by the taxpayer and the ITA) that an individual’s centre of life is in Israel if he/she has spent 183 days or more in Israel during the tax year, or if he/she has spent 30 days in Israel during a tax year and a total of 425 days during the tax year and the two earlier consecutive tax years. The material determination whether a person is an Israeli resident is based on the centre of life test.The ITA proposes a reform that would turn the “days test” into an irreconcilable assumption, which may include additional criteria (such as the existence of a permanent residence in Israel, the actual residency of the taxpayers’ family, etc). Reform of the existing tax holidays provided for new immigrants and senior returning residentsThe ITA plans a major reform of the existing law regarding new immigrants and senior returning residents. Currently, the law provides new immigrants and senior returning residents (Israelis considered “foreign residents” for at least 10 consecutive years) a 10-year tax holiday on business and passive income that is generated or derived outside Israel. This includes a 10-year tax holiday from reporting to the ITA on any income or assets located outside Israel. The ITA is yet to decide the extent of the reform, but the most likely scenario would include the abolishment of 10-year tax holiday on income reporting on assets and income outside Israel. It is indeed possible that the reform may also affect the duration of the tax holiday, or involve additional criteria in order to be eligible for the tax holiday, including the possibility of requiring that immigrants reside in Israel for a specified period following the tax holiday period. Reform in the “Angel Law” – encouragement of hi-tech investments by individualsThe government has suggested incentivising and encouraging investments in the Israeli hi-tech industry. This includes reforming the existing rules (better known as the “Angel Law” rules), which allow for individual investors to use the investment as a deductible business expense on the tax year of the investment. The government is seeking to ease the eligibility criteria for the tax benefit.



Tadmor Levy & Co.5 Azrieli Center, The Square Tower, 132 Begin Rd, Tel Aviv 6701101, Israel

Tel: +972 3 684 6000 / URL: www.tadmor.com

Boaz FeinbergTel: +972 3 684 6000 / Email: [email protected]. Boaz Feinberg heads the firm’s Tax practice group. With extensive experience of close to 19 years in his fields of practice, Boaz provides comprehensive services to the firm’s clients on a wide range of subjects relating to taxation and financial regulation on both administrative and regulative levels, as well as in litigation. His representation includes:• advising and acting on behalf of corporations and high-net-worth

individuals;• advice and tax planning for M&A transactions and other complex

international transactions. Boaz provides sophisticated opinions and pre-ruling applications on direct and indirect tax branches, international tax and trusts, and leads negotiations before the various authorities; and

• advising trusts throughout their establishment and ongoing activities, representing clients before the Israeli Tax Authorities and various judicial instances, including in the Israeli Voluntary Disclosure Program.




ItalyMarco Lantelme, BSVA Studio Legale Associato

Mario Miscali, Studio Miscali

Overview of corporate tax work

Type of workThe Italian M&A market has been relatively stable in 2019 and in the first quarter of 2020, albeit subsquently suffering from a partial slowdown from March 2020 onwards. The latter came about with the lockdown as a result of the measures to contain and contrast the epidemiologic COVID-19 emergency. Up to that point in time, corporate tax work had been focusing on M&A transactions, other transactions and on some outward relocation transactions of large Italian corporates. Italian tax authorities continued, in recent years, with their increased review and enquiries into tax structures that have put pressure on management and brought in an increasingly cautious attitude by business people in shaping M&A, corporate and cross-border transactions in general. Italy as the jurisdiction in which to locate holding companies for large investments has not been the first choice, a trend that many are hoping will be mitigated and reversed medium term through appropriate decisions at political level. The outlook on M&A transactions, at the time of writing, is also dependent upon the progressive easing of lockdown measures and the increase in consumer spending. Corporate tax work is in line with this. Significant deals and themesThe Italian M&A market for the first quarter of 2020 has not been fully affected yet by the COVID-19 emergency. In such quarter, 231 transactions were formally closed in Italy (18 more than in the first three months of 2019) for a total value of approximately EUR 9.2 billion, with a strong increase from the EUR 6.6 billion equivalent in 2019 (+40%), even if around 80% of such value is concentrated in the 10 main transactions.Significant transactions up to March 2020 include the following:• the merger between INWIT and businesses linked with Vodafone’s transmission towers;• the merger transaction between Cofide and the CIR Group;• the change of control over the GEDI Editorial Group (the most important Italian

publisher of daily newspapers and of three major national broadcasters, including Radio DeeJay and Radio Capital) through the acquisition by Exor N.V. of the shareholding not already held;

• the transfer by the Iren Group of a 49.07% interest of the OLT Offshore LNG Toscana S.p.A. share capital, owner of a liquid natural gas regasification terminal, located in the Tyrrhenian Sea, and the acquisition of 80% of I.BLU S.R.L., which operates in the recovery of plastic waste with two secondary selection centres in Friuli Venezia Giulia and Emilia-Romagna;



BSVA Studio Legale Associato / Studio Miscali Italy

• the sale by Astaldi S.p.A. to IC Ictas Insaat Sanayi Ve Ticaret A.S. of its interest in the concessionary company for the construction and management of the Northern Marmara Highway, better known as “Terzo Ponte sul Bosforo”;

• the purchase by the Campari Group of 100% of Baron Philippe de Rothschild France Distribution S.A.S.’s share capital;

• the purchase of the Arches brand by the F.I.L.A. Group from the Finnish company Ahlstrom-Munksjö Oyj;

• the acquisition of Attune Hearing by Amplifon S.p.A., with its distribution network of 55 stores;

• the sale completed in December 2019 of Pramerica Life S.p.A., an Italian authorised insurer, by a group company of Prudential Financial, Inc., the US listed entity, to Eurovita S.p.A. This was the sale of a fully-owned, Italian authorised insurer by a leading US financial group;

• the acquisition of Seguradoras Unidas, S.A. by Assicurazioni Generali S.p.A. (for EUR 510 million);

• the transfer by Intesa Sanpaolo to Nexi of the acquiring merchant activities (for EUR 1 billion);

• the acquisition of Supply@ME S.r.l. by Abal Group PLC (for EUR 266 million);• the acquisition of ThermaCare by Angelini S.p.A. (for EUR 190 million);• the acquisition of Italia Turismo (NewCo) by Human Company S.r.l. (for EUR 138

million);• the acquisition of MBE Worldwide S.p.A. by Oaktree Capital Management (for EUR

100 million); and• the acquisition by Giuliana Albera Caprotti and Marina Caprotti (through Unione Fiduciaria

S.p.A.) from the other familiy members of the remaning stake not yet owned by them of Supermarkets Italiani S.p.A., holding the Esselunga retail chain (for EUR 1.8 billion).

Topics involving corporate tax considerations are:• transfer pricing and Diverted Profits Tax;• controlled foreign corporations (“CFCs”);• tax disputes;• corporate migrations (including US “Inversions”);• M&A (cross-border and domestic);• real estate transactions;• financing through the debt and equity capital markets;• securitisations and other, more structured financing arrangements;• returns of value to shareholders;• corporate restructurings;• joint ventures;• initial public offerings (“IPOs”). These, following a positive trend in recent years,

experienced a boom in the years 2019 and 2018, with 35 and 31 new listings, respectively, four of which were on the main market in each year, by raising €2.5 billion and €2.0 billion in aggregate. This brought the total of companies now listed on the Italian Stock Exchange to 375, raising just under €10 billion in aggregate in the last three years. This trend also has a tax element in it, as it partly comes from the tax incentives introduced in 2018, encouraging – among PMIs – moves towards more listings through cost deduction for tax purposes. The incentives, which will still apply for 2020 and 2021, operate for small- and medium-sized companies that make an IPO, with listing on a regulated market, or on a multilateral trading system, of an EU Member State or of the EEA. The




incentives are in a form of a one-off 50% tax credit over the costs of the advisers for the IPO, up to a maximum of EUR 500,000 per listing, within an annual yearly limit set for the market as a whole. Small- and medium-sized companies, for these purposes, are those defined in EU Commission Recommendation 2003/361/EC.1 The tax credit has a total limit for the whole Italian equity market of EUR 30 million per year. Companies may take advantage of such tax credit to the extent there is an available portion; upon full use by companies in a given year, tax credit is no longer available to other companies. The above expenses may be offset against taxes due for the same tax year. The tax credit is effective starting from the tax period following that in which the admission to listing was obtained and must be indicated in the tax returns for the year in which it is offset. Detailed implementing provisions are set in the second level rules; and

• COVID-19. As for the tax specific rules, not related to the purchase of medical equipment or support, it is worth noting the following: (a) a 20% tax credit for those subscribing in cash a share capital increase of a medium-sized enterprise, in excess of EUR 250,000, with a EUR 2 million limit for such tax credit, provided that the resulting shareholding is held by the subscriber at least up to 31 December 2023; and (b) a 50% tax credit for capital losses exceeding 10% of the net assets, up to 30% of the share capital increase at point (a). Both measures, analysed in more detail below, are aimed at strengthening the equity capital of companies, including those in the form of an S.p.A., S.r.l. or cooperative companies, and companies under EU Regulation No. 2157/2001.2

Key developments affecting tax law and practice

Purely domestic changes• Digital services tax (“DST”) – On 1 January 2020, the DST came into force. The purpose

is to tax revenues generated over the course of the year by digital services rendered to users located in Italy and identified as such by the IP address of the device or other methods that are being used. The DST rate is 3% on the gross revenues (net of value-added tax (“VAT”) or indirect taxes). In particular, this tax includes: online advertising; the use of the digital platforms allowing the direct supply of goods and services; and the transmission of data gathered by users and generated through the use of a digital “interface”. The 3% DST applies to businesses that, individually or group-wide, in the year before the relevant calendar year, have an annual global turnover over EUR 750 million or annual revenues from digital service supply in Italy of over EUR 5.5 million.

• Aid Economic Growth (“ACE”) – The Budget Law 2020 (Law No. 160 of 27 December 2019) has reintroduced the ACE, starting from the 2019 tax period. The purpose of the reintroduction of the ACE is to encourage the capitalisation of companies through a facility linked to the maintenance of profits within the company. It consists of part of the taxable income detaxation, proportional to the net worth increases. ACE benefits are aimed at both corporate income tax (“IRES”) and personal income tax (“IRPEF”) subjects in ordinary accounting, by obligation or by option.

• The Italian Foreign Account Tax Compliance Act (“FACTA”) with the United States, an intergovernmental agreement, was signed on 10 January 2014 and became effective on 1 July 2014, having been ratified in Italy by Law No. 95/2015. It is aimed at contrasting international tax evasion through the automatic exchange of financial information. The 2020 Budget Law, at Article 1, paragraphs 722 and 723, simplified the adequate assessment obligations for customers by financial intermediaries in compliance with the FATCA measures, with the aim of indicating the correct behaviour to be followed in order not to incur sanctions.




• Law Decree No. 23/2020 on COVID-19, the so-called “Liquidity Decree”,3 includes amendments to the tax treatment of dividends received by a non-commercial resident partnership (società semplice). Commercial partnerships are regarded as transparent entities for income tax purposes. As taxation of dividends was unclear in cross-border cases, Article 28 now expressly states the application to non-commercial partnerships of the principle according to which dividends received by commercial partnerships shall be treated for tax purposes as if they were received directly by the partners.4 These rules are also with respect to dividends paid by foreign participated companies. Article 28 applies to dividends received since 1 January 2020.

• Law Decree No. 34/2020 on COVID-19, the so-called “Relaunch Decree”, introduces urgent measures to support health, employment and the economy, as well as social plans connected to COVID-19. Businesses and self-employed workers, with a volume of revenues not exceeding EUR 250 million, are not required to remit payment of the regional tax (“IRAP”) residual balance due for 2019, nor the first IRAP advance payment, of 40%, for 2020. Such first 2020 advance payment is excluded from the calculation of the final IRAP balance of 2020. The Relaunch Decree also provides for a benefit to shareholders for a 20% tax credit for cash contributions made by 31 December 2020, by subscribing to share capital increases of one or more companies. The maximum contribution investment on which the bonus is calculated may not exceed EUR 2 million, provided that no reserves are distributed before 1 January 2024. Failing to comply with this would trigger an obligation for the shareholders to return the received benefit. On the other hand, the recapitalised companies will be granted a tax credit equal to 50% of the losses exceeding 10% of shareholders’ equity, up to a maximum of 30% of the capital increase effected by 31 December 2020, and, in any case, within the EUR 800,000 limit.

Changes resulting from/inspired by international developmentsBase Erosion and Profit Shifting (“BEPS”) – Jointly conceived by OECD and the G20, the BEPS project is an action plan to contrast the transfer of profits to countries with a cheaper tax system or tax evasion by multinational groups. Following the 2015 OECD recommendations, EU Directive 2016/1164 of 12 July 2016 (the so-called “Anti-Tax Avoidance Directive” or “ATAD 1”) was issued to introduce a set of measures preventing tax avoidance practices in Member States. Final reports of the BEPS project also contain provisions aimed at existing bilateral double taxation agreements (“CDI”). EU Directive 2017/952 of 29 May 2017 (“ATAD 2” and together with ATAD 1, “ATAD”) made amendments to Directive 2016/1164, in order to contrast so-called “hybrid mismatch arrangements” (with BEPS Action 2) involving third countries, i.e. differences in tax treatment under the laws of two or more tax jurisdictions to achieve double non-taxation. In order to implement the mandate given by the G20, more than 100 countries and jurisdictions have developed the text of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “Multilateral Instrument” or “MLI”). The MLI was published on 24 November 2016, and Italy signed it on 7 June 2017. To date, more than 90 countries have signed the MLI. As is well known, the MLI was designed to remove aggressive international tax strategies – largely due to existing regulatory gaps in the international tax framework – which determine profits shifting to jurisdictions where taxation is reduced or, sometimes, non-existent. The MLI brings in important changes to the concept of permanent establishment (herein, also referred to as “PE”). The MLI is a treaty of public international law, to be ratified by the signatory States. Italy, among the signatory States, in its so-called “MLI position”, has expressed reservation for disapplication with regard to the contents of the Final Report of Action 7 on permanent




establishment. Indeed, Italy has reserved the right for Article 10 (Anti-abuse Rule for Permanent Establishments Situated in Third Jurisdictions), Article 12 (Artificial Avoidance of Permanent Establishment Status through Commissionnaire Arrangements and Similar Strategies) and Article 14 (Splitting-up of Contracts). With respect to Article 13 (Artificial Avoidance of Permanent Establishment Status through the Specific Activity Exemptions), Italy chose to apply option A, and with regard to Article 15 (Definition of a Person Closely Related to an Enterprise), Italy’s position is to assume that this Article may operate only as far as MLI paragraph 4 of Article 13 is concerned, so it is expected that this definition will only apply with respect to the anti-fragmentation clause.At the time of ratification, it may not be excluded that Italy reverses its position and lifts its reservation, given that any position is freely modifiable by the signatory State until the MLI ratification is deposited with the OECD Secretariat General. Ratification is to be authorised by Parliament in Italy by means of a ratification law. It is hoped that ratification of the MLI will take place in Italy in 2020.In 2017, OECD released its updated Model Tax Convention. Significant novelties have been introduced by the new Model Tax Convention with respect to PE and therefore, Article 162 Italian Income Tax Code (so-called “T.U.I.R.”) was the subject of legislative reform in 2018, in order to bring the internal standard in line with the provisions of the OECD. Currently, and until the enforcement of the MLI, two scenarios will coexist:(a) A double tax treaty in force with a State that implements the OECD 2017 Model, or no

double tax treaty signed between the two States: in the latter case, Article 162 T.U.I.R. will be fully applicable. Among the most relevant novelties under the rephrased Article 162 T.U.I.R., there are the following:• Preparatory activities: the activity exemptions provided under Article 162(4)

T.U.I.R. are directly restricted to activities that are actually preparatory or auxiliary.• Anti-fragmentation rule: the activities performed by closely related enterprises at

one or more fixed places of business should be analysed on an aggregate basis in order to assess if they may qualify as preparatory or auxiliary.

• Dependent agent PE: it is sufficient for a person to act on behalf of a non-resident entity for the purposes of concluding contracts, or to participate in the conclusion of contracts that are routinely entered into without material modifications, to be qualified as a dependent agent. The domestic definition of PE shows a broader application requirement than at international level. In the Italian legal framework, it is sufficient for a person to “operate” for the purposes of entering into contracts, on behalf of the non-resident company, to be qualified as a dependent agent.

• Independent agent PE: PE is excluded when a person who operates in Italy on behalf of a non-resident company carries out the relevant activity as an independent agent and acts for the company as part of its ordinary tasks. However, the rule clarifies that, if an individual acts exclusively or almost exclusively on behalf of one or more undertakings to which he/she is closely related, that person is not considered to be an independent agent.

(b) A double tax treaty not yet adapted to the new Model Convention: the more extensive definition of PE will not apply under Article 169 T.U.I.R. The provisions of Article 162 T.U.I.R. apply only if they are more favourable than the international agreements, while a double tax treaty that has not adopted the novelties introduced by the OECD 2017 Model will certainly be more advantageous, since the notion of PE appears much more restricted.

The ATAD legislation was introduced into the Italian legal system with Legislative Decree No. 142 of 2018, which transposes into the Italian legal system ATAD 1, as amended and integrated by ATAD 2. Its purpose is to contrast all activities that contribute to the tax base




erosion by introducing rules against the transfer of profits outside the internal market and by ensuring that taxes are paid in the place where the profits are generated. ATAD 1 is based on the 2015 OECD recommendations, aimed at addressing BEPS, as approved by the G20 leaders in November 2015. The main provisions set by ATAD include deductibility of interest expenses, exit tax, entry tax, the CFC regime, hybrid mismatch provisions and, finally, a single definition of financial intermediaries, financial holding and non-financial holding companies.ATAD 2 contains measures aimed at neutralising hybrid mismatches in a way that is as comprehensive as possible, also by extending its scope to hybrid mismatches involving third countries. In particular, ATAD 2 attracts other hybrid mismatches in its regulatory framework, such as those involving permanent establishments. The new rules on hybrid misalignments also govern misalignment cases resulting from double deductions, from conflicts in the qualification of financial instruments, payments and entities or from the payment allocations.Hybrid misalignment with permanent establishmentsA hybrid misalignment from permanent establishments occurs when differences between the rules of the jurisdiction of the permanent establishment, and the rules of the jurisdiction of residence regarding the allocation of income and expenses between different parties of the same entity, generate a misalignment in the tax results. This includes cases in which a misalignment occurs where a permanent establishment is not recognised as such under the laws of the jurisdiction in which the fixed place of business is located.Such misalignment could result in a double-deduction or a deduction without inclusion. In the case of unrecognised permanent establishments, the Member State in which the taxpayer resides must include the income that would otherwise be allocated to the permanent establishment.In any case, in order to guarantee proportionality, ATAD sets the intervention limits by indicating the parameter for cases in which there is a substantial risk of tax avoidance through hybrid mismatches. Hybrid misalignments fall within the following boundaries:• those that arise between headquarters and a permanent establishment or between two or

more permanent establishments of the same entity;• those that arise between the taxpayer and its associated companies or between associated

companies themselves. “Associated company” means an entity that, for financial accounting purposes, is part of the same consolidated group as the taxpayer, or an enterprise in which the taxpayer exercises significant influence on the management or an enterprise that exercises a significant influence on the taxpayer’s management; and

• those that derive from a structured agreement involving a taxpayer.ATAD 2 applies to all taxpayers who are subject to corporation tax in one or more Member States, including permanent establishments located in one or more Member States of entities resident for tax purposes in a third country.With reference to the latest rulings issued by the Italian tax authorities (the “Revenue Agency”), a recent ruling concerning withholding tax (“WHT”) on dividends distributed by Italian entities deserves a closer insight. Ruling No. 156 of 28 May 2020 related to the WHT regime applicable to dividends distributed by an Italian entity to a UK Authorised Contractual Scheme (“ACS”), entirely held by UK pension funds. The points raised by a taxpayer were whether: (i) until Brexit (i.e. 31 December 2020), Article 27(3) of Decree of the President of the Republic No. 600/1973, which provides for an 11% WHT rate (instead of 26%) on dividends paid by Italian entities to pension funds set up in EU or EEA countries,




could be applied to the ACS; and (ii) after Brexit (i.e. 1 January 2021), Article 10(2) of the UK–Italy double tax treaty (the “DTT”), which provides for a 15% rate of WHT (instead of 26%), could be applied to a UK pension fund participating in the ACS. Under the above ruling, the Revenue Agency ruled that the 11% WHT rate on dividends provided for EU or EEA pension funds is not available to the ACS. Consequently, Italian companies must apply the 26% WHT rate on dividends paid to the ACS. As for the 15% tax rate, the Revenue Agency also held that the ACS cannot directly benefit from the reduced rate under the DTT since it cannot be considered a “resident person”.Recent case law and rulings• Court of Cassation Judgment No. 2313/2020, concerning the DTT application and its

relationship with the Parent Subsidiary Directive 90/435/EEC (“PSD”). With reference to the tax regime relevant to dividends paid by an Italian subsidiary to its UK parent company, the Italian Court of Cassation ruled, in open contrast to the previous consolidated judgments on the same topic, by overturning the second instance judgment in which the court had denied the refund right of tax credit of an English company. Under Judgment No. 2313/2020, an innovative notion of cross-border dividend tax neutrality was given, which originates from the PSD. The underlying case originated from a request made by an English parent company which received dividends from its Italian subsidiary. Italian tax authorities denied the right to a refund of the tax credit provided for under Article 10(4) of the DTT on the grounds that the dividends had already been exempt from WHT in Italy in accordance with Article 5 of the Directive. The Italian Court of Cassation upheld the position of the claimant company based on two arguments: (i) a difference was set between economic double taxation and juridical double taxation, underling that both the PSD and Article 10(4) of the DTT are intended to eliminate economic double taxation; and (ii) the mere exemption from WHT provided for under the DTT is not sufficient to eliminate economic double taxation. Under Judgment No. 2313/2020, the Italian Court of Cassation seems to adhere to recent ECJ judgments, such as Case C-398/18, Brussels Securities, of 19 December 2019.

• Court of Cassation Judgments No. 2617/2020 and No. 2618/2020, concerning the application of the 1988 DTT to a British trust. A body governed by English law, in its capacity as trustee of a UK resident trust, applied for a refund of the tax credit accrued on dividends paid by Italian companies, pursuant to Article 10(4) of the 1988 DTT. While the Revenue Agency objected to the refund on the grounds that the trust did not fall within the definition of “person” under Article 3(1)(d) of the DTT, the Italian Court of Cassation ruled that trusts are, in principle, entitled to benefits under the 1988 DTT when they are also qualified as tax residents of one or both contracting States.

• Court of Cassation Judgment No. 1967/2020, whereby Spanish pension funds – subject to tax in Spain at a rate of 0% – are entitled to a refund of WHT imposed at a rate of 15% on dividends distributed by Italian companies to the pension funds in 2006.

• European Court of Justice (“ECJ”) Judgment C-405/18 of 27 February 2020, on the treatment of tax losses in the event of a transfer of residence from a Member State. The ECJ held that it is not contrary to EU law for the legislation to exclude the possibility for a company that has transferred its registered office to another Member State to claim a tax loss that arose before such transfer in the EU.

• Revenue Agency Ruling No. 156/2020, regarding the WHT regime applicable to dividends distributed by Italian entities to an ACS (please see above).

• Revenue Agency Ruling No. 100/2020, on foreign “mixed” tax (foreign contractor tax or “FCT”), paid abroad by the permanent establishment of a resident company, which




entitles such company to a tax credit for the tax due on income in Italy, as provided for by Article 165 of the T.U.I.R. The Revenue Agency clarified the scope of the possibility to benefit from tax credit for taxes paid in another country in relation to the income tax component of the local tax. In order to qualify for the tax credit, it is necessary to produce a foreign income, its contribution to the formation of the taxpayer’s overall income and the definitive payment of foreign taxes. The FCT is a tax applicable to non-resident companies and entities that carry out a business activity or produce income as “foreign contractors”, i.e. a foreign entity, company or person, operating in that country on the basis of a contract entered into between any of such entities or by a foreign subcontractor and a foreign counterparty. The tax consists of a part represented by a corporate income tax (“CIT”) (represented, as regards the tax base, by the total considerations net of VAT and other taxes due) and a part relating to VAT. Both portions of tax are levied by means of a WHT levied by the resident subject, before the payment is made to the foreign contractual counterparty. At a later stage, the foreign contractual counterparty is required to recoup the corresponding amount in favour of the first entity, which acted as a tax withholder. Pursuant to Article 165, paragraph 1 T.U.I.R. (the “Article 165 Conditions”), if the income produced abroad contributes to the formation of the total income, the taxes definitively paid on such income are allowed as a deduction from the net tax due. The credit also requires the production of foreign income, its contribution to the formation of the taxpayer’s total income, and the permanent payment of taxes abroad.

• The Revenue Agency considers that the income tax component of the FCT is a forced asset benefit, levied by virtue of the possession of income. This circumstance makes it possible to assimilate the FCT component to income tax and to therefore disallow it under the Article 165 Conditions.

• In February 2020, the FCA Group entered into an agreement in Italy with the Revenue Agency which provides that FCA should pay EUR 730 million to the Revenue Agency through past tax losses. The Revenue Agency challenged the automotive group having underestimated the value of the Chrysler acquisition by EUR 5.1 billion in 2014. The acquisition process lasted five years and ended up with the complete takeover of the American car-maker by FCA. At the end of the restructuring, FCA was created, in the current corporate form, with its registered office in Holland and tax residence in the UK, instead of Turin, which had been the historic headquarter for over a century of Fiat, its merging entity. The relocation of the company headquarters has generated the so-called “exit tax”, the tax that Italy applies on capital gains realised when companies move their activities outside the country. Italy at the time had a tax rate of around 27.5%, so FCA’s tax risk was approximately EUR 1.3 billion. The agreement resolved the corresponding differences.

New Italy–China double tax treatyThe new treaty for double taxation avoidance and prevention of tax evasion (the “2019 Italy–China Treaty”), signed on 23 March 2019, between the governments of Italy and China, has not yet been ratified by the Italian Parliament. The previously signed double taxation treaty dating back to 1986, and in force and effective from 13 December 1990, still applies. The 2019 Italy–China Treaty, aimed at promoting and developing bilateral cooperation between Italy and China, should strengthen coordination and communication on fiscal, financial and structural reform policies between the two countries, to create and foster a favourable economic and financial environment. The 2019 Italy–China Treaty shall apply to taxes on income and on capital gains, but not on taxes over capital. No specific timing has been given on the ratification yet.




Rules on tax disputes involving tax administrationsEU Directive 2017/1852 of 10 October 2017 sets out the EU framework for the resolution of cross-border double taxation disputes that involve tax administrations of different Member States. The scheme under Legislative Decree No. 143/2020, transposing EU Directive 2017/1852 of 10 October 2017, introduces a procedure for resolving tax disputes in the EU of considerable interest to the taxpayer, characterised by the obligation of result for the financial administrations and for the possibility of being investigated even in the event of recourse to the national dispute tax commissions and the definition of the tax claim through one of the deflationary institutions. The purpose of the Directive is to strengthen legal certainty in tax matters by establishing an effective, binding and compulsory dispute settlement mechanism between Member States in the interpretation and application of agreements and conventions for the elimination of double taxation, through a mutual agreement procedure in combination with an arbitration phase and by providing clearly defined deadlines and an obligation to achieve a result.The procedure may involve disputes: on transfer pricing and determination of the income attributable to the permanent establishment; on the challenge of the tax residence in Italy of natural persons, companies or other foreign bodies (the so-called “esterovestizione”); on the existence of a hidden permanent organisation in Italy of non-resident companies or entities; on whether or not foreign taxes are due under a double taxation agreement, in order to benefit from the tax credit pursuant to Article 165 T.U.I.R.; or on the applicability of lower WHTs on interest, dividends or royalties from Italian sources under double taxation treaties.EU Directive 2017/1852 allows Member States to deny access to procedures where “penalties have been imposed for tax fraud, wilful misconduct and gross negligence”. The Italian Government submitted a draft implementing decree to the Italian Parliament. The competent Parliamentary committees expressed a favourable opinion on 26 May 2020. The implementing decree is to be published in the Official Gazette in order to become effective.

Tax climate in Italy

The tax climate in Italy in 2020 shows a consistent trend towards compliance with EU and OECD recommendations on prevention of tax evasion, tax fraud and aggressive tax planning.An increasing trend towards ensuring alignment of the Italian tax rules for companies to most EU Member State peers is also seen. We must query, however, whether the effective tax burden has been aligned, particularly considering that companies in Italy are subject to both IRES – as CIT at a 24% rate, subject to surcharges – and IRAP – as a regional tax on productive activities at a 3.9% rate, plus a potential additional 0.92% rate. Increasing the attractiveness of Italy as a country to invest in should be one of the goals. Concerns over possible challenges from the European Commission, alleging state aid, refer generally to State intervention in large corporates, such as, for instance, any direct State investment into the steel producer Ilva S.p.A., whose going concern at the time of writing is held by ArcelorMittal S.A. through its Italian entities, or Alitalia. To avoid this, the State has mostly allowed investments into Italian companies through either Cassa Depositi e Prestiti S.p.A. or Invitalia S.p.A., the national agency for inward investments and economic development, and not through the Italian State directly.On 11 February 2020, the OECD published its document “Transfer Pricing Guidance on Financial Transactions” on the application of the free competition principle to financial transactions entered into between associated companies. These Guidelines integrate those




already issued by the OECD in 2017 (the so-called “OECD Transfer Pricing Guidelines”) and are intended to ensure greater consistency in the application of the transfer pricing principles, with specific reference to financial transactions and to avoid double taxation. The OECD has also provided some guidance on the extraordinary fiscal measures that States should implement to support their economies in order to contain the economic and financial crisis linked to COVID-19. The OECD has sometimes focused its attention on cash flows. In particular, these measures include: (i) the deferral of tax obligations (more specifically: (a) an extension of the deadline for the transmission of tax returns and payments relating to taxes; (b) a suspension of the application of penalties and interest; (c) an extension of payments relating to taxes; (d) facilitated access to instalment plans and extension of those already in place; and (e) a suspension of collection activities); (ii) accelerated reimbursement of tax credits claimed by taxpayers; (iii) temporary suspension of assessments and checks and search for tools to ensure greater certainty of the tax relationship; and (iv) the development of services and communication activities aimed at taxpayers.The OECD has released a report called “OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19 Crisis” where it provides guidance to avoid the risk of “altering” the location (i.e. fiscal residence) of companies and individuals, as established by the double taxation treaties, in the current emergency situation. Smart working, the inevitable extension of the duration of construction sites in countries and territories other than those of fiscal residence, and the mobility restrictions for managerial staff, led operators, in this period, to question the possible emergence of permanent establishments at their expense, or disputes, regarding the place of effective management and phenomena of dual residence even for individuals. The OECD has made it clear that the occurrence of such circumstances, in situations due to force majeure, including the temporary nature of the circumstance, should not lead to such situations being considered as triggering events for the recognition of a permanent establishment abroad or phenomena of dual residence.

Attractiveness of Italy for holding companies

The Italian system does provide, as some peer jurisdictions, for a 95% partial exclusion from the taxable base on received dividends and a 95% exemption on capital gains upon the sale of shareholdings by a parent Italian company. This is so provided that the foreign dividends and the capital gains realised by such Italian company are not from a non-resident subsidiary located in a low-tax jurisdiction. Italy has experienced an increasing number of Italian listed holding companies of leading industrial groups having moved their registered office abroad, mostly in the Netherlands or some in the UK. These companies that have migrated are unlikely to return for the time being. We must query whether seeking support from the State, either in conjunction with the COVID-19 measures or otherwise, might ultimately lead to, or impose upon them, a trend pointing in the opposite direction.


Incentives are available in the form of capital grants and tax credit. The Budget Law 2020 introduces a tax credit that changes according to the type of investment made (in tangible and intangible assets – the beni strumentali bonus) and modifies the tax credit for investments in research and development, in the technological innovation 4.0 framework.




The year ahead

The attempt to renew and streamline the Italian tax system for achieving tax compliance, and to create a more favourable business environment, has partly persisted up to the first quarter of 2020. The aim is to reinforce and support the competitiveness of Italian-based enterprises. Some procedural changes have impacted on day-to-day activities, both for taxpayers and for tax authorities.Avoiding the increase of the 22% VAT standard rate has been a consistent goal of recent governments. While personal income tax was expected to be revised, by introducing new measures to effectively reduce the tax burden, the consistent increase in government spending and indebtedness, also due to COVID-19, will not necessarily allow for any reduction of the tax burden in the forthcoming years.Moreover, the year ahead will face Brexit implications, in particular concerning VAT and customs-related issues. On 29 January 2020, the European Parliament ratified the UK’s withdrawal agreement from the EU. As of 31 January 2020, the UK has left the EU, but this separation is, for now, purely formal. The withdrawal agreement provides a transitionary period which runs from 1 February 2020 to 31 December 2020. During the transitionary period, EU rules and procedures will continue to apply, thus avoiding the risk of the so-called “Hard Brexit”. Until the end of 2020, therefore, everything remains unchanged: EU rules and procedures on the free movement of persons, services, capital and goods will continue to apply in the UK. As of 31 December 2020, unless otherwise agreed, the UK will no longer be part of the customs and tax territory (VAT and excise duties) of the EU. The movement of goods between the UK and the EU will, therefore, be considered trade with a third country. In order to avoid this, on 18 March 2020, the European Commission’s Task Force for relations with the United Kingdom (“UKTF”) issued the draft Agreement which – if formally approved – will govern relations between the two parties from January 2021. From what can be inferred from the draft text, at the time of writing, the new relationship between the UK and the EU seems to be that of a free-trade area. Therefore, with regard to taxation, making it an area where custom duties on goods originating in the other party are prohibited, based on a principle of reciprocity typical of free trade agreements.It is desirable, among experts, that in the year ahead, the Italian legislator, also considering the consequences on the national economic system due to COVID-19, adopts measures in order to promote foreign investments. Among these measures, highly desirable are those aimed at avoiding personal PE disputes for foreign investment funds (and therefore for foreign investors who invest in them) due to the fact that the investment managers, i.e. the asset managers, act on their behalf in Italy. The introduction of a specific regulation oriented at the asset management sector that excludes, when certain conditions are met, a personal PE risk in Italy, would certainly have the effect of supporting investments by foreign funds in Italian target companies. Similar prescriptions already existing in other jurisdictions, such as the UK, provide for a specific “Investment Management Exemption”. The advantages for Italy could go far beyond the immediate scope of the rules.

Acknowledgments

The authors would like to thank Donatella Colombo, Vittorio Miscali and Martina Cacciatore Dorigo for their invaluable assistance in the preparation of this chapter.




Endnotes1. Such companies being those with no more than 250 employees and a maximum turnover

of EUR 50 million, or a total annual balance sheet of EUR 43 million.2. These measures are set under Article 26 of Law Decree No. 34 of 19 May 2020 (named

the Relaunch Decree, “Decreto Rilancio”, converted into law with amendments on 16 July 2020). The relevant entity must have:• revenues between EUR 5 million and EUR 50 million for the 2019 tax year,

individually or at group level, if part of a group;• suffered at least a 33% revenue reduction, individually or at group level, in March

and April 2020 compared to the same period in the previous year, due to the COVID-19 emergency;

• resolved upon and effected, after the Relaunch Decree was enacted and by 31 December 2020, a fully paid-up share capital increase of at least EUR 250,000;

• not fallen at the end of 2019 into the category of a company in difficulties pursuant to EU Regulation No. 651/2014, EU Regulation No. 702/2014 and EU Regulation No. 1388/2014, which includes a company: (i) that has, due to losses, lost the majority of its share capital or more than half of its own funds, if an unlimited liability partnership; and (ii) that is not subject to insolvency proceedings or in an insolvency condition, provided that businesses that are subject to an approved agreement with creditors with continuity (aziende in concordato preventivo di continuità con omologa già emessa) which have complied with regular reporting and payment of taxes under a plan already existent at the time of entry into force of the Relaunch Decree may also take advantage of these provisions; and

• been in compliance with, among others, tax, building and urban, work, accident prevention and environmental protection rules, and without having its managers, shareholders and beneficial owners in the last five years being convicted for corporate crimes or tax, property or public offences.

To take advantage of these rules, EU Commission approval is to be sought under Article 108, paragraph 3 of the EU Treaty.

As for tax credit for capital losses, an entity may benefit from such tax credit once it approves its 2020 financial statements. No distribution of reserves by the relevant entity may be made up to the end of 2023, failing which the tax credit shall be revoked with a further obligation to pay legal interests to the Inland Revenue.

As for tax credits, which may be coupled by a given entity, these are within an overall EUR 2 billion limit for 2021. Implementing provisions are to be issued by the Ministry of Economy by Decree.

Tax credit for share capital subscription may be used in the year the investment is made and in the succeeding years, up to when it is fully used up, or by offsetting debt with the Inland Revenue, while tax credit for capital losses may only be used by offsetting debt towards the Inland Revenue.

3. Converted with amendements by Law No. 40 of 5 June 2020.4. Article 28 of the Liquidity Decree has rephrased Article 32-quarter of Law Decree No. 124

of 26 October 2019, converted with amendements by Law No. 157 of 19 December 2019.



Marco LantelmeTel: +39 02 783 811 / +39 335 136 3330 / Email: [email protected] Marco Lantelme, Italian avvocato admitted at the Corte di Cassazione and English solicitor registered on the Roll, focuses mostly on banking & finance, M&A, corporate, regulatory, litigation and tax issues.Based in Milan, partner at BSVA Studio Legale Associato, he has assisted primary international and core Italian banking, financial, insurance and industrial groups on transactions for over €75bn, often by drafting most documents. In this context, he regularly advises on transactions that also have a tax element.Partner of a law firm for the last 16 years, he has also spent almost 16 years in three of the top UK international law firms by size, in Milan and in the City of London. He has been a board member for almost seven years of an Italian insurer of a leading international NYSE listed group, has chaired AmCham’s insurance task force, and has been a JIBLR country correspondent for Italy.

Mario Miscali Tel: +39 02 7600 7190 / Email: [email protected] Miscali, Italian avvocato admitted at the Corte di Cassazione and at the Italian Register of Auditors, is a professor of tax law at the Carlo Cattaneo University in Castellanza and focuses on national and international tax law, with particular attention in consulting, assistance and defence in tax litigation, representing both Italian and international clients, private individuals and businesses alike. He has authored many monographs and publications on tax and corporate matters. He serves as a member of the board of auditors and a member of the board of directors of important Italian companies. He founded Studio Miscali in 1991, an independent Italian law firm specialised in every field of domestic, EU and international tax law.

Studio MiscaliVia della Spiga, 1, 20121, Milan, Italy

Tel: +39 02 7600 7190 / URL: www.mariomiscali.eu


BSVA Studio Legale AssociatoVia Borgonuovo, 9, 20121, Milan, Italy

Tel: +39 02 783 811 / URL: www.bsva.it



JapanAkira Tanaka & Fumiaki Kawazoe

Anderson Mōri & Tomotsune

Introduction

In conjunction with the efforts of the Organization for Economic Co-operation and Development (“OECD”) to finalise the Base Erosion and Profit Shifting (“BEPS”) Action Plans, the Japanese government has implemented several legislative measures in accordance with the requirements of the BEPS Action Plans. These legislative measures include:• Application of Transfer Pricing Rules to indirect affiliate transactions (2014).• Exclusion of double non-taxation of dividends paid from foreign subsidiaries from the

foreign dividend exemption system (2015).• Introduction of an exit tax (2015).• Application of a consumption tax to internet digital content services from foreign

countries (2015).• Strengthening of transfer price taxation documentation requirements (2016).• Strengthening of rules regarding inheritance taxation on overseas assets (2017).• Strengthening of Controlled Foreign Corporation (“CFC”) Rules (2017).• Amendment of the definition of permanent establishment (“PE”) (2018).• Additional amendment of the CFC Rules (2018).• Strengthening of the Earnings Stripping Rules (2019).• Amendment of the Transfer Pricing Rules (2019).• Re-amendment of the CFC Rules (2019).• Introduction of Specific Anti-Avoidance Rules for tax avoidance using dividends from

subsidiaries and transferring the shares of the subsidiaries (2020). • Re-amendment of the Earnings Stripping Rules (2020).• Re-amendment of the CFC Rules (2020).This chapter will summarise the three legislative measures that occurred in 2020: (1) the introduction of Specific Anti-Avoidance Rules for tax avoidance using dividends from a subsidiary and transferring the shares of the subsidiary; (2) amendment of the Earnings Stripping Rules; and (3) amendment of the CFC Rules.

Introduction of Specific Anti-Avoidance Rules for tax avoidance using dividends from a subsidiary and transferring the shares of the subsidiary

BackgroundUnder Article 23 of the Corporate Tax Act, all or some of the dividends from a domestic subsidiary are not included in the taxable profit of its parent company, depending on the percentage of shares held by the parent company. Under Article 23-2 of the Corporate Tax Act, 95% of a dividend from a foreign subsidiary is not included in the taxable profit of its



Anderson Mōri & Tomotsune Japan

parent company. As a result of these rules, if a parent company sells shares in a subsidiary after permitting the subsidiary to distribute a significant amount of dividends to the parent company, the parent company may create significant tax loss because the value of the shares would decrease as the dividend is distributed to the parent company, while all or most of the dividends are not included in the taxable profit of the parent company. The Ministry of Finance of Japan introduced the Specific Anti-Avoidance Rules in order to prevent this tax planning, which can be used as tax avoidance.Outline of the Specific Anti-Avoidance Rules for tax avoidance using dividends from a subsidiary and transferring the shares of the subsidiaryThe 2020 Tax Reform introduced the Specific Anti-Avoidance Rules, which will reduce a parent company’s book value of shares in a subsidiary by an amount corresponding to the dividends received when the subsidiary distributes dividends exceeding 10% of the book value of the shares, except in the following cases:• the subsidiary is a domestic corporation and 90% or more of shareholders of the

subsidiary are domestic corporations or Japanese residents during the period between the date of incorporation of the subsidiary and the date on which the parent company achieves a Certain Dominant Relationship with the subsidiary. The parent company is required to retain a document to prove the subsidiary shareholders’ status during that period. The Certain Dominant Relationship generally means a relationship in which a person directly or indirectly has more than 50% of shares or voting rights in a company;

• the subsidiary distributes dividends by using only retained earnings of the subsidiary that are obtained after a domestic corporation achieves a Certain Dominant Relationship with the subsidiary. The satisfaction of this condition is tested by a formula of whether the following item (A) minus item (B) exceeds item (C):(A) amount of retained earnings on the balance sheet of the subsidiary of the fiscal

year immediately preceding a fiscal year in which the subsidiary resolves the distribution of underlying dividends;

(B) total amount of dividends distributed during the period between the initial date of the fiscal year in which the domestic corporation receives the underlying dividends and the date for the domestic corporation to receive the underlying dividends; and

(C) amount of retained earnings on the balance sheet of the subsidiary as of the final date of the last fiscal year before the Certain Dominant Relationship occurs. If the amount of retained earnings decreases due to dividends distributed thereafter, and before the Certain Dominant Relationship occurs, the amount of retained earnings in this item (C) should decrease accordingly. The domestic corporation is required to retain a document to prove that item (A) minus item (B) exceeds item (C) above;

• dividends are distributed after 10 years have passed since the Certain Dominant Relationship occurred; or

• the total amount of underlying dividends and other dividends distributed during the fiscal year in which the underlying dividends are distributed does not exceed JPY 20 million.

Practical notesThe Specific Anti-Avoidance Rules were introduced to prevent tax planning using dividends from a subsidiary and transferring the shares of the subsidiary. However, regardless of whether the parent company is scheduled to transfer the shares, the Specific Anti-Avoidance Rules will apply if underlying dividends from subsidiaries meet the requirements set out above. In addition, whether the parent company is scheduled to transfer the shares to a relevant party or a third party is irrelevant. Accordingly, the application of the Specific Anti-Avoidance Rules




should be examined when a domestic parent company receives dividends from its subsidiaries regardless of whether the parent company is scheduled to transfer the shares.As explained above, the parent company must retain a document to prove the subsidiary shareholders’ status during the period between the date of incorporation of the subsidiary and the date on which the parent company achieves a Certain Dominant Relationship with the subsidiary. However, this requirement may be practically difficult for the parent company to satisfy because a shareholder does not have a right to require a company to disclose a prior shareholder list under the Companies Act of Japan.

Amendments to the Earnings Stripping Rules

Outline of Earnings Stripping Rules and Amendment pursuant to the 2020 Tax ReformIn Japan, beginning in around 2008, there was an increase in cases in which corporations would pay an excessive amount of interest for borrowings from foreign related parties (e.g., foreign parent companies, foreign subsidiaries, etc.), and include those interest payments in their deductible expenses so as to reduce their Japanese tax liability. In order to prevent these companies from claiming excess interest deductions, the Earnings Stripping Rules were introduced in the 2012 Tax Reform in Japan (stipulated in Section 66-5-2 of the Act on Special Measures Concerning Taxation).Prior to the 2020 Tax Reform, the Earnings Stripping Rules provided that in a corporate fiscal year in which Net Interest Payments exceeded 20% of Adjusted Taxable Income, that excess could not be claimed as deductible expenses. For the purposes of this calculation:• Net Interest Payments are defined as total interest paid (excluding any Excluded Interest

Payments) minus the corresponding total amount of Eligible Interest Payments (i.e., the total interest received, calculated through fixed apportionment calculations).

• Excluded Interest Payments include interest payments other than Specified Bond Interest that would be included in taxable income of the recipient (meaning interest payments receipts which are declared as income in income/corporate tax returns in Japan).

• Adjusted Taxable Income means the amount of income (calculated according to a fixed formula) to be compared with Net Interest Payments.

Amendments to the scope of Excluded Interest PaymentsUnder the 2020 Tax Reform, an interest payment to a PE of a foreign company, which would be included in the PE’s taxable income, is excluded from the scope of the Excluded Interest Payments if the right to receive economic benefit with respect to a PE’s underlying claim from which the foreign company accrues the interest will be transferred to the headquarters of the foreign company, unless the interest payment is subject to Japanese taxation on another basis.These amendments to the scope of Excluded Interest Payments are reinforcements of the 2019 Tax Reform, under which the following two cases were excluded from the scope of the Excluded Interest Payments:(A) a related party of the corporation provides the corporation with funds through an

unrelated party of the corporation which receives an interest payment that is included in taxable income of the unrelated party, except that the interest payment would be included in taxable income of the related party if the interest payment was made by the corporation directly to the related party; or

(B) the right to receive an economic benefit with respect to an underlying claim from which an unrelated party accrues the interest will be transferred to another unrelated party, except that the interest payment would be included in taxable income of the other unrelated party if it was directly paid to the other unrelated party.




These two cases are illustrated by the following chart:

The rationale for the exclusionary rule above is that these two cases are considered to have substantially the same effect as a case in which an interest payment would not be included in taxable income of the recipient. The 2020 Tax Reform added a variation of Case B above. As in Case B, typically, a loan participation agreement would be executed between unrelated parties in which the right to receive an economic benefit with respect to the underlying claim from which an unrelated party accrues interest will be transferred to the other unrelated party. Similarly, it appears that an interest payment to a PE will typically be excluded from the scope of the Excluded Interest Payments under the 2020 Tax Reform if the headquarters of a foreign company and the PE have an economic relationship similar to a loan participation agreement.

Amendments to Japan’s CFC Rules

The 2020 Tax Reform makes further additional amendments to the CFC Rules, which were also amended in the 2017, 2018, and 2019 Tax Reforms.Outline of Japan’s CFC RulesIf a domestic corporation holds no less than 10% of any subsidiary in a foreign country, and that domestic corporation, other domestic corporations, and/or Japanese residents hold in aggregate more than 50% of the shares of the subsidiary, that subsidiary will be categorised as a “foreign related company”. If the foreign related company falls within the definition of a “specified foreign related company” (i.e., (i) a paper company, (ii) a company deemed to be an “actual cash box”, or (iii) a company located in a blacklisted country, although no country has been designated as a blacklisted country as of 29 May 2020), the income of the subsidiary will be included in the domestic corporation’s gross revenue for Japanese tax purposes. However, this rule does not apply if the tax burden rate in the foreign country is 30% or more. Further, even if the foreign related company does not fall within the definition of a “specified foreign related company”, if the tax burden rate is less than 20%, the income




of the foreign related company will be included in that of the domestic corporation unless the “economic activity standard” is satisfied. Even if the foreign related company meets the “economic activity standard”, the fixed passive income of the foreign related company will be fully included in the domestic corporation’s income (partial summation system).Amendments to the scope of passive incomeUnder the 2020 Tax Reform, when a foreign related company is engaged in a business that is generally necessary to help an officer or employee of a domestic corporation conduct a business of inventory sales or an associated business, the interest accruing from the inventory sales to a non-related party (i.e., “usance interest”) is excluded from the scope of the passive income of the foreign related company which is included in that of the domestic corporation. The rationale for this reform is to make clear that such usance interest is considered to be related to active business income, rather than passive income.



Akira TanakaTel: +81 3 6775 1190 / Email: [email protected] Tanaka is a partner at Anderson Mōri & Tomotsune. He has broad experience and expertise in various tax practices, ranging from tax planning to tax litigation. He also has extensive experience working on general dispute resolution matters. He has represented numerous Japanese and foreign companies in litigation and other dispute resolution procedures, in areas such as international transactions, M&A and financial transactions. He has external experience at the Institute for Monetary and Economic Studies, Bank of Japan (2010–2011). He is a graduate of the University of Tokyo (LL.B., 2005) and the University of Tokyo, School of Law (J.D., 2007). He is admitted to practise in Japan (2008).

Fumiaki KawazoeTel: +81 3 6775 1275 / Email: [email protected] Kawazoe is an associate at Anderson Mōri & Tomotsune. He advises on various areas of law, including tax regulations and tax litigation, and international and domestic tax. He is a graduate of Keio University (Bachelor of Commerce, 2010), Hitotsubashi University Law School (J.D., 2012) and Leiden University, International Tax Center Leiden (LL.M., 2018). He is admitted to practise in Japan (2013).

Anderson Mōri & TomotsuneOtemachi Park Building 1-1-1 Otemachi, Chiyoda-ku, Tokyo 100-8136, Japan

Tel: +81 3 6775 1000 / URL: www.amt-law.com




LuxembourgJames O’Neal, Inès Annioui-Schildknecht & Rui Duarte

Maples Group

Overview of corporate tax work

Luxembourg continues to be a global leader as a platform for international business, investment funds, and cross-border financing. At the outset of COVID-19, Luxembourg quickly reacted by enacting pragmatic emergency measures, allowing Luxembourg investment funds and companies to maintain operational efficiency despite the global lockdown and restrictions on working and travel. In terms of tax developments, Luxembourg continues to update its competitive tax laws in harmony with new European Union (“EU”) and Organisation for Economic Co-operation and Development (“OECD”) policies principally aimed at anti-abuse and aggressive tax planning. Over the past year, Luxembourg transfer pricing has further increased in importance. Generally, the Luxembourg tax authorities have increased audits with respect to transfer pricing and this trend should continue into the future. Luxembourg tax litigation has continued with a slight increase over the past 12 months and particular focuses of litigation included the Luxembourg intellectual property (“IP”) box regime (prior to the OECD Base Erosion and Profit Shifting (“BEPS”) reform) and director’s liabilities for taxes. In early 2020, Luxembourg courts issued a new decision that addressed transfer-pricing challenges by the Luxembourg tax authorities. The importance of robust economic substance in Luxembourg holding and financing structures continues to grow in the wake of the 2019 landmark ‘Danish cases’ of the European Court of Justice (“ECJ”). Already in 2020, EU Member State tax authorities have started rigorously applying the beneficial ownership and economic substance tests, as elaborated in these ECJ cases. Significant deals and themesWith respect to alternative investment funds (“AIFs”), the Special Limited Partnership (“SCSp”) continues to be the favoured investment vehicle, and the reserve alternative investment fund (“RAIF”) continues as well to be the most-often chosen regulatory regime, while Luxembourg specialised investment funds (“SIFs”) and Luxembourg investment companies in risk capital (commonly referred to as “SICARs”) are less frequently chosen. Over the past year, AIFs focused in particular on private equity, non-performing loans, and real estate. For multinational corporate groups, Luxembourg remains a favoured location for holding and intragroup financing activities, particularly for investments, operations, and financing into the EU. However, over the past 12 months, there has been a noticeable trend in the unwinding of Luxembourg cross-border financing for US multinationals using hybrid instruments (i.e.,



Maples Group Luxembourg

Convertible Preferred Equity Certificates, or “CPECs”) in light of the anti-hybrid rules coming into force in both the USA and Luxembourg (i.e., EU Anti-Tax Avoidance Directive II, or “ATAD II”). Regarding the financing sector, Luxembourg tax resident companies (“Soparfis”) in corporate form continue to be widely utilised as well as securitisation vehicles. Luxembourg has continued to be a top choice for cross-border financing for a variety of industries. To date, COVID-19 has not had a disruptive effect on Luxembourg financing structures, mainly due to the quick government responses, which urgently allowed more flexibility with respect to the management and reporting of these structures. Nonetheless, certain industries such as real estate and hospitality have witnessed a dramatic slowdown in activity since the COVID-19 lockdown began. On the fund finance front, the volume of deals actually increased through March 2020 and then experienced a gradual slowdown. However, there continues to be increased financing activity for enlarging facilities, the expansion of new borrowers, and the renegotiations of extended terms and higher advance rates. We highlight that, at the time of writing, there has been no reported default on financing structures via Luxembourg towards institutional investors.


Domestic cases and litigationExceptional corporate governance measures for Luxembourg companiesThe Grand Ducal Decree of 20 March 2020 introduced exceptional temporary measures in order to maintain and facilitate the effective ongoing governance of Luxembourg companies as a rapid reaction to the challenges suddenly brought on by COVID-19. These new emergency measures overrule the normal requirement for physical board and shareholder meetings. During COVID-19, the governing bodies of any Luxembourg company are allowed to hold board and shareholder meetings without requiring the physical presence of their members – even if the corporate governance documents expressly state the contrary. These meetings can be validly conducted by written circular resolutions, video conferences or other telecommunication means so long as the identification of the members of the corporate body participating in the meeting can be documented.The emergency measures also authorise electronic signatures for validating corporate governance documents.The new emergency measures also include an additional four months to file the annual accounts of a Luxembourg entity, thus deferring the filing deadline from 31 July 2020 (for 2019 accounts) up to 30 November 2020 before incurring a late fee.Luxembourg tax administration emergency support measuresOn 17 March 2020, the Luxembourg tax administration released a ‘newsletter’ that detailed support measures for Luxembourg taxpayers who may be impacted by COVID-19. These emergency relief measures include cancellations and delays for certain Luxembourg direct tax filing and payment obligations.Tax and social security measures for Luxembourg cross-border workersMany of Luxembourg’s approximate 170,000 cross-border workers have benefitted from force majeure applying to the extended lockdown period in which they worked remotely in neighbouring Belgium, France and Germany. All three neighbouring jurisdictions




have announced that days spent working remotely due to COVID-19 will not impact the percentage threshold tests for determining social security or personal tax regimes. Prior to COVID-19, Belgium, France and Germany had begun applying strict limits on workdays allowed for cross-border workers outside of Luxembourg before imposing local taxation on salaries. German residents who work in Luxembourg are allowed a maximum of 19 days, Belgium residents 24 days, and French residents 29 days per year outside of Luxembourg. Now, however, due to the application of force majeure, the maximum workdays outside of Luxembourg will not be exceeded during COVID-19. Pre-2015 Luxembourg advance tax agreements no longer validOn 14 October 2019, the Luxembourg government presented the 2020 draft budget law, which included as its principal measure that all advance tax agreements (“ATAs”) issued prior to 1 January 2015 will no longer be valid as from 1 January 2020 onwards. The cancellations of these pre-2015 tax rulings are consistent with the updated Luxembourg tax ruling procedure, which limits the validity of ATAs for a maximum of five years. The new law allows taxpayers, who may be impacted, to obtain updated rulings under the new procedures. New draft law on updating FATCA/CRS reporting rules On 9 June 2020, the Luxembourg Parliament approved a new law aimed at updating Luxembourg rules on automatic exchange of information (“AEOI”) with the guidelines set out in the Global Forum on Transparency and Exchange of Information for Tax Purposes. This new law also contributes to the harmonisation of AEOI for both the Foreign Account Tax Compliance Act (“FATCA”) and the Common Reporting Standard (“CRS”) rules under Luxembourg domestic laws. One of the highlights of the new law is that, in the absence of reportable accounts, it will now be mandatory to do a ‘nil reporting’ of such accounts for CRS from 2020 onwards (prior to this, such was only mandatory for FATCA). Additionally, fines for non-compliance have been included of up to EUR10,000 for incorrect or incomplete reporting, as well as up to EUR250,000 for the non-compliance of due diligence procedures. The law will enter into force by 1 January 2021. The effective date of the updated FATCA/CRS rules is anticipated to be postponed by up to three months following an announcement on 3 June 2020 by the Luxembourg Ministry of Finance on deferrals of multiple new reporting laws (including the sixth Directive on Administration Cooperation, 2018/822 (“DAC 6”)). Luxembourg enacts ATAD II’s expanded anti-hybrid rules On 19 December 2019, Luxembourg voted to transpose its law on ATAD II, which expands the scope of the anti-hybrid rules as found in the EU’s Anti-Tax Avoidance Directive I (“ATAD I”) and also extends their application to countries outside the EU (“ATAD II Law”). All of the provisions of the new law apply for tax years beginning on or after 1 January 2020 with the exception of the reverse hybrid rule, which will not apply until 1 January 2022. ATAD II was largely inspired by the OECD BEPS Action 2 Report, and this Report should also be used as guidance for interpreting the application of the ATAD II Law. The ATAD II Law’s anti-hybrid rules aim to curtail perceived ‘aggressive tax planning’ by shutting down ‘hybrid mismatch’ outcomes for related party transactions within multinational groups. Examples of hybrid mismatch include when an item of income is deductible for tax purposes in one jurisdiction but not included in income in any other jurisdiction (“deduction/no inclusion” or “D/NI”). Another example is when there is a double deduction (“D/D”) for tax purposes in two or more jurisdictions arising from the same expense. A hybrid mismatch can result from differences of entity or instrument characterisation between two jurisdictions. A hybrid entity is generally considered tax transparent in one jurisdiction but tax opaque in another (e.g., Country A considers the entity a corporation, but Country B considers the




same entity a transparent partnership). A hybrid instrument is generally considered equity in one jurisdiction but debt in another (e.g., Country A considers the instrument debt, thus giving rise to a taxable deduction, but Country B considers the same payment a dividend, and exempts the same item of income under its domestic laws). The ATAD II Law significantly expands the scope of the prior ATAD I hybrid rules to include hybrid mismatches arising from the following cross-border scenarios involving at least one EU Member State: • Hybrid instruments. • Reverse hybrid entities.• Structured arrangements. • Dual residency or no residency situations. • Hybrid permanent establishments.• Imported hybrid mismatches. A hybrid mismatch can only occur between associated enterprises, within the same enterprise (i.e., between the head office and/or one or more permanent establishments), or pursuant to a structured arrangement. Associated enterprises (entities or individuals) are defined by a 50% common threshold with respect to voting rights, capital, and/or rights to profits. The threshold is reduced to 25% with respect to mismatches involving hybrid financial instruments. The concept also applies if the entities are part of the same consolidated group for financial accounting purposes. Associated enterprise also includes a taxpayer having a noticeable influence on the management of an enterprise and vice versa.The ATAD II Law further expands ‘associated enterprise’ to apply to an individual or entity ‘acting together’ with another individual or entity in respect of the voting rights or capital ownership of an entity. In such case, the associated enterprise or individual should be considered as holding a participation in all of the aggregated voting rights or capital ownership that are held by the other individual or entity. However, the ATAD II Law has a rebuttable presumption that investors who hold less than 10% of the shares or interests in an investment fund, and are entitled to less than 10% of profits, are deemed not to be acting together. Pursuant to ATAD II, Luxembourg will have an additional ‘reverse hybrid rule’ which comes into force as of 1 January 2022. Luxembourg’s adaptation of this law provides that a Luxembourg transparent entity (such as an SCS or SCSp) can be recharacterised as being subject to Luxembourg corporate income tax if the following conditions are fulfilled:• one or more associated entities hold in the aggregate a direct or indirect interest in 50%

or more of the voting rights, capital interests, or rights to profits in the Luxembourg transparent entity;

• these associated entities are located in jurisdictions that regard the Luxembourg transparent entity as tax opaque; and

• to the extent that the profits of the Luxembourg transparent entity are not subject to tax in any other jurisdiction.

However, there is an exception to this reverse hybrid rule, which applies when the transparent entity is a ‘collective investment vehicle’, which is defined as an investment fund that is widely held, holds a diversified portfolio, and is subject to investor protection regulation in Luxembourg. The Luxembourg legislative notes suggest that Luxembourg regulated funds (UCITS, SIFs) and funds under regulated management (RAIFs), as well as alternative investment funds within the meaning of the EU Directive, should all qualify for this exemption.




Luxembourg draft law disallowing tax deduction on royalties or interest paid to related entities in the EU’s list of Non-cooperative Tax JurisdictionsOn 30 March 2020, a draft law was submitted to the Luxembourg Parliament that will disallow the tax deductibility of interest and royalties paid to related entities located in the EU’s list of Non-cooperative Jurisdictions for Tax Purposes. The new law is proposed to enter into force as from 1 January 2021.The draft law will specifically disallow the deduction of interest and royalties for tax purposes if the following conditions are fulfilled: the beneficial owner is a corporate entity; the entity is a related party; and the entity is established in a jurisdiction listed in the EU’s List of Non-cooperative Jurisdictions for Tax Purposes.Luxembourg publishes guidance on its controlled foreign companies (“CFC”) regimeOn 4 March 2020, the Luxembourg tax authorities issued a new Circular 164ter/1 (the “Circular”) providing guidance on the CFC rules enacted in Luxembourg pursuant to ATAD I. The Circular in particular elaborates on how both the control and effective tax rate (“ETR”) tests will be applied. With respect to the ETR test, the Circular provides guidance on how to determine whether the ETR of the CFC is comparable to at least a rate of 8.5% for 2020 and future years (9% for 2019). Factors to take into account include the local laws on the official tax rate, the calculation and methodology for determining the local tax base, as well as any special exemptions or rules that may apply when modifying the tax base. Additionally, the Circular clarifies how the ‘comparable tax’ analysis should be conducted by a shadow tax calculation comparing how the CFC would be taxed as if it were subject to corporate tax in Luxembourg. This shadow calculation should then be compared to the actual tax accruing under the local corporate tax of the CFC in question. The Circular elaborates that transfer pricing documentation should be prepared to support ‘significant people functions’ as a means of establishing genuine economic arrangements for CFCs otherwise at risk for falling under the anti-abuse regime when both the control and ETR tests are satisfied. EC notifies Luxembourg to remove the exemption available to securitisation vehicles for the 30% EBITDA interest limitation ruleOn 14 May 2020, the European Commission (“EC”) sent formal notice letters to advise Luxembourg and Portugal to remove the exemptions from the 30% EBITDA interest limitation rules currently available to certain securitisation vehicles under their ATAD I domestic laws. Luxembourg securitisation vehicles in corporate form that earn income other than interest income could be impacted by this development. The removal of the exemption would result in a limitation of tax-deductible commitment payments to 30% of EBITDA for such entities.Amended DAC 6 draft law voted On 21 March 2020, Luxembourg voted to approve its latest amended version of DAC 6. The latest amendments include exemptions on mandatory disclosure for intermediaries who benefit from professional secrecy, such as attorneys and auditors. DAC 6 generally requires intermediaries and in some cases even taxpayers (if there is no intermediary or if the intermediary is bound by professional secrecy) to report certain cross-border arrangements, which are perceived by the EU as likely to be aggressive tax planning, to the Luxembourg tax authorities. Generally, Luxembourg’s DAC 6 law transposes consistently all the DAC 6 concepts as found in the Directive itself (e.g., main purpose test, cross-border arrangements, intermediaries, associated enterprises, information to report, etc.).




However, Luxembourg’s version of the law does have some notable provisions not expressly stated in DAC 6. With respect to ‘privilege’, lawyers, accountants and auditors who are protected by professional secrecy will benefit from a reduced reporting obligation under Luxembourg’s version. Additionally, taxpayers required to disclose under DAC 6 will also have to include a reference to the reportable arrangement in their corporate tax returns. Luxembourg’s DAC 6 law also provides penalties of up to EUR250,000 for incomplete or late reports, or failure to disclose. Currently, the first reporting must include all the reportable cross-border arrangements that occurred on or after 25 June 2018. All reportable arrangements from 25 June 2018 to 1 July 2020 were initially to be reported by 31 August 2020. After 1 July 2020, all reportable arrangements must be reported within 30 days as from when the transaction is available, ready, or implemented (whichever is sooner). However, these dates have been extended due to the COVID-19 lockdown. DAC 6 reporting deferred for six monthsOn 8 May 2020, due to COVID-19, the EC proposed extending the DAC 6 mandatory disclosure deadlines by up to three months. However, by 3 June 2020, EU Member State representatives on the Permanent Representative Committee (“Coreper”) reached a compromise agreement for an optional six-month deferral for both reporting and information exchange deadlines under DAC 6. Accordingly, the Luxembourg Ministry of Finance should be introducing an amended draft law, which will include the six-month deferral of deadlines for DAC 6 and presumably should provide updated DAC 6 reporting deadlines, as follows (the text is not yet published): • Reportable cross-border arrangements implemented between 25 June 2018 and 30 June

2020 should now be reported by 28 February 2021 (i.e., up to six months after the original deadline of 31 August 2020).

• Reportable cross-border arrangements occurring between 1 July 2020 and 31 December 2020 should now be disclosed within 30 days as from 1 January 2021.

• Reportable cross-border arrangements, occurring on or after 1 January 2021, should also be disclosed within a 30-day period.

Luxembourg tax authorities challenge structure with weak transfer pricing and no valid business purposeIn a case published on 28 January 2020, the Luxembourg Administrative Tribunal (Number 4) ruled in favour of the taxpayer in a recent decision addressing the use of hybrid debt instruments and lack of transfer pricing documentation (Case Number 41800). While the court ruled in favour of the taxpayer on the basis that, even if the structure was principally aimed at reducing taxes without economic justifications, the fact that the Luxembourg tax authorities, at that time, were accepting such structures (i.e., mandatory redeemable preferred shares as a form of ‘hybrid instrument’), such prior acceptance impeded them in this particular instance of challenging the structure. A key takeaway from this case is to emphasise that the Luxembourg tax authorities focused heavily on the transfer pricing arguments. Notably, the Luxembourg tax authorities argued that the transfer pricing documentation did not include a sufficient functional analysis and lacked methodology consistent with OECD transfer pricing principles. The Luxembourg tax authorities also argued that the transaction should be disregarded as an ‘abuse of law’, citing that it lacked both economic substance and valid non-tax reasons.




New protocol in force for the France–Luxembourg double tax treaty On 6 April 2020, the Luxembourg Parliament approved the pending protocol to the tax treaty with France. The protocol to the 2018 income and capital tax treaty with France clarifies the apportioning of taxation rights between the two countries for cross-border professionals who work in Luxembourg but reside in France. France shall use the exemption with the progression method instead of the credit method to the income of French cross-border workers paid for their employment in Luxembourg. The protocol applies retroactively as from 1 January 2020.New protocol in force for the Luxembourg–US double tax treaty protocol related to information exchange On 9 September 2019, the new protocol on the Luxembourg–US tax treaty entered into force. The amendments mainly apply to the treaty’s article 28 on information exchange. The protocol was negotiated in 2009 but was delayed for several years by the Senate’s ratification process. The new protocol’s amendment aligns the Luxembourg–US tax treaty with the US model tax treaty regarding information exchange. Notably, the updated provision allows for information held by Luxembourg financial institutions to be exchanged on requests between Luxembourg and the US, thus overriding the potential application of Luxembourg’s bank secrecy laws. The new protocol reinforces the ability of the Luxembourg tax authorities to automatically collect information on US taxpayers with accounts in Luxembourg and provide that information to the US Internal Revenue Service. The protocol will be applicable to information requests made on or after 9 September 2019 (i.e., the entry into force) and covers tax years beginning on or after 1 January 2009.Other tax treaty developments As of 8 June 2020, Luxembourg’s tax treaty network has expanded to 84 tax treaties in force with three pending ratification and 10 more tax treaties under negotiation. New double tax treaties entering into force since August 2019 include Argentina, Kosovo, and Uzbekistan. Treaties currently under negotiation include Colombia, Kyrgyzstan, and Lebanon. Tax treaties pending ratification include Botswana, as well as an updated protocol with Kazakhstan. OECD and EU developmentsOECD new report on transfer pricing to financial transactions On 11 February 2020, the OECD released final guidance on transfer pricing guidelines (“TPG”) related to financial transactions as part of the mandated follow-up work arising from the final reports on the OECD’s BEPS Actions 8 to 10 related to transfer pricing. Luxembourg tax authorities generally respect and apply OECD transfer pricing guidelines, and thus the new OECD guidance should have an important impact on the financial services activities in Luxembourg. The new guidelines notably address intra-group financing, treasury activities, financial guarantees, and captive insurance functions. EC recommends stepped-up action for aggressive tax planning on outbound payments from LuxembourgOn 20 May 2020, the EC issued recommendations to EU Member States for curbing aggressive tax planning. In particular, the EC communicated specific recommendations towards six Member States including Cyprus, Hungary, Ireland, Luxembourg, Malta, and the Netherlands. With respect to Luxembourg, the EC commended its steps to address aggressive tax planning by implementing OECD and EU-based initiatives (e.g., BEPS, ATAD I and II, etc.), but highlighted that dividend, interest, and royalty payments remained a relatively high percentage of its GDP, thus suggesting aggressive tax planning may still be




occurring there. The EC further elaborated that Luxembourg has an absence of withholding tax on royalties and interest, which may lead to such payments escaping taxation altogether. The EC recommended that Luxembourg ‘step-up action to address features of the tax system that facilitate aggressive tax planning, in particular by means of outbound payments’. ECJ case on Luxembourg fiscal unity On 14 May 2020, the ECJ ruled that Luxembourg’s fiscal unity regime, which separates vertical from horizontal fiscal unity groups, violates the principle of freedom of establishment (C-749/18). In light of EU Law, the ECJ’s decision should be enough for Luxembourg fiscal unities to be able to claim combined vertical and horizontal groups regardless of an actual change in Luxembourg’s law. EU cases and developments in the wake of the ECJ Danish holding company cases In the wake of the ECJ landmark Danish cases (C-115/16, C-118/16, C-119/15) that addressed whether Luxembourg and other intermediate EU tax resident holding companies qualify for EU tax directive benefits on dividends and interest paid from Danish subsidiaries, EU Member States’ tax authorities are now concentrating their efforts on challenging such structures. We highlight the following:• On 8 October 2019, the Spanish Tax Court rejected the application of the withholding

tax exemption for interest payments from a Spanish subsidiary up to its Dutch holding company parent. The Spanish court ruled that the Dutch holding company was not the beneficial owner of the interest payments by applying the same criteria found in the ECJ Danish cases.

• On 8 January 2020, the Dutch Supreme Court denied application of the EU Parent-Subsidiary Directive due to the existence of a ‘wholly artificial arrangement’ involving a Luxembourg tax resident parent company of a Dutch subsidiary. The Dutch Court duly noted that the Luxembourg company had very limited substance and no economic activities.

EU state aid investigations On 5 March 2020, in the European General Court, Amazon challenged the EC’s order to repay EUR250 million in Luxembourg taxes. In its filing, Amazon’s legal team cited that the EU had multiple legal and factual errors and even accused the EU enforcers of discrimination by using 2017 OECD guidelines for a tax ruling dated 15 years earlier in 2003. Previously, the EC’s investigation asserted that royalty payments covered by the tax ruling for its Luxembourg subsidiary were not respecting the arm’s length standard and thus provided Amazon an unlawful selective advantage. On 24 September 2019, the European General Court issued its judgments on the EU state aid cases for both Fiat and Starbucks. Both companies had challenged the EC’s decision to repay taxes arising from illegal state aid advantages by application of transfer pricing methodologies. The EU General Court annulled the EC’s decision for Starbucks, concluding that the EC failed to establish that Starbucks enjoyed a selective advantage by the transfer pricing method used. Conversely, the EU General Court affirmed the EC’s decision against Fiat by citing that, in this case, the Luxembourg tax authorities did not properly apply the transfer pricing methodology to its Luxembourg subsidiary. Notably, these two cases affirm the EC’s power to review the application of transfer pricing by EU Member States into the future for assessing whether an illegal selective advantage is granted. The EU state case involving Huhtalux, a Luxembourg holding company which is part of the Finnish food and drink packaging company Huhtamäki, has remained silent since




May 2019 when the non-confidential version of the decision to open the investigation was published. The Luxembourg company had obtained a tax ruling allowing deemed interest deductions on interest-free loans. The case is particularly interesting because Luxembourg is allowing a pro-taxpayer transfer pricing adjustment (i.e., decreasing the tax base because of adjustments on related party transactions). OECD multilateral instrument update The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) entered into force for Luxembourg on 1 August 2019. The MLI contains several provisions, which are aimed at preventing treaty shopping and other perceived abuses. Among the MLI’s provisions, the most notable is the ‘principal purpose test’ (“PPT”) which can deny tax treaty benefits (such as reduced withholding taxes) if ‘obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit’. Whether one of Luxembourg’s double tax treaties is covered by the MLI will depend on the status of the treaty partner country’s election to also have the treaty covered by the MLI and if it too has gone through the ratification and deposit process. Eventually, the MLI could potentially apply to almost all of Luxembourg’s 84 double tax treaties to the extent the treaty partner country also agrees and ratifies the MLI. Currently, over 50 of Luxembourg’s 84 tax treaties are covered by the MLI as from 1 February 2020.

The year ahead

In the coming 12 months, we can certainly expect that EU Member States will increase tax audits for sources of additional tax revenues in light of both the COVID-19 economic downturn and the EU’s focus on curbing aggressive tax planning. Accordingly, it is important that Luxembourg structures should be updated, if not already, by documenting the non-tax business reasons for their implementation, appropriate economic substance and supporting transfer pricing documentation (when applicable). Factors worth reviewing include assessing that the Luxembourg entity is the beneficial owner of items of income it receives from EU subsidiaries (i.e., mindful of any reliance on an EU Directive or tax treaty based on a reduced withholding tax position), the level of economic substance in Luxembourg is commensurate with its activities, and that the structure has solid business (non-tax) reasons for being implemented. Additionally, transfer pricing documentation should be prepared with respect to related party transactions. We highlight that already during 2020, Luxembourg has new case law evidencing the Luxembourg tax authorities’ focus on transfer pricing. Likewise, the European General Court has now confirmed in the Fiat and Amazon state aid cases that the EC may continue to utilise transfer pricing for state aid cases in the future. DAC 6 reporting will become due in the coming months. It is worth mentioning that the Luxembourg Association of the Luxembourg Funds Industry (“ALFI”) is expected to issue comprehensive DAC 6 guidelines in the summer of 2020 which should prove useful for the much-needed guidance currently lacking for this comprehensive, mandatory disclosure regime.In light of recent EC policy recommendations to Luxembourg, we should expect Luxembourg to amend the 30% EBITDA limitation rule exemption from applying to securitisation vehicles. Such entities that are currently relying on this exemption should urgently contact their Luxembourg tax advisor on the impact and planning solutions.




We should also expect Luxembourg to respond to the EU’s recommendation for Luxembourg to address outbound payments of dividends, royalties, and interest to low tax jurisdictions outside the EU. At the time of writing, Luxembourg had not yet responded to this EU recommendation. For the year ahead, the AIF space should continue to prosper with particular focus on alternative asset classes and the suitability of the SCSp/SCS and RAIF structures for these new investments. We also expect to see a significant increase in cross-border financing via Luxembourg for infrastructure, e-business, and logistics projects. We estimate increased projects regarding distressed debt for real estate and the commercial office sector in particular. Conversely, financing for hospitality, aircraft, and retail sectors should continue with a sustained slowdown. We are seeing a much more conservative approach from lending banks, despite the support of EU regulatory authorities, resulting in deals taking longer (despite borrowers seeking to lock pricing), and increased due diligence and analysis of enforcement scenarios beforehand.



Maples Group12E, rue Guillaume Kroll, L-1882, Luxembourg

Tel: +352 28 55 12 00 / Fax: +352 28 55 12 01 / URL: www.maples.com

James O’NealTel: +352 28 55 12 43 / Email: james.o’[email protected] O’Neal is a principal at Maples and Calder (Luxembourg), the Maples Group’s law firm, where he is head of the Luxembourg Tax group. He advises Fortune 500 companies, private equity, alternative investment funds and start-ups on many aspects of Luxembourg taxation, including holding activities, cross-border financing, IP planning, mergers and acquisitions, and restructuring. James joined the Maples Group in 2018. He was previously a principal in the Tax group at AMMC Law and, prior to that, was a Director of the International Tax team of a Big Four firm in Luxembourg. James began his career in Silicon Valley, California. He has an LL.M. in Taxation from the New York University School of Law and a J.D. with Honours from the University of Florida College of Law. James speaks English, French, and Spanish. James is a member of the Florida Bar.

Inès Annioui-SchildknechtTel: +352 28 55 12 45 / Email: [email protected]ès Annioui-Schildknecht is an associate of the Tax team at Maples and Calder (Luxembourg), the Maples Group’s law firm. Inès focuses on international tax planning for multinationals and investment funds related to global holding structures, cross-border finance, and mergers and acquisitions. Inès joined the Maples Group in 2018. Prior to this, she worked for large law firms both in Luxembourg and France. She began her career as a tax adviser at Deloitte Luxembourg. She has a Master’s degree in Tax and Business Law with Honours from the University of Strasbourg in France. Inès speaks French and English. She is also registered as an attorney with the Paris and Luxembourg Bars.


Rui DuarteTel: +352 28 55 12 57 / Email: [email protected] Duarte is a tax lawyer at Maples and Calder (Luxembourg), the Maples Group’s law firm. He advises multinational companies and alternative investments funds. As part of his work, Rui focuses on a variety of international tax issues, including tax structuring, cross-border holding and financing activities, as well as mergers and acquisitions. Previously, Rui worked as a senior international tax consultant of a Big Four firm in Luxembourg. Rui has an M.Sc. in Tax Law from the Catholic University of Portugal. Rui speaks Portuguese, English, French, and Spanish. Rui is admitted to the Luxembourg Bar as a Luxembourg qualified lawyer.



NetherlandsIJsbrand Uljée & Peter van Dijk

BUREN N.V.


Types of corporate tax workIn 2019, the Dutch M&A market was stunning, despite the political and economic uncertainties caused by trade wars and Brexit. This trend, however, changed in the first part of 2020 due to the COVID-19 pandemic. With the help of the Dutch government, which supports taxpayers by introducing favourable rules which improve the attractiveness of the tax environment, the Dutch economy and the Dutch M&A market seem to be well positioned to pick up speed after the COVID-19 pandemic. Of course, there are threats that could break this relatively positive prospect. A prolonged COVID-19 pandemic, European tax measures, geopolitical concerns, monetary policy, volatility in capital markets and high valuation levels are factors that could contribute to a downturn in deals and affect the Dutch M&A market.The introduction of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (“MLI”), recent case law of the Court of Justice of the European Union (“CJEU”) and the adoption of the EU Anti-Tax Avoidance Directives aimed at preventing the use of artificial structures, have created some uncertainty on the current and future application of the EU Parent Subsidiary Directive and tax treaties by international holding and financing companies, as well as an additional focus on substance and beneficial ownership. This is in line with international developments. The Netherlands remains an attractive jurisdiction for international businesses and especially for companies actively engaged in operational activities. Significant deals and themesReturns of value to shareholders One of the most significant recent developments in Dutch taxation was the announcement by the Dutch Ministry of Finance that new anti-abuse rules would be introduced based on which dividend payments to low-tax jurisdictions will be subject to a new Dutch conditional withholding tax on dividends from 1 January 2024 onwards. The Dutch government also took measures to improve the Dutch tax climate. An example is the gradual reduction of the corporate income tax rate from 19% (for taxable income up to and including EUR 200,000) in the year 2019 to 16.5% in the year 2020 and 15% by 2021, and from 25% (for taxable profits exceeding EUR 200,000) in the year 2020 to 21.7% by 2021.Real estate transactionsAs per 1 January 2019, the depreciation of buildings has been limited to the property value as annually determined by the municipality (the so-called “WOZ-waarde”). Previously, the depreciation of buildings used by an enterprise was allowed up to 50% of the property



BUREN N.V. Netherlands

value (depreciation of buildings leased out to third parties was already limited to 100% of the property value). Still we see an increasing number of foreign investors entering the Dutch real estate market.FundingBased on the implementation of the Anti-Tax Avoidance Directive 1, as of 1 January 2019, the Dutch earning stripping rules limit the deduction of excessive interest expenses related to intra-group and third-party payables for Dutch corporate income tax purposes. Under these rules, the starting point is to determine the Dutch taxpayers’ so-called interest expense excess. This is the amount by which the Dutch taxpayers’ tax-deductible interest expenses exceed the taxable interest income. The deductibility of the interest expense excess is limited to (i) 30% of the taxpayer’s EBITDA (carving out tax-exempt income), and (ii) a safe harbour threshold of EUR 1 million, whichever is higher. Interest disallowed under the earnings stripping rule can be carried forward to later years without limitation in time.M&ASignificant issues for the M&A practice were the abolishment of the limitation of interest deduction rules for participation debt (Article 13l of the Dutch Corporate Income Tax Act 1969, “CITA”) and acquisition holding debt (Article 15ad CITA) and the rules limiting the carrying forward of losses by holding and financing companies (Article 20.4 CITA) in connection with the introduction of the earning stripping rules.


Domestic – cases and legislationFiscal unity regimeOn 23 April 2019, the Dutch parliament adopted a legislative proposal changing Dutch fiscal unity rules retroactively effective from 1 January 2018. Under the new rules, several provisions included in the CITA and the Dutch Dividend Withholding Tax Act 1965 must be applied as if the Dutch tax consolidation regime were non-existent. The government has announced that the Dutch fiscal unity regime will be replaced in its entirety by a new tax grouping regime. Introduction interest and royalty withholding taxCurrently, the Netherlands does not levy a withholding tax on interest and royalty payments. However, the government has announced that a withholding tax on interest and royalty payments will apply from 1 January 2021 onwards. The applicable rate is expected to be 21.7%. The withholding tax would apply to intra-group interest and royalty payments by Dutch resident companies to related entities residing in jurisdictions with no or low statutory tax rates (i.e. most likely less than 9%), in jurisdictions that are on the EU blacklist of non-cooperative jurisdictions or in abusive situations.Reduction of maximum period of loss carry-forward facilityOn 1 January 2019, the maximum period in which tax losses can be carried forward was reduced from nine to six years. Tax losses incurred in 2018 and earlier can still be carried forward for a maximum of nine years. Case law on Dutch tax treatment of perpetualsOn 25 May 2020, the Dutch Supreme Court issued an important ruling regarding the tax treatment of Fixed-to-Floating Rate Perpetual Capital Securities (“Securities”) with pari passu ranking to preference shares. Typical for such Securities is that due to the perpetuality, it is uncertain if and when the principal amount will be refunded.




The main question was whether the Securities should be treated as equity from a Dutch civil law and tax law perspective, or as debt. The Dutch tax authorities argued that the Securities should be treated as equity as a result of which the interest expenses on the Securities would be non-deductible. The Dutch Supreme Court ruled in favour of the taxpayer that the Securities should be treated as debt which should generally result in a tax deduction, unless for instance the deduction would be limited under the application of the Dutch limitation of the interest deduction rules.

European – CJEU cases and EU law developments

On 26 February 2019, the CJEU ruled in six cases (the Danish cases T Danmark (C-116/16) and Y Denmark (C-117/16), Luxembourg 1 (C-115/16), X Denmark (C-118/16), C Danmark (C-119/16) and Z Denmark (C-29916)). In these cases, the CJEU provided the following indications that there are artificial arrangements or transactions involving an intermediary holding company receiving a dividend, including: • All or almost all of the dividends received by the intermediary holding company are,

very soon after receipt, passed on to entities that do not fulfil the conditions of the dividend withholding tax exemption.

• The sole activity of the intermediary holding company is the receipt of dividends and their transmission to the beneficial owner or to other conduit companies. The absence of actual economic activity must, in the light of the specific features of the economic activity in question, be inferred from an analysis of all the relevant factors relating, and in particular, to: 1. the management of the company; 2. its balance sheet; 3. the structure of its costs and to expenditure actually incurred; 4. the staff it employs; and 5. the company’s premises and equipment.

• The existence of various contracts between the companies involved in the financial transactions, the way in which the transactions are financed, the valuation of the intermediary companies’ equity and the conduit companies’ inability (legal or factual) to have economic use of the dividends received.

• Dividend withholding tax is avoided due to the interposition of the intermediary holding company between the company that pays dividends and the company in the group that is their beneficial owner.

• The existence of conduit companies that are without economic justification and the purely formal nature of the structure of the group of companies, the financial arrangements and the loans.

In addition, the CJEU ruled that national authorities and courts should consider a general EU anti-abuse principle by which the benefits of the EU Parent Subsidiary Directive and EU Interest & Royalty Directive should be denied in case of abusive practice, even in the absence of anti-abuse provisions in domestic law or tax treaties. In response to the above-mentioned cases, legal provisions in the Dutch dividend withholding tax exemption, and non-resident corporate income tax rules and controlled foreign company rules, changed on 1 January 2020. Under the current rules, the relevant substance requirements for intermediate non-resident holding companies and companies subject to controlled foreign company (“CFC”) rules serve as decisive for the burden of proof and no longer as a safe harbour. Not meeting the substance requirements means that there is a presumption of an abusive situation, unless the relevant taxpayer reasonably




demonstrates towards the tax authorities that there is no abusive situation. On the other hand, the Dutch tax authorities will have the possibility to demonstrate that an abusive situation exists even if the relevant substance requirements have been met.Implementation of ATAD IIThe Dutch law implementing the Anti-Tax Avoidance Directive II preventing hybrid mismatches related to non-EU countries entered (partially) into force on 1 January 2020.

BEPS

On 29 March 2019, the Netherlands deposited its instrument of ratification for the MLI with the Organisation for Economic Co-operation and Development (“OECD”). Therefore, the provisions of the MLI will (partly) apply to Dutch tax treaties as of 1 January 2020.

Tax climate in the Netherlands

The Dutch government’s current view of the tax climate is detailed in the 2019 fiscal policy agenda dated 27 May 2019 and the 2020 fiscal policy agenda dated 12 December 2019, which include the following goals. Reduction of tax evasion and tax avoidanceAlthough the Dutch Ministry of Finance emphasises that tax evasion and tax avoidance are international phenomena that can best be addressed by unilateral measures by the EU and OECD, the Netherlands aims at taking the lead in the international process to combat both. Besides previous measures (such as the implementation of the Anti-Tax Avoidance Directives and the MLI), the Ministry of Finance envisages (i) introducing a conditional withholding tax on interest and royalty payments on 1 January 2021 as well as a conditional withholding tax on dividends on 1 January 2024, and to increase transparency by implementing new policies for international ruling practice and tax treaties (see further below), and (ii) an increase in the substance for intra-group financing and licencing companies on 1 January 2021.Increase appeal for companies engaged in operational activitiesBesides the reduction of corporate income tax rates (see above), the Dutch Ministry of Finance aims at further increasing the Dutch tax system’s appeal by introducing new rules related to the levy of wage tax and personal income tax in respect of option plans for start-ups and scale-ups. The proposal seeks to defer the moment of levying taxation from the time of exercise of the options to the sale of the shares. The new rules should enter into force on 1 January 2021. In addition, a specific limitation of interest deduction rules for banks and insurance companies was introduced in the form of a minimum equity rule and entered into force on 1 January 2020. Other goalsOther policy goals are reducing taxes on employment, increasing the “greening” of the tax system in view of global climate goals, and increasing the efficiency of taxation.

Developments affecting attractiveness of the Netherlands for holding companies

Legislative changes affecting holding companies in particularCFC legislationThe Netherlands has one of the best holding company regimes in the world. The Dutch participation exemption provides for a full exemption of income (e.g. dividends, capital gains, liquidation proceeds) derived from share interests in qualifying participations. The




conditions for the application of the Dutch participation exemption are relatively easy to meet compared to similar regimes in other jurisdictions (e.g. no minimum holding period, low minimum share interest of 5% or more). Based on the implementation of the Anti-Tax Avoidance Directive 1, CFC rules apply as from 1 January 2019. Under the CFC rules, the participation exemption does not apply to profits from passive portfolio investment activities of direct or indirect subsidiaries or permanent establishments established in jurisdictions with no or low statutory tax rates (i.e. less than 9%), or in jurisdictions that are on the EU blacklist of non-cooperative jurisdictions included in a blacklist issued by the Dutch Ministry of Finance. Only interests of 50% of Dutch taxpayers, together with related companies, are targeted. The CFC rules do not apply if there is no abusive situation. If the subsidiaries or permanent establishments have a certain level of substance (including office space and payroll expenses of generally at least EUR 100,000), the Dutch tax authorities will have burden of proof to demonstrate that an abusive situation exists. Not meeting the substance requirements means that there is a presumption of an abusive situation, unless the relevant taxpayer reasonably demonstrates towards the tax authorities that there is no abusive situation. Abolition of limitation of loss carry-forward rules for holding and financing companiesOn 1 January 2019, the rules limiting the carrying forward of losses by holding and financing companies were abolished. Losses incurred in 2018 and before are still subject to the former rules under a grandfathering regime. Limitation of deduction of liquidation lossesThe Dutch Ministry of Finance is currently preparing draft legislation in order to limit the possibility of the deduction of liquidation losses. It is expected that only losses incurred on the liquidation of subsidiaries will be deductible up to an amount of EUR 5 million and for the excess only in cases of EU/EEA subsidiaries in which the taxpayer would have a controlling influence. Furthermore, the time in which the loss can be deducted will likely be limited. Losses may only be deducted if the liquidation is completed within three years of the cessation or completion of the decision to do so (unless the term would be longer based on business reasons). Policy update for international ruling practiceOn 1 July 2019, the new Decree on the Dutch international ruling practice (“Decree”) entered into force, replacing the previous version of the Decree. The Decree includes rules on the application procedure for international tax rulings, the specifics of that procedure, conditions for applicants (which should be met for the Dutch tax authorities to take applications under consideration) and certain transparency considerations. The most important changes concern stricter conditions for applicants for an international tax ruling. Under the proposed rules, the Dutch tax authorities will consider a ruling request only if:1. the Dutch taxpayer has sufficient “economic nexus”;2. the main or principle reason for the transaction should not be to mitigate Dutch or non-

Dutch taxes; and3. the transaction should not involve a jurisdiction included in the Dutch list of low-taxed

jurisdictions.An anonymised summary of all rulings with an international character will be published, including a description of the relevant facts and main conclusions from transfer pricing reports, or other documents and an analysis of the relevant legislation (where applicable). In addition, summaries will be published of ruling requests with an international character




(which have been discussed with the Dutch tax authorities during preliminary consultations) that have not been honoured and the reasons why.Policy update for tax treaty negotiationsOn 29 May 2020, the Dutch Ministry of Finance published an updated note containing the Dutch position in tax treaty negotiations. The main amendments compared with the previous version of the note relate to changes related to the Dutch MLI positions. In addition, the Netherlands aims to strengthen the levy rights of poor developing countries by allowing source taxation on dividends, interest, royalties and technical services, and the expansion of the scope of the permanent establishment definition. In addition, the Netherlands would like to renegotiate tax treaties with low-taxed jurisdictions in order to be able to effectuate the soon-to-be-introduced Dutch withholding tax on interest and royalties.Impact of developments on migration trendsBased on newly adopted rules, the Netherlands has become generally more attractive to international businesses, especially to companies engaged in active operational activities. The introduction of various anti-abuse rules over the last few years affected some holding companies with limited presence in the Netherlands. As a consequence, some groups decided to increase their presence in the Netherlands.


PropertyThe introduction of the earnings stripping rules particularly affected the Dutch tax position of entities engaged in the exploitation of real estate. In general, entities engaged in the exploitation of real estate tend to be heavily debt-funded and usually do not own substantial receivables. As a consequence, such entities often have large interest expense excess resulting in an increased risk for limitation of interest deduction under the earning stripping rules.Start-up and scale-up companiesCompanies in start-up or scale-up phases are usually in loss-making positions. The reduction of the maximum period of the loss carry-forward facility to six years particularly affects these companies, as their chances to apply the loss carry-forward facility will be reduced.

The year ahead

Future tax developments are described in the above paragraphs.



IJsbrand UljéeTel: +31 70 318 4200 / Email: [email protected] Uljée obtained a degree in tax law from the University of Groningen in 2011. IJsbrand has been working as a tax advisor since 2012 in the international tax practice of the Big Four and an international tax boutique firm.IJsbrand advises his clients on Dutch tax aspects of (domestic and international) transactions such as M&A, and (re)structurings of investments and debt. Furthermore, his expertise lies in assisting internationally operating groups with various M&A transactions and starting and developing (cross-border) activities.He is a member of the Dutch Association of Tax Advisors.

Peter van DijkTel: +31 70 318 4834 / Email: [email protected] van Dijk, lawyer and tax lawyer and partner at BUREN, specialises in setting up corporate structures both for foreign investors and Dutch-based internationally operating groups. He has a special focus on Russia/CIS, CEE and Japan. Furthermore, his expertise lies in assisting internationally operating groups with various M&A transactions and starting and developing (cross-border) activities. Peter advises multinationals, listed companies and SMEs.Peter obtained a degree in tax law from Leiden University in 2001 and in history from Radboud University Nijmegen in 1996. In 2015, he was appointed partner. He is a member of the Dutch Tax Consultants Association and the Dutch Bar Association. He was a lecturer at the training institute for Federal Tax Advisors as well as the Hague University of Applied Sciences.

BUREN N.V.WTC – Tower C level 14, Strawinskylaan 1441, 1077 XX – Amsterdam, Netherlands

Johan de Wittlaan 15, 2517 JR – The Hague, NetherlandsTel: +31 20 333 8390 / +31 70 318 4200 / URL: www.burenlegal.com




SpainErnesto Lacambra & David Navarro

Cases & Lacambra


Types of corporate tax workDue to the improvement of the Spanish economy, the Spanish market has experienced a growth of M&A transactions involving private equity (PE) funds. Also, in the past few years there has been a boost in real estate transactions. Favourable special regimes envisaged for real estate entities such as Spanish real estate investment trusts (SOCIMIs) and companies engaged in the rental of properties have contributed to the growth of companies within this sector.Furthermore, relevant tax credits available for companies associated with research and development (R&D) and intellectual property (IP) activities are contributing to the allocation of innovation hubs in Spain, and also to investment in R&D activities by Spanish companies.On the other hand, the Spanish tax authorities are increasing their scrutiny of the following matters:(i) Effectiveness of substance requirements required by the anti-abuse Spanish regulations

on non-resident entities recipient of payments derived from interest, royalties and dividends from Spanish entities, i.e. business purpose test of non-resident entities benefitting from tax incentives derived from EU Directives or Double Taxation Treaties.

(ii) In the field of transfer pricing within the scope of multinational corporate groups, the tax authorities are focusing on: (i) the review of the correct allocation of profits by Spanish entities according to the risks and functions assumed and performed, respectively by the Spanish entity; (ii) recharacterisation of business models adopted by Spanish entities according to the real functions and risks; and (iii) determination of PEs in Spain derived from the functions carried out by dependent commercial agents (e.g. substantial functions vs. ancillary or auxiliary functions).

(iii) Taxation derived from operating via a company without their own means and resources by individual professionals due to the different rates for corporate tax and personal tax purposes.

(iv) Review of the requirements to consolidate tax according to the horizontal fiscal unity regime.

Incorporation of Spanish holding entities due to the tax measures introduced recently, such as the participation exemption regime, have also contributed to the increase of restructuring transactions, such as exchange of shares.



Cases & Lacambra Spain


Domestic – cases and legislationDuring the most difficult years of the Spanish economic crisis, there was a significant decrease in the income collected through corporate income tax, since the majority of Spanish-based companies were experiencing a significant reduction in profit, and some of them serious losses, which generated tax credits against the Spanish Treasury.In addition, the former tax system encouraged Spanish companies to borrow money to benefit from a flexible tax regime on the deductibility of interest payments with no limitation.Consequently, to revert the situation, Spanish corporate income tax was profoundly amended, following these principles: (i) simplifying the provisions set out in the law in order to reduce tax litigation by including recent judicial and administrative resolutions; (ii) providing the tax system with legal certainty; (iii) reducing tax rates and abolishing tax allowances; and (iv) introducing legal measures oriented toward cash repatriation (participation exemption) and measures to strengthen the equity of companies.The most relevant developments of corporate income tax in Spain are the following:(i) New participation exemption regime on dividends and capital gains.(ii) New tax horizontal consolidation regime.(iii) Success of the Spanish SOCIMI.(iv) Amendments to the rollover regime on company restructurings.(v) Special measures focused on reducing the public deficit.(vi) Introduction of the capitalisation reserve and other tax credits.Participation exemption regime on dividends and capital gainsThe participation exemption regime was introduced in Spain following a resolution from the European Commission which focused on two main issues: (i) to give an equivalent treatment to dividends and capital gains arising from qualified resident and non-resident companies; and (ii) to set an exemption method to avoid double taxation in order to increase competitiveness and internationalisation of European companies. Following the European Commission’s resolution, Spain passed a participation exemption method for dividends and capital gains arising from qualified resident and non-resident companies. This participation exemption regime has eliminated the former imputation method to internal source dividends and capital gains, which will now only apply to internationally sourced dividends and capital gains.Accordingly, Spanish companies are entitled to benefit from the participation exemption regime on qualifying resident and non-resident companies on the distribution of dividends and capital gains. In addition, Spanish companies with non-resident subsidiaries may choose to apply for the participation exemption regime or the imputation method, deducting withholding tax in accordance with the applicable tax treaty provisions.In order to qualify for the participation exemption regime, the following requirements should be met: (i) the shareholding in the subsidiary must be of at least 5% or, alternatively, it must have a minimum value of at least €20 million (participation requirement); and (ii) it must be held uninterruptedly for at least one year (holding requirement). In this sense, the holding requirement might be met at the company group level. In addition, if more than 70% of the subsidiary’s income consists of dividends or capital gains deriving from other subsidiaries, it would be required that the holding meets the above-mentioned participation and holding requirements in the indirectly controlled subsidiary. Nevertheless, the precedent rule would not be applicable if dividends have been included in




the tax base of the directly or indirectly owned entity in entities not allowed to apply for an exemption scheme or a double taxation tax credit scheme.This exemption also applies to foreign-source dividends and capital gains if the above-mentioned participation and holding requirements are met and the subsidiary has been subject to (and not exempt from) a tax equivalent to Spanish corporate income tax at a nominal rate of at least 10%. In this regard, the “equivalent tax” requirement will be met when the subsidiary is resident in a jurisdiction that has concluded a tax treaty with Spain which includes an exchange of information provision. Besides, the indirect shareholding requirement would also apply to foreign-source dividends and capital gains.The exemption does not apply to dividends or capital gains deriving from the transfer of shares in entities with tax residence in a tax haven jurisdiction in accordance with Spanish legislation.Conversely, in order to apply symmetric treatment, tax losses derived from the transfer of qualified participations as defined above are not deductible. Capital losses derived from the sale of non-qualified participations may be deductible, but reduced by, if any, the amount of tax-exempt dividends received by the subsidiary since 2009 and by the amount of exempt gains recognised by a related party seller in a previous transfer of the Spanish subsidiary.Lastly, in case of foreign PEs (e.g. branches, etc.), the Spanish Head Office is not allowed to apply the participation exemption on profits generated by the PE until such profits do not exceed the amount of tax losses computed and deducted before 2013.Horizontal tax consolidation regimeIn line with several EU Court cases, effective from 1 January 2015, Spanish legislation extended the scope of the tax group in order to allow the application of the tax consolidation regime to the following cases:• Spanish subsidiaries held indirectly through a foreign intermediary company can form

part of the tax group.• Horizontal tax consolidation is permitted in the sense that Spanish direct or indirect

subsidiaries of a common foreign parent company are able to form a Spanish tax group.Until that date, only Spanish entities directly participating in another Spanish entity were allowed to form part of a tax unity in Spain.This amendment has required multinational groups or PE funds to revisit the corporate tax treatment of their portfolio of Spanish subsidiaries given that, according to the previous law, when Spanish subsidiaries were commonly participating in a non-Spanish entity, they could not belong to the same tax group of companies. On the contrary, with the new regulations, Spanish entities with a common parent company can form part of a group of companies, irrespective of the country of residence of the parent company.Special rules were envisaged for specific situations such as two or more already existing tax groups which, according to this new rule, must be integrated within a sole tax group.Due to the vast variety of situations, this new rule generated considerable uncertainty in relation to the effects derived from (i) the creation of new tax unities, (ii) the extinction of previous tax groups, or (iii) the integration of several tax unities into a sole one. As a result, a relevant number of rulings of a binding nature were issued by the Spanish tax authorities during 2017.New groups of companies may opt to be taxed on a consolidated basis if their election to operate under this regime is carried out before the beginning of the tax year in which the regime is going to be applied.




For applying the tax consolidated regime, several requirements must be met, including, amongst others: the dominant entity must hold directly or indirectly at least 75% of the dependent entity; such ownership must be maintained for the entire year of consolidation; the Spanish companies must not be subject to special regimes such as Temporary Business Alliances or be tax-exempt companies; and the companies must not be taxed at a different rate to that of the parent company, etc.Amendment to the rollover regime on company restructuringsThe Spanish tax system foresees a special tax regime which allows the deference of both direct and indirect taxation arising from a restructuring transaction which has valid economic reasons. In line with the recommendations of the European Union, the aim of this regime is to eliminate tax barriers arising from mergers, spin-offs, contributions of assets, swap of securities and other restructuring transactions.This regime is expressly configured as the general regime to be applied to restructuring transactions. Previously, the Spanish rollover regime was applied only if the taxpayer decided on such. Although the rollover regime is currently applied by default, there is a general obligation to notify the Spanish tax authorities of the existence of a restructuring transaction which must respond to valid economic reasons to defer direct and indirect taxation derived from the disposal of assets. The applicability of the rollover regime requires valid economic reasons for its application. If the taxpayer fails to prove valid economic reasons when applying this regime, the restructuring transaction would not qualify to apply for such regime. In this regard, one of the main amendments was the reformulation of the legal consequences enforceable when the valid economic reason requirement was not met. The former regime foresaw that if the restructuring transaction did not qualify for the regime due to a lack of valid economic reasons, it triggered taxation for all capital gains arising from the transaction. Under the current regime, if the valid economic reason is not met, the legal consequence would be only to lose any tax advantage gained with the restructuring. Special measures focused on reducing the public deficitTo date, the government has maintained tax measures passed in 2016 directed at reducing the public deficit and adjusting imbalances in the Spanish economy, designed to increase revenues by (i) eliminating the deduction of losses on investments in other companies and bringing forward the reversal of provisions recorded at an earlier date, and (ii) by placing limits on, and deferring, the use of net operating losses and double taxation credits.The main tax measures are summarised below:• Limits on the use of tax loss carry forwards apply depending on the net revenue of the

taxpayer. In that sense, for large companies with net revenues equal to or above €20 million in the first 12 months before the beginning of the taxable period, the following limits are laid down: (i) up to 50%, wherein the 12 months before the starting date of the taxable period, the company’s net revenues are equal to or above €20 million but below €60 million; and (ii) up to 25%, wherein the same 12-month period the company’s net revenues are equal to or above €60 million.

• For other companies, no amendments have been made. Consequently, the 70% limit remains for them.

• Limit on the use of domestic and international double taxation credits. For companies having net revenues equal to or above €20 million in the 12 months before the beginning date of the taxable period, a limit has been placed on their use of domestic and international double taxation credits, whereby the aggregate amount of both types of credits that they use cannot exceed 50% of the gross payable for the year.




• Change in control rules for entities with net operating losses. The use of net operating losses of an acquired entity will be disallowed under certain circumstances, including (amongst others) where the acquired entity has been dormant in the past three months (currently, six months) or where, within the two years after the acquisition, the acquired entity carries out different (or additional) activities from the activities it carried out before the acquisition that generate turnover that exceeds more than 50% of its average turnover for the two years prior to the acquisition.

• Write-down of participations deducted before 2013 must be recaptured in a maximum period of five years commencing from the fiscal year 2016, or in a shorter period if the value of the portfolio is recovered in a shorter period of time, or if the participation is sold before the end of the five-year period.

Capitalisation reserve reduction and other tax creditsThe capitalisation reserve aims to strengthen Spanish entities’ net equity by keeping retained earnings undistributed in line with the principles inspiring the amendments to the corporate income tax, and allows a tax deduction for 10% of the increase in net equity in a particular tax year, provided the company maintains the net equity increase during the following five years (except in the case of accounting losses). A non-distributable reserve for the same amount must be booked. The deduction may not exceed 10% of the taxable base before the deduction, adjustments for deferred tax assets and the use of net operating losses. The excess may be carried forward for the following two years, subject to the applicable limit for each year.Spain has never permitted the carry back of tax losses and this principle remains unchanged. However, since 1 January 2015, an allowance consisting of a tax levelling reserve has been applicable. Thus, small- and medium-sized companies (companies with a turnover in the previous tax year of below €10 million) are allowed to deduct 10% of their taxable profits and allocate them to that special reserve. This reserve must be used to offset the losses incurred by the company within the five-year period following its creation. When this reserve is released, the tax deduction must be recaptured, diminishing or even cancelling the tax losses of that year. If during the five-year period the company does not incur any tax losses, the reserve must be released – and the tax deduction recaptured – at the end of the period. The deduction is limited to an annual limit of €1 million.BEPSSpain signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) on 7 June 2017 together with 67 other jurisdictions.On 13 July 2018, the Spanish Council of Ministers approved the MLI as a starting point of the internal ratification process following which it will be deposited to bring the MLI into force for its covered tax treaties.Spain has played an active role in the discussions on the BEPS Action Plan. In particular, the Spanish tax authorities have participated in several negotiations in international forums regarding the content and implementation of the BEPS programme, resulting in a package of 15 measures to be implemented in both European and domestic legislation.As a result, and despite the fact that the BEPS Actions can be considered soft law – the OECD final reports on each action are legal recommendations to States – Spain has intended to transmute most of the BEPS Actions into domestic legislation.




In general terms, the majority of actions taken by Spain were reflected in the last reform of corporate income tax in 2015. In this sense, the most important amendments to Spanish domestic legislation are the following:• Tax planning disclosure (DAC6). Spain has published draft legislation and will pass

before 31 December 2019 the implementation of the measures included within Council Directive (EU) 2018/822 of 25 May 2018, as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements.

• List of tax havens. The Spanish tax system foresees an important number of anti-avoidance rules in relation to the use of “tax havens”. The concept of “tax haven” is solely Spanish and it does not necessarily compare with other EU jurisdictions.

• Tax treaty abuse. Spain’s current tax treaty policy is to negotiate the inclusion of limitation on benefits clauses.

• Controlled foreign corporation (CFC) rules. Before the implementation of the BEPS Actions, Spain already had important provisions in this regard. However, following the OECD recommendations, Spain has strengthened its CFC rules by making them more restrictive.

• Interest deductibility. Spain has already introduced a limitation on interest deductibility linked to the earnings before interest, tax, depreciation and amortisation (EBITDA) with the company.

• PEs. Spain has not passed or amended any current law in this regard. However, the Spanish tax authorities have been applying in practice a more economic approach to the PE definition, very close to the broader PE rule established within BEPS.

Within this environment, the Spanish government introduced for Spanish corporations the obligation to file a Country-by-Country Report for fiscal years commencing as of 1 January 2016.Country-by-country reporting is required from:• Entities resident in the Spanish territory that are the parent in a group, defined in the

terms established in corporate tax law and which are not dependent on another resident or non-resident company, when the net business turnover of the group of persons or entities forming part of the group, in the 12 months prior to the start of the tax period, is at least €750 million.

• Entities resident in the Spanish territory, which are direct or indirect subsidiaries of a non-resident company in the Spanish territory that is not, at the same time, a subsidiary of another, or PEs of non-resident companies when, likewise, the net business turnover of the group of persons or entities that form part of the group, in the 12 months prior to the start of the tax period, is at least €750 million, provided that one of the following circumstances exists:• Entities designated by their non-resident parent entity to prepare this information.• There is no obligation for country-by-country reporting or similar as set forth in

this section regarding the aforementioned non-resident entity in its country or the territory of its tax residence.

• There is no agreement for automatic exchange of information, with regard to this information, with the country or territory in which this non-resident entity has its tax residence.

• That, with the existence of an agreement for automatic exchange of information with regard to this information with the country or territory in which this entity has its tax residence, there has been a systematic non-compliance of the same that has been notified by the Spanish tax agency to the subsidiary entities or to the permanent resident companies in Spanish territory.




However, country-by-country reporting will not be required by entities in the event that the country-by-country reporting has taken place through a subrogated parent country, complying with the conditions set forth in Council Directive 2016/881 of 25 May 2016.Any entity resident in Spanish territory that forms part of a group obliged to carry out country-by-country reporting must notify the Tax Administration of the identification and the tax country or residence of the entity obliged to prepare this information. This notification must be made every year before the end of the tax period to which the information refers and must include the identification of the entity obliged to report it and whether this is carried out depending on the parent entity, obliged affiliate entity or subrogating entity.VAT Immediate Supply of Information system2018 was the first complete fiscal year of application of the Immediate Supply of Information system, according to which VAT taxpayers are required to file electronically and in real time the information related to invoices issued or received from their activity. Due to this system, the tax authorities have all the information related to the operations carried out by Spanish entities, meaning a strengthening of the existing electronic control systems in the hands of the tax authorities.This special regime is mandatory for VAT taxpayers with a revenue exceeding €6 million, for VAT groups, and for taxpayers voluntarily applying the VAT monthly refund.

Tax climate in Spain

The corporate income tax regulations underwent a sound reform in 2015 with the approval of a new corporate income tax law, which implied (i) a broadening of the taxable base derived from the elimination of certain tax allowances such as the portfolio impairment, (ii) a reduction of the tax rate from 30% to 25%, and (iii) the removal of most of the available tax credits. Since then, the government has been reluctant to approve further corporate income tax incentives other than the capitalisation reserves and other minor incentives analysed above. No changes to the corporate tax rate are expected.According to the last State Budget Bill, and as further explained below, the potential implementation of certain measures aimed at increasing tax revenues cannot be discarded, amongst others: (i) limitation to the participation exemption regime for dividends and capital gains to 95%; (ii) introduction of a minimum tax for corporate income tax purposes for taxpayers with a turnover exceeding €20 million, or tax groups; (iii) the reduction of the tax rate for very small entities; (iv) the increase of the interim payments on account of the final corporate tax due; or (v) amendments to the SOCIMI regime.In 2019 and at the beginning of 2020, Spain has remained active at an international level, signing, negotiating or renegotiating Double Tax Agreements with Azerbaijan, Cape Verde, China, Romania and the United States of America.In regard to the United States of America, the new protocol which entered into force in November 2019 provides significant improvements in terms of tax efficiency for companies and investors between Spain and the United States. Most notably, the new agreement reduces, and even eliminates, taxes at source on dividends, interest and profits and allows for the tax-free transfer of pension plans.During 2019, the tax authorities toughened their campaign to increase control over fraud and the submerged economy. Amongst others, the tax audit campaign was focused on the review of high-net-worth individuals, fraud in the digital economy, entities without real substance, fintech companies, cryptocurrencies, tax effects on Brexit, etc.




The Control Tax Plan from the tax authorities for the fiscal year 2020 also foresees special control on companies with net operative losses which have been generated repeatedly, more control over the shadow economy, special focus on related party transactions, the possible existence of permanent establishments and/or the attribution of profits, etc., as well as the implementation of a new technology system that will allow taxpayers’ representatives and advisors to interact with the tax inspection online.Within the scope of the climate of control, on 29 December 2018, Spain passed legislation by way of transposition of EU Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups, whose objective is to identify risk in order to improve sustainability and the confidence of investors, consumers and society in general.According to the above, Spanish companies exceeding certain thresholds (e.g. 500 employees, value of assets exceeding €20 million, etc.) and public interest entities as defined by the law shall report and disclose the following tax information in their annual accounts and management reports: profits obtained in each country; tax paid on profits; and public subsidies received.

Developments affecting attractiveness of Spain for holding companies

Holding companiesSpain offers a very attractive tax regime for holding companies with non-resident subsidiaries. In particular, this structure has been commonly set up to benefit from the important network of tax treaties between Spain and Latin American jurisdictions and its participation exemption regime.Any Spanish entity may opt to apply for the ETVE regime (“Entidad de Tenencia de Valores Extranjeros” or “Foreign Securities Holding Company”) as long as certain requirements are met.Under this regime, ETVE companies will be entitled to apply for a full exemption on dividends and capital gains from foreign subsidiaries and no withholding tax would apply on the distribution from the ETVE company to its shareholders. In particular, the main benefits of this regime are:(a) Full exemption applicable to dividends and capital gains obtained by the ETVE from

its shareholding in non-resident subsidiaries.(b) The non-Spanish taxation applicable to ETVE non-resident shareholders.The main requirements to apply for this regime are as follows:• The company’s corporate purpose shall include the management and administration of

foreign shareholdings through the appropriate human and material resources. However, the corporate purpose may also include other activities in Spain or overseas.

• The Spanish entity must hold a minimum participation of at least 5% either directly or indirectly in the foreign subsidiaries. This requirement may be replaced by an acquisition cost of the subsidiary’s shares equal to or greater than €20 million. In case of holding shares in a subsidiary acting as a holding company, its income should derive from more than 70% of dividends and capital gains, and the mentioned 5% participation must be indirectly met by the Spanish entity in the lower-tier subsidiaries or, otherwise, certain other requirements must be met.

• The shareholding in which the minimum participation requirement has been met must have been held for at least one year prior to the date on which dividends and capital gains eligible for the participation exemption regime are received.




• In the case of dividends, this minimum holding period may be completed after the dividend distribution takes place. The period of time during which other members of the group have held the subsidiaries is also taken into account to calculate the holding period.

• Subject to tax test. Foreign subsidiaries held by a Spanish holding company must have been subject to tax equal or similar to the Spanish corporate income tax at a statutory rate of at least 10% (it is allowed for the effective tax rate to be lower due to the application of any reductions or allowances in the subsidiary). This test is considered to be met for subsidiaries resident in a country that has signed a Double Tax Treaty with Spain with an agreement on exchange of tax information. For capital gains purposes, this test must be met during the entire holding period.

• The participation exemption will not apply in case the dividend distribution constitutes a tax-deductible expense in the subsidiary.

• The subsidiary cannot be resident in a Spanish listed tax haven unless the jurisdiction is within the EU and the taxpayer proves that it has been incorporated for sound business reasons and it performs an active business.

Any capital gains derived from the transfer of shares of the ETVE by non-resident shareholders, other than those that are tax haven-based or with a permanent establishment in Spain, will not be taxable in Spain provided the gain is derived from non-Spanish qualifying source income.


Real estate. One of the symptoms of the Spanish economic recovery is the significant increase of real estate transfers and rentals. A large number of real estate transactions took place in 2019, following the trend of the last few years. Success of the Spanish SOCIMISOCIMIs were introduced in Spain on 26 October 2009. However, the earlier regime was not attractive for foreign investments and it was not until the latest amendments, which took place in 2012, that SOCIMIs started to be attractive for foreign investors.SOCIMIs, also known as Spanish real estate investment trusts (REITs), are Spanish listed companies whose main purpose is the acquisition and development of real estate of an urban nature for the purpose of renting or holding of shares in other SOCIMIs or foreign REITs.In 2012, the Spanish government introduced several amendments to the legal and tax regime of SOCIMIs in order to attract foreign investment in Spain through this vehicle. The main feature of this regime is the SOCIMI 0% corporate income tax rate if certain requirements are met, competing with other REITs in different jurisdictions. This preferential tax regime for SOCIMIs partly relies on the shift of taxation from the SOCIMI to the investors, whose final taxation will depend on its legal form and its tax residence. Nevertheless, SOCIMIs will be taxed at 0% provided the shareholders owning at least 5% of its capital are taxed on the dividends received at a minimum nominal tax rate of 10% (“minimum taxation test”). If the shareholders are entitled to apply for an exemption, or subject to a nominal tax rate of less than 10%, SOCIMIs will be taxed at a 19% tax rate on the dividends distributed to those qualified shareholders. It is important to clarify that this 19% tax rate will be paid by the SOCIMI and it will not be considered a withholding tax on the dividends distributed.As per the corporate requirements to apply for the special tax regime, Spanish legislation requires SOCIMIs to have a minimum share capital of €5 million, which must be fully paid-up and meet important investment requirements.




At least 80% of the value of the SOCIMI’s assets must be invested in qualifying assets or shares, and at least 80% of its income must derive from the rental income or dividends distributed by companies devoted to the rental of real estate.However, there is no requirement with regard to the number of properties or shareholdings in companies which, in practice, means a SOCIMI could apply for the special tax regime holding on property as long as it is held for a minimum period of three years. Nevertheless, the Spanish National Securities Market Commission establishes certain control over the launching of SOCIMIs with minor shareholders.SOCIMIs are required to distribute at least 80% of their profits arising from real rental income and complementary activities, 50% of profits from the disposal of assets or shares, and 100% of profits arising from qualifying shares.Automotive, pharmaceuticals, chemical, life sciences, engineering, R&DThe automotive industry is one of the key drivers of the Spanish economy, being one of the main employment-generating sectors. Its contribution to Spanish GDP in 2016–2017 was around 12%, and its production is growing every year in a very consistent manner, reaching maximum historic values of production in 2017.Due to the strong bet by the Spanish government on R&D incentives in connection with corporate taxes (i.e. R&D credit and the Patent Box regime), including generation of tax credits of between 25% and 42% of R&D expenses and the possibility to monetise such tax credits up to an amount of €5 million, several multinational groups have decided to allocate their R&D activities in Spain. The pharmaceuticals, life sciences, chemical and engineering industries are also amongst the sectors to benefit most from R&D incentives.2019 proved to be a highly active year for mergers and acquisitions as well as other corporate reorganisations derived from the Brexit effect. The clarity on the UK’s future relationship with the EU has resulted in strategic transactions in order to carefully plan how to face the new UK market position.

The year ahead

It is expected that there will be continuous efforts by the government to increase the revenue from corporate income tax, as discussed above in this chapter, by way of amendments of the corporate income tax law, or by way of tax review works primarily focused, for instance, on the field of transfer pricing for multinational entities.These measures were included in the Bill for the General State Budget for 2019, which eventually was not approved due to the political situation experienced during the year and due to the current, ongoing impact of COVID-19. The expected measures that would affect corporate tax are:• Taxation of dividends and income derived from the transfer of shares: Currently, income derived from both dividends and transfer of qualifying shares

(amongst others, involving a minimum holding of 5%, or acquisition value of more than €20 million) is exempt, provided that the holding period is more than one year and, if the subsidiaries are non-resident, that they have been subject to a tax equivalent to corporation tax at a nominal rate of at least 10%.

The latter requirement is deemed to be met if the subsidiary is resident in a country that has entered into a double taxation agreement with Spain containing an effective exchange of information clause.




The proposed measure would consider the exemption on dividends and income derived from the transfer of affiliates, but no longer as a full exemption (of 100%) but limited to a 95% exemption.

This reduction of the exemption is justified based on the Parent-Subsidiary Directive, which enables Member States to consider expenses relating to the management of shares as non-deductible up to a limit of 5% of the distributed profit.

Therefore, if the rule is approved, this would mean that dividends distributed by subsidiaries would be subject to taxation at an effective rate of 1.25%.

• Implementation of a minimum taxation of 15% of the taxable base for companies with a turnover equal to or greater than €20 million.

• Implementation of a tax rate of 23% for companies with a turnover of less than €1 million.• Application of a 24% tax rate on instalment payments to all companies (not only those

with a turnover of €10 million or more), and an increase of the tax rate from 23% to 24% on instalment payments.

• Enabling a deduction for the promotion of gender equality (relating to the increase in the number of female directors), of 10% of the remuneration paid to them.

• Implementation of a special tax at the headquarters of the SOCIMI of 15% of the profits of the year that are not distributed to the shareholders.



Cases & LacambraAvenida Pau Casals 22, 08021, Barcelona, Spain

Tel: +34 93 611 92 32 / URL: www.caseslacambra.com

Ernesto LacambraTel: +34 93 611 92 32 / Email: [email protected] Lacambra is a co-managing partner of Cases & Lacambra. He leads the Tax practice. Ernesto is specialised in advising multinational groups, private equity firms and foreign and national investment funds and in the international tax planning of cross-border investments. He has extensive experience in mergers and acquisitions and reorganisations of multinational groups. In particular, he has focused on the reorganisation of Spanish holding companies for Latin American groups, as well as in investments in Spain by European, American and Asian investors.Ernesto also has extensive experience advising high-net-worth individuals, family business groups and large national and multinational business groups. He is an expert in tax audit procedures. He also advises on transfer pricing regulations (reorganisation of the value chain, litigation and master file documentation).Ernesto is a regular speaker at international business schools on international taxation matters and bilateral investments between the Middle East and Spain.

David NavarroTel: +34 93 611 92 32 / Email: [email protected] Navarro is a partner in the Tax practice of Cases & Lacambra. He has extensive experience in advising family business groups, large national and multinational business groups, private equity firms and investment funds in both domestic and international environments, in relation to group restructuring and corporate reorganisation (mergers, acquisitions, divestments, etc.), international tax planning of cross-border investments and ongoing tax advice.He has advised multinational groups and companies in their operations in Spain and abroad in a wide range of fields. He has extensive experience in internationalisation processes of Spanish companies in foreign jurisdictions.




SwitzerlandSusanne Schreiber & Elena Kumashova

Bär & Karrer Ltd.


Types of corporate tax workM&AIn comparison to the record-breaking year of 2018, M&A activity in 2019 was slightly lower. Four hundred and two deals involving Swiss companies and investors were reported, with a transaction value amounting to USD 127bn. Two-thirds of that amount was attributable to the 10 largest mergers and acquisitions. These were driven primarily by two pharmaceutical groups, Novartis International AG and Roche Holding AG. The spin-off alone of Novartis’ eye care division Alcon AG contributed almost a quarter of the total transaction volume in 2019. Furthermore, the industrial sector and the technology, media and telecommunications (TMT) sector were also key driving forces in Swiss M&A business, with a transaction amount of 127 and a transaction volume of USD 23.3bn. Notably, Swiss companies acquired significantly more foreign companies than vice versa. Tax litigationIn addition to traditional tax litigation matters, international requests for exchange of information remain a highly prolific ground for tax litigations in Switzerland. Switzerland continues to receive a large number of requests for assistance under the double tax treaties (DTTs) and agreements on the exchange of information, and the Multilateral Convention on Administrative Assistance. Around 20% of these requests concern corporate entities.Most of the cases deal with procedural aspects of the administrative assistance requests, such as the possibility to use information in respect of third persons, provision of information in respect of third persons (which is a common concern when, for example, the data in respect of bank account transactions is provided), and the obligation of the Swiss Federal Tax Administration (SFTA) to inform third persons ex officio and provide them with a possibility to object to the disclosure of information by way of administrative assistance. The fact that the decisions of the Swiss Federal Supreme Court often reverse the decisions of the Swiss Federal Administrative Court shows that there are still many aspects of the administrative assistance practice that remain uncertain.This was also the case with the decision of the Swiss Federal Supreme Court of 26 July 2019, which reversed the decision of the Swiss Federal Administrative Court and allowed the SFTA to provide information on more than 40,000 UBS bank accounts by way of administrative assistance to France.1 The decision not to qualify France’s request for administrative assistance as a “fishing expedition” is likely to lead to an expansion of the administrative assistance practice and a further lowering of the hurdles for granting it.



Bär & Karrer Ltd. Switzerland

Financing transactions and liquidity enhancement measuresWith the Swiss economy feeling the impact of the COVID-19 pandemic, the first half of 2020 saw an increase in financing and re-financing transactions, as well as other measures aimed at liquidity management of the balance sheet situation. The types of work range from the issuance of straight bonds and credit facility agreements to equity issuances and issuance of convertible bonds, or a combination of all of the above. For example, in April 2020, Dufry AG placed 5.5m of its shares and CHF 350m of convertible bonds and secured a commitment for a new CHF 425m credit facility. For liquidity reasons or because of the requirements for emergency loans from the federal government, companies may have to waive the distribution of already declared dividends or change the purpose of the share buybacks, for example, by placing the treasury shares on the market or distributing them as dividend in-kind. All such measures require a careful tax analysis to avoid adverse tax consequences.IPOsDuring 2019, seven companies (Novavest Real Estate AG, Achiko Limited, SoftwareONE Holding AG, Aluflexpack AG, Stadler Rail AG, Alcon AG, and Medacta Group SA) were listed on the Swiss stock exchange. The largest addition was not a classic IPO. The eye care company Alcon was spun off from Novartis. However, the addition of Alcon was the largest entry on the Swiss stock exchange in the last decade. Due to the current COVID-19 pandemic, fewer IPOs than normal are expected in 2020.

Significant deals and themes

M&AThe following deals stood out in 2019 and early 2020, all requiring tailored corporate tax advice for the transaction itself, the integration or the debt financing:• Migros-Genossenschafts-Bund sells Globus: On 5 February 2020, Migros-

Genossenschafts-Bund sold Magazine zum Globus AG (Globus) along with eight associated real estate properties to a joint venture of SIGNA Holding GmbH and Central Group. SIGNA and Central jointly own Germany’s KaDeWe Group, and Central Group currently owns Italy’s Rinascente and Denmark’s ILLUM, all leading luxury department stores in Europe.

• Far Point Acquisition Corporation merges with Global Blue: In January 2020, Far Point Acquisition Corporation, a special purpose acquisition company (SPAC) co-sponsored by the institutional asset manager Third Point LLC, and Swiss-based Global Blue, a strategic technology and payments partner empowering global merchants to capture the growth of international shoppers, have announced that they will merge, as a result of which Global Blue will become a publicly traded company on the New York Stock Exchange. The deal is structured as a triangular reverse merger. Far Point and new investors, including Ant Financial Services Group, the operator of Alipay, will invest a total of approximately USD 1.0bn reflecting a total enterprise value of Global Blue of EUR 2.3bn.

• Clariant AG sells global Masterbatches business to PolyOne: On 19 December 2019, Clariant AG sold its entire Masterbatches business to PolyOne Corporation for a total transaction value of USD 1.56bn. The transaction is expected to close in the third quarter of 2020.

• Capvis acquires Tertianum Group: On 13 December 2019, Capvis acquired Tertianum Group from Swiss Prime Site AG. The transaction included over 80 residential and care centres as well as elderly residences distributed throughout Switzerland.




• IWG sells Regus Holding GmbH: On 4 November 2019, IWG plc sold Regus Holding GmbH of Zug, Switzerland and its 38 flexible co-working locations in Switzerland to a joint venture owned by private banking group J. Safra Group and real estate investor P. Peress Group.

• Nestlé SA sells Nestlé Skin Health: On 2 October 2019, Nestlé SA sold its Nestlé Skin Health division to a consortium of investors led by EQT, Luxinva SA (a wholly owned subsidiary of the Abu Dhabi Investment Authority) and PSP Investments for a value of CHF 10.2bn.

• DSV completes public exchange for Panalpina: On 19 August 2019, DSV A/S of Hedehusene, Denmark, completed its announced public exchange offer for all publicly held shares of Panalpina Welttransport Holding AG of Basel, Switzerland (listed on SIX Swiss Exchange). The total value of the transaction is approximately USD 5.5bn.

• CRH sells its European distribution business to PE funds managed by Blackstone: On 16 July 2019, CRH plc sold its European distribution business to private equity funds managed by Blackstone Group Inc. The distribution business supplies building materials through a network of local and regional brands across six countries in Western Europe, including Switzerland. The transaction value amounted to EUR 1.64bn.

• Pfizer acquires Therachon: On 8 May 2019, Pfizer Inc. entered into an agreement to acquire all shares in Therachon Holding AG for USD 340m upfront and an additional USD 470m contingent on the achievement of key milestones in the development and commercialisation of TA-46 for the treatment of achondroplasia, a genetic condition and the most common form of short-limbed dwarfism. The acquisition does not cover Therachon’s apraglutide development programme, which was spun off into a separate, independent company.

• Medical Properties Trust acquires a 46% stake in Infracore SA: On 27 May 2019, Aevis Victoria SA sold a 46% stake in Swiss healthcare real estate company Infracore SA to Medical Properties Trust, Inc. Infracore SA has a value of approximately CHF 1bn and the shares were sold at a price of CHF 51 per share. The Infracore portfolio is comprised of 13 state-of-the-art acute care hospital campuses located throughout Switzerland and operated primarily by Swiss Medical Network, a wholly owned Aevis subsidiary.

Real estate transactions• Flughafen Zürich acquires Real Estate Portfolio: On 13 December 2019, Flughafen

Zürich AG acquired 36 properties (buildings and land), located on or directly adjacent to the airport perimeter, from Priora Suisse AG. The properties include, among others, hangars, a catering building including car parking, and multiple buildings for engine maintenance.

Financing• Firmenich issues EUR 1.5bn bonds and CHF 425m bonds: On 30 April 2020,

Firmenich Productions Participations SAS issued EUR 750m 1.375%. Series 1 bonds due 2026 and EUR 750m 1.750% Series 2 bonds due 2030. Concurrently, Firmenich placed CHF 425m bonds with a 3.6-year maturity to be listed on SIX Swiss Exchange. The net proceeds of the bonds will be used to finance the acquisition of DRT and for general corporate purposes.

• Dufry places 5.5m shares and CHF 350m convertible bonds: On 23 April 2020, Dufry AG completed a private placement of 5.5m newly issued shares and 500,000 treasury shares by way of an accelerated bookkeeping. At the same time, Dufry placed through its subsidiary Dufry One CHF 350m senior bonds due 2023, conditionally convertible into Dufry shares. These measures are designed to help Dufry to weather the COVID-19 pandemic and current economic downturn.




• Novartis issues bonds to finance the acquisition of The Medicines Company: In February 2020, and in connection with the acquisition of NASDAQ-listed bio-pharmaceutical company The Medicines Company for USD 9.7bn, Novartis International AG and Novartis Finance Corporation entered into a USD 7bn short-term (bridge) credit agreement and completed a USD 5bn four-tranche SEC-registered bond offering.

• Credit Suisse issued USD 2bn bail-in-able notes: On 11 September 2019, Credit Suisse Group AG completed the issuance of USD 2bn 2.593% Fixed Rate/Floating Rate Senior Callable Notes due 2025 under its US Senior Debt Program. The Notes are bail-in-able bonds which are eligible to count towards Credit Suisse’s Swiss gone concern requirement. For the first time, Swiss law-governed bonds have a floating rate of interest that is determined by reference to the Secured Overnight Financing Rate (instead of USD LIBOR).

• ADC Therapeutics raises USD 303m in financing round: On 9 July 2019, ADC Therapeutics SA announced that it had raised an aggregate of USD 103m through a private placement of shares. Its Series E financing round amounts now to USD 303m. The financing was supported by existing and new investors. Thanks to the new funds, the company plans to advance the development of pyrrolobenzodiazepine (PBD)-based ADCs for the treatment of hematological cancer and solid tumours.

• Cembra Money acquires financing for the acquisition of cashgate: In order to finance its acquisition of cashgate AG, Cembra Money Bank sold treasury shares (gross proceeds of CHF 112.8m) in an accelerated bookbuilding, placed CHF 150m perpetual additional Tier 1 bonds and CHF 250m net share settled convertible bonds.


Domestic legislationThe Federal Act on Tax Reform and AHV FinancingOn 1 January 2020, the Federal Act on Tax Reform and AHV (social security) Financing (TRAF) entered into force. The TRAF repealed the privileged tax regimes, i.e. holding, mixed and domicile companies at the cantonal level, and finance branch and principal companies at the federal level. As compensation, the new legislation introduced a mandatory OECD-compliant patent box regime and an optional super deduction for research and development (R&D) expenditures. Both instruments are implemented at cantonal level only. Since the TRAF only sets out general parameters of both regimes, the modalities of implementation – such as the qualifying R&D activities, tax charge upon entry into patent box, re-calculation rules for the qualifying income quota in case of the patent box – may differ from one canton to another. Further, the maximum deductions permitted also differ between the cantons. For example, in Zürich, 90% of the qualifying patent income is exempted from the tax base and the total combined tax deduction from different incentives must not exceed 70% of the taxable profit (before deductions). The same limits apply in Aargau, Bern, Jura, Nidwalden, Obwalden, Schwyz, Solothurn, Ticino and Zug. Other cantons have implemented more restricted deductions, e.g. St. Gallen limited the patent box deduction to 50% of the qualifying patent income and the overall deduction to 40% of the taxable income, while Basel abstained from implementing the R&D super deduction.In addition, in order to counteract the impact of the abolition of the privileged tax regimes, most of the cantons significantly decreased the cantonal corporate tax rates. For example, the effective corporate tax rate (including federal tax rate) in Basel decreased from 20.18% to 13% as of 2019, in Geneva from 24.16% to 13.99% as of 2020, in Zürich from 21.15%




to 19.7% as of 2021 (with a further decrease in 2023), and in Zug from 14.62% to 11.91%. Most of the cantons also decreased the capital tax either by decreasing the capital tax rate or deducting a percentage of taxable equity attributable to qualifying participations, intercompany loans and patents from the taxable base, or a combination of both measures.As an important change, the new provisions include a restriction on the capital contribution principle. Under the current rule, dividend distributions out of capital contribution reserves are neither subject to withholding tax nor to Swiss income tax for individuals. The TRAF introduced a 50:50 rule stating that distributions out of capital contribution reserves of companies listed in Switzerland will only benefit from the tax-free regime if the company makes a distribution out of taxable reserves of at least the same amount. A comparable rule applies in case of a share buyback on the second trading line where, at a minimum, the same amount of capital contribution reserves and other reserves must be used. These restrictions for distributions do not apply to distributions from the so-called foreign capital contributions reserves, i.e. capital contribution reserves created through the contribution of participations in foreign companies or capital contribution reserves creates through mergers with foreign companies.As a result of the adoption of the TRAF, in October 2019, Switzerland was de-listed from the EU grey list of non-cooperative jurisdictions and was found to be fully compliant with EU principles of tax good governance.Regulation on tax credits for foreign withholding taxesOn 13 November 2019, the Federal Council approved changes to the Regulation on tax credits for foreign withholding taxes. The amended Regulation implements the changes introduced in the TRAF, formally approves certain practices which were already applicable based on the Swiss Federal Supreme Court Decision of 2014, and makes a number of technical changes.The most important innovations concern the right of Swiss branches of foreign companies to claim tax credits for foreign withholding taxes in Switzerland. Previously, Swiss branches of foreign companies were not entitled to such tax credits. Under the new rules, such Swiss branches are entitled to a tax credit, provided there are three DTTs in place: between Switzerland and the state of the source of income; between the state of the source of income and the state of the foreign company’s headquarters; and between Switzerland and the state of the foreign company’s headquarters.Specification of the administrative practice concerning the flow-back of proceeds from domestically guaranteed foreign bondsSwitzerland imposes a 35% withholding tax on interest payment on notes and bonds issued by Swiss borrowers and, under certain circumstances, to notes and bonds issued by foreign group companies guaranteed by Swiss group companies. The regime does not allow for a reduction/exemption of the 35% withholding tax at source. In 2019, the SFTA, based on the amended withholding tax ordinance, relaxed the rules in respect of the withholding tax on foreign bonds guaranteed by Swiss parent companies. Under this new rule, it is permissible to on-lend to Swiss group companies an amount up to (i) the sum of equity of foreign subsidiaries, and/or (ii) the outstanding debt of foreign subsidiaries towards the Swiss group companies. The equity test is rather generous since the foreign subsidiaries’ equity amounts are not calculated on a consolidated basis, but on a cumulative basis. Further, this test can be combined with the loan test, that is, the maximum on-lending threshold is increased by the amount of outstanding debt of foreign group entities towards Swiss group entities. Since its introduction, many Swiss groups have made use of the new practice. Whereas in the past, funds received by foreign issuers could generally only be used abroad, e.g. for foreign




acquisitions, the Swiss group can now – up to the permitted threshold – repatriate the funds and use them for domestic transactions or even funding of dividends/share repurchases.Amendments to the Withholding Tax Act introducing a paying agent withholding tax regimeIn a further, significantly more wide-reaching step than the relaxation of the rules concerning the flow-back of proceeds from domestically guaranteed foreign bonds, in April 2020, the Swiss Federal Council proposed a conceptual reform of the withholding tax on debt instruments, the central element of which is the move from a debt-based system to a paying agent system.The move to a paying agent withholding tax regime has been discussed already for some time by the Swiss legislators. The new proposal was published and submitted to the legislative consultation procedure by the Swiss Federal Council on 3 April 2020.2

The basic principle of the new regime is as follows: a Swiss-based paying agent will be responsible for withholding and transferring to the tax authorities the withholding tax on interest payments made to individuals based in Switzerland. There are no changes in respect of the withholding tax on dividends.The proposal suggests two essential changes to the scope of the withholding tax. Firstly, only interest income of individuals based in Switzerland is subject to Swiss withholding tax. No withholding tax is due on payments to foreign-based investors (corporate or individual) or Swiss-based corporate investors. Secondly, the Swiss withholding tax will newly apply to domestic and foreign bonds and notes likewise, irrespective of whether such foreign bonds and notes are guaranteed by a Swiss parent or not. Further, the reform also expands the scope of income from investment funds subject to withholding tax. Under the current regime, Swiss withholding tax is due only in respect of certain Swiss investment funds and some foreign-based funds, normally foreign contractual investment funds with fund management in Switzerland. Under the new regime, indirect interest income received through all types of domestic and foreign investment funds will be subject to Swiss withholding tax, provided that such income is paid to an individual based in Switzerland. The tax is due and must be deducted only by Swiss-based paying agents. The reform proposal explicitly indicates that a trustee would qualify as a paying agent. Interest payments via foreign paying agents will not be subject to Swiss withholding tax. For Swiss-based issuers of notes and Swiss-based collective investment schemes, the change to the paying agent-based regime will be voluntary. They can choose whether they will switch to the paying agent regime or continue to apply the currently existing debtor-based regime. No such choice is provided to foreign issuers or foreign collective investment schemes; for them, the application of the paying agent regime is mandatory.The consultations procedure in respect of the reform is open until July 2020. The parliamentary debates are not expected before 2021 and entry into force, if adopted, is not expected before 2022.Changes to the determination of the beneficiary of a constructed dividend for withholding tax purposes In general, should a Swiss company provide goods or services to an affiliated company under preferential non-arm’s length conditions, Switzerland treats such non-arm’s length transactions as constructive dividends, subject to a 35% withholding tax on dividends.The determination as to which party qualifies as a beneficiary in such transactions is also determinative as to which party, under which DTT and to what extent, can claim the refund of the withholding tax. For the purposes of Swiss withholding tax, Switzerland applies the




direct beneficiary approach, i.e. in a non-arm’s length transaction between related parties other than parent and subsidiary; for example, between sister companies, the sister company is deemed to receive the constructive dividend directly from its sister, not via the joint parent.As a result, the affiliated sister company is deemed to have the refund right, which is assessed based on the applicable DTT between Switzerland and the country of incorporation of the sister company. The constructive dividend is considered to constitute a “dividend” under the applicable DTT. Since the sister company does not hold any shares in a Swiss company directly or indirectly, the preferential parent subsidiary regime is not triggered and the residual 15% non-refundable withholding tax rate is applicable. Moreover, this approach also bars the application of the notification procedure (reduction at source) and requires the actual cash payment followed by the more burdensome refund procedure.The approach has long been criticised as having no basis either in the provisions of Swiss domestic legislation nor in the provisions of Swiss DTTs. In December 2019, a motion requesting the amendment to the Swiss Withholding Tax Act and the application of the “three-corner” approach in all cases in respect of the withholding tax was filed with the Swiss Parliament.3

Under the three-corner approach, the direct parent company would be deemed to receive the dividend and would also have the right to request a (full) refund of the withholding tax or avoid the withholding tax on such constructive dividends altogether by applying the notification procedure. The motion to apply the three-corner approach for Swiss withholding tax would result in a long-awaited alignment with the income tax treatment and international practice. Technically rather undisputed, it remains to be seen whether it will find the necessary political support, particularly in these COVID-19 times as tax revenues are expected to decrease anyway.Global Forum’s recommendationsIn 2016, the Global Forum issued a recommendation requiring Switzerland to ensure that appropriate reporting mechanisms are in place to effectively secure the identification of the owners of bearer shares in all cases. In response to this recommendation, on 21 June 2019, the Swiss Parliament passed the Federal Act on the implementation of the recommendations of the Global Forum on Transparency and Exchange of Information for Tax Purposes. This Act entered into force in October 2019.The central aspect of the Act is the abolishment of bearer shares. This general rule does not apply to listed companies or companies that issue bearer shares as book rights. Further, the Act imposes an overall reporting obligation in respect of beneficial owners controlling more than 25% of the shares of a company. The company is obliged to keep the register of the beneficial owners. In order to ensure effective performance of these obligations, the Swiss Criminal Code was supplemented with two provisions imposing financial sanctions in case of violations of the reporting obligations. Following the adoption of the Act, the SFTA regularly uses its authority to collect information with respect to Swiss withholding tax on dividends to verify whether the companies comply with the reporting obligations. On 6 April 2020, the Global Forum’s second round peer review report in respect of Switzerland was published.4 As in the first round, Switzerland has been found to be largely compliant. The main recommendations concern the availability of ownership and identity




information and the confidentially provisions, in particular the obligation of the jurisdiction’s information exchange mechanism to make sure that it has adequate provisions to ensure the confidentiality of the received administrative assistance requests. While the first set of recommendations appears to be related to fact that the Federal Act on the implementation of the recommendations of the Global Forum on Transparency and Exchange of Information for Tax Purposes was only adopted recently and its effectiveness has not yet been tested, the recommendations in respect of confidentially may prove problematic. In particular, it is recommended to ensure that the request letter is kept confidential during administrative proceedings, that a rather narrow exception to the right to see the file is expanded and that the information on the received requests (including the bulk requests) is not published in the Federal Gazette. As these requirements impinge on the fundamental rights of the parties in administrative proceedings, it remains to be seen whether and how they might be implemented in Switzerland.Automatic Exchange of Information (AEOI)The legal foundations for the AEOI have been in force since 1 January 2017. The Swiss Parliament has approved the introduction of the AEOI with 107 partner states. As of 1 January 2020, the AEOI has now been activated with 97 partner states. Switzerland’s network of AEOI partner states includes all EU and EFTA Member States, almost all G20 states, and all OECD states. Financial account information was successfully exchanged with a total of 75 partner states at the end of September 2019.5

On 20 November 2019, the Federal Council adopted the dispatch on amending the AEOI Act6 following the consultations procedure commenced in February 2019. Among other things, the Federal Council proposed removing the exception for condominium owners associations. Furthermore, the applicable due diligence obligations will be adapted, the amounts will be shown in US dollars and a document retention obligation for reporting Swiss financial institutions will be introduced. At the same time, contrary to the consultation’s proposal, it was decided to maintain the reporting exceptions for non-profit associations’ and foundations’ accounts.The amended legislation, if approved, should come into force on 1 January 2021.Tax policy in the response to the COVID-19 pandemic With respect to the COVID-19 pandemic, in its report “Tax and Fiscal Policy in Response to the COVID-19 pandemic: Strengthening Confidence and Resilience”, the OECD pointed out that recovery after containment and mitigation may require fiscal stimulus and tax support. However, the support must be carefully timed and well-targeted. According to the OECD, tax support should be directed to limiting adverse impacts and aggregate demand, especially for the most vulnerable households and businesses.Switzerland has implemented several fiscal support measures. For instance, the eligibility for unemployment benefits has been extended, short-time working has been extended and simplified loans have been made available for all types of businesses by providing government securities and low interest rates (limited to five years). A number of tax measures have also been implemented: companies are given the possibility to temporarily defer payment of social security contributions; and interest-free and tax payment periods can be extended without interest on arrears. For this reason, the interest rate for value-added tax (VAT) has been reduced to 0.0% (from 21 March to 31 December 2020). The same regulation applies to direct federal (personal and corporate income) tax (from 1 March to 31 December 2020). All of these measures are temporary.




International DTTsSwitzerland remains active in negotiating new or revising existing DTTs. As of 1 January 2020, Switzerland has signed more than 100 DTTs, of which 62 contain a provision on the exchange of information according to international standards. In addition, Switzerland has signed 10 tax information exchange agreements, all of which are in force. Revised DTTs, which entered into force or whose dispatch was submitted to the Swiss Parliament for approval between March 2019 and March 2020, include treaties with Ukraine, South Korea, Iran, the Netherlands, New Zealand, Norway, Sweden and Ireland. The revision of these DTTs implements the base erosion and profit shifting (BEPS) minimum standards and some of them include an arbitration clause. Furthermore, both of the protocols to the DTT with the UK and the USA entered into force in 2019. The 2017 Protocol to the DTT with the UK substituted the previous anti-abuse provisions with an overarching principal purpose test anti-abuse norm. The 2009 Protocol to the DTT with the USA introduced a mechanism for the exchange of information upon request in tax matters between Switzerland and the USA, which is in line with international standards, and allows the USA to make group requests under the Foreign Account Tax Compliance Act concerning non-consenting US accounts and non-consenting, non-participating foreign financial institutions.Domestic casesBGer 2C_34/2018: Split-up of holding companiesIn this case, the Swiss Federal Supreme Court overturned certain practice of the SFTA and cantonal tax authorities in respect of the tax-neutral split-up of holding companies.In addition to overall requirements for tax-neutral restructurings (such as transfer at balance sheet value and the continuing tax residency in Switzerland), as per the SFTA practice, a tax neutral split-up of holding companies is possible only if both of the following conditions are met:• the participations held by a holding company consist predominantly (by value) of

significant (at least 20% of capital or which otherwise allow control over such subsidiary companies) participations in active companies; and

• the holding companies which will exist after the split-up must carry out holding functions with its own personnel in respect of multiple subsidiary companies.

The requirement in respect of the holding of participations in multiple subsidiaries was particularly controversial. The tax authorities require that after the split-up, each newly established holding company holds participations in at least two subsidiaries.In this case, holding company Holding C AG incorporated in the canton of Geneva, which was held by two natural persons also resident in Geneva, was split up into two holding companies, Holding C AG and Holding E AG. Initially, Holding C AG held participations in four subsidiary companies, and only the participation in one subsidiary (an operative company) – Holding F AG – was transferred to Holding E AG. Consequently, following the split-up, Holding C AG held participations in three operating companies and Holding E AG held 100% participation in one operating company. Geneva tax authorities refused to treat the split-up as a tax-neutral restructuring, since the requirement mentioned above – that both holding companies after the split-up hold participations in multiple subsidiaries – was not complied with.The Swiss Federal Supreme Court overruled this practice and clarified that in case of the split-up of holding companies, the newly established holding companies must indeed continue




to carry out business activities. However, for holding companies, this requirement does not necessarily need to be satisfied through participation of the holding company in at least two subsidiaries. Instead, the operative/business activities of the subsidiary may be attributed to the holding company. In other words, provided that the newly established holding companies each hold, following the split-up, a (significant) participation in at least one active company, the requirement of the continuation of business activities is considered to be met.The decision of the Swiss Federal Supreme Court was a welcome development which put a halt to a controversial practice of the tax authorities and discussions in the academic literature and added flexibility to restructuring options of holding companies.BGer 2C_119/2008: Deduction of the value of treasury shares from taxable capitalAccording to the revised Swiss accounting principles, treasury shares bought back by a company must be shown as a minus position in the total shareholders’ funds of a company (valued in the amount of the acquisition costs). The tax basis for the cantonal capital tax builds the total amount of the shareholders’ funds (e.g. nominal share capital and reserves) and any taxed hidden reserves (e.g. write-offs and allowances not recognised by tax authorities).As per the previously existing practice of the tax authorities, also confirmed in the report of the Swiss Tax Conference, despite the fact that the treasury shares are accounted for as minus positions in the shareholders’ funds, treasury shares qualify as assets belonging to the company that have a certain financial value. Consequently, for tax purposes (as under the previous accounting rules), the value of treasury shares cannot be deducted from the taxable capital for the purpose of the cantonal capital tax.7 This practice was also followed in the cantons.In this case, holding company A AG incorporated in Zürich held treasury shares with a balance sheet value of approximately CHF 468m. In Switzerland, the buyback of own shares is generally treated as a partial liquidation subject to withholding tax on dividends and income tax for individuals. However, for tax purposes, such partial liquidation is deemed to exist only if the company decreases its share capital in connection with the buyback of shares, the nominal value of the bought-back shares exceeds certain thresholds (e.g. generally 10% of the nominal share capital), or the bought-back shares are not sold by the company within the next six years. Per 31 December 2014, none of the above scenarios was applicable to A AG and it was not yet obliged to pay the withholding tax in respect of its treasury shares.Consequently, the Zürich tax authority did not agree with the deduction of the value of the treasury shares from the taxable capital, arguing, among other things, that such shares represent an asset and that there has been no partial liquidation of the company from a tax standpoint.The Swiss Federal Supreme Court disagreed with these arguments. In its decision, the following two factors were decisive. First of all, from an economic perspective, the buyback of shares leads to the cash outflow by the company, whereas the company does not receive anything in return which did not belong to it before (at least not before the treasury shares are re-sold). Secondly, Switzerland applies the principle that tax accounting should be based on statutory accounting, unless tax legislation contains specific correction norms. As per the statutory accounting rules, treasury shares are deduced from the shareholders’ funds. As the Zürich tax authority could not identify explicit tax norms allowing the add-up of treasury shares for tax purposes, it was not possible to disregard the statutory accounting in this case.




Consequently, the value of the treasury shares must be deducted from the taxable capital, irrespective of whether, from a tax perspective, a partial liquidation is deemed to have occurred or not.Although the economic analysis of the Swiss Federal Supreme Court is controversial, the arguments in respect of the binding effect of the commercial accounting rules are convincing, in particular when taking into account that the same argument is used regularly by tax authorities to the disadvantage of the taxable persons. BGer 2C_592/2018: Tax residence of legal persons in inter-cantonal relationsThis Swiss Federal Supreme Court decision deals with the determination of the primary tax residence of a legal person in inter-cantonal relations, i.e. in a situation when two or more cantons claim to have the primary taxing rights.In international constellations, Article 50 of the Act on Direct Federal Taxes provides that a legal person is a tax resident in Switzerland provided it is incorporated in Switzerland or its actual management is carried out in Switzerland. The statutory seat abroad is, therefore, not decisive.In inter-cantonal relations, the determination of the primary taxing jurisdiction was assessed differently. The canton, where the statutory seat was located, was deemed to be the primary taxing jurisdiction, unless such seat was nothing more than a letter box and a different canton could provide evidence that the actual management of the company was carried out from its territory. The attributes of a “letter box” seat were, e.g., lack of office space, no personnel working at the statutory seat, no phone connections, no documents stored. Normally, such a letter box seat was a registered seat at the premises of a law firm or an asset management company.In the present case, A AG was initially incorporated in the canton of Zürich, thereafter its statutory seat was moved to the canton of Obwalden. In Obwalden, A AG rented office premises which were used spontaneously by the staff (there were no permanent staff in these premises), all board of directors and general shareholders’ meetings took place in Obwalden, and some administrative functions were also performed from these premises. On the other hand, A AG still rented larger premises in Zürich, from which all of its employees performed their daily functions. Still, the infrastructure in Obwalden far exceeded that of a mere letter box seat.The Swiss Federal Supreme Court acknowledged this fact. However, it ruled that in inter-cantonal relations, similarly to international relations, the primary tax residence lies at the place where the actual management takes place. The Swiss Federal Supreme Court justified its decision by noting that in all previous cases, at least in respect of cantonal taxes, it dealt exclusively with the situations where the statutory seat was a letter box office. Therefore, its previous statements suggesting that it may only be possible to disregard the statutory seat if such seat is merely a letter box were obiter dicta. Although this decision of the Swiss Federal Supreme Court deals with the primary taxing jurisdiction with respect to cantonal taxes, it is to be expected that the same approach would be applied in cases of federal direct taxes.Overall in 2019, the Swiss Federal Supreme Court dealt with an unprecedented number of cases dealing with the primary taxing rights in inter-cantonal relations. In 2019 alone, the Swiss Federal Supreme Court issued nine such decisions in comparison to four decisions overall in the preceding decade.




With increased tax competition between cantons and advances in information technology, it is to be expected that litigations in respect of primary tax residences will increase further.BEPSSwitzerland has actively participated in the OECD’s BEPS initiative and will implement, or has implemented, the BEPS minimum standards, as follows:

Action Topic Method of implementation in Switzerland

5 Abolition of harmful tax regimes. The TRAF abolishes favourable cantonal and federal tax regimes as of 2020.

5 Requiring substantial activity for preferential regimes.

The patent box regime under the TRAF will follow the OECD standard.

5

Improving transparency, including the compulsory spontaneous exchange of information on certain rulings.

Agreement on OECD/Council of Europe Convention on Mutual Administrative Assis-tance in Tax Matters and revision of Swiss Federal Act on International Administrative Assistance in Tax Matters (see below).

6 Prevention of treaty abuse. Inclusion of new anti-abuse clauses in DTTs (principal purpose test).

13Automatic exchange of country- by-country reports (CbCRs; without Master and Local File).

Agreement on the multilateral CbCR convention and enactment of law regarding CbCR (see below).

14 Making the dispute resolution mechanism more effective.

Switzerland already offers access to the required dispute resolution mechanism; all new DTTs are in line with the OECD minimum standard (see below).

15 Multilateral instrument.Switzerland signed the BEPS Convention and announced the adjustment of a number of DTTs by way of the MLI (see below).

BEPS Action 5: Implementation of the spontaneous exchange of information on tax rulingsWith regard to BEPS Action 5, Switzerland has implemented the spontaneous exchange of information in tax matters in its domestic legislation with effect from 1 January 2017. The regulations on the spontaneous exchange of tax rulings are included in the Tax Administrative Assistance Ordinance. The Ordinance provisions are closely based on the guidelines in the BEPS Action 5 report. The exchange covers Swiss tax rulings, which were granted after 1 January 2010 and are still in force as of 1 January 2018; i.e. the time when the actual exchange of tax rulings started in Switzerland. The new transparency should not change the Swiss ruling practice per se, except that in cases subject to exchange, the tax authorities now generally request that the template for the exchange is completed and submitted together with the tax ruling request. The information on relevant tax rulings will be submitted in electronic form (so-called “BEPS templates”) to the SFTA which, in turn, will exchange these with the foreign states. In May 2018, the SFTA has, for the first time, transmitted information on advance tax rulings to spontaneous exchange of information partner states. Information was sent to 41 states, including France, Germany, the United Kingdom, the Netherlands and Russia. In the second OECD peer review report, Switzerland was ranked as compliant with the international standard in respect of the exchange of information mechanism.8

BEPS Action 13: Country-by-country reportingSwitzerland adopted the global minimum standard included in Action 13 of the OECD BEPS Project for the international automatic exchange of CbCRs with quantitative as




well as qualitative data of multinational enterprises (MNEs), with an annual consolidated turnover of the equivalent of CHF 900m. The relevant legal framework for the exchange of CbCRs entered into force on 1 December 2017. This includes the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (MCAA-CbCR), and the associated law (ALBA Act) including the ordinance (ALBA Ordinance). MNEs in Switzerland have been obliged to draw up CbCRs since the fiscal year 2018. In 2020, Switzerland will exchange CbCRs with 72 partner states (status as of 14 May 2020).9 Prior exchanges for the period 2016 and 2017 are possible on a voluntary basis.BEPS Action 14: Making the dispute resolution mechanism more effectiveThe mutual agreement procedure (MAP) in Switzerland covers both the situations dealing with the elimination of double taxation as such and transfer pricing cases. The first category of cases deals mostly with the issues of residency of individuals, the right of taxation for dependent personal services, differentiation between employment and self-employment, and income from government services. The second category covers transfer pricing attribution/allocation cases and advance pricing agreements. The detailed guidelines governing the procedure as well as the necessary forms are publicly available and published on the homepage of the State Secretariat for International Finance (SIF). In 2018, 257 MAPs were initiated and 220 cases were closed. The average time taken to complete the MAPs in Switzerland was 22 months, and 31.3 months for transfer pricing cases.10

In addition, Switzerland strives to include the arbitration clause in its DTTs whenever possible. For example, the arbitration clause was incorporated into the amending protocols to the DTTs with Ireland, Ukraine and New Zealand. Following the generally positive peer review report (Stage 1) on the implementation of the BEPS Action 14 minimum standard, Switzerland committed to further improve the access to, and speediness of, the mutual agreement procedures. It attributed more resources to SIF (the competent authority for the handling of MAP cases). Furthermore, it updated MAP guidance and introduced a system that monitors the timeliness of different steps in the process. This was recognised in the MAP peer review report (Stage 2) made in August 2019. The peer review report stated that Switzerland met all of the other requirements under Action 14. In respect of the implementation of MAP agreements, Switzerland almost meets the minimum standard of Action 14. In particular, Switzerland does not monitor the implementation of such agreements. Further, formally the MAP procedure does not interrupt or suspend the running of the national statutes of limitations. Consequently, there is a risk that such agreements cannot be implemented where the applicable tax treaty does not contain the equivalent of Article 25(2) of the OECD Model Tax Convention. However, in practice, this risk is minimised through the possibility of opening a tax revision process following the closing of the MAP procedure.In any event, despite these risks, according to the peer review report, no problems have surfaced regarding the implementation throughout the peer review process. In December 2019, the Federal Council published a proposal and opened the consultation process for the total revision of the Federal Act on Implementation of International Tax Agreements. The proposed legislation sets forth the national rules for mutual agreement procedures and largely follows current practice. The Act would apply to the extent that the relevant DTT does not contain any deviating provisions. The Act regulates, among other aspects, the implementation of MAP agreements. The implementation of a MAP agreement would require the consent of the affected taxpayer, and by giving its consent for




the implementation, such affected person will waive their rights in respect of the national appeal procedures; this waiver does not cover appeals in respect of the implementation of the MAP agreement itself. The MAP agreement must be implemented by the relevant tax authority, independent of the status of the domestic tax assessment procedure, i.e. also in cases where the tax assessment for the relevant period is already in force and may no longer be appealed under the domestic rules. The proposal also lays down the new limitation period: the relevant tax authority is obliged to implement a MAP agreement if the MAP procedure was requested within 10 years of the notification of the relevant tax assessment decision. The proposal was generally welcomed albeit with some reservations, particularly in respect of the long limitation period. The proposal has not yet been debated in the Swiss Parliament.BEPS Action 15: Developing a multilateral instrument to modify tax treatiesOn 1 December 2019, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, also known as the Multilateral Instrument (MLI), entered into force in Switzerland. This allows existing DTTs, covered by the MLI, to be swiftly adjusted to the recommendations of the OECD/G20 BEPS Project. Switzerland has taken the approach to generally cover only the mandatory minimum BEPS standards when implementing the BEPS Convention, including:• modification of the preamble text to include an express statement condemning tax

treaty abuse through double non-taxation, tax evasion or avoidance; • anti-abuse provision in the form of principal purpose test provisions;• provision preventing double non-taxation upon a conflict of qualifications; and• dispute resolution understandings pursuant to Articles 16 and 17 of the BEPS Convention.In addition, Switzerland undertook to include the arbitration clause in its DTTs.Switzerland’s DTTs will be directly amended by the MLI if the parties to the treaty in question (i) both share the view that the MLI has the same effect as an amendment protocol, and (ii) agree to confirm the exact wording of the DTT as amended by the MLI. Out of its 100 DTTs, only those with countries that agree on points (i) and (ii) mentioned above are covered by the MLI. Currently, the following 12 of Switzerland’s DTTs are covered by the MLI: Argentina; Austria; Chile; the Czech Republic; Iceland; Italy; Lithuania; Luxembourg; Mexico; Portugal; South Africa; and Turkey. The MLI has no direct effect on other DTTs. However, Switzerland is willing to negotiate the BEPS minimum standard bilaterally. In this case, a parliamentary approval process is required.

Tax climate in Switzerland

Increasing tax transparency/transfer pricing disputesIncreasing tax transparency, which especially results from the implementation of the AEOI, has led to a flood of non-punishable voluntary disclosures during the last two years. The implementation of the mandatory disclosure requirements introduced in Directive 2011/16/EU on mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (DAC 6), although not directly applicable to Switzerland, would undoubtedly add to tax transparency. In the corporate tax field, both the spontaneous exchange on tax rulings as well as the CbCR may increase the number of follow-up information requests from foreign tax authorities in the future. The Swiss tax authorities will also receive information from foreign tax authorities and will need to find a way to digest such information (on foreign tax rulings and




CbCR). We do not expect a significant reduction of tax ruling requests in Switzerland due to the spontaneous exchange on tax rulings, since tax rulings are still a valid and useful tool to obtain upfront certainty on the application of the tax law to a specific case. Such certainty is a valuable asset for Swiss taxpayers in a complex tax environment.As a result of increased transparency, we expect that the amount of tax litigation and also tax arbitration in the field of transfer pricing are going to increase in the next few years. Tax reformVarious measures at the cantonal and federal levels ensured a relatively smooth implementation of the TRAF and the abolishment of privileged tax regimes. In 2019 and 2020, many companies are still assessing the impact of the new rules and any tax restructuring measures that may need to be implemented. The local tax authorities are generally cooperative and search for business-friendly compromises to settle the most pressing issues, such as, for example, the taxation of hidden reserves accumulated in the period when a company was subject to a privileged tax regime. Although there are still some uncertainties as to how the patent box regime and the R&D super deduction will be implemented, both instruments should also raise the attractiveness of Switzerland.

Developments affecting attractiveness of Switzerland for holding companies

Following the entry into force of the TRAF, holding companies are no longer exempt from cantonal and communal profit tax. Still, the attractive participation deduction provisions for dividends and capital gains will remain unchanged. The availability of the participation deduction in combination with the decrease of cantonal taxes in almost all of the cantons should ensure that Switzerland remains an attractive location for holding companies.Further, Switzerland currently has no intention of introducing controlled foreign corporations rules and generally remains, with its extensive DTT network, a beneficial location for holding companies.


Technology industry/fintechOn 27 November 2019, the Swiss Federal Council published the draft bill for a new Federal Act regarding the Adaptation of Federal Law to Developments in the Technology of Distributed Electronic Registers. The proposed new law is a framework act intended to introduce pinpoint amendments to Swiss law in order to provide more legal certainty to business applications of distributed ledger technology (DLT).The Swiss Federal Council aims to create the best possible conditions for Switzerland to evolve as a leading, innovative and sustainable location for fintech and DLT companies while at the same time taking a firm stance against any potential abuse of the new technologies. The Federal Council considers that specific amendments to the legal framework in key areas are sufficient to achieve these goals and has decided against a full codification in a technology-specific act.The Swiss Parliament is expected to start deliberations on the draft in 2020.In parallel, the SFTA is also carrying out work aiming to lay down the basics of the taxation of initial coin offerings (ICOs) in respect of income tax on the corporate and individual




level, stamp duties and VAT. In August 2019, the SFTA published a work paper which outlines various aspects of taxation of various types of ICOs and cryptocurrencies. Debt marketsThe reform of the Withholding Tax Act in respect of interest income has potential to boost the Swiss debt markets. It is hoped that the reform will lead to the decrease of financing costs and an increased competitiveness of the Swiss debt capital market. Due to the abolition of the withholding tax on interest paid to Swiss corporate and all foreign investors, it should be more attractive for Swiss companies to issue bonds and notes and carry out group financing activities (e.g. treasury and cash pooling functions) out of Switzerland. On the other hand, the technical implementation would require significant resources on the part of Swiss banks. It is planned that at least the initial implementation costs will be financed through the partial allocation of withholding tax to banks.

The year ahead

The COVID-19 pandemic tax relief measures will remain the centre of attention in the year ahead. In March 2020, the Swiss Federal Council approved a temporary waiver of default interest for late payment of certain taxes at federal level. Most cantons have introduced tax relief measures with regard to the cantonal and communal taxes, such as deadline extensions for filing 2019 tax returns and for payment of cantonal and communal taxes, and a waiver of default interest for cantonal and communal tax claims. In addition, Switzerland is in the process of concluding binding agreements with its neighbouring countries (Germany, France and Austria, but not yet Italy) regarding cross-border commuters and similar employees who are temporarily not working in Switzerland but rather from their home countries due to the pandemic. It remains to be seen whether additional measures would follow, for example, in respect of the thin capitalisation rules.In addition to the impact of COVID-19, the next global challenge, in particular for Switzerland, will be the new international developments addressing the taxation of the digital economy such as OECD’s Pillar 1 solution. As per the proposed solution, a higher share of consolidated profits should be allocated to market jurisdictions for taxation. Switzerland stands in favour of a long-term, consensus-based multilateral solution. Switzerland’s position is that taxation should continue to apply at the place of performance-related value creation and that the share of profit to be allocated to market jurisdictions remains in proportion with their share of added value, and hence moderate. Should the new rules as proposed within Pillars 1 and 2 be implemented, Switzerland as a smaller, innovative and export-based economy will likely see its tax receipts decreased.

* * *

Endnotes1. See https://www.bger.ch/ext/eurospider/live/de/php/aza/http/index.php?lang =de&type

=show_document&highlight_docid=aza://26-07-2019-2C_653-2018&print=yes (last visited 15 May 2020).

2. See https://www.admin.ch/gov/de/start/dokumentation/medienmitteilungen.msg-id-78 687.html (last visited 15 May 2020).

3. See https://www.parlament.ch/de/ratsbetrieb/suche-curia-vista/geschaeft?AffairId=201 94635 (last visited 15 May 2020).




4. See https://www.sif.admin.ch/sif/en/home/dokumentation/medienmitteilungen/medien mitteilungen.msg-id-78708.html (last visited 15 May 2020).

5. See https://www.efd.admin.ch/efd/de/home/themen/wirtschaft--waehrung--finanzplatz /finanzmarktpolitik/automatischer-informationsaustausch--aia-.html (last visited 15 May 2020).

6. See https://www.efd.admin.ch/efd/en/home/dokumentation/nsb-news_list.msg-id-771 58.html (last visited 15 May 2020).

7. For the updated analysis on this issue, following the decision of the Swiss Federal Supreme Court, see https://www.steuerkonferenz.ch/index.php?Dokumente:Analysen (last visited 15 May 2020).

8. See https://www.sif.admin.ch/sif/de/home/multilateral/gremien/global_forum.html (last visited 15 May 2020).

9. See https://www.sif.admin.ch/sif/en/home/multilateral/steuer_informationsaust/auto(m atischer-informationsaustausch/cbcr.html (last visited 14 May 2020).

10. See https://www.sif.admin.ch/sif/de/home/bilateral/verstaendigungsverf.html (last visited 15 May 2020).



Susanne SchreiberTel: +41 58 261 52 12 / Email: [email protected] Schreiber comprehensively advises corporate clients on domestic and international tax matters.She advises listed and privately held groups on tax-related questions, in particular regarding restructurings, cross-border and domestic M&A transactions (sell- and buy-side, pre-deal carve-outs, post-merger integration) and financing. She supports institutional investors and private equity companies throughout the investment cycle with tax advice.Susanne Schreiber is a frequent speaker at national and international tax seminars. She regularly publishes on tax topics, mainly in the areas of international corporate tax, M&A and restructurings.She is a qualified Swiss tax expert, German tax advisor and German attorney-at-law. She joined Bär & Karrer as partner and co-head of the tax team in 2015 after having led the Swiss M&A tax department of a Big Four firm.Susanne Schreiber won the award of “Rising star: Tax” at the IFLR Europe Women in Business Law Awards 2016 and is listed as a “Woman-in-Tax Leader” in the International Tax Review. The Legal 500 listed her as a “Leading Individual” in the category “Tax Switzerland”. She has recently been awarded for outstanding quality client service with the Client Choice Award 2020 for Corporate Tax in Switzerland.

Elena KumashovaTel: +41 58 261 53 20 / Email: [email protected] Kumashova is an associate at Bär & Karrer. Her practice focuses on all aspects of national and international corporate tax law for Swiss and foreign clients.She advises clients on tax-related questions in the areas of M&A transactions, restructurings and corporate finance, and she also has broad experience in advising clients in the area of tax compliance. Elena Kumashova frequently works on M&A transactions (buy-side or sell-side advice across all stages of the transaction, advice on management incentive schemes), restructurings and reorganisations and provides advice on various national and international corporate tax matters.


Bär & Karrer Ltd.Brandschenkestrasse 90, 8027 Zürich, Switzerland

Tel: +41 58 261 50 00 / Fax: +41 58 261 50 01 / URL: www.baerkarrer.ch



United KingdomSandy Bhogal & Barbara OnuongaGibson, Dunn & Crutcher UK LLP


Significant deals and themesThe following statistics are accurate as at July 2020. Mergers & Acquisitions (“M&A”)The value of outward M&A in 2019 was £20.9 billion, which is lower than the total outward M&A value in 2018 (£23.8 billion) and the lowest recorded since 2016 (£17.3 billion) and significantly lower than the £77.5 billion value recorded in 2017. The total value of inward M&A in 2019 was £53.8 billion compared to £78.8 billion in 2018. The lower values of outward and inward M&A transactions can be explained by fewer higher value acquisitions compared to recent years.The total value for domestic M&A during 2019 was £8.7 billion, a significant decrease compared to 2018 (£27.7 billion). Again, the decrease is as a result of a reduction in higher value domestic M&A transactions. Year-on-year comparison also shows that the value of completed domestic M&A during 2019 was the lowest recorded since 2015, when the value was £6.9 billion. One notable domestic M&A transaction that took place in 2019 was Ensco Plc of the UK, which acquired Rowan Companies Plc of the UK. The majority (206) of the outward M&A deals in 2019 (250) came from the Americas (100) and Europe (106). This is consistent with the area analysis reported in 2018. The majority (503) of total inward M&A deals in 2019 (575) came from the Americas (269) and Europe (234), which is comparable with 2018.1

FinancingLondon IPO proceeds were £5.9 billion in 2019, which is lower than in 2018 where £9.6 billion was raised. Network International Holdings plc was the largest IPO to list in 2019, raising £1,218 million of capital. This was followed by Trainline plc which raised £1,093 million.2 Real estate transactions2019 was a noticeably slow year for commercial real estate (“CRE”) transactions in the UK. The first nine months of the year saw £32 billion invested in UK CRE – the slowest nine-month period since 2013.3 However, overseas investors continued their dominance of the real estate investment market and increased their market share to 49% (up from 44% in 2018). However, the geographical source of capital changed in 2019 as Far Eastern investors decreased capital deployed to £4.93 billion, whereas North American investors increased to £8.42 billion.4

Transfer pricing and diverted profits tax (“DPT”)HM Revenue & Customs (“HMRC”) approximated that the annual amount of additional actual tax secured from transfer pricing challenges decreased from £1,774 million in



Gibson, Dunn & Crutcher UK LLP United Kingdom

2017/2018 to £1,169 million in 2018/2019.5 In addition, the DPT yield figures published by HMRC have decreased from 2017/2018 (£219 million) to 2018/2019 (£12 million).6 HMRC stated that the figures reflect the net amount received as a result of HMRC issuing DPT charging notices which are not repaid. HMRC also noted that in previous years, an amount was included in the DPT yield equating to additional corporation tax arising from transfer pricing enquiries as a result of behavioural change relating to the DPT. Due to the close association between DPT and transfer pricing enquiries, HMRC stated that they now “no longer consider this subdivision of transfer pricing yield to be appropriate” and will report on the additional corporation tax relating to behavioural change in the wider figure for transfer pricing yield.


The below section on UK tax law developments reflects a summary of the key developments in 2019, but it is not a comprehensive or detailed discussion of all tax measures in the past year. The legislation, case law and information stated below is accurate as at July 2020. Domestic legislationCOVID-19 tax implicationsThe coronavirus (“COVID-19”) pandemic has had a significant impact on the UK economy and all sectors have been affected by the restrictions imposed in order to control the disease. The tax implications of the COVID-19 pandemic are constantly evolving as the Government response to dealing with the virus develops. The longer-term impact of COVID-19 for UK tax policy remains to be seen but the short-term measures adopted by the Government are summarised below. Legislative measures and updated HMRC guidance• Tax residence for individuals and corporates The COVID-19 pandemic has resulted in the introduction of the most severe international travel restrictions in modern times. This is relevant for corporate taxpayers and individuals as the application of numerous tax provisions is dependent on where an individual or an organisation’s employees and directors are physically located. The UK statutory residence test considers the number of days an individual spends in the UK in determining their tax residency (amongst other factors). HMRC released a statement confirming that certain situations arising from the COVID-19 pandemic would constitute “exceptional circumstances” for the purposes of the statutory residence test for individuals. There are still a number of areas that require clarification, namely, (i) individuals at risk of losing UK tax residency status due to being unable to enter the UK as a result of the travel restrictions, and (ii) existing rules require that no more than 60 days in the UK can be ignored due to “exceptional circumstances” but it is not clear when the current travel restrictions will be completely lifted. In relation to corporates, HMRC published COVID-19 guidance in the International Tax Manual, stating that HMRC considers that the “existing legislation and guidance in relation to company residence already provides flexibility to deal with changes in business activities necessitated by the response to the COVID-19 pandemic”. In addition, in respect to permanent establishment, the relevant HMRC guidance similarly stated that the “existing legislation and guidance in relation to permanent establishments already provides flexibility to deal with changes in business activities necessitated by the response to the COVID-19 pandemic”. HMRC did note that it would not consider that a company will necessarily become resident in the UK because a few board meetings are held in the UK,




or because some decisions are taken in the UK over a short period of time. Likewise, the HMRC guidance also stated that a non-resident company will not have a UK fixed place of business permanent establishment after a short period of time as a degree of permanence is required. It is not clear what HMRC will consider a short period of time, particularly as the duration of the travel restrictions is unknown. As the migration of company residence and creation of a permanent establishment may have serious consequences, it will be important for companies to identify if they will be affected and to consider how to mitigate the risk if the crisis continues for an extended period. • Tax treatment of the Coronavirus Job Retention Scheme Grant (“JRS”) The JRS provides qualifying employers with a subsidy of 80% of the gross salary of furloughed employees, subject to a cap of £2,500 per month, backdated to 1 March 2020. The JRS is available for the period to the end of October 2020 (extended from its end date of June 2020). To be eligible for JRS, employers must have created and started a pay-as-you-earn (“PAYE”) payroll scheme on or before 19 March 2020. The receipt of the grant is treated as taxable income for businesses “in accordance with normal principles” (typically, this will mean it is treated as trading income), but the corresponding wage costs will continue to be deductible as normal. In the Summer Economic Update 2020, the Government announced that it will introduce a one-off payment of £1,000 to UK employers for every furloughed employee who remains continuously employed through to the end of January 2021. Extensions to deadlines and other procedural measuresThere are a number of extensions to consultation and tax filing deadlines as well as new procedures adopted to deal with the restrictions caused by the COVID-19 pandemic. A summary of the current measures as at July 2020 are outlined below. Stamp duty on share transfers: New procedures have been put in place so that the process for stamping stock transfer forms following share transfers is carried out by email (and not by post). Company secretaries will be able to update company shareholder registers upon receipt of an electronic verification letter from HMRC (rather than on receipt of duly stamped stock transfer forms). Stamp duty relief applications must be sent by email.Off-payroll working rules (IR35): New rules designed to mitigate tax avoidance by workers, and the companies hiring them, who supply their services via intermediary companies (but who would be employees if the intermediary was not used) have been deferred for 12 months until April 2021.Extension to Spring Budget 2020 consultation deadlines: On 28 April 2020, the Government announced a three-month extension to a number of the consultations published as part of the Spring Budget 2020 as a result of the COVID-19 pandemic. The extension applies to a number of consultations including (i) the tax impact of the withdrawal of the London interbank offered rate (“LIBOR”), (ii) notification of uncertain tax treatment by large businesses, (iii) hybrid mismatches, (iv) tackling construction industry scheme abuse, (v) tax treatment of asset holding companies in alternative fund structures, and (vi) the call for evidence on raising standards in the tax advice market.EU Directive on Administrative Cooperation: The European Commission had, as a result of COVID-19, initially proposed to defer the reporting deadlines under DAC6 by three months, whilst affirming that the initial date of application of the rules will remain until 1 July 2020. However, political agreement has been reached by EU Member States to postpone the filing deadlines on an optional basis by up to six months, as follows:• for reporting “historical” cross-border arrangements (i.e. arrangements in relation to

which the first step was implemented in the period from 25 June 2018 to 30 June 2020), the filing deadline would be 28 February 2021;




• the operation of “30-day” reporting deadlines will be postponed from 1 July 2020 to 1 January 2021, with the effect that:• arrangements that become reportable in the period between 1 July 2020 and 31

December 2020 will need to be reported by 31 January 2021; and• arrangements that become reportable after 31 December 2020 will need to be

reported within 30 days; • for marketable arrangements, the first periodic report would need to be reported by the

intermediary by 30 April 2021; and• the automatic exchange of information reported between Member States will be

postponed from 31 October 2020 to 30 April 2021.Depending on the evolution of the pandemic, the amended directive also provides for the possibility to extend the deferral period once, for a maximum of three further months.HMRC updated guidance on “reasonable excuse”: HMRC updated its general guidance on how it would apply the concept of reasonable excuse where COVID-19 has impacted on a person’s ability to meet their tax obligations. The updated guidance states that HMRC will consider COVID-19 as a reasonable excuse for missing some tax obligations (such as payments or filing dates). Taxpayers are expected to explain how they were affected by COVID-19 and they must still make the return or payment “as soon as [they] can”. Conduct of tax tribunals and courts: All proceedings before the First-Tier Tax Tribunal were stayed for 28 days from 24 March 2020 with all time limits for complying with directions extended by the same period. With effect from 21 April 2020, this general stay has been extended until 30 June 2020 for all cases categorised as standard or complex, with the hearing windows for those cases and the deadlines pushed back by a further 70 days. The Upper Tribunal Tax and Chancery Chamber stated that its administrative functions are greatly reduced at the present time. However, the judges (both the tribunal judges and the high court judges) will be working remotely and during the period of the current pandemic, substantive hearings will take place remotely until further notice in accordance with the relevant Practice Direction. Digital taxationThe Finance Bill 2019–21 has introduced, with effect from 1 April 2020, a 2% digital services tax (“DST”) levied on the revenues of search engines, social media services and online marketplaces which derive value from UK users. The DST will be levied on any revenue earned by a group connected to “digital services activity”, namely (a) social media services, (b) internet search engines, or (c) online marketplaces which are attributable to UK users. A social media service is defined as an online service where the main purpose (or one of its main purposes) is to promote interaction between users and make content generated by users available to others. The rules helpfully state that an internet search engine does not include a facility on a website designed to search material on such website or closely related websites. An online marketplace is defined as an online service the main purpose of which is to facilitate the sale by users and enables users to sell or advertise things to other users. A UK user is defined as an individual who, it is reasonable to assume, is normally located in the UK or a business that is established in the UK. The DST focuses on the participation and engagement of users as an important aspect of attribution of value. Generally, revenues are attributable to UK users if the revenue arises by virtue of a UK user using or paying for the service. However, advertising revenues are derived from UK users when the advertisement is intended to be viewed or consumed by a UK user. The provision of associated online




services by a social media service, internet search engine or online marketplace may also give rise to the DST. An associated online service is one that is operated by an online platform and derives significant benefit from its association with the social media service, internet search engine or online marketplace. A significant exemption from the online marketplace definition is for financial and payment services providers with more than half their relevant revenues arising from the trading of financial instruments. The DST will only be payable by businesses whose global revenues from the in-scope activities are at least £500 million. Tax will not be levied on the first £25 million of revenue from in-scope business activities linked to the participation of UK users. Groups will be able to elect to calculate their DST liability under an alternative method which deducts a proportion of relevant operating expenses attributable to UK digital services revenues applicable to the group. Various jurisdictions have also been implementing unilateral national measures relating to the tax challenges arising from the digitalisation of the economy (including France, Austria, Hungary, Italy and Turkey). It is difficult to envisage how multiple domestic minimum tax rules would interact on a global level. Issues relating to sovereignty over tax affairs are likely to arise, as well as the matter of how to determine tax allocation rights. A move towards a global minimum tax, as suggested in pillar two of the Organisation for Economic Co-operation and Development (“OECD”)’s proposal (discussed below), may unify the various domestic rules. However, it would be highly complicated to achieve this from a technical and administrative perspective. The DST does contain provisions allowing relief for certain cross-border transactions. This is in recognition that transactions concluded on a marketplace may be cross-border in nature, so that the revenues are linked to both a UK user and a foreign user. Normally, all the revenues from the transaction will be UK digital services revenues; however, subject to a valid claim being made, UK digital services revenues from qualifying cross-border transactions may be reduced by 50%. In order to qualify, the cross-border transactions should be:• a marketplace transaction where a foreign user is a party; and• where all or part of the revenues arising in connection with the transaction are, or would

be, subject to a foreign digital services tax charge.A foreign digital services tax need not be identical to the UK DST, but the legislation provides that it should be “similar”. It is not clear exactly what will constitute a foreign digital services tax and as there is no further legislative interpretation, HMRC guidance on the matter will be important in practice. There are a number of other international considerations regarding the operation of the UK DST, particularly in relation to state aid concerns and the interaction of the UK DST with the UK’s double tax treaty obligations. The Government has committed to reviewing the position by the end of 2025 in order to better align UK tax policy with the international consensus. International Tax Enforcement (Disclosable Arrangements) Regulations 2020 (“DAC6”)Final regulations implementing DAC6 in the UK were published on 13 January 2020. DAC6 is the most recent EU reporting regime and requires promoters and service provider intermediaries to report details of certain cross-border tax arrangements that feature one or more “hallmarks”. The hallmarks are widely drawn and leave a lot of room for debate as to whether many ordinary commercial transactions and structures will be reportable. HMRC has published guidance to the UK DAC6 regulations as there are key points that have not been dealt with in the DAC6 regulations.




The UK DAC6 regulations implement Directive (EU) 2018/822 (the “EU Directive”). Even though the UK has officially left the EU, it is still legally obliged to implement the EU Directive properly so the scope of the UK rules closely follows that of the EU Directive. Any deviation from this would mean the UK would not meet its international obligations and could also lead to potential differences in the approaches of the UK and other countries. The UK Government for its part has implemented legislation to give effect to the deferral of the EU Directive on the full six-month basis. The amended regulations take effect from 30 July 2020 and HMRC has advised that no action will be taken for non-reporting during the period between 1 July and the date the amended regulations come into force.Corporation tax on non-UK resident companies with UK property incomeAs previously announced, from 6 April 2020, non-UK resident companies that carry on a UK property business, or have other UK property income, will be charged to corporation tax, rather than being charged to income tax. Accordingly, UK property income profits chargeable to corporation tax will be calculated in accordance with ordinary corporation tax principles as set out in the relevant legislation. A non-UK resident company that carries on a UK property business is also chargeable to corporation tax in respect of its profits that arise from loan relationships or derivative contracts that the company is a party to for the purpose of that business. Existing income tax withholding provisions under the non-resident landlord scheme will continue to apply, unless the non-UK resident company has permission to be paid gross (notwithstanding that amounts withheld will be within the corporation tax regime). There are adverse consequences of the changes, including: (i) restrictions on the deduction of interest and other finance costs under the hybrid mismatch rules (if applicable) or the corporate interest restriction (which broadly limits deductions in excess of £2 million per group to 30% of EBITDA as a default position, subject to available exemptions and elections); and (ii) restrictions on the use of carried-forward income and capital losses (which cannot be set-off against more than 50% of profits exceeding £5 million in any year). However, pre-6 April 2020, property rental losses can still be carried forward for use against future profits without restriction.UK real estate – non-resident capital gains taxThe significant changes for non-resident investors in UK real estate were enacted in the Finance Act 2019 and came into effect on 6 April 2019. Historically, non-resident investors were not subject to UK capital gains tax (“CGT”) on UK real estate sales, but the new rules mean that CGT is levied on UK real estate sales by non-UK resident investors. Broadly, all non-UK residents will now be taxable on gains on disposals of directly held interests in any type of UK land. Non-UK residents will also be taxed on any gains made on the disposals of significant interests in entities that directly or indirectly own interests in UK land. For tax to be imposed, generally the entity being disposed of must be “property rich” (where at least 75% of the gross market value of the entity’s qualifying assets at the time of disposal is derived from UK land), and the non-UK resident must be a “substantial investor” (where, at the date of disposal or at any time within two years prior to disposal, the non-UK resident holds, or has held directly or indirectly, at least a 25% interest in a property-rich entity).There are three broad tax treatments that may apply for offshore collective investment vehicles (“CIVs”) falling within these new rules: a) Default position: The default position for CIVs will be that they are treated for capital

gains purposes as if they were companies. An investment in such a fund will be treated




as if the interests of the investors were shares in a company, so that where the fund is UK property rich, a disposal of an interest in it by a non-UK resident investor will be chargeable to UK tax under the new rules. CIVs may therefore be subject to corporation tax from April 2020 as a result of being treated as companies.

b) Transparency election: The fund manager of a CIV may make a transparency election provided the relevant entity meets certain conditions. The effect of the election is to treat the CIV as a partnership for UK capital gains purposes such that any gains arising at CIV level would be chargeable on its investors.

c) Exemption election: Eligible CIVs can instead apply for an exemption election. The effect of this election is to provide entity-level exemption from tax on direct and indirect disposals of UK land. Investors will become chargeable on investment gains on distribution of realised gains by the fund or when investors sell their interest in the CIV.

The UK Property Rich Collective Investment Vehicles (Amendment of the Taxation of Chargeable Gains Act 1992) Regulations came into force on 10 April 2020 and make amendments to the above-mentioned legislation in the Finance Act 2019. The main purpose of the amendments is to ensure that exempt investors such as pension funds will not lose the benefit of the exemption when investing in UK property-rich CIVs.Changes to entrepreneurs’ relief lifetime limit for CGTA number of changes were introduced in the Finance Act 2019 relating to entrepreneur’s relief (“ER”), namely: (i) an increase in qualifying holding period; (ii) dilution; and (iii) amendments to the 5% shareholding test. Further changes were announced in the Spring Budget 2020. For disposals taking place on or after 11 March 2020, there will be an immediate reduction in the lifetime limit available for ER from £10 million to £1 million. The changes will result in a reduction of the maximum relief available from £1 million to £100,000 for individuals who realise gains that qualify for ER. As a general rule, the time of disposal for capital gains purposes is the time when the contract for sale becomes unconditional (rather than the time of completion). Parties to an uncompleted pre-11 March 2020 sale contract will be subject to the £1 million lifetime limit unless they can demonstrate (a) that the purpose of entering into the contract was not to take advantage of this timing rule (in order to circumvent the widely reported narrowing of ER), and (b) in the case of connected parties, that the contract was also entered into for wholly commercial reasons. In addition, where shares have been exchanged for those in another company in the period from 6 April 2019 to (and including) 10 March 2020, and an election to crystallise the gain on the exchange (rather than adopt roll-over treatment) is made on or after 11 March 2020, the new lifetime limit will apply if, broadly, either:• the companies whose shares are exchanged are under common control; or• the consequence of the exchange is that the exchanging shareholders’ proportionate

shareholding is increased, and qualifies for ER.Stamp dutyLegislation was published in the Finance Bill 2019–21 in relation to changes to the calculation of stamp duty and stamp duty reserve tax for certain connected company transactions. The legislation extends the market value rule at sections 47 and 48 Finance Act 2019 (which applies in respect of transfers of listed shares or securities to connected companies) to transfers of unlisted securities to connected companies. Such transfers will be caught by the extended market value rule where there is an issue of shares by way of (part) consideration for the transfer.




Prior to the proposed extension, the stamp duty payable on the transfer of UK shares in a share-for-share exchange would be calculated by reference to the value of shares issued in consideration. The extension of the market value rule to transfers of unlisted securities to connected companies is intended to discourage “swamping”, i.e. tax planning whereby the value of newly-issued consideration shares is low in the context of share-for-share exchanges. Structures and Buildings Allowance (“SBA”)Businesses that incur qualifying expenditure on the construction, renovation or conversion of non-residential structures and buildings on or after 29 October 2018 may claim SBA. The annual rate of SBA will increase from 2% to 3% from 1 April 2020 for corporation tax purposes, and 6 April 2020 for income tax purposes. Hybrid Capital Instrument (“HCI”) regimeA new HCI regime came into force in place of the regulatory capital securities regime from 1 January 2019. Prior to 1 January 2019, the taxation of regulatory capital instruments issued by banks and insurers was governed by the Taxation of Regulatory Capital Securities Regulations, SI 2013/3209 as amended (the “RCS Regulations”). The analysis under the RCS Regulations broadly required a determination that the instrument met the regulatory capital requirements and that a targeted anti-avoidance rule was not applicable. Pursuant to the new HCI regime, the terms and conditions of each HCI will need to be analysed to ensure that it meets the definition of HCI for tax purposes. The definition of HCI is detailed in the new section 475C of the Corporation Tax Act 2009. This provision states that a loan relationship is an HCI if:• it makes a provision under which the debtor can defer or cancel a payment of interest;• it has no other significant equity features; and• the debtor has made an election in respect of the loan relationship that has effect for

the period. This election is ineffective where there are arrangements of which the main purpose, or one of the main purposes, is to obtain a tax advantage for any person.

Group financing exemption in the UK CFC regimeThe Finance Act 2019 contained changes to the UK taxation of controlled foreign companies (“CFC”) taking effect from 1 January 2019. The CFC regime introduced in 2012 operates by reference to gateways, through which CFC income must pass if it is potentially to be subject to a CFC charge. For non-trading lending activity in low-taxed CFCs, income can pass through a relevant “sub-gateway”, either if the capital being deployed has been sourced from the UK part of the group, or if the “significant people functions” (“SPFs”) in respect of the lending activity are located in the UK. Formerly, the so-called “group financing exemption” could prevent income on certain loans (broadly, loans to other non-UK members of the relevant group) from passing through either sub-gateway. Accordingly, from 1 January 2019, the exemption only protects against the UK capital sub-gateway, and not the UK SPFs one.Capital loss carry-forward restrictionThe corporate income loss restriction was introduced with effect from 1 April 2017. Under the relevant rules, only 50% of a company’s profits or gains in an accounting period can be offset by carried-forward income losses, subject to the application of a £5 million deductions allowance. Capital losses were exempted from these rules. However, from 1 April 2020, legislation contained in the Finance Bill 2019–21 restricts companies’ use of carried-forward capital losses to 50% of the capital gains arising in an accounting period, subject to the existing £5 million deductions allowance which a group will now have to allocate between capital




as well as income losses. It will apply to gains arising on or after 1 April 2020, but the restriction will apply to all carried-forward capital losses, whenever arising. Current-year losses can be utilised without restriction.Anti-forestalling measures have been put in place to stop companies from incurring capital gains before 1 April 2020. The anti-forestalling provision states that if a company has an accounting period ending before 1 April 2020, a deduction in respect of a chargeable gain will not be allowed if the main purpose or one of the main purposes of the relevant arrangements (entered into on or after 29 October 2018) is to secure a tax advantage by reason of the capital loss restriction not having yet come into effect.Profit fragmentationSchedule 4 of the Finance Act 2019 enacted new rules to target arrangements through which a UK resident carrying on a business transfers a disproportionate part of their profits to offshore persons or entities in low-tax jurisdictions and whereby a related individual receives, or could receive, some kind of benefit from the value transferred. Broadly, these rules apply where: (i) there is a provision between a UK-resident person or entity and an overseas person or entity; (ii) as a result of the provision, value is transferred from the UK-resident person or entity to the overseas person or entity which derives from the profits of a business chargeable to UK income tax or corporation tax; (iii) the value transferred exceeds what would be agreed between independent parties acting at arm’s length; (iv) a related individual is able to enjoy the profits that have been diverted; and (v) there is a tax mismatch (very broadly, the tax payable overseas is less than 80% of the reduction in UK tax) and it is reasonable to conclude that the main purpose, or one of the main purposes, for which the arrangements were entered into was to obtain a tax advantage. These new rules came into effect in respect of value transferred on or after 1 or 6 April 2019 for corporation tax and income tax purposes, respectively.Offshore receipts in respect of intangible propertyThe Finance Act 2019 also introduced new “offshore receipts in respect of intangible property” (“ORIP”) rules which took effect from 6 April 2019. The new rules are designed so that a charge to UK income tax will arise to certain non-UK residents (broadly those resident in jurisdictions that do not have a double tax treaty which contains a non-discrimination article) in respect of income from intangible property that is referable to sales of goods or services in the UK, where the intangible property (or rights over that property) are held in a no- or low-tax jurisdiction. A tax exemption applies where the tax payable by the non-UK resident in relation to income that is referable to the sale of goods or services in the UK is at least 50% of the UK income tax charge that would otherwise arise. In addition, there is a £10 million de minimis UK sales threshold. Targeted anti-avoidance rules have effect for arrangements entered into on or after 29 October 2018.Consultation on UK hybrid mismatch rulesInternational hybrid mismatches and related tax arbitrage are among the primary areas identified in the OECD’s base erosion and profit shifting (“BEPS”) project. Action 2 of the OECD’s BEPS Final Report, Neutralising the Effects of Hybrid Mismatch Arrangements (the “Action 2 Final Report”), addresses tax arbitrage with a view to avoiding the exploitation of the different ways in which tax instruments are treated by entities in different jurisdictions. Model treaty provisions were developed and recommendations were set out regarding the design of domestic rules to neutralise the effect (that is, double non-taxation, double deduction, long-term deferral) of hybrid instruments and entities.




In 2017, the UK implemented a detailed set of hybrid mismatch rules to combat cross-border tax advantages arising from hybrid mismatches. The UK’s hybrid mismatch rules under Part 6A of the Taxation (International and Other Provisions) Act 2010 (“TIOPA”) derive from the recommendations of the Action 2 Final Report. However, the mechanical operation of these rules has resulted in unexpected material disallowances for some taxpayers. A consultation on certain technical aspects of the hybrid rules has been launched. The consultation on the UK hybrid mismatch rules focuses on three areas, namely: • Double deduction mismatches: Expenses deducted twice (either in two jurisdictions or

by more than one taxpayer) in relation to arrangements where a hybrid entity is involved may trigger a counteraction under the UK hybrid mismatch rules, such that a UK tax deduction would be denied to a relevant UK entity within scope of the rules. However, no counteraction is required to the extent that the expenses are deducted from so-called “dual inclusion income”. This is intended to refer to the same amounts of income brought into the charge to tax for different taxpayers. However, there are strict limits as to when amounts so brought into account would qualify. Despite changes made in 2018 to the UK hybrid rules to address double deduction mismatches, it is generally recognised that the double deduction rules can often apply more widely than they should, targeting genuinely commercial arrangements where there is no economic mismatch.

• Connected parties – “acting together”: In the absence of “structured arrangements”, the hybrid rules will only apply where parties to the arrangements are connected. In applying this test, parties who are “acting together” will be deemed to be connected. The purpose is to prevent otherwise unconnected parties from working together or being used to circumvent the effect of the rules. Nevertheless, the consultation acknowledges that the test can throw up practical difficulties (e.g. as a result of difficulties in obtaining sufficient information about counterparties’ structures to assess whether the deeming provisions apply). HMRC has therefore called for evidence of circumstances where taxpayers feel the impact of the deeming provisions should be modified.

• Exempt investors in hybrid entities: An expense in a UK company would not typically be disallowed if the payment is made directly to an exempt investor (e.g. a pension fund or sovereign wealth fund). However, where the payment is indirectly made to such exempt investors via a hybrid entity, there is no equivalent general dispensation. This goes against the overarching intention of the UK tax system to achieve tax neutrality for collective investment. HMRC states in its consultation that it is willing to contemplate the case of amending the hybrid rules to improve the operation of the rules, e.g. a “white list” of entities which would not give rise to a counteraction.

The consultation deadline was originally May 2020 but has been extended to August 2020 in response to the COVID-19 pandemic. Consultation on the tax treatment of asset holding companies in alternative investment fund structuresIn the course of 2020, the UK Government has committed to undertake a review of the UK’s funds regime. This will include a review of the value-added tax (“VAT”) treatment of fund management fees and a consultation regarding the tax treatment of asset holding companies. The aim of the consultation is to “gather evidence and explore the attractiveness of the UK as a location for intermediate entities through which alternative funds hold assets”. Some of the issues cited in the consultation are specific to particular kinds of funds as follows: • Credit funds: Distribution treatment for results-dependent interest and the relative

narrowness of the UK’s securitisation regime.• Real estate funds: The trading condition to the substantial shareholding exemption and

relatively stringent conditions to accessing the UK REIT regime.




• Private equity: Income treatment on the distribution by intermediate holding companies to funds of disposal proceeds from the sale of underlying assets (in particular in the context of share buybacks).

The consultation also discusses general issues that would be relevant to most asset holding companies, namely: (i) administrative burdens in qualifying for exemption from interest withholding tax; and (ii) the application of hybrid mismatch rules to exempt fund investors, and difficulties arising from investors being treated as “acting together” for the purposes of the rules.The Government has confirmed that it is prepared to make comprehensive legislative changes in response to the consultation. However, the consultation noted that (i) the Government is not willing to make changes that would take income or gains outside the scope of UK tax in a manner which is “inconsistent with the overall principles of the UK tax system”, and (ii) any such changes must be compatible with the UK’s international obligations under the OECD BEPS project and the UK’s obligations in respect of state aid.The consultation deadline was originally May 2020 but has been extended to August 2020 in response to the COVID-19 pandemic. Notification of uncertain tax treatments for large businessesThe Government announced its intention to require large businesses to notify HMRC where they have adopted an uncertain tax treatment. A consultation document entitled “Notification of uncertain tax treatment for large businesses” sets out the framework for that requirement and seeks views on a range of implementation issues. The notification requirement will be legislated in the Finance Bill 2020–21 and will apply to uncertain tax treatments in returns filed after April 2021.The proposal is designed to improve HMRC’s ability to identify issues where businesses have adopted a different “legal interpretation” to HMRC’s view. This includes the interpretation of legislation, case law and guidance. Taxes covered by the proposal include corporation tax, income tax (including PAYE), VAT, excise and customs duties, insurance premium tax, stamp duty land tax, stamp duty reserve tax, bank levy and petroleum revenue tax. The intention is to catch all “uncertain tax positions”, irrespective of whether they derive from genuine uncertainty or “with the deliberate intention of pushing the boundaries of the law to their advantage”. However, only “large” businesses (broadly expected to be those with a turnover above £200 million and/or a balance sheet total above £2 billion) will be within scope. Notification will not be necessary where (a) a transaction is disclosed under the Disclosure of Tax Avoidance Schemes rules or under DAC6, or (b) the uncertainty is the subject of formal discussion with HMRC, or HMRC confirms that it already has sufficient information regarding the uncertainty. Similarly (although not a formal exemption), HMRC would not consider the rules to apply where they have previously provided clearance and there is no change in facts or circumstances. It is also proposed that uncertain tax treatments which amount to a maximum of less than £1 million in the tax outcome will not be notifiable.The consultation deadline was originally May 2020 but has been extended to August 2020 in response to the COVID-19 pandemic. IR35 and off-payroll workingThe “intermediaries legislation” (“IR35”) is designed to ensure that an individual who works like an employee, but through their own personal service company (“PSC”) is liable to employment income tax and national insurance contributions in cases where such individual would have been an employee if they were directly engaged by an organisation.




Draft legislation was published in July 2019 which, if enacted, would extend the changes to the IR35 rules imposed upon the public sector to large- and medium-sized private sector businesses. The proposed changes will impose significant compliance burdens on businesses as it will shift the responsibility of operating the off-payroll working rules from the individual’s PSC to the business to which the individual is supplying their services. Accordingly, under the new rules, businesses will be required to determine for each worker whether or not that worker would be an employee if he or she was engaged directly by the business and ensure that income tax and national insurance contributions are deducted from payments in cases where the IR35 rules apply.The changes to the off-payroll rules were due to come into effect on 6 April 2020. This has now been delayed until April 2021 because of the COVID-19 pandemic. Joint and several liability of directors on corporate insolvencyOn 11 April 2018, the Government published a discussion document entitled “Tax Abuse and Insolvency”. Following consultation in respect of the discussion document, a new cross-tax provision has been included in the Finance Bill 2019–21. The draft legislation allows HMRC to make directors and other persons involved in tax avoidance or evasion jointly and severally liable for a company’s tax liabilities, if there is a risk that the company may enter insolvency. Domestic case lawThe below cases are a sample of significant recent tax cases. Hancock and another v HMRC sets out the circumstances in which roll-over relief is applicable in the conversion of both qualifying corporate bonds (“QCBs”) and non-QCBs. The case of Christa Ackroyd Media Ltd v HMRC considers when an employer exercises control in the context of the intermediaries legislation. The Supreme Court in Fowler v HMRC examined the interaction of UK national law and the double tax treaty between the UK and South Africa. The case of Gallaher Ltd v HMRC considered the compatibility with EU law of the limitation to UK corporation taxpayers of the relief in the “no gain no loss” provisions and led to an amendment to the legislation in Finance Bill 2019–21. R (on the application of Aozora GMAC Investment) v HMRC is a significant case as it is a reminder on the limits of establishing legitimate expectation when relying on HMRC guidance. In United Biscuits (Pension Trustees) Ltd and another v HMRC, the long dispute concerning the classification of VAT for services supplied to the United Biscuits occupational pension scheme was referred to the European Court of Justice and it opined that the such supplies were not VAT-exempt. Finally, the case of Union Castle Mail Steamship Co Ltd v HMRC concerned the taxation of derivatives held in an investment fund and the Court of Appeal concluded that a statutory requirement can override computational accounting principles. Hancock and another v HMRC [2019] UKSC 24 Mr and Mrs Hancock exchanged shares in their company for redeemable loan notes. They structured the disposal of their shares in three stages. Stage 1 was the exchange of the shares for notes which, being convertible into foreign currency, were not QCBs. At stage 2, the terms of some of those notes were varied so that they became QCBs. At stage 3, both sets of notes (QCBs and non-QCBs) were, together and without distinction, converted into one series of secured discounted loan notes (“SLNs”), which were QCBs. The SLNs were subsequently redeemed for cash. The taxpayers sought to show that the redemption of the loan notes fell outside the charge to CGT by virtue of the exemption in section 115 of the Taxation of Chargeable Gains Act 1992 (“TCGA”) for disposals of QCBs.




Roll-over relief is available for reorganisations, resulting in the issue of securities such as shares. The issue was whether roll-over relief (pursuant to section 127 TCGA) applied on the original disposal of their shares by the taxpayers. The Supreme Court stated that (1) a conversion as defined is to receive the same relief as a reorganisation, i.e. roll-over relief, even if it involves QCBs whose disposal is otherwise outside the charge to CGT, and (2) emphasis is given to the “aggregation of the securities into a single asset”. Accordingly, the applicability of roll-over relief depended on whether the conversion of securities at the third stage comprised separate transactions or if it was only one conversion of the QCBs and non-QCBs. The appeal would fail if it was concluded that the third stage had involved separate transactions. Section 116(1) TCGA provides as follows: “This section shall have effect in any case where a transaction occurs of such a

description that, apart from the provisions of this section—(a) sections 127 to 130 would apply by virtue of any provision of Chapter II of this

Part; and(b) either the original shares would consist of or include a qualifying corporate bond

and the new holding would not, or the original shares would not and the new holding would consist of or include such a bond.”

The Supreme Court stated that section 116(1)(b) TCGA contemplates the possibility of a single transaction which involves a pre-conversion holding of both QCBs and non-QCBs, and also acknowledged that, coupled with the fact that the Court of Appeal’s interpretation renders the words “or include” appearing in section 116(1)(b) idle, these are powerful arguments in support of the appellants’ construction.However, the Supreme Court also observed that there would be nothing to prevent taxpayers from using the occasion of a minimal conversion (e.g. £1 nominal QCB) following a reorganisation and obtaining relief from CGT, which was stated to be “plainly contrary to and inconsistent with that which was intended to apply to a conversion connected to a reorganisation”. The Supreme Court added that the word “include” in section 116(1)(b) made it clear that “the intention of Parliament was that each security converted into a QCB should be viewed as a separate conversion”. Accordingly, it was held that there had been two conversions: one of QCBs; and one of non-QCBs. The potential gain within the non-QCBs was frozen on conversion and did not qualify for roll-over relief pursuant to section 127 TCGA. Christa Ackroyd Media Ltd v HMRC [2019] UKUT 326In Christa Ackroyd, the Upper Tribunal upheld the decision of the First-Tier Tribunal (“FTT”) that the BBC had sufficient control of a presenter that, had the services been supplied directly by the presenter rather than through her personal services company, an employment relationship would have subsisted.Ms Ackroyd is a television journalist and presenter who presented “Look North” on BBC 1 between 2001 and 2013. The appeal before the FTT related to a fixed-term contract dated 4 May 2006 between the BBC and Christa Ackroyd Media, which was terminated by the BBC in June 2013 (the “Contract”). Between March 2013 and October 2014, HMRC issued to Christa Ackroyd Media determinations in respect of income tax and notices of decision in respect of national insurance contributions under the intermediaries legislation contained in sections 48 to 61 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) and the relevant national insurance contribution legislation. For the period covered by the Contract, the legislation required the FTT to determine a direct contract between the BBC




and Ms Ackroyd for the services under that contract (the “hypothetical contract”) and to determine whether the circumstances are such that it would be a contract of employment.The Upper Tribunal stated that in determining employment status, the starting point is the conditions set out in Ready Mixed Concrete (South East) Limited v Minister of Pensions and National Insurance [1968] 2QB 497, namely: (i) mutuality of obligation; (ii) control; and (iii) taking into account other relevant factors (a negative condition that looks at the provisions of the contract as a whole). It was determined by the FTT that the necessary mutuality of obligation existed and that condition was not the subject of appeal. The issue in the appeal turned to whether the FTT erred in law in concluding that, on the basis of the facts found, under the hypothetical contract, the BBC would have had sufficient control of Ms Ackroyd to establish a relationship of employment. The Upper Tribunal held that the FTT correctly determined that under the Contract, the BBC had explicit control over Ms Ackroyd in a number of important respects, and that it should be implied that it had “ultimate authority” in the sense referred to in the relevant case law including statements from MacKenna J in Ready Mixed Concrete, whereby it was stated that: “The question is not whether in practice the work was in fact done subject to a direction

and control exercised by any actual supervision or whether any actual supervision was possible but whether ultimate authority over the man in the performance of his work resided in the employer so that he was subject to the latter’s order and directions.”

The determination by the Upper Tribunal was very fact-specific to this case but the issues raised will become increasingly relevant to corporate businesses as the intermediaries legislation is extended to the private sector in April 2021. Fowler v HMRC [2020] UKSC 22Mr Martin Fowler is a qualified diver, resident in the Republic of South Africa. During the 2011/2012 and 2012/2013 tax years he undertook diving engagements in the waters of the UK Continental Shelf. HMRC claimed that the income he earned from those diving engagements is subject to UK taxation. The double taxation treaty between the UK and South Africa (the “Treaty”) had to be applied in order to determine the taxation of Mr Fowler. The Treaty provides for employment income to be taxed in the place where it is earned, i.e. in the UK, but for the earnings of self-employed persons to be taxed only where they are resident, i.e. in South Africa.The Supreme Court noted that there were two primary complications: (a) under UK tax law, employed divers such as Mr Fowler are to be treated as if they were self-employed for income tax purposes; and (b) under article 3(2) of the Treaty, any terms that are not defined in the Treaty itself are to be given the meaning that they have in the tax law of the state seeking to recover tax, i.e. the UK (noting that there is no definition of employment in the Treaty). The Treaty identifies specific categories of income (or profits) and provides that each are taxable in one or other contracting States of the Treaty. Accordingly, pursuant to article 14, employment income is taxed where it is earned, whereas pursuant to article 7, business profits are (subject to the rules about permanent establishment) taxable where the relevant business enterprise is resident. The relevant UK legislation is as follows: (i) tax on employment income is regulated by the ITEPA; and (ii) tax on trading profits is regulated by the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA 2005”). Section 6(5) ITEPA provides that “employment income is not charged to tax under this Part if it is within the charge to tax under Part 2 of ITTOIA 2005 (trading income) by virtue of section 15 of that Act (divers and diving




supervisors)”. Section 15(2) ITTOIA 2005 provides that where section 15 applies, “the performance of the duties of employment is instead treated for income tax purposes as the carrying on of a trade in the United Kingdom”. The Supreme Court then considered how the deeming provision contained in section 15(2) ITTOIA 2005 should be applied in respect to the Treaty provisions. The Supreme Court held that the taxation of Mr Fowler’s remuneration as trading income under section 15 of ITTOIA 2005 did not affect its classification under the Treaty. This reversed the Court of Appeal’s decision. The Supreme Court stated that nothing in the Treaty requires articles 7 and 14 to be applied to the fictional, deemed world which may be created by UK income tax legislation. Rather, they are to be applied to the real world, unless the effect of article 3(2) of the Treaty is that a deeming provision alters the meaning that relevant terms of the Treaty would otherwise have. In this case, there was “no doubt” that article 14 would apply without section 15 (if the taxpayer was employed, rather than self-employed, on general principles, which was assumed in this judgment). This case highlights that taxpayers should carefully analyse the ambit of national deeming provisions to determine whether they affect their position under double tax treaties.Gallaher Ltd v HMRC [2019] UKFTT 207 (TC)In Gallaher, the FTT considered the compatibility with EU law of the limitation to UK corporation taxpayers of the relief in the “no gain no loss” provisions contained in section 171 of the TCGA 1992. The FTT held that the difference in treatment between a purely domestic transfer, and one to a group company in a different EU or EEA State, was a restriction of the Netherlands parent company’s right to freedom of establishment which could not be justified, unless the UK company was given the option to pay the extra tax over five years. In the absence of such an option, the FTT concluded that the transfer to the Netherlands company should be treated in the same way as a domestic transfer.From 11 July 2019, companies may apply, with immediate effect, to defer payment of up to the amount of corporation tax on profits or gains attributable to affected group asset transfers. The Finance Bill 2019–21 introduces draft legislation to allow companies to defer payment of tax which arises on certain transactions with group companies in the EEA. This is intended to provide certainty for UK business following the FTT decision in Gallaher.R (on the application of Aozora GMAC Investment) v HMRC [2019] EWCA Civ 1643In Aozora, the Court of Appeal concluded that a statement in HMRC’s International Manual could, in theory, establish a legitimate expectation, but that the taxpayer had failed to show that HMRC departing from its published guidance would be “so unfair as to amount to an abuse of power”. The principal issue that arose before the FTT was whether the relevant HMRC manual gave rise to a legitimate expectation on the part of a taxpayer to rely on the contents of such manual as an interpretation of the relevant legislation. Aozora UK was the wholly owned subsidiary of a Japanese company, Aozora Japan. Aozora UK owned a subsidiary in the USA, Aozora US. Aozora UK had made loans to Aozora US and received interest payments. The USA had imposed a 30% withholding tax on the interest received and Aozora UK was liable to corporation tax in the UK on such interest. It was denied relief under the relevant legislation. Aozora UK argued that HMRC’s International Manual contained a representation by HMRC that gave rise to a legitimate expectation that it would be taxed in accordance with the manual, whether or not the terms of the manual were accurate. The FTT concluded that the relevant HMRC guidance was a representation that may give rise to legitimate expectation. However, the FTT examined whether the taxpayer relied on




the relevant representation and concluded that Aozora Japan’s tax adviser relied on their own analysis, and Aozora UK was unable to demonstrate that it had suffered substantial detriment by means of “putative reliance” on the relevant representation. The taxpayer appealed the FTT’s decision. The Court of Appeal clarified that a legitimate expectation can arise from a statement made by HMRC in its published guidance. However, in this case, the Court of Appeal held that the kind of representation relied on by Aozora UK, although clear, unambiguous and unqualified, is “weak in the sense that it is only a representation as to HMRC’s opinion as to the law”. In addition, Aozora Japan obtained advice from specialist tax advisers who were not at any great disadvantage compared to HMRC when coming to their own view of the law, and it is that view on which Aozora Japan relied. Accordingly, Aozora UK has not shown that it has suffered a serious detriment as a result of any reliance on the representation. Given the increased publication of HMRC guidance, this case is an important reminder on the limits of establishing legitimate expectation when relying on said guidance. However, it should be noted that each case will be examined on its own facts and circumstances. United Biscuits (Pension Trustees) Ltd and another v HMRC Case C-235/19The dispute before the Court of Appeal between the trustees of an occupational pension scheme of United Biscuits (UK) Ltd and HMRC concerned the classification for VAT purposes of the investment management services supplied to the trustees of United Biscuits occupational pension scheme for the purposes of the administration of its pension scheme.The Court of Appeal referred the case to the European Court of Justice and the principal question was whether investment management services supplied to United Biscuits occupational pension scheme were exempt “insurance transactions” within article 135(1)(a) of Council Directive 2006/112/EC (the “VAT Directive”) and its predecessor provisions. Advocate General Pikamäe (“AG”) opined that supplies of pension fund management services to United Biscuits occupational pension scheme between 1978 and 2013, by trustees who were not approved as insurers (i.e. non-insurers), were not VAT-exempt.The VAT Directive provides that the supply of services for consideration within the territory of a Member State by a taxable person acting as such is to be subject to VAT. However, Member States shall exempt from VAT “insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents”. The AG stated that it was apparent that in accordance with the relevant UK legislation on the authorisation of insurance companies, the provision of pension fund management services, including to defined benefit occupational pension funds, was a class of “insurance business” when effected and carried out by an insurer carrying on an insurance business. During the period from 1 January 1978 to 30 September 2013, as regards supplies of pension fund management services to defined benefit occupational pension funds, HMRC distinguished between those provided by insurers, which were exempt, and those provided by non-insurers, which were not exempt, pursuant to the relevant UK legislative provisions in place at the time. The dispute concerns whether the supply of pension fund management services by trustees who are not approved as insurers may be classified as an “insurance transaction” and thus be exempt from VAT.The AG stated that although insurance transactions were not defined by the VAT Directive, the exemption must be interpreted in context. The essentials of insurance transactions are “that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialization of the risk covered, with the service agreed when the contract was concluded… it is the assumption of risk for consideration that allows




an activity to be classified as an insurance transaction”. In addition, the AG stated that the concept of “insurance transactions” must be understood in a strict sense and not to the management of insurance policies. Furthermore, insurance transactions necessarily imply the existence of a contractual relationship between the provider of the insurance service and the person whose risks are covered by the insurance, namely, the insured. Accordingly, it is the nature of the relationship, not the status of the parties, that determines whether something is an insurance transaction. The AG stated that in this case, the investment managers did not contract with the trustees to provide any form of indemnification against the materialisation of risk, so that the pension fund management services at issue do not entail any assumption of a risk by the investment managers for consideration. The AG opined that it follows that such an activity is not an “insurance transaction” and is not exempt from VAT. The AG also rejected arguments on fiscal neutrality, noting that the discrepancy in the treatment of services provided by insurers and non-insurers arose from the UK treatment, not EU law.Union Castle Mail Steamship Co Ltd v HMRC [2020] EWCA Civ 547In Union Castle Mail Steamship Co Ltd v HMRC, the Court of Appeal dismissed the taxpayers’ appeals against the Upper Tribunal’s decision which disallowed corporation tax deductions for purported losses arising from a marketed derivatives “derecognition” scheme. The issue was whether the “derecognition” in the accounts of the taxpayers’ companies of 95% in one case, and 100% in the other, of the value of derivative contracts held by them respectively gave rise to an allowable loss for the purposes of corporation tax. This issue turns on the proper construction and application of schedule 26 to the Finance Act 2002, which contains an exhaustive code for the taxation of profits arising from derivative contracts. Union Castle Mail Steamship Company Limited (“Union Castle”) made a bonus issue to their parent company of 5020 “A Shares”. The A Shares carried a right to receive a dividend equal to 95% of the cash flows arising on the close-out of certain derivative contracts, such dividend to be paid within five business days following receipt by Union Castle of the cash flows. As a consequence of issuing the A Shares, Union Castle was required to “derecognise” 95% of the value of the derivative contracts for accounting purposes, amounting to £39,149,128. HMRC disallowed a deduction of £39,149,128 made by Union Castle in its corporation tax return for the year to 31 March 2009, claimed as a result of a derecognition of 95% of derivative contracts held by it. The relevant paragraphs of schedule 26 to the Finance Act 2002 (as they applied in the tax year 2008/2009) are as follows: “Paragraph 15:

(1) The credits and debits to be bought into account in the case of any company in respect of its derivative contracts shall be the sums which, when taken together, fairly represent, for the accounting period in question –

(a) all profits and losses of the company which (disregarding any charges or expenses) arise to the company from its derivative contracts and related transactions; and

(b) all charges and expenses incurred by the company under or for the purposes of its derivative contracts and related transactions.”

The key issue in this case was in relation to the “fairly represented” requirement. The Court of Appeal held that this requirement was a freestanding criterion which was not bound by the accounting treatment of profits and losses and it could override such treatment. While it was long-established that the computation of the profits and losses of a business for tax purposes was to be undertaken in accordance with generally accepted accounting




principles, that general principle had to give way to any express or implied statutory rule. The Court of Appeal held that the “fairly represented” requirement was such a rule. In this case, the accounting debit did not fairly represent a loss to Union Castle for the purposes of paragraph 15(1) of schedule 26. It had lost no asset nor incurred any liability other than a liability to pay a dividend on shares, such shares being issued for no consideration to its parent company. The payment of a dividend was in fact a distribution of profits. Accordingly, an obligation to pay a dividend could not be a loss.European – EU law developmentsThe below section on EU tax law developments reflects a summary of the key developments in 2019, but it is not a comprehensive or detailed discussion of all measures in the past year. The law and information stated below is accurate as at July 2020.Brexit updateOn 31 January 2020, the UK left the EU and the UK-EU withdrawal agreement came into force. Section 1 of the European Union (Withdrawal) Act (“EUWA”) repealed the European Communities Act 1972 (“ECA 1972”), which had previously enabled EU law to apply to the UK. However, the EUWA saved most of the provisions contained in the ECA 1972 (in modified form) for the duration of the transition period, i.e. until 31 December 2020, as well as any UK legislation that implemented EU requirements, i.e. “EU-derived domestic legislation”. The new body of retained EU law by the EUWA will provide a basis for continuity, but will require amendment to reflect the change in the UK’s relationship with the EU. Digital Taxation – OECD and EU updatesAs part of the OECD/G20 BEPS project, and in the context of Action 1, the Task Force on the Digital Economy considered the tax challenges raised by the digital economy. The 2015 Action 1 BEPS Final Report and the 2018 Action 1 BEPS Interim Report noted that highly digitalised business models are characterised by an unparalleled reliance on intangibles, along with the importance of data, user participation and their synergies with intangible assets.Following the publication of the Action 1 BEPS Reports, the potential tax challenges were debated – particularly in relation to the remaining BEPS risks and the question of how taxing rights on income generated from cross-border activities in the digital age should be allocated among jurisdictions. No consensus was reached regarding how to address these issues but there was a commitment to deliver a final report in 2020, aimed at providing a consensus-based, long-term solution. Further to the analysis included in the Action 1 BEPS Reports, members of the OECD/G20 Inclusive Framework on BEPS suggested that a consensus-based solution to the taxation of the digital economy should be focused on: (i) the allocation of taxing rights by modifying the rules on profit allocation and nexus; and (ii) unresolved BEPS issues. On 31 May 2019, the OECD published a consensus document entitled “Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy” (the “Programme Report”). The Programme Report emphasises that the way multinational corporations are taxed will need to be reshaped in order to effectively deal with the tax challenges arising from digitalisation. The Programme Report focuses on two pillars, namely:Pillar One – Allocation of taxing rights: This pillar details the different technical issues that need to be resolved to undertake a coherent and concurrent revision of profit allocation.Pillar Two – Remaining BEPS issues: This pillar describes the work to be undertaken in the development of a global anti-base erosion (“GloBE”) proposal that would, through changes to domestic law and tax treaties, provide jurisdictions with a right to “tax back” where other




jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.The development of the GloBE proposal under pillar two contemplates radical new principles of international taxation which would extend beyond the sphere of purely digitally-focused businesses by way of:• an income inclusion rule that would tax the income of a foreign branch or a controlled

entity if that income was subject to tax at an effective rate that is below a minimum rate;• an undertaxed payments rule that would operate by way of a denial of a deduction

for a payment to a related party if that payment was not subject to tax at or above a minimum rate;

• a switch-over rule to be introduced into tax treaties, which would permit a residence jurisdiction to switch from an exemption to a credit method where the profits attributable to a permanent establishment or derived from immovable property are subject to an effective rate below the minimum rate; and

• a subject-to-tax rule that would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source.

These developments represent a significant moving of the international tax goalposts. The European Commission also proposed in March 2018 its own turnover tax on digital businesses, pending reform of its common corporate tax rules for digital activities. However, such proposals have been laid aside due to opposition from several EU Member States. Despite ongoing negotiations, a growing list of countries (including the UK, France, Austria, Hungary, Italy and Turkey) have decided to move ahead with unilateral measures to tax the digital economy.ATAD IIOn 12 July 2016, the Anti-Tax Avoidance Directive (“ATAD I”) came into force and it included measures to implement the recommendations of a number of BEPS action items, including Action 2 on hybrid mismatch arrangements. ATAD I contains the basic measures for implementation of the hybrid action points, to be implemented from 1 January 2019.The general aim of the ATAD I provisions is to target double deduction or deduction/no inclusion situations in an intra-EU context. The Anti-Tax Avoidance Directive II (“ATAD II”) was subsequently implemented, which amended ATAD I and required that EU Member States introduce comprehensive hybrid mismatch rules under a prescriptive set of principles. ATAD II contains complex measures in relation to hybrid mismatches (to be implemented from January 2020) and reverse hybrids (to be implemented from January 2022). The principal additions compared to ATAD I are that (i) hybrid mismatch situations are targeted in a global context, and (ii) ATAD II also applies to hybrid permanent establishments, imported mismatches and reverse hybrids. Non-cooperative jurisdictionsThere are certain countries that the EU considers as having sub-par tax governance standards. Such countries are included in the list of “non-cooperative jurisdictions”. On 18 February 2020, it was announced that the EU’s Economic and Financial Affairs Council had added the Cayman Islands to the list of non-cooperative jurisdictions. It should be noted that some jurisdictions are taking counteractive measures in respect to the non-cooperative jurisdictions. For example, on 31 March 2020, Luxembourg released a bill aimed at disallowing the deduction of interest and royalty expenses paid to companies set up in blacklisted countries. The purpose of the proposed measures is to fight aggressive tax planning that results in interest and royalty payments made by Luxembourg companies that are tax-exempt or taxed




at a very low tax rate in such jurisdictions. Other Member States, such as the Netherlands, France and Belgium are also enacting tax measures against non-cooperative jurisdictions.BEPS updateIn 2019, the UK continued its implementation of the BEPS measures. An update on the implementation status of certain key BEPS measures is outlined below:• Action 1 – Addressing the tax challenges of the digital economy: The Finance Bill 2019–

21 has introduced, with effect from 1 April 2020, a 2% DST levied on the revenues of search engines, social media services and online marketplaces which derive value from UK users.

• Action 2 – Hybrids: A consultation on certain technical aspects of the UK hybrid rules has been launched, focusing primarily on (a) double deduction mismatches, (b) connected parties “acting together”, and (c) exempt investors in hybrid entities.

• Action 4 – Interest deductions: The restriction on tax deductibility of corporate interest expense consistent with OECD recommendations was introduced in the UK on 1 April 2017. Schedule 11 to the Finance Act 2019 made a number of changes to the corporate interest restriction legislation that is contained in TIOPA. Most of the changes made by schedule 11 have been made to ensure that the legislation works as it was intended.

• Action 13 – Transfer pricing documentation and country-by-country reporting: The UK is party to the automatic exchange of country-by-country reports, and as of January 2020, has activated 64 exchange relationships.

• Action 15 – Multilateral Instrument (“MLI”): The MLI has now been implemented in the UK, the effect of which is to enable countries to implement the recommendations contained in the relevant BEPS actions into double tax treaties. Other countries are now also ratifying the instrument and thereby enacting amendments into bilateral tax treaties.

Developments affecting attractiveness of the UK for holding companies

Tax climate in the UKThe UK has had to use extraordinary economic measures to deal with the impact of the COVID-19 pandemic. It will remain to be seen how tax policy will be shaped in the coming years in order to recover the economy and revitalise UK industry. Aside from COVID-19, Brexit will have a significant and long-term impact on EU-wide tax planning, particularly in relation to the loss of EU Directives. It will be interesting to examine the impact of the newly introduced DST in the UK and also how it will interact with similar measures on an EU-wide and global level. Many service providers and companies will have to grapple with the new UK DAC6 regulations aimed at promoting cross-border tax transparency, but there are still unanswered questions as to its practical application.


Overseas property investorsThe UK continues to be one of the most mature and diverse real estate markets in the world. However, it has undergone numerous changes to the real estate tax provisions in recent years and the impact of such measures on the economic return for overseas investors is still unclear. FinanceThe Government has recently committed to undertake a review of the UK’s funds regime. In addition to various financial regulatory matters, the indirect and direct taxes of funds will be considered with a view to examining the case for policy changes. This will include a review of the VAT treatment of fund management fees and a consultation regarding the



tax treatment of asset holding companies in alternative fund structures. In addition, it is expected that, from the end of 2021, LIBORs, which are used as reference rates in the loan, bond and derivatives markets, will cease to be published. Instead, these rates are to be replaced with “nearly risk-free” benchmark rates. Similar processes are occurring with other benchmark rates, e.g. EONIA. The UK Government has launched a consultation calling for information from taxpayers regarding the tax issues that arise from the reform of LIBOR and other benchmark rates. Oil and gasOn 20 March 2017, the Government published a discussion paper identifying tax issues that may be discouraging new investment in older UK continental shelf oil and gas fields and assets and which may, therefore, result in the decommissioning of late-life assets before maximising their economic value. The paper focuses on the impact of decommissioning costs on sales, particularly asset sales. The discussion paper primarily focused on the feasibility of introducing a transferable tax history. This led to provisions in the Finance Act 2019 to enable a seller’s tax history to be transferred on the sale of an interest in a UK oil licence, thereby enabling the buyer to set the decommissioning costs of the field against the transferable tax history. The petroleum revenue tax rules will also be amended to allow a deduction for decommissioning costs.

The year ahead

The impact of COVID-19 on UK businesses is multifaceted, from the disruptions to daily working routines to changes in consumer demand dependent on industry. From an economic perspective, the forecasts announced in the Spring Budget 2020 did not take into account the full impact of COVID-19 and it is apparent that the UK economy will suffer, but the extent of any recession is unpredictable at this stage. The current climate will mean that companies will have to consider many issues, particularly in relation to their workforce and maintaining production. In addition, on 31 January 2020, the UK left the EU and the impact of this on UK industry will be determined by the outcome of ongoing negotiations during the transition period. Despite the challenging circumstances, businesses must be cognisant of the evolving tax climate nationally and on a global level. UK tax authorities are continuing to use extensive powers to counteract perceived tax avoidance and compliance with the various reporting obligations, particularly DAC6, which may become increasingly burdensome. In addition, the OECD’s attempt to craft a “consensus-based solution” to the taxation of the digital economy by the end of 2020 – embodied by the two pillar approach set out in its Programme Report – marks a potentially ground-breaking shift in the way taxation will apply to multinational businesses.

* * *

Endnotes1. https://www.ons.gov.uk/businessindustryandtrade/changestobusiness/mergersandacq-

uisitions/bulletins/mergersandacquisitionsinvolvingukcompanies/octobertodecem-ber2019#outward-mergers-and-acquisitions-january-to-december-2019.

2. https://www.pwc.co.uk/audit-assurance/assets/pdf/ipo-watch-q4-2019-annual-review.pdf. 3. https://assets.kpmg/content/dam/kpmg/uk/pdf/2020/01/look-back-face-forward.pdf.4. https://www.savills.co.uk/research_articles/229130/294855-0. 5. https://www.gov.uk/government/publications/transfer-pricing-and-diverted-profits-tax-

statistics-to-2018-to-2019/transfer-pricing-and-diverted-profits-tax-statistics-2018-to-2019.6. Ibid.




Gibson, Dunn & Crutcher UK LLPTelephone House 2–4 Temple Avenue, London, EC4Y 0HB, United Kingdom

Tel: +44 20 7071 4000 / URL: www.gibsondunn.com

Sandy BhogalTel: +44 20 7071 4266 / Email: [email protected] Bhogal is a 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 multilateral tax controversies.

Barbara OnuongaTel: +44 20 7071 4139 / Email: [email protected] Onuonga is an associate in the London office of Gibson, Dunn & Crutcher.Ms. Onuonga qualified in 2013 and specialises in a variety of transactional and advisory work covering direct corporate tax, VAT and tax-efficient incentive arrangements both in the UK and internationally. Ms. Onuonga’s practice includes advising individual and corporate clients on the tax implications of disposals and acquisitions, joint ventures and reorganisations across a diverse range of sectors. Ms. Onuonga also has experience in coordinating multi-jurisdictional advice, particularly in relation to international share plans.




USAMyra Sutanto Shen, Michelle Wallin & Derek E. Wallace

Wilson Sonsini Goodrich & Rosati, P.C.

Introduction

U.S. corporate tax since the release of last year’s edition of Global Legal Insights – Corporate Tax can be characterised by two themes. First, in the last half of 2019, the U.S. Treasury Department (“Treasury”) and the Internal Revenue Service (the “IRS”) released a substantial amount of guidance under legislation commonly known as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), and 2020 promised much of the same, including long-anticipated regulations governing limitations on business interest deductions under Section 163(j).1 However, the economic and social upheaval related to the novel coronavirus (“COVID-19”) pandemic has shifted focus among corporations and the government alike. Congress signed comprehensive legislation commonly known as the Families First Coronavirus Response Act (“FFCRA”) and the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). As we head into the latter half of 2020, corporations and practitioners alike continue to grapple with how to implement the modifications to the Internal Revenue Code of 1986, as amended (the “Code”) as introduced by the Tax Act, the FFCRA and the CARES Act, as well as how to manage fallout from the COVID-19 pandemic.

Legislation

COVID-19: Income tax relief provisionsNet operating lossesThe CARES Act temporarily relaxed certain restrictions put in place by the Tax Act on the utilisation of net operating losses (“NOLs”) and made a number of technical amendments to the Tax Act’s NOL provisions.2

Under the Tax Act, a taxpayer’s deduction for NOLs arising in taxable years beginning after December 31, 2017 (“NOLs arising post-2017”) was limited to no more than 80 per cent of the taxpayer’s taxable income (the “80 Per Cent Limitation”). NOLs arising in taxable years beginning on or before December 31, 2017 (“NOLs arising pre-2018”) are not subject to limitation under the Tax Act. The CARES Act suspended the 80 Per Cent Limitation for taxable years beginning before January 1, 2021. In addition, the CARES Act modifies the Tax Act’s prohibition on NOL carrybacks by permitting a five-year carryback (the “5-Year Carryback”) for NOLs arising post-2017 and before January 1, 2021. Nevertheless, the CARES Act prohibits taxpayers from using an NOL carried back under the 5-Year Carryback to offset income under Section 965 (the so-called transition tax), either by deeming taxpayers to have made an election under Section 965(n) to forgo use of the NOL in the Section 965 inclusion year to the extent of the net amount required to be included in income on account of Section 965, or by allowing taxpayers to exclude Section 965 inclusion years from the 5-Year



Wilson Sonsini Goodrich & Rosati, P.C. USA

Carryback. Which option is preferable to a particular taxpayer will depend on a number of factors, including the impact of the deemed Section 965(n) election on the taxpayer’s ability to utilise foreign tax credits in the year of the Section 965 inclusion.In addition, the CARES Act provided helpful clarification for situations in which both NOLs arising post-2017 and NOLs arising pre-2018 are carried to a taxable year beginning after December 31, 2020. In that case, the taxpayer’s taxable income (determined without regard to Section 199A, Section 250 or NOL deductions) would be reduced first by 100 per cent of NOLs arising pre-2018, and NOLs arising post-2017 would be allowed as a deduction up to the amount of 80 per cent of any remainder.Deductibility of business interestThe CARES Act temporarily relaxed some of the restrictions on the deductibility of business interest enacted by the Tax Act.3 Under Section 163(j) as enacted by the Tax Act, a taxpayer was generally permitted to deduct business interest paid or accrued only to the extent of business interest income, plus 30 per cent of “adjusted taxable income”. The CARES Act increased the limitation from 30 per cent to 50 per cent of adjusted taxable income for taxable years beginning in 2019 or 2020 (except with respect to entities taxed as partnerships, as described below). Taxpayers are entitled to elect out of this change.The 50 per cent limitation applies to entities taxed as partnerships only for taxable years beginning in 2020. If a partnership has excess business interest (i.e., business interest deductions in excess of the amount allowed under the general limitation) for a taxable year beginning in 2019, half of the excess is treated as business interest paid or accrued by the partner in its first taxable year beginning in 2020 and is not subject to the general limitation on the deductibility of business interest, while the remainder is carried forward and is subject to the normal limitation applicable to excess business interest of a partnership. If a partner is allowed to deduct this amount in a taxable year beginning in 2020, presumably the 50 per cent limitation (instead of the 30 per cent limitation) described above would apply, unless the partner elected otherwise. A partner may elect out of the application of these rules.The CARES Act also allows a taxpayer to calculate the business interest limitation for a taxable year beginning in 2020 based on its adjusted taxable income for its last taxable year beginning in 2019. The election could benefit a taxpayer that had greater adjusted taxable income in 2019 than in 2020 and wanted to increase its business interest limitation.Bonus depreciationThe CARES Act assigned qualified improvement property (“QIP”) a 15-year recovery period (rather than 39 years).4 Notably, the Tax Act provided for 100 per cent bonus depreciation under Section 168(k) for property with a recovery period of less than 20 years. This change ensures that QIP is eligible for 100 per cent bonus depreciation, retroactive for property placed in service after 2017. Acceleration of credit for corporate AMTThe Tax Act repealed the corporate alternative minimum tax (“AMT”) and allowed taxpayers a refundable credit in respect of AMT that was already paid (and not previously credited). The credit could be claimed over a four-year period beginning with the corporation’s taxable year beginning in 2018. The CARES Act accelerated the refundable credit so the remaining uncredited AMT balance is creditable over a two-year period beginning with the corporation’s taxable year beginning in 2018.5 The CARES Act also allowed a corporate taxpayer to elect to accelerate the entire uncredited AMT balance as a credit for the corporation’s taxable year beginning in 2018.




COVID-19: Payroll tax provisionsSick leave creditsThe FFCRA enacted new payroll tax credits for certain businesses with fewer than 500 employees. First, the FFCRA introduced a credit against the tax imposed by Section 3111(a) (commonly referred to as the Social Security tax) for each calendar quarter in an amount equal to 100 per cent of the qualified sick leave wages paid per employed individual per day.6 The amount of the credit is limited to 10 days per individual and is capped at: (i) $511 per day for an individual who is quarantined or self-quarantined due to COVID-19 or seeking a medical diagnosis for COVID-19 symptoms; and (ii) $200 per day for an individual caring for either a quarantined or self-quarantined individual or for a child due to COVID-19-related school or childcare disruptions, and is increased by the amount of tax imposed by Section 3111(b) (commonly referred to as the Medicare tax) on qualified sick leave wages. Eligible employers are also allowed a credit against the Social Security tax for each calendar quarter in an amount equal to 100 per cent of the qualified family leave wages paid per employed individual per day.7 Qualified family leave wages are generally wages payable to an individual caring for a child due to COVID-19-related school or childcare disruptions. The amount of the credit is generally capped at a per individual amount of $200 per day and $10,000 in total for all calendar quarters, increased by the amount of Medicare tax on such wages. Employee retention creditsThe CARES Act established a new refundable tax credit against the Social Security tax of 50 per cent of “qualifying wages” paid to an employee after March 12, 2020 and before January 1, 2021, capped at $10,000 of qualifying wages per employee (a maximum credit of $5,000 per employee).8 The credit is available to employers engaged in a trade or business that (i) is subject to closure due to COVID-19 orders, or (ii) experiences a “significant decline” in gross receipts. “Closure” means a full or partial suspension of business activity due to orders from an appropriate governmental authority due to COVID-19. A “significant decline” in gross receipts occurs during the period beginning with the first calendar quarter beginning after December 31, 2019 in which the employer’s gross receipts drop to less than 50 per cent of gross receipts for the same quarter in the prior year, and ending with the first quarter in which gross receipts are greater than 80 per cent of gross receipts for the same calendar quarter in the prior year. The IRS released a number of frequently asked questions (“FAQs”) that explain certain aspects of the employee retention credit on its website;9 however, the FAQs are not legal authority and are not binding. Small employers (with 100 or fewer employees) are eligible for the credit for any wages paid during a closure or a period of significant decline in gross receipts. Larger employers (with more than 100 employees) are eligible for the credit only for wages paid with respect to employees who are not providing services due to closure or a significant decline in gross receipts. The credit is not available to employers who receive a Payroll Protection Program (“PPP”) Loan under the CARES Act.Payroll tax deferralEmployers may defer deposit and payment of the 6.2 per cent Social Security payroll tax from March 27, 2020 through the end of 2020 beginning with the date of enactment of the CARES Act.10 Fifty per cent of the tax deposits may be deferred until December 31, 2021, and the remaining 50 per cent may be deferred until December 31, 2022. The deferral does not apply to the employee portion of payroll taxes or the Medicare tax imposed on employers.




New regulations and guidance

PFIC RegulationsOn July 10, 2020, Treasury and the IRS issued long-awaited proposed regulations (the “Proposed PFIC Regulations”) that address certain rules relating to passive foreign investment companies (“PFICs”) under Sections 1291, 1297 and 1298, including rules addressing the insurance exception and for determining ownership of a PFIC and calculating passive assets and income.11 The Tax Act modified Section 1297 to provide that passive income does not include investment income derived in the active conduct of an insurance business by a qualifying insurance corporation (“QIC”). The Proposed PFIC Regulations provided guidance on the application of this exception, including rules defining a QIC and insurance business and rules that govern the treatment of income and assets of domestic insurance companies owned by a QIC.The Proposed PFIC Regulations also clarified that for purposes of determining whether a U.S. person owns stock of a PFIC under the applicable attribution rules, a partner in a partnership is deemed to own 50 per cent or more of the stock of any foreign corporations that are not a PFICs (which is the threshold for purposes of attributing any PFIC stock owned by such corporations to their shareholders) only if the partner owns 50 per cent or more of the partnership, i.e., by applying what the Proposed PFIC Regulations refer to as a “top-down” approach. Finally, the Proposed PFIC Regulations addressed certain aspects of the income and asset tests. The regulations clarify the application of the look-through rules under Section 1297(c), and offered guidance regarding the elimination of certain intercompany assets and income for purposes of the PFIC asset and income tests. The regulations also clarify which exceptions applicable to the determination of “foreign personal holding company income” apply for purposes of the PFIC income test – notably, the regulations provide that the Section 954(h) active banking or finance business exception does apply, while the Section 954(i) insurance business exception does not apply. In addition, the regulations provide that the asset test is determined using the quotient of the average of the values at the end of each quarter, rather than the average of the quotients of the values. The Proposed PFIC Regulations are generally applicable to tax years beginning on or after the date the final regulations are published, but taxpayers may apply the Proposed PFIC Regulations to open tax years if applied consistently. Cloud computing and digital transactionsOn August 9, 2019, Treasury and the IRS released proposed regulations intended to provide a framework for classifying cloud computing transactions either as a lease of property or a provision of services for purposes of many international U.S. federal income tax provisions, as well as guidance applicable to transfers of digital content (the “Proposed Cloud Computing Regulations”).12 The Proposed Cloud Computing Regulations define a cloud transaction as a transaction through which a person obtains non-de minimis, on-demand network access to computer hardware, digital content or other similar computing resources, and provide that a cloud transaction is classified solely as a lease of property or provision of services based on all relevant factors. Factors that tend to demonstrate that a cloud transaction should be treated as a provision of services include: whether the provider has the right to determine the specific property used in the cloud transaction and replace such property with comparable property; whether the property is a component of an integrated operation in which the provider has other responsibilities, including ensuring the property is maintained and updated; and whether the provider’s fee is primarily based on a measure of work performed or the level of the customer’s use rather than the mere passage of time.




The Proposed Cloud Computing Regulations also expand the application of current Treasury Regulation Section 1.861-18, which classifies transactions relating to computer programs for purposes of many international U.S. federal income tax provisions, to transactions relating to “digital content”, which is defined to include all content in digital format that is either protected by copyright law or is no longer protected by copyright law solely due to the passage of time, including books, movies, and music in digital format in addition to computer programs. The regulations also provided for an exception to the provisions of Treasury Regulation Section 1.861-18 regarding “copyright rights” for the transfer of the right to publicly perform or display digital content for the purpose of advertising the sale of the digital content.Finally, the Proposed Cloud Computing Regulations provided that income from the sale of electronically transferred digital content subject to copyright is sourced to the location where such content is downloaded or installed onto the end-user’s device that is used to access such content or, in the absence of such information, to the location of the customer according to the provider’s recorded sales data for business or financial reporting purposes. Under existing law, such income is sourced by considering a variety of factors, including the location where legal title passes. The proposed changes represent a departure from existing law and practice, especially for non-U.S. taxpayers selling digital content into the United States for whom such income would generally be non-U.S. source under current law and U.S. source under the proposed regulations. Calculation of NOL limitationsSection 382 generally limits the amount of taxable income that can be offset annually by NOLs after an ownership change; however, if the corporation has net unrealised built-in gain (“NUBIG”) immediately before the ownership change, gain recognised within five years of the ownership change that is attributable to a pre-change asset is considered recognised built-in gain (“RBIG”) and increases the Section 382 limitation for the relevant year. Under Notice 2003-65, taxpayers were permitted to use one of two alternative approaches to calculating NUBIG (and its corollary, NUBIL): (1) an accrual-based “Section 1374” approach, which provides that RBIG (and its corollary, RBIL) only includes gain or loss a corporation actually recognises following the ownership change from the sale of an asset; and (2) a “Section 338” approach, which generally identifies items of RBIG and RBIL by comparing the corporation’s actual items of income, gain, deduction, and loss with those that would have resulted if the corporation had made a hypothetical Section 338 election on the ownership change date. The Section 338 approach has been particularly beneficial to taxpayers with substantial goodwill or self-created intangibles that have a low-tax basis (and thus low or no actual cost recovery deductions) but significant built-in gain.On September 9, 2020, Treasury and the IRS issued proposed regulations (“Proposed NOL Regulations”) that require taxpayers to use the Section 1374 approach, thereby eliminating the alternative, generally taxpayer-favourable, Section 338 approach.13 The Proposed NOL Regulations also made various other amendments intended to coordinate the calculation of built-in items with the changes enacted by the Tax Act, including clarifying that interaction of the business interest carryforwards under Section 163(j) and the Section 382 limitation, and clarifying when certain cancellation of debt income recognised by a corporation following an ownership change is included in the computation of NUBIG or net unrealised built-in loss. If adopted, the Proposed NOL Regulations would be effective for ownership changes occurring after the date the rules are finalised. On January 10, 2020, Treasury released updated regulations that provided that the Proposed NOL Regulations will not apply until 30 days following the date on which the rules are finalised (the “Delayed Applicability Date”)




and will not apply to companies that experience an ownership change after such date if the ownership change is publicly announced or triggered pursuant to a binding agreement in effect on or before the Delayed Applicability Date (or if certain other conditions are met).14

Downward attributionOne significant change introduced by the Tax Act was to repeal Section 958(b)(4) in determining whether a non-U.S. corporation is a controlled foreign corporation (“CFC”). Prior to repeal, Section 958(b)(4) provided that for purposes of applying the attribution rules of Section 318 to determine CFC status stock owned by a non-U.S. person would not be attributed to a U.S. entity owned by such non-U.S. person (such attribution, “downward attribution”). With the repeal of Section 958(b)(4), the number of CFCs rose significantly. On October 2, 2019, Treasury and the IRS released proposed regulations regarding the repeal of Section 958(b)(4) (the “Proposed Downward Attribution Regulations”).15 The Proposed Downward Attribution Regulations revert to pre-Tax Act law (i.e., repeal downward attribution) solely for purposes of applying Sections 267, 332, 367, 672, 706, 863, 904, 1297, and 6049. For example, under Section 1297(e), CFCs that are not publicly traded (as specially defined) are generally required to use adjusted tax basis, rather than fair market value, for purposes of determining whether they satisfy the asset test to qualify as a passive foreign investment company. The Proposed Downward Attribution Regulations provide that solely for purposes of determining whether a corporation is a PFIC, whether the corporation is a CFC is determined without regard to downward attribution. In addition, non-U.S. corporations which are CFCs solely as a result of the application of downward attribution are not subject to the increased reporting requirements under Section 6049. The Proposed Downward Attribution Regulations are generally applicable on or after October 1, 2019, but may generally be relied on for a taxpayer’s last taxable year beginning before January 1, 2018 and taxable years thereafter.The IRS concurrently released Rev. Proc. 2019-40, which provides a safe harbour for U.S. shareholders to determine whether a non-U.S. corporation is a CFC. The safe harbour provides that if a U.S. shareholder does not have actual knowledge, statements received or publicly available information that a non-U.S. corporation is a CFC, and the U.S. shareholder requests certain specified information from its directly held non-U.S. corporation, the IRS will accept the shareholder’s determination regarding CFC status. Rev. Proc. 2019-40 also provides a safe harbour, permitting U.S. shareholders to rely on certain information provided by a CFC or a specified foreign corporation, including earnings and profits.Base Erosion and Anti-abuse Tax (“BEAT”)On December 6, 2019, Treasury and the IRS released final regulations under Section 59A, providing guidance on base erosion payments made by corporations to non-U.S. related parties (the “BEAT Regulations”).16 The BEAT Regulations retain the same approach and structure as prior proposed regulations, with a few exceptions. One exception is that the BEAT Regulations expressly provide that amounts transferred subject to a nonrecognition provision such as Sections 332 or 368 are not subject to BEAT, although the regulations also add anti-abuse provisions to target transactions in which a basis step-up is obtained prior to the nonrecognition transaction. The BEAT Regulations also include new provisions addressing mechanics of calculating the amount of BEAT, rules that simplify the calculation of interest on excess effectively connected liabilities and rules for determining the applicable taxpayer. Finally, the BEAT Regulations added several taxpayer-favourable provisions relating to financial transactions and added more details on the treatment of transactions involving partnerships.




On the same day, Treasury and the IRS released proposed regulations providing additional guidance under BEAT (the “Proposed BEAT Regulations”).17 The Proposed BEAT Regulations proposed mechanical rules for determining a taxpayer’s aggregate group and additional details on the treatment of transactions involving partnerships. In addition, the Proposed BEAT Regulations provided an election for taxpayers to waive allowable deductions, subject to a general anti-abuse rule. Foreign tax creditsTreasury and the IRS released final regulations that provide guidance on the determination of foreign tax credit to implement changes made by the Tax Act (the “Final FTC Regulations”).18 The Final FTC Regulations adopted proposed regulations from December 2018 (the “Prior FTC Regulations”)19 and finalised certain prior proposed regulations relating to overall foreign losses and notification requirements.20 The Final FTC Regulations largely follow the basic approach and structure of the Prior FTC Regulations, which are beyond the scope of this chapter.On the same day, Treasury and the IRS released proposed regulations that provide a number of additional changes to the existing guidance regarding determination of foreign tax credits (the “Proposed FTC Regulations”).21 The Proposed FTC Regulations provided a framework to allocate a number of specified expenses, including rules for research and experimentation (“R&E”) expenditures, stewardship expenses, expenses in connection with litigation or settlements, and interest expense. Of note, the Proposed FTC Regulations generally required R&E expenditures to be apportioned based on relative gross receipts from sales. The existing rule that apportions 50 per cent to the geographic location of research and development remains in place, but only for purposes of determining foreign tax credit limitation and not for other purposes. In addition, the Proposed FTC Regulations generally treat all R&E expenditures of a U.S. taxpayer as allocated to “gross intangible income”, which generally includes all gross income attributable to intangible property but not dividends or amounts included in income under Sections 951, 951A or 1293. Accordingly, a U.S. taxpayer’s R&E expenditures deductions are not apportioned to the global intangible low tax income (“GILTI”) basket. The Proposed FTC Regulations provided guidance on a number of other matters, including detailed rules on assigning foreign taxes to various Section 904 baskets and groupings, rules allocating income from disregarded entities and other foreign branches, and guidance that whether an entity is predominantly engaged in an active financing business, and whether income is financial services income, is determined under the same standard as the active financing exception of Section 954(h)(2)(B). The Proposed FTC Regulations are generally applicable for tax years ending on or after December 16, 2019, with certain exceptions.SourcingOn December 23, 2019, Treasury released proposed regulations intended to address changes made by the Tax Act to Section 863(b) and modify the rules to source sales of inventory produced within and without the United States (the “Proposed Sourcing Regulations”).22 Section 863(b), as modified by the Tax Act, provides that for tax years beginning after December 31, 2017, sales of inventory produced by a taxpayer is sourced on the basis of the production activities of such taxpayers. Prior to amendment, Treasury Regulations under Section 863 provided that income would be sourced by one of three methods: the 50/50 method; the independent factory price method; or the books and records methods. Consistent with the revisions to the statute, the Proposed Sourcing Regulations source income from sales of inventory solely based on production activities and not from sales activities.




In addition, the Proposed Sourcing Regulations clarify the interaction between Section 863 and Section 865(e)(2). Section 865(e)(2) provides that income from sales of inventory and other personal property made by non-U.S. taxpayers through an office or other fixed place of business in the United States is U.S. source, and the Proposed Sourcing Regulations clarify that this rule not impacted by the Tax Act changes to Section 863. The Proposed Sourcing Regulations are intended to be effective for taxable years ending on or after December 23, 2019, if finalised in their current form. However, taxpayers may rely on the Proposed Sourcing Regulations in their entirety for taxable years beginning after December 31, 2017. Hybrid regulationsOn April 7, 2020, Treasury and the IRS released final and proposed regulations regarding hybrid dividends under Section 245A(e) and certain amounts paid or accrued under Section 267A relating to hybrid arrangements (i.e., arrangements or entities that are characterised differently for U.S. and non-U.S. tax purposes) (respectively, the “Final Hybrid Regulations” and the “Proposed Hybrid Regulations”).23 The Final Hybrid Regulations generally retain the framework set forth by proposed regulations issued in December 2018 (which is beyond the scope of this chapter), with a few exceptions. Of note, the Final Hybrid Regulations include certain transitional rules to delay the application of the hybrid provisions. For example, the regulations generally retain the applicability of the hybrid deduction rules to include a deduction with respect to equity, including notional interest deductions (“NIDs”), but delay the effectiveness of the rules to NIDs for taxable years beginning on or after December 20, 2018. The regulations also include a general anti-duplication rule to address deductions or other tax benefits that are duplicated in multiple tiers of CFCs and clarify that the “hybrid deduction account” with respect to acquired stock is eliminated if an election is made under Section 338(g) with respect to a CFC target. The Proposed Hybrid Regulations provide guidance on calculating hybrid deduction accounts under Section 245A(e), in particular by reducing the amount by Subpart F income, GILTI and Section 965 inclusions (though not necessarily dollar for dollar). In addition, the Proposed Hybrid Regulations expand the conduit financing rules under Treasury Regulations Section 1.881-3 to treat certain instruments characterised as equity for U.S. tax purposes but debt for non-U.S. tax purposes as a financing transaction that can result in a conduit financing arrangement. Limitations on the deductibility of executive compensationOn December 20, 2019, Treasury and the IRS released proposed regulations under Section 162(m), providing guidance on certain aspects of Section 162(m) that had been significantly modified by the Tax Act, as well as building in certain new provisions.24 Section 162(m) generally limits the deduction available to public companies on compensation paid to covered employees to $1 million per covered employee per taxable year. The Tax Act, among other changes, removed the exception from the deductibility limitations for qualifying performance-based compensation and expanded the definitions of “publicly held corporation” and “covered employee”, although it did provide limited grandfathering under the prior rules. The proposed regulations, in turn, build on these concepts by: • further expanding the definition of publicly held corporation to generally include publicly

traded partnerships taxed as corporations, foreign private issuers and S-corporations that have publicly traded debt, as well as by modifying the rules related to affiliated groups and disregarded entities;




• applying Section 162(m) to “Up-C” and similar structures by subjecting the distributive share of a partnership’s deduction for compensation paid to covered employees that is allocated to a publicly held corporation to the deductibility limits;

• providing that a company’s publicly traded status is determined on the last day of the company’s taxable year;

• specifying that covered employees of an acquired corporation remain covered employees if the acquiror is publicly held;

• clarifying that an employee must be an executive officer (as defined in Securities and Exchange Commission rules under 17 CFR 240.3b–7) to be a covered employee, but need not be included in the company’s summary compensation table; and

• providing guidance regarding the application of the grandfathering provisions, including noting that accelerated vesting is generally not a material modification that would remove compensation from grandfathered status.

In general, the proposed regulations will be effective for taxable years beginning on or after the date the final regulations are published in the Federal Register, although certain provisions have alternate, earlier effective dates.

Other updates

California budgetOn June 15, 2020, the California State Senate approved amendments to A.B. 85, which were concurred with by the California State Assembly. A.B. 85 includes a number of changes pertinent to businesses subject to California income tax. A.B. 85 suspends the use of NOLs to offset California business income in taxable years beginning on or after January 1, 2020 and before January 1, 2023 for taxpayers with net business income or modified adjusted gross income in California of $1 million or more. A.B. 85 also limits the use of business incentive credits to offset a maximum of $5 million of tax. The expiration date of the NOLs and credits subject to these limitations is extended. As of the date of this chapter, A.B. 85 has been sent to Governor Gavin Newsom for signature.

* * *

Endnotes1. All Section references are to the Internal Revenue Code of 1986, as amended.2. Section 2203 of the CARES Act.3. Section 2206 of the CARES Act.4. Section 2207 of the CARES Act.5. Section 2205 of the CARES Act.6. Section 7001 of the FFCRA.7. Section 7002 of the FFCRA.8. Section 2301 of the CARES Act.9. https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act.10. Section 2302 of the CARES Act.11. 84 Fed. Reg. 33120 (July 11, 2019).12. 84 Fed. Reg. 40317 (Aug 14, 2019).13. 84 Fed. Reg. 47455 (September 10, 2019).14. 85 Fed. Reg. 2061 (January 14, 2020). 15. 84 Fed. Reg. 52398 (October 2, 2019).




16. 84 Fed. Reg. 66968 (December 6, 2019), as corrected by 85 Fed. Reg. 11841 (February 28, 2020).

17. 84 Fed. Reg. 67046 (December 6, 2019). 18. 84 Fed. Reg. 69022 (December 17, 2019), as modified by 85 Fed. Reg. 29323 (May

15, 2020). 19. 83 Fed. Reg. 63200 (December 7, 2018).20. 77 Fed. Reg. 37837 (June 12, 2012) and 72 Fed. Reg. 62805 (November 7, 2007).21. 84 Fed. Reg. 69124 (December 17, 2019).22. 84 Fed. Reg. 71836 (December 30, 2020).23. 85 Fed. Reg. 19802 (April 8, 2020) and 85 Fed. Reg. 19858 (April 8, 2020). 24. 84 Fed. Reg. 70356 (December 20, 2019).



Wilson Sonsini Goodrich & Rosati, P.C.650 Page Mill Road, Palo Alto, CA 94304, USA

Tel: +1 650 565 3815 / URL: www.wsgr.com

Myra Sutanto ShenTel: +1 650 565 3815 / Email: [email protected] Sutanto Shen is a tax partner at Wilson Sonsini Goodrich & Rosati, where she represents public and private companies in connection with federal income tax planning for a variety of corporate transactions in domestic and cross-border settings, including corporate formations, financings and restructurings, equity offerings, and mergers and acquisitions. She received her J.D. from Northwestern University Pritzker School of Law and is a member of the Taxation Section of the State Bar of California and International Fiscal Association – U.S.A. Branch. Myra was named in the 2014–2017 editions of the “Rising Stars” list published by Northern California Super Lawyers. Myra is admitted to practise in California.

Michelle WallinTel: +1 650 565 3620 / Email: [email protected] Wallin is a partner in the employee benefits and compensation practice at Wilson Sonsini Goodrich & Rosati, where she represents a wide range of public and private technology and growth companies with respect to executive compensation and employee benefit arrangement matters. Her practice focuses on the design and implementation of equity compensation plans, employment and severance agreements, and cash compensation arrangements, as well as on the corresponding tax, accounting, securities law, and day-to-day operational issues that can arise in connection with such arrangements. Michelle also is actively involved in the firm’s transactional practice, working with employers to manage the transition of employees and their benefits during and after a merger or acquisition. She received her J.D. from Harvard Law School and is admitted to practise in California.


Derek E. WallaceTel: +1 212 497 7785 / Email: [email protected] E. Wallace is Of Counsel in Wilson Sonsini Goodrich & Rosati’s tax and tax equity practice, where he focuses on a variety of corporate, partnership, and international tax matters, including domestic and cross-border mergers, acquisitions, divestitures, restructurings, financings, and the formation and operation of limited liability companies and partnerships. Derek received his J.D. from New York University School of Law and is admitted to practise in New York.

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