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International Tax NewsEdition 36February 2016
WelcomeKeeping up with the constant flow of international tax developments worldwide can be a real challenge for multinational companies. International Tax News is a monthly publication that offers updates and analysis on developments taking place around the world, authored by specialists in PwC’s global international tax network.
We hope that you will find this publication helpful, and look forward to your comments.
Shi‑Chieh ‘Suchi’ LeeGlobal Leader International Tax Services NetworkT: +1 646 471 5315E: [email protected]
www.pwc.com/its
In this issue
Tax Administration and Case LawTax legislation TreatiesProposed Tax Legislative Changes
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Tax LegislationBelarus
Changes to the withholding tax (WHT) base
As of January 1, 2016, certain changes with regard to withholding tax (WHT) have been introduced to the Tax Code of Belarus.
In particular, the list of income derived by foreign legal entities subject to WHT has been amended. The following Belarus sourced income derived by foreign legal entities is subject to WHT in Belarus as of January 2016:
• Income from web hosting (including integrated services, hosting, and management of web sites).
• Income from the integrated data processing services provided by the client, and the compilation of these data on the basis of special reports; and some other types of IT income.
Several types of income were excluded from the WHT base:
• Income from provision of certain services regarding booking international passenger transportation and accommodation.
• Income from provision of repository services, automated system of interbank payments, international payment systems, international telecommunication data transmission systems, and (or) making payments.
WHT incentives on interest income derived by foreign banks from provision of loans to Belarusian residents under syndicated loan agreements were abolished. The respective income is now taxable.
At the same time, a new WHT exemption regarding certain types of loan was introduced.
PwC observation:Belarusian residents purchasing the respective services should take into account the proposed amendments and to tax the relevant income. Foreign companies should consider the changes while structuring their transactions.
Eugenia ChetverikovaMinskT: +375 17 335 4000E: [email protected]
Dmitry TihnoMinskT: +375 17 335 4000E: [email protected]
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Belarus
Beneficial owner conception
Many of the double tax treaties (DTTs) concluded by Belarus stipulate that lower tax rate / tax exemption is provided in relation to interest, dividend, and royalty income in case the recipient is the beneficial owner of the respective income. However, due to the absence of beneficial owner definition, the respective provision was never applied and tax incentives were provided to the recipient of income on no condition.
As of January 2016, beneficial owner conception was introduced to the Tax Code of Belarus.
A foreign legal entity is recognised as beneficial owner of relevant income provided that the following criteria are met:
• It carries out business related to the income in respect of which it claims tax incentives as beneficial owner.
• It is a direct beneficiary of relevant income.• It is entitled to use and (or) dispose of this income on its own.
In case the Belarusian legal entity which pays relevant income to a foreign legal entity has doubts on whether the foreign legal entity is the beneficial owner of the respective income, it should request additional information/documents from foreign legal entity confirming the beneficial owner status. Exact list of the respective information/documents is not defined at the moment. We expect Belarusian Tax Authorities will deliver further clarifications.
PwC observation:Belarusian legal entity which pays relevant income to a foreign legal entity and grants to foreign legal entity tax incentive stipulated by respective DTT should ensure that the recipient is recognised as beneficial owner of the respective income.
Eugenia ChetverikovaMinskT: +375 17 335 4000E: [email protected]
Dmitry TihnoMinskT: +375 17 335 4000E: [email protected]
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Cyprus
Legislation for tax neutral treatment of foreign currency exchange differences
Legislation was enacted in December 2015 introducing a tax neutral treatment under corporate income tax (CIT) for foreign currency exchange differences (forex). This legislation amendment had been proposed earlier in the year and its effective date of application is as of January 1, 2015.
With this CIT amendment, all forex gains are not taxable and all forex losses are not deductible with the exception of forex arising from trading in foreign currencies (and related derivatives) which remain subject to tax.
Cyprus
EU Parent-Subsidiary Directive amendments enacted
The required law implementing the European Union (EU) Parent-Subsidiary Directive (PSD) anti-hybrid rule and general anti-avoidance rule (GAAR) is enacted in Cyprus with effect from January 1, 2016.
The implementation of the anti-hybrid rule in Cyprus means that dividends which are deductible for any paying company, i.e. not restricted only to EU subsidiaries, are subject to corporate income taxation (CIT) in the hands of their Cyprus tax resident corporate shareholder (or Cyprus permanent establishment [PE] of their non-Cyprus tax resident corporate shareholder).
For implementation of the PSD GAAR, the only amendment is for the denial of a tax credit in Cyprus for underlying tax in other EU member states where the dividend is taxable because the participation exemption criteria are not met.
Marios AndreouNicosiaT: +357 22 555 266E: [email protected]
Marios AndreouNicosiaT: +357 22 555 266E: [email protected]
Stelios ViolarisNicosiaT: +357 22 555 300E: [email protected]
Stelios ViolarisNicosiaT: +357 22 555 300E: [email protected]
Joanne TheodoridesNicosiaT: +357 22 553 694E: [email protected]
Joanne TheodoridesNicosiaT: +357 22 553 694E: [email protected]
PwC observation:This amendment is intended to remove the tax risks associated with forex (except for trading in foreign currencies and related derivatives) providing certainty to taxpayers.
PwC observation:Under EU law, Cyprus was required to implement the PSD anti-hybrid and GAAR rules. Cyprus has chosen to implement a wider anti-hybrid rule than was required by the PSD, as its application relates to all deductible dividends and not only those paid by an EU subsidiary.
The GAAR related amendment is expected to have minimal impact as it only applies to those dividends which fail the Cyprus participation exemption criteria. Further in respect of dividend withholding tax (WHT), no PSD GAAR amendment was required as there is no WHT on all dividend payments to non-Cyprus tax residents per the Cyprus domestic law.
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France
France enacts distribution rules and BEPS-inspired measures
France on December 30, 2015, enacted the 2016 Finance Act and the Amended 2015 Finance Act. Most enacted measures will apply immediately and some will be retroactive.
Besides other tax measures, the acts change the existing distribution and anti-abuse provisions and also introduce country-by-country reporting (CBCR), which may apply to France-based multinational companies (MNCs) and to French subsidiaries of foreign-based MNCs.
New 99% participation-exemption regime
To align the French participation exemption regime with European Union (EU) law (following the Steria Case - CJEU, September 2, 2015, case C-386/14, Groupe Steria SCA), the Amended 2015 Finance Act eliminates the ‘full exemption’ regime applicable to French tax consolidated groups, and lowers the dividend’s taxable portion from 5% to 1%. The decrease in dividend taxability results in a 99% participation exemption for participation income received by a member of a consolidated tax group from:
• another member of the same group or • a company i) subject to a tax equivalent to French corporate income
tax in another EU Member State, or in a European Economic Area (EEA) Member State that has concluded an administrative assistance agreement with France to fight against tax fraud and tax evasion and ii) which would fulfill the conditions to participate in a French tax consolidated group if it was established in France (other than being subject to corporate tax in France).
This new regime applies to fiscal years that begin on or after January 1, 2016.
The 95% participation exemption will continue to apply to distributions from subsidiaries eligible for the parent-subsidiary regime which do not meet the above conditions; e.g. dividends from French subsidiaries that are not part of a consolidated group or dividends received from a foreign subsidiary if the French parent is not a member of the French consolidated group. That case might raise concerns related to compatibility of the new regime with EU law.
Amendments to existing parent-subsidiary regimes that apply to French entities The Amended 2015 Finance Act also includes several measures affecting domestic parent-subsidiary regimes, mainly to make them compatible with EU law.
French-source dividends distributed to an EU or EEA parent In addition to foreign companies established in the EU, the withholding tax (WHT) exemption also applies to foreign companies whose effective place of management is in an EEA Member State that has concluded an administrative assistance agreement with France as described above. These States include Iceland, Norway, and Liechtenstein.
In order to benefit from the WHT exemption, the foreign parent company must own at least 10% of the distributing entity’s capital. To compute the percentage, the new law requires the parent company to include the distributing entity’s shares held in full ownership, as well as shares held in bare ownership (nue-propriété).
Dividends received by a French parent from qualifying holdings To benefit from the participation exemption, the French parent must own at least 5% of distributing entity’s capital. To compute this percentage, the new law requires the parent company to include the distributing entity’s shares held in full ownership as well as shares held in bare ownership.
The participation exemption regime is available when the parent owns at least 2.5% (instead of 5%) of the financial rights and 5% of the voting rights, provided that at least one qualifying non-profit organisation controls the parent, and holds that ownership for five years.
The participation exemption regime is available to distributions received from entities established in non-cooperative states or territories (NCSTs) provided the parent company demonstrates that the operations of those entities are not designed for or do not result in locating profits in such NCST for tax fraud purposes.
The new acts also exclude certain transactions from the French participation exemption.
New GAAR The EU Council on January 27, 2015, amended the EU parent-subsidiary directive 2011/96/UE through directive 2015/121/UE. The new directive introduces a binding de minimis anti-abuse clause (general anti-avoidance rule [GAAR]) to prevent tax avoidance and aggressive tax planning by corporate groups.
EU Member States had until December 31, 2015, to sign an equivalent anti-abuse provision into national law. As a result, the Amended 2015 Finance Act introduced new GAARs into French domestic legislation.
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The new French GAARs provide that parent-subsidiary regime benefits cannot be claimed if the distributions result from a scheme or series of schemes i) put in place to obtain, as a main objective or as one of the main objectives, a tax benefit that is contrary to the purpose of the parent-subsidiary regime and ii) which is not genuine based on the applicable facts and circumstances.
The new GAARs apply to fiscal years beginning on or after January 1, 2016.
France implements country-by-country reporting To align with recommendations of the Organisation for Economic Co-operation and Development (OECD) and the G20 Base Erosion and Profit Shifting (BEPS) Initiative (Action 13), France has introduced CbCR for MNCs, applicable to tax years beginning on or after January 1, 2016.The annual obligation requires MNCs to file with French tax authorities anytime within the 12 months following their fiscal year end a CbC Report disclosing information regarding the name, the activities, and profits of foreign entities in the same group. MNCs will therefore file their first CBC report sometime in 2017. As an example, for fiscal years opened on January 1, 2016, the filing must be made no later than December 31, 2017.
Miscellaneous developments On December 21, 2015, the French government published a Ministerial decree removing the British Virgin Islands (BVI) and Montserrat from its list of NCSTs, retroactive to January 1, 2015. The updated list now includes Botswana, Brunei, Guatemala, Marshall Islands, Nauru, and Niue. Transactions involving NCSTs are subject to stringent French tax measures for controlled foreign corporations (CFCs), French WHTs, the French participation exemption regime, capital gains treatment, deductibility of expenses, and transfer pricing documentation.
Renaud JouffroyParisT: +33 1 56 57 42 29E: [email protected]
Emanuelle VerasMarseilleT: +33 4 91 99 30 36E: [email protected]
Guillaume GlonParisT: +33 1 56 57 40 72E: [email protected]
Despite some discussions in the French Parliament, the French corporate income tax (CIT) surcharge of 10.7% will be repealed for tax years closed on or after December 31, 2016. The resulting effective CIT rate will be reduced from 38% to 34.43%.
The social solidarity contribution (C3S) assessed on a company’s turnover will be repealed in 2017. In the interim, the tax rebate on the basis of the contribution has increased from 3.25 million euros (EUR) to EUR 19 million. In practice, companies with turnover lower than this new threshold in 2015 will be exempt from the C3S payable in 2016.
On August 7, 2015, a new temporary investment incentive measure was introduced, enabling companies making qualifying capital asset investments between April 15, 2015, and April 14, 2016, to claim an additional deduction equal to 40% of the investment. Given the budget constraints, the government refused to extend the deduction to investments made through December 31, 2016.
PwC observation:Foreign MNCs operating in France or entering into transactions with French entities should carefully consider the impact of the newly enacted measures.
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Italy
2016 Italian Budget Law published in the Italian Official Gazette
2016 Italian Budget Law (Law No. 208/2015) has been published in the Italian Official Gazette 302 on December 30, 2015. The Budget Law introduces a number of measures aimed at enhancing economic growth and reducing the tax burden. Inter alia, the main tax provisions that could be relevant for multinational companies (MNCs) investing in Italy are the following:
• From 2017 onwards, reduction of the Italian corporate income tax (IRES) rate from 27.5% to 24%. This will imply, inter alia, the reduction from the current 1.375% to 1.20% rate of the Italian withholding tax (WHT) levied on dividends distributed to qualifying European Union (EU)/ European Economic Area (EEA) tax resident shareholders.
• Repealing of the restrictions upon the deductibility of costs incurred with entities located in ‘black list’ countries. These costs will be deductible from 2016 onwards according to the ordinary criteria of inherence, certainty and objectively determinability, including transfer pricing requirement in case of intercompany transactions.
• Repealing of the ‘black list’ of countries relevant for the application of the controlled foreign companies (CFC) regime. From 2016 onwards, a not EU/EEA resident controlled company would be relevant for CFC purposes if the nominal tax rate it applies is lower than 50% of the Italian one (i.e. 13.75% for 2016); CFC regime for companies resident either in EU/EEA or elsewhere, predominantly realizing passive income and subject to an effective tax rate lower than 50% of the Italian one remains unchanged.
• From 2017 onwards, qualifying banks and financial institutions (not including industrial holdings) will be subject to a 3.5% surtax (for IRES purposes) and will be entitled to fully deduct interest expenses for both IRES and Italian Regional tax (IRAP) purposes.
• Introduction of an additional tax depreciation allowance from 2015 onwards equal to 40% of the purchase price of specific machinery and equipment purchased between October 15, 2015 and December 31, 2016.
• Country by country report (CBCR) required for companies having revenues exceeding 750 million euros (EUR). Implementation details are expected through an ad hoc Ministerial Decree.
• In fiscal year 2015, the Italian companies can step-up their tangible and intangible assets and qualifying shareholdings booked in the financial statements as of December 31, 2014 up to their fair market values. The step up is subject to the payment of a substitute tax equal to 16% or 12% for depreciable and non-depreciable assets respectively. The tax recognition of the depreciation is deferred to the third tax period following the one of the step up. In case of disposal of the asset, the stepped up tax base cost is recognised from the fourth tax period following the one in which the step up occurred. Claw back rules apply in case of early disposal of the stepped up assets.
• Possibility for non-Italian companies to elect for a tax step up (up to fair market value) of shareholdings held as of December 31, 2016 in non-listed Italian companies by paying a substitute tax at 8% rate.
• The statute of limitations has been extended by one year: from 2016 onwards, taxpayers would be subject to tax assessment up to the end of the fifth (fourth up until December 31, 2015) year following the year of filing of the relevant tax return. The statute of limitation is extended to seven years in case of omitted filing of the tax return.
PwC observation:The changes provided by the 2016 Budget Law represent valid incentives to re-consider tax planning strategies. Foreign investors should carefully evaluate the potential tax benefits deriving from the enforcement of the new tax measures.
Franco BogaMilanT: +39 0291 605 400E: [email protected]
Alessandro Di StefanoMilanT: +39 0291 605 401E: [email protected]
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Korea
Korea Tax Law Changes for 2016
The Korean National Assembly has approved amendments to tax laws for 2016 which include some changes to the proposals announced in August 2015. Supporting details related to the tax law changes have also been released in amendments to relevant Enforcement Decrees. The main corporate tax law changes that may have impact on Korean inbound investors include:
• The introduction of a limit on the amount of carried forward net operating losses that can be offset against taxable profits. Companies will only be able to utilise carried forward net operating losses of up to 80% of their taxable profits each year. Prior to this amendment, net operating losses could be carried forward for 10 years and be used to offset against a company’s taxable profits without any limitation. Small and medium sized enterprises (SMEs) are exempt from the restriction.
• The introduction of new transfer pricing reporting requirements applicable to Korean corporations and foreign corporations with Korean permanent establishments (PEs) that have annual gross sales exceeding 100 billion South Korean won (KRW) and international related party transactions exceeding KRW 50 billion per year. Where these thresholds are exceeded, additional information relating to international related party transactions must be submitted to the authorities including a transfer pricing master file and local file by the corporate tax return filing deadline.
• New tax credits worth KRW 5 million (KRW 2 million for large corporations) for the increase in employment of young regular workers aged between 15 to 29 years old, subject to certain restrictions. The new tax credit is available for fiscal years that include December 31, 2015.
• Korean capital gains tax may be applicable when a foreign company disposes of shares held in a domestic company if the domestic company is regarded as being ‘property rich’, subject to the provisions of any applicable double tax treaty (DTT). For the purposes of testing whether a domestic company is property rich, the value of shares in property rich subsidiaries owned by the domestic company will now also be taken into account as real property when calculating whether greater than 50% of the company’s assets consist of real property.
PwC observation:The tax law changes overall are intended to help stimulate the Korean economy, but foreign invested companies could see their corporate income tax liabilities increase and face greater compliance obligations as a result of some of the changes. Foreign invested companies operating in Korea should, therefore, assess how they may be impacted by the law changes.
The new transfer pricing reporting requirements are intended to increase the transparency of related party transactions and are generally consistent with the recommendations made in the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) Action 13 on transfer pricing documentation. The Korean government will continue to review whether to make further changes to domestic tax law to implement other BEPS recommendations.
Most of the changes have effect for taxable years beginning on or after January 1, 2016. Some of the details regarding the laws are included in Enforcement Decrees that may be subject to minor modifications before being finalised towards the end of January 2016.
Henry AnSeoulT: +82 2 3781 2594E: [email protected]
Sang‑Do LeeSeoulT: +82 2 709 0288E: [email protected]
Robert BrowellSeoulT: +82 2 709 8896E: [email protected]
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Poland
Financial Institutions Tax (FIT) instead of Financial Transactions Tax (FTT)
On January 15, 2016, the Polish Parliament adopted the bill introducing a new tax on financial institutions (called also a bank levy). The bill was passed for signature of the President. It is expected that it will enter into force starting from February 1, 2016.
Generally, the tax will apply to banks, credit unions, lending institutions, as well as insurance/reinsurance companies. The new tax will apply also to Polish branches of foreign banks (credit institutions) and foreign insurance/reinsurance companies. The funds are out of scope.
In principle, taxpayers will be obligated to pay FIT on a monthly basis, not later than by 25th day of each calendar month for the preceding month. Certain entities will be exempt from FIT, e.g. national banks.
According to the new law, the tax base is defined as the surplus of total assets disclosed in the financial institution’s accounting books exceeding certain amount (e.g. above 4 billion Zloty [PLN] in case of banks) calculated at the end of each month. In the case of banks and credit unions, as a rule, the tax base will be decreased by the amount of their equity.
The tax rate will amount to 0.0366%.
PwC observation:FIT will constitute the additional cost for financial institutions and it cannot be deducted. According to the project, the new tax cannot be the reason for changing the terms of providing financial and insurance services (i.e. as a rule should not be passed on the consumers).
Please note that it is said that the new tax will enter into force instead of Financial Transactions Tax which the ruling party proposed before. We will monitor the legislative procedure.
Agata OktawiecWarsawT: +48 22 746 4864E: [email protected]
Weronika MissalaWarsawT: +48 502 18 4863E: [email protected]
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United States
President Obama signs tax extender, government funding legislation
President Obama late on December 18, 2015 (date of enactment) signed into law legislation (H.R. 2029) that includes a 680 billion dollars (USD) tax package and funds the federal government through September 30, 2016.
H.R. 2029 provides for retroactive, permanent extension of 22 provisions, including the research credit, the Subpart F exceptions for active financing income, and a number of other provisions for business and individual taxpayers. The legislation also renews for five years (2015 through 2019) look-through treatment of payments between related controlled foreign corporations (Controlled foreign company (CFC) look-through), ‘bonus’ depreciation (with a phase down), New Market Tax Credits, and the Work Opportunity Tax Credit.
PwC observation:House Speaker Paul Ryan (R-WI) said that the tax legislation “is one of the biggest steps toward a rewrite of our tax code that we’ve made in many years”.
Making permanent a substantial number of expired tax provisions in the extenders package will provide increased tax certainty for many businesses and individuals. At the same time, other provisions that were not made permanent in this legislation will face a more challenging environment to secure further extensions.
Congress is expected to review both permanent and temporary tax provisions in the future as part of comprehensive tax reform. The permanent extension of the research credit and 21 other temporary provisions is now part of the federal budget baseline, which could favourably impact future tax reform legislation required to be revenue neutral since such provisions no longer will have to be paid for.
Scott McCandlessWashington D.C.T: +1 202 312 7686E: [email protected]
Larry CampbellWashington D.C.T: +1 202 414 1477E: [email protected]
Andrew PriorWashington D.C.T: +1 202 414 4572E: [email protected]
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Proposed Tax Legislative ChangesCyprus
Intellectual Property (IP) Box alignment with the OECD’s BEPS Action 5 conclusions announced, with maximum transitional arrangements
The Cyprus Ministry of Finance (MoF) announced on December 30, 2015 that it will propose amendments to the current Cyprus intellectual property (IP) Box in order to introduce a new IP Box as from July 1, 2016 which will be fully aligned with the conclusions of the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) Action 5 conclusions.
Per the MoF announcement, Cyprus intends to provide from the maximum possible transitional arrangements. It is therefore expected that IP already benefitting from the current Cyprus IP Box by June 30, 2016 will continue to receive the current benefits for a further 5 years, i.e. until June 30, 2021. A much shorter transitional period to December 31, 2016, however, is expected in the case of IP which is acquired, directly or indirectly, from related parties at any time in the first six months of 2016, unless at the time of acquisition such IP was already benefitting from an IP Box.
The current Cyprus IP Box leads to a competitive effective corporate tax rate of 2.5% (or lower) for qualifying incomes earned on qualifying IP assets. Qualifying income currently includes royalties, gains on disposal of IP and IP infringement compensation. Qualifying assets are currently broadly defined and include, for example, copyrights (which may take any of the following forms: literary works, dramatic works, musical works, scientific works, artistic works, sound recordings, films, broadcasts, published editions, databases, publications, software programmes), patented inventions, trademarks (and service marks), as well as designs,
and models that are used or applied on products. A narrower range of IP assets will qualify under the new IP Box as compared to the current IP Box, expected to include patents and computer software.
Although not referred to in the MoF announcement, it is expected that the planned new Cyprus IP Box will retain the benefit of the competitive effective corporate tax rate of 2.5% (or lower) but only a portion of income may qualify. The qualifying portion of the income is expected to reflect the research and development (R&D) expenditure undertaken by the IP owner itself (or outsourced to unrelated parties) as compared to the total R&D expenditure required to develop the asset.
In line with BEPS Action 5 recommendations it is expected that Cyprus will spontaneously exchange information (under existing international agreements) on taxpayers who benefit from the transitional arrangements of the current IP Box if the IP entered the current IP Box in the period February 7, 2015 to June 30, 2016.
PwC observation:Given the political agreement at European Union (EU) level, this was an expected move by the Cyprus Authorities to amend the current IP Box to be in line with the OECD’s BEPS Action 5.
We welcome the Cyprus Authorities intention to provide for the maximum possible transitional arrangements (until June 30, 2021, the latest) so as to give taxpayers stability in the medium term.
Taxpayers should consider whether there is IP not currently benefitting from the current Cyprus IP Box which they wish to introduce by June 30, 2016 in order to take advantage of the transitional rules until June 30, 2021, should the IP be eligible.
We expect that in the coming months more detail will be announced by the Cyprus Authorities on the new Cyprus IP Box.
Marios AndreouNicosiaT: +357 22 555 266E: [email protected]
Stelios ViolarisNicosiaT: +357 22 555 300E: [email protected]
Joanne TheodoridesNicosiaT: +357 22 553 694E: [email protected]
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Hong Kong
Bill on corporate treasury centre and regulatory capital security
The Inland Revenue (Amendment) (No. 4) Bill 2015 (Bill) was gazetted on December 4, 2015.
The Bill contains draft legislation that implements the following proposed measures:
• To introduce a concessionary profits tax rate for qualifying corporate treasury centres (CTCs).
• To enhance the existing interest deduction rules for intra-group financing business carried on by corporations.
• To clarify the profits tax and stamp duty treatments in respect of regulatory capital securities issued by financial institutions in compliance with Basel III capital adequacy requirements.
The Bill has to be scrutinised and approved by the Legislative Council before being enacted into law. Once enacted, the provisions on the concessionary tax rate applicable to CTCs and the new interest expense deduction rules for intra-group financing business are expected to apply from April 1, 2016.
Hong Kong
Bill on implementing automatic exchange of information in Hong Kong
Further to Hong Kong’s commitment to adopt Common Reporting Standard (CRS) in September 2014, Inland Revenue (Amendment) Bill 2016 (Bill) was gazetted on January 8, 2016.
The Bill seeks to put in place a legal framework for Hong Kong to implement automatic exchange of information (AEoI) and commence the first information exchanges by the end of 2018. The key proposals in the Bill cover the following five areas:
• Scope of financial institutions (FIs), non-reporting FIs and excluded accounts.
• Due diligence and reporting requirements.• Scope of information to be furnished by FIs.• Scope of reportable jurisdictions. • Enforcement provisions – powers of the Hong Kong tax authority
and sanctions.
The Bill has to be scrutinised and approved by the Legislative Council before being enacted into law.
PwC observation:The Bill demonstrates the Hong Kong government’s intent to attract more foreign companies to set up their corporation treasury function in Hong Kong. However, the stringent conditions for the concessionary tax rate and the tax deduction for interest, the complicated and overstretching anti-avoidance provisions and other issues pertaining to the commercial operating needs of a group treasury centre, etc. may cast doubts on whether the proposed tax legislation in its current form is effective in achieving such goal.
Multinational corporations (MNCs) that would like to benefit from these tax incentives should review their current corporate treasury operation in light of the proposed tax legislation and consider if any restructuring of such operation is necessary or desirable in order to fit into the requirements of the draft law.
Fergus WT WongHong KongT: +852 2289 5818E: [email protected]
PwC observation:If enacted, the Bill would open a new chapter for the exchange of information (EoI) in Hong Kong. Under the proposed EoI regime, tax information can be exchanged with jurisdictions which have entered into either a double tax treaty (DTT) or a tax information exchange agreement (TIEA) as well as a Competent Authority Agreement on an annual basis. It is imperative that FIs analyse the CRS impact on their business and work towards implementing CRS-compliant processes and procedures.
Fergus WT WongHong KongT: +852 2289 5818E: [email protected]
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United Kingdom
The UK Finance Bill 2016 - draft anti-hybrid rules
Draft legislation for inclusion in the UK Finance Bill 2016 was published on December 9, 2015. The draft legislation includes anti-hybrid rules which closely follow the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) Action 2 recommendations. The anti-hybrid rules will apply to payments made on or after January 1, 2017 and there is no grandfathering of existing arrangements. The UK’s existing anti-arbitrage legislation will be repealed.
To assist with understanding of the application of these rules, HM Revenue & Customs (HMRC) published a series of draft examples on December 22, 2015. HMRC’s examples are based upon a selection of examples from the OECD’s BEPS Action 2 report, with some additional examples dealing with hybrid transfers. The examples are not exhaustive.
PwC observation:Since the Finance Bill is currently in draft, it is likely that amendments to the anti-hybrid provisions will be made in the coming months before their enactment. We will be looking to try and clarify certain aspects of the new rules with HMRC. HMRC will publish further guidance on the application of the anti-hybrid rules in 2016.
Neil EdwardsLondon, Embankment PlaceT: +44 20 7213 2201E: [email protected]
Jonathan HareLondon, Embankment PlaceT: +44 20 7804 6772E: [email protected]
Stephen E CruseLondon, Embankment PlaceT: +44 113 289 4674E: [email protected]
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Tax Administration and Case LawBelgium
Belgian Minister of Finance sheds light on implementation of BEPS related measures
The Belgian Minister of Finance (MoF) shared insights on how Belgium will be addressing the outcome of the Organisation for Economic Co-operation and Development (OECD)/G20 project in relation to Base Erosion and Profit Shifting (BEPS) via a ‘Plan Against Fiscal Fraud’. In this document, the Minister announced that Belgium is looking to the introduction of Country-by-Country (CbC) reporting legislation, new transfer pricing (TP) documentation and reporting requirements, increased and more targeted tax audits, investments in e-auditing and data-mining. Other measures intended to prevent tax abuse and to combat tax fraud are mentioned in the document as well.
A plea for coordinated actions in sync with global, OECD, and European Union (EU) initiatives -- as opposed to unilateral measures, is a recurring theme throughout the policy document.
With respect to TP regulation, the policy note from the Belgian (MoF) specifically states that (i) the OECD CbC reporting initiative is fully endorsed by Belgium and will be implemented into local legislation whereby the threshold of 750 million euros (EUR) consolidated turnover for completing and filing is expected to be maintained and (ii) the revised OECD TP guidelines (resulting from the final OECD report on BEPS Action Points 8, 9, and 10 and which are in the process of being drafted) will be used as the reference framework for the Belgian TP investigations and ruling/Advance Pricing Agreement (APA) practice.
In addition, the MoF is overall in support of the initiatives in respect of permanent establishments (PEs) and the other actions of the BEPS action plan.
PwC observation:Companies with activities in Belgium should start preparing themselves for multiple transparency and reporting requirements that will be introduced over the next few months. It is recommended to already start putting the necessary processes in place to collect and produce CbC data and test whether systems are adequately equipped to handle or automate CbC reporting. Given the increased scrutiny, priority actions for companies with activities in Belgium also should focus on verifying the consistency of their TP arrangements with actual conduct and analysing/documenting the tax treatment of business restructuring. In addition, it is recommended to review compliance with the framework proposed by the OECD for PEs and interest deduction rules.
Axel Smits Pascal JanssensBrussels AntwerpT: +32 3 2593120E: [email protected]
T: +32 3 2593119E: [email protected]
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Cyprus
Notional interest deduction (NID) interest rates for 2015 announced by tax authorities
During 2015 and with effect from January 1, 2015, Cyprus introduced a notional interest deduction (NID) on qualifying new equity for corporate income tax (CIT) purposes, with new equity being paid-up share capital or share premium introduced to a company as from January 1, 2015.
The NID is calculated as ‘the NID interest rate’ * ‘new equity’ and it is deductible in a similar manner as for actual interest expense, subject to a maximum cap which is 80% of the profits generated by the activities financed by the new equity.
The NID interest rate is as a minimum the yield on ten year Cyprus government bonds plus a 3% premium, as at December 31 of the prior tax year. The interest rate may be higher if the Cyprus company utilises the funds raised outside of Cyprus. In such a case, the yield on ten year government bonds in the country where the funds are utilised plus a 3% premium is applied, if higher.
On December 31, 2015 the Cyprus Tax Authorities (CTA) announced the applicable yield for 10 year Cyprus government bonds and for a number other selected countries for tax year 2015. Based on this announcement the NID interest rate for 2015 is as a minimum 8.037%.
PwC observation:This announcement by the CTA is a welcome clarification on the practical application of the recently introduced NID amendment.
A CTA circular providing more clarifications on the NID’s practical application is expected in the coming months.
Marios AndreouNicosiaT: +357 22 555 266E: [email protected]
Stelios ViolarisNicosiaT: +357 22 555 300E: [email protected]
Joanne TheodoridesNicosiaT: +357 22 553 694E: [email protected]
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United States
IRS Notice 2015-79 provides further inversion limitations
On November 19, 2015, the Treasury Department (Treasury) and the Internal Revenue Service (IRS) issued Notice 2015-79 (the Notice), which announces their intent to issue further regulations to limit cross-border merger transactions that the government characterises as ‘inversions’ and certain post-inversion transactions, expanding on guidance previously issued in Notice 2014-52. Except as otherwise stated, the Notice applies to transactions undertaken on or after November 19, 2015.
The Notice’s provisions are generally grouped into three categories. First, the Notice provides three new rules under Section 7874 designed to make it ‘more difficult for US companies to invert’. The guidance involves the following:
• Requiring that the ’substantial business activities’ test be satisfied only if the foreign acquiring corporation is tax resident in the applicable foreign jurisdiction.
• Limiting the ability of the new foreign parent of the combined group to be organised in a jurisdiction other than that in which the foreign target company was organised before the combination.
• Clarifying that the regulations under Treas. Reg. 1.7874-4T apply to any property (including active business assets) acquired with a principal purpose of avoiding the purposes of Section 7874, regardless of whether the transaction involves an indirect transfer of ’specified nonqualified property.’
PwC observation:The Notice represents the latest effort by Treasury and the IRS to hinder transactions that they view as corporate inversions and to reduce or eliminate any US tax benefit that might arise from certain transactions that taxpayers might consider undertaking after an inversion has occurred. While the proposed rules set forth in Section 2 of the Notice (Regulations to Address Transactions Contrary to the Purposes of Section 7874) may not have a significant impact on whether companies engage in these transactions (although they remove a certain degree of flexibility), the Notice further reflects the Administration’s stated views that certain acquisitions of US companies by foreign corporations should be curtailed now to prevent losses to the US tax base while talks regarding corporate tax reform continue. Although Treasury has publicly stated that legislative action is needed with respect to inversions, it continues to explore the scope of its administrative authority to address such transactions. In particular, in the Notice, Treasury and the IRS have reiterated that they are considering additional guidance to prevent the erosion of the US tax base by expatriated entities through, for example, intercompany debt. Whether and to what extent they currently have the authority to write such rules is the subject of some debate, and in that light, the absence of any such rules in the Notice may be seen as significant. Nevertheless, taxpayers should carefully consider the rules announced in the Notice to determine if they will be impacted, and keep an eye out for possibly more guidance to come.
Michael A DiFronzoWashington D.C.T: +1 202 312 7613E: [email protected]
Carl DubertWashington D.C.T: +1 202 414 1873E: [email protected]
Second, the Notice announces rules intended to “reduce the tax benefits of inversions”. These new rules would:
• expand the scope of ‘inversion gain’ to include certain income inclusions so that they cannot be offset by losses or other attributes, and
• require that all net unrealised built-in gain in controlled foreign company (CFC) stock be recognised, without regard to the amount of the CFC’s undistributed earnings and profits, if the transaction terminates the status of the foreign subsidiary as a CFC or substantially dilutes the interest of a US shareholder in the CFC.
Third, the Notice modifies certain rules announced last year in Notice 2014-52, including:
• Modifying the application of the foreign group nonqualified property rules under Notice 2014-52 to exclude (i) certain property that gives rise to income described in the PFIC insurance exception, and (ii) certain property held by domestic corporations engaged in the active conduct of an insurance, banking, or financing business.
• Providing a de minimis exception to the ’non-ordinary course distribution’ rules under Notice 2014-52.
• Clarifying that the rule set forth in Notice 2014-52 with respect to decontrolling or diluting an expatriated entity’s CFC in post-inversion transactions applies to the percentage of CFC stock (by value).
The foregoing modifications to Notice 2014-52 are generally taxpayer-friendly and address unintended consequences of Notice 2014-52. Significantly, the Notice does not include rules limiting deductions for cross-border payments made by inverted entities; however, the accompanying press release indicates that such rules could be issued in the ’coming months’.
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TreatiesBelarus
Double tax treaty with Georgia entered into force
As of November 24, 2015, double taxation treaty (DTT) between Belarus and Georgia came into force.
China
China and Zimbabwe signed a double taxation treaty (DTT)
On December 1, 2015, China signed a DTT with Zimbabwe, bringing the number of DTTs signed by China to 104. The DTT will enter into force upon completion of the ratification procedures by both sides. The important features of China-Zimbabwe DTT include:
• Withholding tax (WHT) rates on dividends, interest, and royalties paid to qualified beneficial owners (BO) are 2.5% / 7.5% (2.5% for corporate BO which holds directly or indirectly at least 25% shares of the company paying the dividends and 7.5% for all other cases), 7.5% and 7.5% respectively.
• There is a ‘principle purpose test (PPT)’ provision in each article of dividends, interest, and royalties stipulating that if the main purpose or one of the purposes to put in place the arrangement is to take advantage of the treaty benefit, the treaty benefit shall not be granted.
• Capital gains arising from the transfer of property-rich shares and shares that represent a participation of at least 50% in a company in the source state may be taxed in the source state. In other cases of share transfers, the taxing right lies with the residence state.
• The profit derived by an enterprise from the operation or rental of ships, boats, aircraft, rail, or road transport vehicles in international traffic and the rental of containers and related equipment which is incidental to the operation of international traffic shall all be taxable only in the contracting state where the place of effective management of the enterprise is located.
Eugenia ChetverikovaMinskT: +375 17 335 4000E: [email protected]
Matthew MuiChinaT: +86 (10) 6533 3028E: [email protected]
Dmitry TihnoMinskT: +375 17 335 4000E: [email protected]
PwC observation:Lower tax rates and/or tax exemption provided by respective DTT may be applied by residents of Belarus in relation to income derived from Georgia and vice versa by residents of Georgia in relation to income derived from Belarus.
PwC observation:Generally, the China-Zimbabwe DTT follows the trend of other new tax treaties concluded or re-negotiated by China in recent years. The DTT is generally more favourable to investors comparing with other China DTTs. The unusually low WHT rates on dividends, interest, and royalties would be welcomed by Chinese investors investing in Zimbabwe and vice versa. It is the fourteenth DTT signed by China with African jurisdictions, demonstrating China’s determination to promote the business cooperation with Africa.
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Antonis ChristodoulidesNicosiaT: +357 22 553 671E: [email protected]
Stelios ViolarisNicosiaT: +357 22 555 300E: [email protected]
Joanne TheodoridesNicosiaT: +357 22 553 694E: [email protected]
Cyprus
Double tax treaty between Cyprus and Switzerland effective January 1, 2016
The first Cyprus-Switzerland double tax treaty (DTT), signed in 2014, entered into force in October 2015 with its provisions taking effect as from January 1, 2016.
Under the treaty there is no withholding tax (WHT) on interest and royalties. There is also no WHT on dividends in those cases where the beneficial owner of the dividends is:
• a company (other than a partnership), the capital of which is wholly or partly divided into shares, holding directly at least 10% of the capital of the company paying the dividends for an uninterrupted period of at least one year (the time period criterion may be satisfied post the date of the dividend payment), or
• a pension fund or similar institution recognised as such for tax purposes, or
• the government, a political subdivision, local authority, or the central bank of one of the two Contracting States.
Per the treaty, a 15% WHT on dividends applies in all other cases. Irrespective of this, per the provisions of Cyprus’ domestic tax legislation, Cyprus does not apply WHT on dividend payments out of Cyprus at all times.
PwC observation:Cyprus is rapidly expanding its DTT network as indicated by this new very competitive treaty with Switzerland. The treaty should assist in trade and investment between the two countries.
Under the treaty, Cyprus retains the exclusive taxing rights on disposal of shares in Swiss companies except in certain cases when the disposed-of shares derive more than 50% of their value directly or indirectly from immovable property situated in Switzerland.
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Marios AndreouNicosiaT: +357 22 555 266E: [email protected]
Stelios ViolarisNicosiaT: +357 22 555 300E: [email protected]
Joanne TheodoridesNicosiaT: +357 22 553 694E: [email protected]
Cyprus
Protocol to Cyprus-South Africa treaty in force
The 2015 amending protocol to the Cyprus-South Africa double tax treaty (DTT) entered into force on September 18, 2015. Per the provisions of the protocol, it is effective retrospectively as from April 1, 2012.
The protocol revises the dividend article and in particular provides for the below withholding tax (WHT) rates on dividends:
• 5% of the gross amount of the dividends if the beneficial owner is a company which holds at least 10% of the capital of the company paying the dividends, or
• 10% in all other cases.
The protocol also modernises the provisions of the treaty relating to exchange of information (EoI) and amends the term ‘resident of a contracting state’ to align it with the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention.
PwC observation:The amendment in relation to dividends is only relevant for dividend payments from South Africa, as Cyprus does not apply WHT on dividend payments out of Cyprus at all times per its own domestic legislation. For dividend payments out of South Africa, taxpayers should assess the potential impact of these rules should they be enforced retroactively (given the effective date of application of the protocol is April 1, 2012).
The Cyprus-South Africa tax treaty remains competitive. The above WHT rates on dividends are competitive rates amongst South Africa’s tax treaty network and the treaty continues to provide for no WHT on interest and royalty payments at all times. Further, Cyprus retains the exclusive taxing right on disposals by Cyprus tax residents of shares in South African companies, including South African companies holding South Africa located immovable property.
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Hong Kong
Hong Kong-United Arab Emirates double tax treaty enters into force
The Hong Kong-United Arab Emirates (UAE) double tax treaty (DTT) entered into force on December 10, 2015. The DTT will take effect in Hong Kong from April 1, 2016.
Hong Kong
Tax information exchange agreements with four Nordic jurisdictions entered into force
The tax information exchange agreements (TIEAs) signed with four Nordic jurisdictions (i.e. Denmark, the Faroes, Iceland, and Norway) in August 2014 entered into force on December 4, 2015.
These TIEAs will become effective from year of assessment 2016/2017 in Hong Kong. For the other contracting jurisdictions, the TIEAs will take effect for exchange of information (EoI) in respect of (i) the taxable periods beginning on or after December 4, 2015 or (ii) where there is no taxable period, for all charges to tax arising on or after December 4, 2015.
PwC observation:Given that Hong Kong does not currently impose any withholding tax (WHT) on dividends and interest paid to non-residents and the WHT rate on royalties paid to non-residents under the Hong Kong domestic law (i.e. 4.95%) is lower than that specified in the Hong Kong-UAE DTT (i.e. 5%), the major benefits under the DTT for UAE resident companies investing in Hong Kong will be the potential tax exemption for (i) business profits derived from Hong Kong provided that there is no permanent establishment (PE) in Hong Kong and (ii) trading gains derived from Hong Kong from disposal of shares.
Fergus WT WongHong KongT: +852 2289 5818E: [email protected]
PwC observation:As the pressure for greater tax transparency continues to grow, it is expected that Hong Kong would continue to expand its TIEA network with those jurisdictions that are currently not prepared to sign a double tax treaty (DTT) with Hong Kong and move towards automatic EoI.
Fergus WT WongHong KongT: +852 2289 5818E: [email protected]
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Spain
Spain-Andorra DTT
The income and capital gains tax treaty between Spain and Andorra and protocol, signed on January 8, 2015, and published on December 7, 2015 by the Spanish government (Official Gazette No. 292) will enter into force on February 26, 2016 according to its provisions. The main highlights are:
• Source taxation of dividends shall not exceed 5% if its beneficial owner is a company (other than a partnership) that directly holds, at least, 10% of the capital of the paying company; a rate of 15% will apply in all other cases. In the case of dividends paid by a ‘SOCIMI’ (Spanish REIT) to an effective beneficiary resident of Andorra, the tax shall not exceed 15%. Branch remittance tax is limited to 5%.
• Interest and royalties may be taxed at source, but such taxation is capped at the rate of 5% in both cases, provided the effective beneficiary is a resident of the other contracting State. An exemption is introduced for interest paid to the government of the other contracting State (being its effective beneficiary) and interest payments made by the government of a contracting State.
• Capital gains arising from the alienation of (i) immovable property may be taxed in the State where the property is situated (ii) movable property of a permanent establishment (PE) or the sale of such PE may be taxed at source (iii) ships or aircrafts shall be taxable only in the country where the effective central management of the company is located (iv) shares or similar rights deriving more than 50% of their value, directly or indirectly, from immovable property may be taxed in the State where the property is located (gains from the alienation of listed shares in either
contracting State are excluded) (v) shares or similar rights that grant its owner the right to enjoy immovable property situated in a contracting State may be taxed in said State (this does not apply to gains obtained by the person with the right to enjoy immovable property under a time share agreement in case such enjoyment is 2 weeks per year or less), and (vi) shares or other rights representing a direct or indirect holding of at least 25% of the capital of the company resident in a contracting State may be taxed at source.
• Other highlights introduced by the new agreement are as follows: (i) the convention is in line with the Organisation for Economic Co-operation and Development (OECD) standards (ii) following Base Erosion and Profit Shifting (BEPS) (Action 6), the treaty includes in its preamble a clear statement saying that the contracting States do not intend to create opportunities for non-taxation or reduced taxation through tax evasion or avoidance, and (iii) the protocol clarifies that article 24 (exchange of information) will supersede the Spain–Andorra Tax Information Exchange Agreement (TIEA), signed on January 14, 2010, as of January 1, 2016.
PwC observation:The new Spain-Andorra double tax treaty (DTT) provides reduced source taxation for dividends, interest, and capital gains and is in line with the current OECD standards.
Ramón MulleratMadrid and BarcelonaT: +34 915 685 534E: [email protected]
Carlos ConchaMadrid T: +34 915 684 400E: [email protected]
Luis Antonio GonzálezMadridT: +34 915 685 528E: [email protected]
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