Corporate Tax 2020

International Comparative Legal Guides

Corporate Tax 2020

A practical cross-border insight to corporate tax law 16th Edition

Featuring contributions from:

Blackwood and Stone LP M&T Lawyers Slaughter and May Boga & Associates Maples Group SMPS Legal Braekhus Advokatfirma DA Marval, O’Farrell & Mairal Tirard, Naudin Buren N.V. Mul & Co Totalserve Management Limited Carey Nagashima Ohno & Tsunematsu Vivien Teu & Co LLP Eric Silwamba, Jalasi and Linyama Nithya Partners, Attorneys-at-Law Walder Wyss Ltd. Legal Practitioners Oppenhoff & Partner Waselius & Wist Gibson, Dunn & Crutcher LLP Pepeliaev Group Webber Wentzel Greenwoods & Herbert Smith Freehills Pirola Pennuto Zei e Associati Weil, Gotshal & Manges LLP GSK Stockmann Schindler Attorneys Wong & Partners KYRIAKIDES GEORGOPOULOS Law Firm Sele Frommelt & Partner Yaron-Eldar, Paller, Schwartz & Co. Lopes Muniz Advogados Attorneys at Law Ltd.

ICLG.com ISBN 978-1-83918-015-6 ISSN 1743-3371 Corporate Tax 2020

Published by 16th Edition glg global legal group 59 Tanner Street London SE1 3PL United Kingdom +44 207 367 0720 Contributing Editor: www.iclg.com William Watson

Group Publisher Slaughter and May Rory Smith Senior Editors Caroline Oakley Rachel Williams

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Disclaimer 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. Table of Contents

Expert Chapters

1 Fiscal State Aid: Is There Method in the Madness? William Watson, Slaughter and May 11 Taxing the Digital Economy Sandy Bhogal & Barbara Onuonga, Gibson, Dunn & Crutcher LLP

16 The Growing Influence of the EU in the Tax Affairs of Member States – A Legal Perspective Andrew Quinn & David Burke, Maples Group

Q&A Chapters

23 Albania 136 Japan Boga & Associates: Genc Boga & Alketa Uruçi Nagashima Ohno & Tsunematsu: Shigeki Minami 29 Argentina 145 Kosovo Marval, O’Farrell & Mairal: Walter C. Keiniger, Boga & Associates: Andi Pacani & Fitore Mekaj María Inés Brandt & María Soledad Gonzalez 150 Liechtenstein 36 Australia Sele Frommelt & Partner Attorneys at Law Ltd.: Greenwoods & Herbert Smith Freehills: Richard Hendriks & Heinz Frommelt Cameron Blackwood 157 Luxembourg 45 Austria GSK Stockmann: Mathilde Ostertag & Schindler Attorneys: Clemens Philipp Schindler & Katharina Schiffmann Martina Gatterer 54 Brazil 166 Malaysia Lopes Muniz Advogados: Maria Carolina Maldonado Wong & Partners: Yvonne Beh Mendonça Kraljevic & Camila de Arruda Camargo 172 Mexico 60 Chile SMPS Legal: Ana Paula Pardo Lelo de Larrea & Carey: Jessica Power & Ximena Silberman Alexis Michel 66 China 178 Netherlands M&T Lawyers: Libin Wu & Ting Yue Buren N.V.: Peter van Dijk & IJsbrand Uljée 71 Cyprus 184 Nigeria Totalserve Management Limited: Petros Rialas & Blackwood and Stone LP: Kelechi Ugbeva Marios Yenagrites 188 Norway Braekhus Advokatﬁrma DA: Toralv Follestad & 78 Finland Waselius & Wist: Niklas Thibblin & Mona Numminen Charlotte Holmedal Gjelstad Russia 84 France 194 Tirard, Naudin: Maryse Naudin Pepeliaev Group: Alexandra Shenderyuk & Andrey Tereschenko 92 Germany Oppenhoff & Partner: Dr. Gunnar Knorr & Marc Krischer 200 South Africa Webber Wentzel: Brian Dennehy & Lumen Moolman 97 Greece KYRIAKIDES GEORGOPOULOS Law Firm: Panagiotis Pothos 206 Sri Lanka & Emmanouela Kolovetsiou-Baliafa Nithya Partners, Attorneys-at-Law: Naomal Goonewardena & Savini Tissera 103 Hong Kong Vivien Teu & Co LLP: Vivien Teu & Kenneth Yim 212 Switzerland Walder Wyss Ltd.: Maurus Winzap & Janine Corti & 110 Indonesia Fabienne Limacher Mul & Co: Mulyono 220 United Kingdom 118 Ireland Slaughter and May: Zoe Andrews & William Watson Maples Group: Andrew Quinn & David Burke 229 USA 125 Israel Weil, Gotshal & Manges LLP: Joseph M. Pari, Yaron-Eldar, Paller, Schwartz & Co.: Tali Yaron-Eldar & Devon M. Bodoh & Lukas Kutilek Gilad Ben Ami Zambia 129 Italy 236 Pirola Pennuto Zei e Associati: Massimo Di Terlizzi & Eric Silwamba, Jalasi and Linyama Legal Practitioners: Andrea Savino Joseph Alexander Jalasi & Mailesi Undi ChapterXX 1 1

Fiscal State Aid: Is There Method in the Madness?

Slaughter and May William Watson

In my introductory chapters for the past couple of years (“Fiscal State Fiscal State Aid also presents new challenges for advisers. They Aid: the Kraken Wakes” and “Fiscal State Aid: Some limits Emerging at must have expertise in both big-ticket tax litigation and, of course, Last?”), I have focused on the alarming unpredictability for taxpayers in the principles of State Aid – usually the province of a competition and tax authorities alike of the fearsome weapon that is fiscal State lawyer. By contrast, detailed knowledge of the relevant domestic tax Aid. It has at times seemed uncontrollable, threatening to wreak system is rather less important. Thus, while Slaughter and May has havoc on well-established tax practices and principles. But with a lot acted for a global financial services company on a State Aid dispute of squinting it is perhaps possible to discern a thread of rationality before the High Court in the UK and assisted several UK groups at the heart of it and this year I should like to look anew at fiscal with applications to the General Court to annul the Commission’s State Aid with this in mind. decision regarding the UK’s CFC rules (discussed below), we are also Although the UK’s Brexiteers have shown no interest in the advising a multinational on a Commission investigation into alleged subject, this is one imposition that can definitely be sourced to the State Aid granted by the Luxembourg tax authority. EU, and specifically the European Commission. The prohibition on State Aid is contained in the main EU Treaty and is an understand- Convoluted cases but a discernible principle? able adjunct to the single market, designed to prevent Member States The next section of this article sets out the criteria for determining favouring domestic businesses (or inward/outward investment more the existence of fiscal State Aid and it will become apparent in generally). But in recent years the Commission has shown that legis- subsequent sections that in my view the practical application of lation and rulings in the tax sphere may be vulnerable in a way that those criteria is a matter of considerable obscurity. would once have been unimaginable. But I should disclose upfront the thread of rationality that I Nor in fact can Brexit be relied upon to provide an answer, even believe may run through the cases. The European courts would very for UK corporates, unless perhaps it is on “no deal” terms. The UK likely deny this but, as will be discussed below under the heading “A government has said that it will replicate the EU’s State Aid rules Proposed Rationale: Deliberate Market Distortion”, one way to after Brexit, with an independent decision-maker to ensure distinguish the cases is to ask whether the legislation was passed or compliance − though it would be a considerable constitutional the ruling made with an intent to distort competition. If it was, you novelty for any court or independent body to have a specific remit can expect the courts to strike it down. to strike down legislation, given the sovereignty of Parliament. Principles and Procedure The scourge of multinationals As I have noted in previous years, the Commission’s activism has led The EU does not have competence with regards to direct tax to criticism that its investigations have become a tax policy tool – matters; Member States are supposed to have full sovereignty over part of a coordinated EU wide response to perceived corporate tax the design of their direct taxation systems. However, it has long avoidance – and are straying a long way from the original purpose been recognised that the prohibition on State Aid could, in principle, of the Treaty prohibition. Indeed Margrethe Vestager, the energetic catch discriminatory tax measures and there were a few instances in EU Commissioner who is about to start her second five-year stint past years where particular legislative features fell foul of it. in charge of competition policy, can seem to be on something of a crusade against the tax (and other) practices of multinationals. A Article 107(1) TFEU statement she released in September 2019 following decisions of the General Court in Fiat and Starbucks began as follows: The prohibition was previously set out in Article 87 of the EC Treaty “All companies, big and small, should pay their fair share of tax. If Member and now appears in Article 107(1) of the Treaty on the Functioning States give certain multinational companies tax advantages not available to their of the European Union (“TFEU”). This is worded as follows: rivals, this harms fair competition in the EU. It deprives the public purse and “Save as otherwise provided in the Treaties, any aid granted by a Member EU taxpayers of much needed funds to fight climate change, to build infra- State or through State resources in any form whatsoever which distorts or structure, to invest in innovation.” threatens to distort competition by favouring certain undertakings or the There is a significant transatlantic dimension too: where the production of certain goods shall, in so far as it affects trade between Member Commission has targeted tax rulings, the taxpayers have as often as States, be incompatible with the internal market.” not been US groups. To American eyes this can look rather like a Cash subsidies are an obvious example, but aid can also involve tax grab by the EU and the issue even engaged the attention of the state foregoing revenue to which it would otherwise be entitled, President Trump, who dubbed Margrethe Vestager the “tax lady”. for example through tax exemptions and reliefs.

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Application to Tax The financial consequences of a negative Commission decision are potentially severe for the company said to have received the aid. Case law of the EU courts has broken down the Treaty rule into the Indeed, applying for annulment of a Commission decision does not following four elements: automatically release the relevant Member State from its obligation ■ Is an economic advantage provided to an undertaking? to implement the recovery order. This was shown most graphically ■ Is it provided by a Member State or financed through state in the Apple case: following a challenge made by the Commission in resources? 2016 to a tax ruling issued by Ireland many years earlier, and after ■ Is it “selective” in favour of a particular undertaking or category initially stiff resistance, Apple and Ireland were forced to accept that of undertakings or in favour of a particular category of goods? the alleged aid did indeed have to be repaid pending the eventual ■ Does it distort or threaten to distort competition and affect trade outcome of their appeals. Apple then paid €14.3bn into an escrow between Member States? account established by Ireland. The Apple case is discussed further A Member State’s tax practices can breach the State Aid regime in below, under “Rulings on Transfer Pricing”. two main ways: (a) through legislative measures that favour particular This example illustrates an unusual feature of State Aid challenges economic sectors, categories of undertakings or regions, thus more generally. The Member State in question will be the immediate constituting an “aid scheme”; or (b) in the form of discretionary tax target of the challenge and will in most cases lead the appeal. Yet if rulings that favour individual undertakings (“individual aid”). the appeal fails, the Member State will also be the immediate bene- In cases of alleged fiscal State Aid, the second and fourth elements ficiary as it will receive any payment then required from the relevant in the list above are usually uncontroversial. Legislative tax measures taxpayer(s). and tax rulings are, by definition, provided by the state or financed out of state resources (whether at national or local level); and if they are Tax Legislation as a Form of State Aid selective, they will necessarily strengthen the position of one category over another and are likely to have the potential to distort competition. As noted, investigations which concern legislative measures usually Thus, the focus is on “economic advantage” and “selectivity”. turn on whether the advantage granted by such legislation is More particularly, for cases involving discretionary rulings, the “selective” in favour of any sufficiently clear and definable category pertinent issue is often whether tax authorities have provided an of undertakings. individual undertaking with a benefit that diverges from the “normal” practice of the Member State, thereby providing an The Test “economic advantage”. In cases involving legislative measures such as tax reliefs, the measure clearly exists to convey some sort of In determining whether a particular legislative measure is “selective”, the economic advantage and the case typically turns on whether that Commission generally applies a three-step test (the “Selectivity Test”): advantage is “selective” in favour of any sufficiently clear and ■ First, it identifies the “system of reference” or “reference definable category of undertakings. framework”. This is the “normal” tax position in the relevant Member State. ■ Second, it determines whether the relevant measure “derogates” Clearance from the system of reference in favour of a certain category of Member States are meant to notify the Commission of any proposal undertakings or goods as compared to other undertakings or to grant aid that may be incompatible with EU State Aid rules and goods that are in a similar factual and legal situation. If a to wait for the Commission’s approval before putting any such derogation exists, the Commission will draw the conclusion that proposal into effect. the measure is prima facie selective. Notification triggers a preliminary investigation period during ■ Third, it determines whether the derogation is nevertheless which the Commission has two months to determine whether the justified by the nature or general scheme of the system of proposal constitutes State Aid, and if so, whether the aid is reference. Only objectives inherent to the tax system (such as nonetheless compatible with EU rules because its positive effects preventing fraud, tax evasion or double taxation) can be relied outweigh the distortion of competition. (In practice, it appears upon to justify a prima facie selective tax measure. Extrinsic unlikely that the Commission would find fiscal State Aid to be objectives (such as maintaining employment) cannot form a compatible.) If serious doubts remain as to the compatibility of the basis for possible justification. measure, the Commission must open an in-depth investigation. Competitive Tax Regimes Investigations, Decisions and Appeals The obvious target for a challenge based on fiscal State Aid is a tax If the Commission becomes aware of aid having been granted regime which encourages corporate taxpayers to establish themselves, without its prior approval, it will follow a similar investigation or to carry on some specified activity, in a particular EU jurisdiction. procedure and may issue a “negative decision” ordering the Member Many Member States have introduced such regimes over the years State to recover the unpaid amount, plus interest, from the bene- in the name of tax competition. ficiaries of the aid. State Aid can be recovered up to 10 years after it has been given and this clock can be “paused” by certain acts taken Belgium’s “excess profits” regime by the Commission, such as requests for information. Belgium is a notable example. It gave favourable treatment to “Belgian A negative decision can be appealed by the Member State to Coordination Centres” until a State Aid challenge forced it to scrap which it is addressed, or any interested person (such as a taxpayer in the regime. It then brought in the “notional interest deduction”, but receipt of the alleged aid), by application to the EU courts for that has been of limited value in an era of very low interest rates. “annulment”. An application can be made, for example, on grounds Belgium’s most recent invention is a replacement for the Coordination of error of law or manifest factual error, and will be considered by Centre concept in the form of a special exemption for “excess profits”. the General Court (the court of first instance) and/or the Court of This could be loosely described as a reverse transfer pricing rule: if a Justice (“CJEU”, the highest EU court). (Decisions of the General Belgian member of a multinational made more profit than it would have Court are denoted with the prefix “T-” and decisions of the CJEU done as a standalone company, the “excess” was exempt from Belgian are denoted with the prefix “C-”, with the suffix “P” if they are tax. appeals from the General Court.)

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In theory the idea was that a non-Belgian member of the relevant The CJEU overturned this decision and referred the cases back group, sitting at the other end of the transaction or transactions that to the General Court. In demonstrating the selectivity of a legislative gave rise to the supposed excess, would have made less profit than measure, it was not necessary for the Commission to identify a it should have done and would be taxed in its jurisdiction on an particular category of undertakings that exclusively benefited from equivalent amount. But there was no requirement for the group to that measure. The relevant measure was “selective” simply by virtue establish that this was in fact happening and doubtless in reality it of discriminating between undertakings which acquire 5% of a wasn’t. One might also assume that the method to be used to deter- foreign company and undertakings which acquire 5% of a Spanish mine the arm’s length pricing of the transactions was not calculated company. In other words, it was enough to show unjustified to maximise the hypothetical standalone profitability of the Belgian discrimination on the basis of different transactions. member of the group. Finally, the exemption could only be claimed The need for this creative approach to selectivity is a good illus- on the basis of a clearance from the Belgian fisc and, while this was tration of the difficulties caused by applying Article 107(1) in the tax not it seems an express requirement in the legislation, in practice sphere. It is reasonable to assume that the real offence was, as noted clearance was only given for newly established arrangements. above, that Spanish acquirers received what one might describe as an Thus the excess profits exemption could fairly be painted as a export subsidy: when considering the purchase of a foreign company regime designed to encourage multinationals to add a Belgian (or a stake in such a company), they could trump bidders from other member to the group and price intra-group transactions so as to countries because of the associated Spanish tax benefit. But it was maximise actual profit – and thus also the exempted profit – in that presumably felt that potential acquirers in different jurisdictions were company. In short, a thinly disguised competitive tax regime. not in a “similar legal and factual position”, which is a fundamental requirement for the second step in the Selectivity Test. Challenges from the Commission The Commission announced in January 2016 that it regarded the The General Court’s second attempt exemption as providing a selective tax advantage that amounted to At any rate the General Court took the hint and, in November 2018, unlawful State Aid, and told Belgium to recover the exempted tax reversed itself by upholding the Commission’s decisions in both from the groups concerned. Belgium effectively conceded defeat by cases. The General Court noted that, applying the CJEU’s judgment, introducing retrospective legislation aimed at doing just that. a measure may be selective even where the resulting difference in Despite this unpromising backdrop, the Commission decision was treatment “is based on the distinction between undertakings which successfully challenged by affected taxpayers. In February 2019, the choose to perform certain transactions and other undertakings General Court found that the Commission had erred in identifying which choose not to perform them”. Selectivity was not restricted Belgium’s “excess profit” system as an unlawful “aid scheme” merely to situations where there were distinctions between undertak- because the Belgian tax authorities maintained (and did in practice ings “from the perspective of their specific characteristics”. exercise) a margin of discretion over the operation of the system It has been observed that Santander and World Duty Free essentially and further “implementing measures” – the provision of clearance merged the Selectivity Test into one question: does the measure place and agreement as to the hypothetical standalone profit – were the recipient in a more favourable position than entities in a required before taxpayers could benefit from the regime. comparable factual and legal situation in light of the general goals However, that is not the end of the story. The General Court did of the reference system? This, in turn, raises another important not endorse the taxpayers’ arguments on the substantive issues and question: to what extent are different situations factually and legally the Commission has renewed the attack. In September 2019, it “comparable”? The question is not easily answered but on one point announced that it was opening in-depth investigations into the tax the Commission and the CJEU leave little room for doubt: this is rulings given to 39 multinational companies. Rather than char- always a matter for the EU rather than individual Member States. acterising the Belgium system as an aid scheme, the Commission is The CJEU judgment might also open up new possibilities for the now looking to assess the compatibility of each tax ruling on an Commission. Doubtless most tax systems include rules which tax individual basis. different activity differently. This is hardly an efficient way to proceed from anyone’s perspective, but the Commission can I think have high hopes of Sectoral Tax Regimes – Regulatory Capital ultimate success. This second category is not perhaps such an obvious target for the Santander/World Duty Free Commission, as it may not involve a Member State using tax incen- The CJEU has already shown that it does not like beneficial tax tives to attract business to its jurisdiction or give its existing businesses regimes which, while arguably open to any undertaking in the assistance in competing for foreign opportunities. Nonetheless, it is relevant jurisdiction, are available only if another party is or is not not difficult to see how rules which give beneficial tax treatment to a based in the same jurisdiction. This is clear from a long-running saga particular sector can fall foul of the Selectivity Test. involving some Spanish legislation. This particular story began in January 2018, when the Commission The CJEU delivered judgment in Santander (C-20/15 P) and World sent a letter to the Netherlands querying the special tax treatment of Duty Free (C-21/15 P) at the end of 2016. The cases concerned a “contingent convertibles” designed to constitute capital for regulatory tax provision which gave Spanish companies acquiring a purposes while preserving the issuer’s ability to deduct interest; these are shareholding of at least 5% of a non-Spanish company a tax often called “hybrid instruments” because they boost regulatory capital deduction for amortisation of goodwill. No such tax relief was but for tax purposes preserve their character as debt. The argument was available for a Spanish company acquiring a shareholding in a local that the special tax rule provided State Aid to Dutch banks and insurers, company (unless it also merged with that company, which in turn because ordinary corporates could not get the same treatment. required a controlling stake rather than a mere 5% holding). The challenge was not made public at the time. But it could be Although Spanish companies in the second camp may not have divined from the reaction of the Dutch government when, in late minded, acquisitive companies in other jurisdictions objected to what June 2018, it put forward a proposal to abolish deductibility on these they saw as an unfair advantage for Spanish acquirers. “AT1” instruments (issued by banks) and “RT1” instruments (issued The General Court had found that the tax relief was not selective, by insurers) with effect from 1 January 2019. Publication of the and not therefore State Aid, because it was not restricted to a 2019 Dutch Finance Bill three months later confirmed the proposal particular category of business or the production of any particular and made it clear that there would be no grandfathering for existing category of goods; rather, it was potentially available to all Spanish instruments. companies.

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This development has caused dismay in other Member States, An unhappy Advocate General such as the UK, which have similar rules. Banks and insurers would When Advocate General Wahl delivered his opinion in Heitkamp in no doubt say that if it were not for regulatory capital requirements December 2017, he agreed with much of what the General Court that do not apply to any other sector, they would issue normal debt had said. However, he disagreed with its identification of the system and so be entitled to the deductions anyway. Are they then in a of reference. “comparable legal and factual situation”? In the UK specifically, The AG began his discussion of this crucial issue with some banks may also feel aggrieved that they are taxed at a significantly entertainingly direct remarks. He observed that in cases such as higher rate than other businesses and deductibility for AT1 debt World Duty Free, the CJEU had said the reference system is the hardly compensates. common or “normal” tax regime applicable in the Member State Of course, the Dutch response is not the only possible one for concerned. However: “As a criterion of assessment that statement governments that do not want to litigate. Member States could take is remarkably unhelpful.” the view that – with interest deductibility now heavily constrained Mindful perhaps of lèse-majesté, the AG then made it clear that he by various BEPS-related rules anyway – the ability to issue hybrid didn’t blame the CJEU for failing to give useful guidance. When instruments carrying deductible interest could be extended to all considering positive benefits of the sort primarily targeted by the corporates. Indeed, the UK has in theory moved in that direction, State Aid regime (for example, a straight subsidy), it is usually easy introducing a new, non-specific, regime for “hybrid capital enough to identify the “normal situation”. That is not so in the tax instruments” with effect from April 2019. sphere and, according to the AG, even the Commission struggles to This replaces the more generous rules under the UK’s regulatory produce a coherent rationale; apparently “the Commission was capital securities regime, which was expressly available only to banks unable to explain on what basis it determines the reference system”. and insurers. However, the UK’s experience offers a cautionary tale. The AG did however detect in the case law a principle of sorts: In its eagerness to avoid openly discriminatory rules while seeking to “a broad approach is to be favoured in determining the reference ensure that in practice only banks and insurers use it, the UK might system”, indeed the approach should be one which “takes into find it has the worst of both worlds. The UK Revenue is tying itself account all relevant legislative provisions as a whole, or the broadest in knots in the attempt to explain how the new rules preserve possible reference point”; and in support of this he cited again the deductibility, while it is not inconceivable that – assuming State Aid CJEU’s judgment in World Duty Free, where “the relevant benchmark continues to be a relevant concept after Brexit – they could be found was not the rules governing investments abroad, but rather the to be de facto selective and for that reason unlawful. Spanish corporate tax system as a whole”. At any rate, it will be interesting to see whether the Commission Pursuing this approach, the AG concluded that the Commission persists with a challenge to the openly “selective” rules for regulatory and the General Court had been wrong to exclude the Carry capital previously operated in the Netherlands, the UK and indeed Forward Rule from the system of reference and once that error is many other Member States. rectified, the Restructuring Clause “becomes an intrinsic part of the reference system itself ” rather than “an obvious derogation from it” Standard Tax Rules – Commission Overreach? – it puts the taxpayer back in the position of being able to carry forward losses, notwithstanding the change in its ownership. Special tax regimes may be the obvious target but it has become clear that the Commission believes the State Aid principle has an even Confirmation from the CJEU broader remit in the tax sphere. Two recent German cases show just The CJEU endorsed the AG’s conclusion: the Commission and the how far this can go. General Court had erred in their analysis of selectivity by choosing the wrong system of reference. That system could not consist of Heitkamp “provisions that have been artificially taken from a broader legislative The first of these cases is Heitkamp (C 203/16 P, heard together with framework”. In focusing solely on the Forfeiture Rule as the an appeal on similar facts by a company called GFKL). It suggests that, reference system and excluding the Carry Forward Rule, “manifestly in the Commission’s view at least, State Aid has the potential to catch the General Court defined [the framework] too narrowly”. legislative measures that are commonplace in many Member States. It would be wrong, though, to give the impression that Heitkamp Heitkamp concerned a State Aid challenge to a provision of German contains nothing but good news. The Advocate General seemed law that is designed to support companies in financial difficulty. content that a strict approach should be taken to justification, the Losses incurred in previous tax years can be carried forward to future last step under the Selectivity Test; indeed he noted that “to my tax years (the “Carry Forward Rule”). To discourage loss-buying (the knowledge, the Court has yet to accept the reasons relied upon by purchasing of loss-making companies to access their historic losses), Member States under the third step of the assessment of selectivity”. German law also states that a lossmaking company will automatically forfeit its ability to carry forward fiscal losses if it is subject to a A-Brauerei significant change in control (the “Forfeiture Rule”). However, there However, the second German case in fact provides an example of is an exception to the Forfeiture Rule to permit the acquisition and exactly that: in A-Brauerei (Case C-374/17), the CJEU found that the rescue of companies in financial difficulty. Losses can be carried exemption under review was not “selective” because it was justified. forward in spite of a significant change of control if the company in question is in financial distress (the “Restructuring Clause”). Another disgruntled AG In applying the Selectivity Test, the General Court identified the Before discussing the outcome of the case, though, I should again Forfeiture Rule as the correct system of reference to the exclusion of like to look at the opinion of the Advocate General (on this occasion the Carry Forward Rule. It found that all companies which have Saugmandsgaard Øe) as this too showed real discontent with the undergone a change of control, whether in financial distress or not, operation of State Aid in the tax sphere; indeed, the AG questioned are in a comparable factual and legal situation, but that the whether the standard three-step Selectivity Test is in fact the right Restructuring Clause derogated from the system of reference in favour approach at all. only of those companies in financial distress. The General Court also A German court had requested a ruling on an exemption from confirmed that supporting companies in financial difficulty was not land transfer tax where the “transfer” occurs on the merger of the an objective intrinsic to the relevant tax system (it sought to achieve a “transferor” into the “transferee” and the two companies are part different policy objective from that of merely ensuring the coherence of the same group. The Commission argued that the “reference of the tax system) and therefore did not justify the derogation. system” is the German rule which, in principle, imposes a transfer

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tax on any transaction which results in a transfer of ownership of A Proposed Rationale: Deliberate Market Distortion German real estate. On that basis, the exemption is a derogation and, said the Commission, selectivity is established. The cumulative detail from these cases can be overwhelming. Certainly, some of the distinctions drawn by the Courts in applying “Reference framework” method or “general availability” test? the Selectivity Test – in particular, determining the “reference The notion that such an inoffensive exemption should constitute framework” – make the further reaches of scholastic philosophy unlawful State Aid is remarkable and the AG clearly had no look like models of clarity and consistency by comparison. sympathy whatsoever for the Commission’s conclusion. I draw three conclusions from this. Right at the start of his opinion, the AG makes the following First, what is now Article 107(1) TFEU was surely not drafted with claim: “the case-law of the Court on the issue of material selectivity tax in mind and it simply does not work very well in this context, where is characterised by the co-existence of two methods of analysis, in Member States commonly operate discriminatory rules that benefit particular in tax matters”. Those are, he says, the “reference particular undertakings through a transfer of state resources (or framework” method and what he calls “the traditional method of through the reduced extraction of resources from the undertakings). analysis … based on the general availability test”. The second, related, point picks up the observations of Advocate The crucial distinction is that under the latter, there is no General Saugmandsgaard Øe in A-Brauerei. The Commission is selectivity if any undertaking could avail itself of the relevant rule, much too enthusiastic in its application of the State Aid principle to subject to satisfying some basic criteria; putting this another way, a tax matters and the Courts do not provide a sufficient brake on that measure is only selective if the criteria “irrevocably exclude certain enthusiasm. But unless and until the CJEU develops a broader undertakings or the production of certain goods from the benefit concept of “justification”, this seems unlikely to change. of the advantage concerned”. By contrast, the AG believes that the The third conclusion is just a little more encouraging. Beneath all reference framework method “tends to turn the rules on State Aid the complexity – and, dare I say it, occasional casuistry – one can into a general discrimination test, covering any criterion of perhaps detect a central characteristic which distinguishes the cases discrimination” (his emphasis). the Commission has won from those it has lost. The feature I will not attempt here to determine the correctness or otherwise common to Heitkamp and A-Brauerei is that in neither case could of the AG’s assertions. They received no support when the case anyone seriously think the relevant rule was introduced for came before the CJEU and it is not clear that they are compatible competitive advantage, or to assist particular types of business. with the CJEU’s decision in World Duty Free. The Courts would not acknowledge that motive is relevant. However, his trenchant criticisms of the way in which State Aid Indeed, when World Duty Free returned to the General Court in principles are applied to tax legislation and rulings are certainly September 2018 this was expressly rejected (at paragraph 175); and noteworthy. The AG considers that the Commission’s efforts should of course if one looks at the wording of Article 107(1) the focus is be “refocused on the measures which are the most damaging to on effects, not intentions. But in the tax sphere it is simply too easy competition within the internal market, namely individual aid and to fall foul of the “objective” conditions. I would suggest, therefore, sectoral aid”; the Commission should not have “the power to that asking whether a particular rule (or ruling) was intended to ‘smooth out’ the national tax systems by requiring the removal of produce market distortions is as good a way as any of predicting the those differentiations legitimately established for social, economic, ultimate outcome. environmental or other reasons”. He also detects dissatisfaction in the opinions of other Advocates General, citing Advocate General UK CFC Exemption: Competitive Feature or Logical Result? Wahl’s – clearly correct − observations in Heitkamp to the effect that the identification of the reference framework is a major source of The UK also believes in competing on tax (though, like Ireland, legal uncertainty, as well as comments from Advocate General would say it achieves this primarily through a low tax rate). It Kokott in ANGED (2017). amended its most obviously alluring offering – its version of the “patent box” concept – in the face of a potential challenge. But it CJEU decision may not have anticipated the attack which is now causing I am sorry to report that the CJEU effectively ignored the AG’s criti- consternation for many UK multinationals. cisms when it delivered its judgment three months later (December In October 2017, the Commission announced that it was 2018). It stuck with the “reference framework” approach and agreed launching an in-depth investigation into certain aspects of the UK’s with the Commission that in this instance it was Germany’s regime regime for taxing controlled foreign companies (“CFCs”); a month for taxing the transfer of (German) real estate. It then noted that later it released its preliminary decision to the effect that the rules the merger exemption was a derogation from that regime and was are defective. available only where the two companies had for at least five years Some context will be helpful here. A little over 10 years ago, the prior to the merger been linked by a shareholding of 95% or more, UK moved from a system of taxing the worldwide profits of UK so it was well on the way to a finding of selectivity too. The Court companies to a “territorial” regime which can, in principle, exclude barely touched on the requirement for the potential to distort non-UK profits. Then in 2012/13 the CFC rules were completely competition and affect trade between Member States. overhauled, in a manner consistent with that fundamental switch; the Perhaps I should not complain too much, since the CJEU did at general idea is that profits earned by offshore subsidiaries should be least answer the plea I made at the end of last year’s article: as noted caught only if they have been, as the UK Revenue would put it, above, it finally decided a case on the basis of “justification” − the “artificially diverted” from the UK. The Commission began looking derogation was not in fact selective because it was justified. into the regime shortly after the overhaul, requesting information However, the justification was that land transfer tax can be from the UK on the reformed rules in April 2013. assumed to have been paid when the relevant group acquired the Non-trading (passive) income is of course a target for many CFC property, such that imposing a second charge on a merger of regimes because it can so easily be shifted from one jurisdiction to companies within the group would amount to double taxation. This another. The UK’s rules catch non-trading finance profits for this is hardly the expansion of the justification concept that I was calling reason; the relevant legislation is in Chapter 5 of Part 9A of the for, analogous to the CJEU’s belated discovery of the “balanced Taxation (International and Other Provisions) Act 2010 (“TIOPA”). allocation of taxing powers” as a check on its own activism in Chapter 5 captures relevant financing income of the CFC if, in applying the four freedoms to Member States’ tax legislation. particular, (i) it is funded from “UK connected capital”, or (ii) there are UK “significant people functions” involved in generating that

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income. However, if these threshold conditions are not triggered capital”, so long as there were no UK “significant people functions” (or are switched off – see immediately below), Chapter 5 is then involved in generating that income. In this scenario, the UK rule is subject to a number of exemptions that are set out in Chapter 9 of a justified proxy to avoid complex and disproportionately burden- Part 9A (the “finance exemptions”). some intra-group tracing exercises. However, where there were UK “significant people functions” Exemptions for “non-trading finance profits” involved in generating the relevant financing income of the CFC, the At the time of the Commission’s challenge, Chapter 9 operated by finance exemptions were not justified (and so constituted State Aid). (broadly) switching off the rules in Chapter 5 so long as the This was because, in the Commission’s view, the exercise required to requirements for the application of one of the finance exemptions assess the extent to which the financing income of a company derives were satisfied. from UK activities is not particularly burdensome or complex. The main finance exemptions themselves have not materially The Commission rejected the argument that the Chapter 9 exemp- changed since their introduction. Assuming that the threshold tions were necessary to safeguard freedom of establishment and conditions have indeed been switched off, Chapter 5 does not apply comply with the seminal Cadbury Schweppes judgment from 2006, on at all if the UK parent can show that the CFC is funded entirely the grounds that taxing a CFC’s profits attributable to UK “specific from an (external) issue of equity capital by the group or from people functions” followed established principles for profit profits generated by members of the group in the same jurisdiction attribution. The Commission decided that there had been no as the CFC (the “qualifying resources” exemption), or that the group infringement of the fundamental freedoms and rejected an argument does not have net interest expense in the UK (the “matched interest” based on legitimate expectation. exemption and together, the “full exemptions”). On the same assumption, in the event that neither of the full exemptions is avail- Freedom of establishment able, 75% of the CFC’s non-trading finance income is exempt so The CJEU has been very clear that companies can be set up in long as the group borrowers are themselves outside of the UK too particular European jurisdictions merely to take advantage of lower (the “partial exemption”). tax rates and in Cadbury Schweppes it held that CFC rules can only be The UK’s justification for the partial exemption is that UK justified to the extent that they target “wholly artificial arrangements” funding for a CFC is likely to be provided wholly in the form of that do not reflect economic reality. equity – a phenomenon sometimes called “fat capitalisation”, as it is By that measure, far from being too liberal as the State Aid the reverse of the more familiar “thin capitalisation” – whereas for challenge might suggest, the UK’s regime is (still) too restrictive. a UK multinational the typical mix of equity to debt would be in the (One might say this encapsulates a basic difference between State Aid region of 3:1. To give a simple illustration: UK parentco raises and the four freedoms: State Aid focuses on positive discrimination funding of 100, comprising 75 of equity and 25 of debt; parentco – the Commission is presumably saying that the specified non-trading puts the 100 into a CFC subsidiary as equity; and CFC then lends finance profits of CFCs are given favourable treatment and instead the 100 to a non-UK opco in the group. The idea is that there should always trigger a full CFC charge − whereas the freedoms focus should be a CFC charge to cancel out interest deductions on the 25 target negative discrimination, so UK multinationals would say that that is indirectly financing the opco’s non-UK activity. even taxing just 25% of relevant profits is a restriction on freedom of establishment.) This makes the State Aid/CFC issue unusually Are the exemptions selective? complex – and awkward for both taxpayers and the UK Revenue. As usual where legislation is under attack, selectivity is the critical issue. Pursuing the three-step Selectivity Test, the Commission took Appeal the view that (i) the relevant “reference system” here is the CFC The UK and 17 of the affected taxpayers have since lodged appeals regime (or possibly just “the specific provisions within the CFC with the General Court, so the saga will doubtless run on for several regime determining artificial diversion for (deemed) non-trading years to come; the lead appellants will be the UK, and (for rather finance profits” – a formulation that the UK would be happy with random reasons) ITV, the country’s leading independent broadcaster. if the Commission did not then exclude Chapter 9), (ii) the finance Meanwhile, the UK Revenue has put in train arrangements for the exemptions represent a derogation from them, and (iii) the recovery of the alleged aid from taxpayers which relied on Chapter derogation cannot be justified. 9 to switch off Chapter 5 for financing income the generation of It is true that Chapters 5 and 9 of Part 9A TIOPA protect only which involved UK significant people functions – that is, the route the UK tax base, leaving a UK-headed multinational free to use debt into the finance exemptions which is still subject to challenge from funding from subsidiaries in low-tax jurisdictions to finance non-UK the Commission. members of the group. However, the UK argues that this is a It is worth noting that the Finance Act 2019 has already repealed, natural concomitant of a territorial tax system which aims to tax with effect from 1 January 2019, this ability to disregard UK offshore profits only where they have been artificially diverted from significant people functions for the purposes of the finance exemp- the parent jurisdiction. Indeed, the UK would say – with some tions. A cynic might say this demonstrates somewhat less than justification – that the whole purpose of the two chapters taken complete confidence in the arguments the UK is making in its together is to identify non-trading finance profits of this kind. So appeal, though the UK could reasonably retort that the repeal was the reference system should be looked at more broadly, rather as the simply a pragmatic move which recognised the inherent uncertainty CJEU has done in the Heitkamp case: in principle, non-UK profits when litigating fiscal State Aid. are outside the UK tax net, Chapters 5 and 9 taken together set certain limits on the principle (to catch profits which as a matter of Deliberate Market Distortion? economic reality have been shifted out of the UK) but there is no The challenge to the UK’s CFC regime might be summarised in two “derogation” and therefore no selectivity. propositions. On the one hand, the UK’s fundamental defence has clear merit: the finance exemptions are indeed a natural concomitant Commission decision of a territorial regime. However, the judges might conclude that the The Commission published its final decision in April 2019. This exemptions were not entirely innocent and that they aimed to found that one of the two routes into the finance exemptions was persuade companies to become – or at least, to remain – parented in fact justified. There was no unlawful State Aid if the relevant in the UK. financing income of the CFC was funded from “UK connected

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If they do, my proposed rationale underlying fiscal State Aid applied the arm’s length principle when allocating profits to these would suggest that the case is likely to go against the UK. Only a Irish activities. very brave commentator would predict the Court’s reasoning, but it The General Court heard Apple’s case in September 2019 and might essentially say that even under a territorial regime, profit judgment is expected shortly. attributable to UK activity – albeit arising in a non-resident subsidiary (the “CFC”) − ought to be taxed in the UK. Fiat and Starbucks It is important to note that the application of the arm’s-length Tax Rulings as a Form of State Aid principle remains a national competency of Member States, and the Commission has acknowledged that Member States have a margin While the challenges to tax legislation are perhaps the most of appreciation in applying their transfer pricing regime. concerning, at least from a UK perspective, it is the Commission’s The significance of but also the limitation on that margin were pursuit of tax rulings given by Member State tax authorities that has brought into focus by two very recent decisions of the General captured the headlines. Court. Tax rulings are common practice throughout the EU. They are In Starbucks, the taxpayer was a Dutch member of the group which effectively comfort letters which give the requesting companies clarity bought and roasted coffee beans then supplied them (and other as to the calculation of their tax liabilities. Although not problematic consumables) to other EMEA members of the group. It paid a in themselves, tax rulings can constitute unlawful State Aid (in the deductible royalty to yet another group company and this was the form of “individual aid”) when they confer an economic advantage specific focus of the Commission’s challenge. An advance pricing and are not approved by the Commission prior to being issued. agreement (“APA”) had been concluded between the Dutch tax authorities and Starbucks that allowed Starbucks to calculate its pricing using The “Luxleaks” the “transactional net margin method” (“TNMM”). The Commission decided that the methodology proposed under the APA did not result Tax rulings granted to major multinationals have attracted consider- in a market-based outcome in line with the arm’s length principle. able public and political attention in recent years, especially against The General Court said that the Commission had to show the the backdrop of tight public budgets. The controversy was pricing was clearly out of kilter – taking account of the margin of amplified by the leaking, on 5 November 2014, of several hundred appreciation – and that it gave the taxpayer a selective advantage over tax rulings issued by the Luxembourg tax authorities in respect of other similarly placed companies. It held that, even though there over 300 companies. Since then the Commission has concluded were methodological errors in the APA, the Commission had failed several in-depth investigations, targeting, inter alia, tax rulings issued to demonstrate that the pricing method used resulted in Starbucks by Ireland (to Apple), the Netherlands (to Starbucks and IKEA) and gaining an economic advantage. This combination of the burden Luxembourg (to Fiat and Amazon). of proof and the margin of appreciation will obviously place a limit on the Commission’s ability to question transfer pricing rulings. Rulings on Transfer Pricing In contrast, in Fiat, the same pricing method was found to have granted the taxpayer an economic advantage. Transfer pricing has been the most common focus of these The taxpayer was a member of the group which provided intra- investigations. The Commission contends that the rulings in ques- group financial services. Fiat had allocated profits to the taxpayer tion allowed for intra-group pricing that departed from the through the TNMM in line with a tax ruling made by the conditions that would have prevailed between independent oper- Luxembourg fisc. ators; in other words, the pricing does not comply with the The General Court found that the Commission was correct in finding arm’s-length principle. that the TNMM approach approved in the ruling could not result in an arm’s length outcome. Applying the pricing method established a Apple taxable profit base for Fiat that was significantly lower than for The most eye-watering claim relates to Apple. In August 2016, the comparable companies in Luxembourg. As a result, the taxpayer gained Commission ordered Ireland to recover around €13bn, plus interest, a selective advantage through its application of the ruling. and fourteen months later the Commission referred Ireland to the The Commission may have won in Fiat in part because it is easier CJEU for failing to do so. As noted above, Ireland has now to find comparables for financing transactions than for other more collected €14.3bn from Apple which it is holding in an escrow bespoke commercial arrangements. The availability of such account pending the outcome of the appeal. comparables may have helped the General Court conclude that the Apple had used a variation of the “double Irish” tax structure, tax ruling fell outside the “margin of appreciation” of the relevant under which companies that were incorporated in Ireland but Member State. managed in the US could effectively be stateless for tax purposes. I imagine it may therefore point to the outcome of the McDonald’s Amazon investigation (see below) and argue that it too was doing no more National tax administrations have of course taken an interest in than taking advantage of a mismatch in national tax regimes. Apple multinationals’ cross-border pricing arrangements for many years, is also arguing that transfer pricing is simply not a relevant issue in and in this respect there is an intriguing angle to the Amazon case. its case; it says that the arm’s-length principle as developed by the The Commission told Luxembourg to reclaim €250m relating to OECD was not part of Irish law and therefore Ireland’s ruling could what it says was an unlawful tax ruling given in 2003 (then confirmed not have provided a selective advantage. in 2011) which concerned a royalty payable by a Luxembourg The Commission, of course, disagrees, arguing that transfer subsidiary; Amazon is appealing against this decision, seeking to have pricing is indeed in point and that the arm’s-length principle is it annulled on the basis of flawed selectivity analysis and citing the inherently part of Article 107(1) of the Treaty (the provision which principles of legal certainty and sound administration. sets out the prohibition on State Aid). And it contends that even if Meanwhile, the Internal Revenue Service launched a conventional the companies were not resident in Ireland and therefore could not inquiry into the US end of the same arrangements. The IRS claimed be taxed by Ireland on their global profits, non-resident companies more than four times as much as the Commission has said should were still subject to corporation tax on profits attributable to their be repaid by Amazon to Luxembourg. However, it lost both at first activities in Ireland. Apple’s Irish subsidiaries, it argued, had not instance and in a subsequent appeal decided in August 2019.

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One might say that in Starbucks too the more obvious target was challenge the relevant transactions under its general anti-abuse rule – the absence of US tax on the royalty, rather than the ability of the unabashed by the fact that, at the time, Luxembourg had only invoked Dutch company to obtain a deduction for paying it. But the Amazon its GAAR once in the 60 or more years since its introduction. case suggests that the US courts may be a rather tougher proposition Then, in June 2018, the Commission released its conclusion: the than their counterparts in Luxembourg. rulings artificially lowered ENGIE’s tax burden without valid justification, so Luxembourg must recover tax of €120m. Both Tax Mismatches Luxembourg and ENGIE have since lodged an action for annulment of the Commission’s decision with the General Court. Two other noteworthy investigations concern rulings given by the The McDonald’s and ENGIE investigations are a reminder that Luxembourg fisc to McDonald’s and ENGIE (previously GDF State Aid enquiries into tax rulings are not limited to transfer pricing. Suez). Each of them could be seen as an attempt by the Affected areas could include, for example, rulings on the Commission to broaden its attack on tax rulings, though one has qualification of hybrid entities (transparent or opaque), hybrid now been abandoned. instruments (debt or equity, as in ENGIE) and other perceived “mismatch” arrangements. Rulings are more likely to be challenged McDonald’s if they involve some sort of factual determination by the tax auth- The Commission opened a formal investigation in December 2015 orities and especially if they concern structures with potential for into two tax rulings given by Luxembourg to McDonald’s. It what the tax world now knows as “base erosion and profit shifting” considered that one of them constituted unlawful State Aid because (BEPS). it exempted the US branch of McDonald’s Luxembourg subsidiary from local tax under the US/Luxembourg double tax treaty, despite Adjustments to Interest Expense – Huhtamäki the relevant profits also being exempt from US tax under US law. The profits were derived from royalties paid by European franchisee The most recent front in the Commission’s campaign against restaurants to the Luxembourg subsidiary for the right to use the “competitive” tax rulings was opened in March 2019, with the McDonald’s brand and associated services and the profits were then commencement of an in-depth investigation into the tax treatment transferred internally to Luxco’s US branch. of Huhtamäki in Luxembourg. The target is another form of the However, in September 2018 the Commission announced that it interest imputation under attack in ENGIE, albeit one that did not would end the investigation. It accepted that the double non- generate a tax mismatch within the same jurisdiction. The relevant taxation resulted from a mismatch between the national laws of Luxembourg rule simply imputed interest expense on interest-free Luxembourg and the US, as applied by the Luxembourg/US tax debt. treaty; Luxembourg was not giving McDonald’s special treatment – The group lender to Huhtamäki was an Irish company and at the any company could have taken advantage of the tax treaty in the time Ireland did not have a standard transfer pricing regime, so the same way – and therefore there was no State Aid. (Returning for a lender did not pay tax on a deemed interest receipt to match the moment to my “market distortion” thesis, one might say that the deemed interest expense in Luxembourg. treaty was not seen as a problem because it was a tool to regulate The Commission is arguing that the unilateral downward adjust- cross-border taxation rather than to alter the behaviour of ment resulting from the deemed expense represents a derogation taxpayers.) from the principle of taxing all commercial profits of a company, A week later, in a wide-ranging speech on competition policy at adding that the arm’s-length principle is not sufficient justification Georgetown Law School in Washington D.C. (which I also quote for the derogation. The downward adjustment therefore constitutes from at the start of this article), Commissioner Vestager confirmed unlawful State Aid. the thinking. The Commission didn’t like the tax result, but couldn’t Luxembourg has responded by saying that the tax ruling is formally challenge it: “That doesn’t mean that nothing was wrong. But unobjectionable because the basis for imputing interest expense is competition enforcers can’t intervene just because something’s not right. We act rooted in transfer pricing principles that have been set out in the tax if – and only if – it turns out that a company or government has broken the legislation since 2015; in other words, there was no “individual aid”. rules.” And the pressure has not been in vain: Luxembourg has said It remains to be seen what final decision the Commission will reach. it will change underlying domestic law in a way that prevents a similar In any event, any potential impact and recovery of State Aid will be arrangement in future. limited to Huhtamäki only as this is a standalone case. Attacking the legislation itself as an “aid scheme” would require a new investigation ENGIE – the reverse, one might say, of what has happened in relation to Meanwhile, a dispute involving ENGIE (previously GDF Suez) Belgium’s “excess profits” regime. rumbles on. The Commission launched its investigation in September 2016, targeting tax rulings given by Luxembourg to Conclusion ENGIE in respect of certain intercompany zero-interest convertible loans. It claimed that the rulings treated the convertible loans incon- The application of the EU State Aid regime to tax rulings and legis- sistently, as both debt and equity, which gave rise to double lation continues to make waves. There are obvious, and in my view non-taxation and hence an economic advantage that was not avail- well-founded, objections to the way in which the prohibition on able to other groups subject to the same tax rules in Luxembourg. State Aid operates in the tax sphere. However, while several The rulings allowed the borrowers to make claim deductions for Advocates General have made clear their disquiet, there is little sign interest that accrued but was not paid, while the conversion feature that the General Court and CJEU are paying heed and no sign at all meant the lenders treated the loans as equity and (as in many other that the Commission will be deterred from what many see as a jurisdictions) equity returns were exempt from taxation under crusade to promote tax harmonisation. Luxembourg law. One key objection is that seeking retroactive recovery of unpaid The Commission has said that the Luxembourg tax authority taxes strikes a serious blow to the principle of certainty in law. This “failed to invoke established accounting principles”, though there is perhaps particularly acute in the case of the Commission’s seems to be little doubt that the accounting used by debtor and investigations into tax rulings. All of these commenced in the last creditor complied fully with the applicable principles; and it claimed six years, so it is unlikely that the risk of a State Aid challenge was that the fisc could be providing State Aid merely by failing to evaluated when relevant transactions were entered into.

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It also seems an inefficient use of the Commission’s resources to There is a policy question too. It is not clear why the Commission chase after individual aid cases; the Belgian “excess profits” saga is should be intervening in the allocation of multinationals’ profits between a prime example. countries when the countries themselves are not. For example, neither Challenges to tax legislation are bedevilled by another sort of Ireland nor the US welcomed the Apple investigation. The US govern- uncertainty. They revolve around the question of “selectivity” and, ment has made no secret of its opposition to the decision and, despite within that, the determination of the appropriate “reference the prospect of a €14bn windfall, Ireland has appealed. system”. It is hard to deny that the application of State Aid I will end by returning to my central thesis. The practical principles to taxation is generally fraught with difficulty and application of the State Aid concept in the tax arena is shrouded in uncertainty, given the inherent tendency of tax regimes to obscurity. Until the CJEU provides clearer judicial guidance, discriminate between different undertakings by reference to their examining cases through the lens of deliberate market distortion may location or activities and to finance this through state resources be as good a way as any of achieving some semblance of rationality (collecting less tax in specified circumstances). and predictability.

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William Watson joined Slaughter and May in 1994 and became a partner in the Tax Department in 2004. His practice covers all UK taxes relevant to corporate and financing transactions. Particular areas of interest include real estate and the oil & gas sector; however, William also has extensive experience more generally of mergers & acquisitions, demergers and other corporate structuring, debt and equity financing and tax litigation. William is listed as a leading individual in the Tax section of Chambers UK, 2018 and Chambers Europe and Chambers Global, 2018. He is also listed in the International Tax Review’s Tax Controversy Leaders Guide, 2018 and in Who’s Who Legal, 2018 and is recommended for both Corporate Tax and Tax Litigation & Investigations in The Legal 500, 2018.

Slaughter and May Tel: +44 20 7090 5052 One Bunhill Row Email: [email protected] London URL: www.slaughterandmay.com EC1Y 8YY United Kingdom

extensive ‘best friends’ network of prominent firms. Particular strength in ■ structuring of the biggest and most complicated mergers & acquisitions and corporate finance transactions; structuring and the establishment of joint ventures. Provides sophisticated expertise on high-profile M&A and financing transactions. Client roster ■ development of innovative and tax-efficient structures for the full range of includes leading multinational companies from a variety of sectors including financing transactions, working with lawyers from our Financing group; telecoms, retail and life sciences, as well as private equity houses.” – ■ documentation to implement transactions, to ensure that it meets tax Chambers Europe, 2019 objectives; “Their knowledge, client service, responses and ability to cut through complex ■ tax aspects of private equity transactions and investment funds from issues are outstanding” – Chambers Europe and Global, 2019 initial investment to exit; and Winners of the Best Corporate Tax Practice award at Tolley’s Taxation Awards ■ tax investigations and disputes from initial queries to litigation or 2018. settlement. *The Best Friends Tax Network comprises BonelliErede (Italy), Bredin Prat We also provide a general tax and stand-alone tax consultancy service which (France), De Brauw Blackstone Westbroek (the Netherlands), Hengeler Mueller aims to offer constructive and innovative tax solutions. Much of our work has (Germany), Slaughter and May (UK) and Uría Menéndez (Spain and Portugal). an international dimension and we work closely with members of the Best www.slaughterandmay.com Friends Tax Network* and other leading local tax advisers to enable our clients to meet their objectives in the most positive and tax efficient way. “Slaughter and May’s ‘high quality’ team provides ‘very commercial’ advice to clients on the taxation aspects of large corporate and fund-related transactions. The firm also has a well-developed tax advisory practice which draws on the ‘excellent technical and practical knowledge’ within the group.” – The Legal 500, 2019

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Taxing the Digital Economy Sandy Bhogal

Gibson, Dunn & Crutcher LLP Barbara Onuonga

Introduction activities. However, the EU Economic and Financial Affairs Council failed to reach consensus on a way forward on an EU digital services As part of the OECD/G20 BEPS project, and in the context of tax. It is unlikely that there will be an agreed approach in the EU Action 1, the Task Force on the Digital Economy considered the tax until at least 2020, but the new European Commission President, challenges raised by the digital economy. The 2015 Action 1 BEPS Ursula von der Leyen, published a manifesto which stated that final report (the “2015 Report”) and the 2018 Action 1 BEPS taxation of big technology companies is a priority, and that the EU interim report (together, with the 2015 Report, the “Action 1 BEPS should act alone if no global solution is reached by 2020. Reports”) noted that highly digitalised business models are char- Various jurisdictions have also been implementing unilateral national acterised by an unparalleled reliance on intangibles, along with the measures relating to the tax challenges arising from the digitalisation of importance of data, user participation and their synergies with the economy. As examples, French senators have recently approved a intangible assets. temporary digital services tax, and the UK digital services tax will take Following the publication of the Action 1 BEPS reports, the effect from April 2020. These measures are outlined below. potential tax challenges were debated – particularly in relation to the remaining BEPS risks and the question of how taxing rights on The Programme Report – Digitalisation of the income generated from cross-border activities in the digital age Economy, not the Digital Economy should be allocated among jurisdictions. No consensus was reached regarding how to address these issues but there was a commitment One of the findings of the Action 1 BEPS Reports was that the to deliver a final report in 2020, aimed at providing a consensus- whole economy was digitalising and, as a result, it would be difficult, based, long-term solution. if not impossible, to ring-fence the digital economy. The Programme Further to the analysis included in the Action 1 BEPS Reports, Report may therefore impact multinational organisations which members of the OECD/G20 Inclusive Framework on BEPS (the would not be immediately categorised as “digital businesses”. “Inclusive Framework”) suggested that a consensus-based solution The Programme Report focuses on two pillars, namely: to the taxation of the digital economy should be focused on the: (i) 1. Pillar One – Allocation of taxing rights: This pillar details the allocation of taxing rights by modifying the rules on profit allocation different technical issues that need to be resolved to undertake and nexus; and (ii) unresolved BEPS issues. On 31 May 2019, the a coherent and concurrent revision of the profit allocation, and OECD published a consensus document entitled “Programme of nexus rules are detailed. Work to Develop a Consensus Solution to the Tax Challenges Arising from the 2. Pillar Two – Remaining BEPS issues: This pillar describes the work Digitalisation of the Economy” (the “Programme Report”). The to be undertaken in the development of a global anti-base Programme Report emphasises that the way multinational corpor- erosion (“GloBE”) proposal that would, through changes to ations are taxed will need to be reshaped in order to effectively deal domestic law and tax treaties, provide jurisdictions with a right with the tax challenges arising from digitalisation. The aim is still to “tax back” where other jurisdictions have not exercised their that a global, consensus-based solution will be agreed by the end of primary taxing rights or the payment is otherwise subject to low 2020. The proposals outlined in the Programme Report are levels of effective taxation. summarised below. The Programme Report also discusses the work to be undertaken in Aside from the proposals in the Programme Report, the other connection with an impact assessment and economic analysis of the BEPS Actions also have a significant impact on the taxation of a above proposals. digitalised economy. The most relevant BEPS direct tax measures for digitalised businesses include amendments to the permanent Pillar One – Allocation of Taxing Rights establishment definition in Article 5 of the OECD Model Tax Convention (Action 7), revisions to the OECD Transfer Pricing The Programme Report considers the objective and scope of the Guidelines related to Article 9 of the OECD Model Tax Convention reallocation of taxing rights across jurisdictions – i.e. the “new taxing (Actions 8–10), and guidance based on best practices for jurisdictions right”. The technical issues identified in relation to the new taxing intending to limit BEPS through controlled foreign company rules right are as follows: (Action 3). These topics are also explored in more detail below. a) different approaches to determine the amount of profits subject The EU has also made efforts to find a solution to the tax to the new taxing right and the allocation of those profits among challenges arising from digitalisation. In March 2018, the European the relevant jurisdictions; Commission published two proposals to address such challenges. b) the design of a new nexus rule that would capture a novel The first was based on a long-term solution that proposed to tax a concept of business presence in a market jurisdiction reflecting digital permanent establishment, while the second was a short-term the transformation of the economy, and not constrained by a proposal that would apply to revenues created from specific digital physical presence requirement; and

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c) different instruments to ensure full implementation and efficient commissionaire arrangements. The result was a shift of profits out administration of the new taxing right, including the effective of a certain jurisdiction but without a substantive change in the elimination of double taxation and resolution of tax disputes. functions performed there. Other structures more specific to highly digitalised businesses, such as the online provision of advertising Pillar Two – Remaining BEPS issues services, involved contracts substantially negotiated in a market jurisdiction through a local subsidiary, but not formally concluded The Programme Report recognises that the measures set out in the in that jurisdiction. Instead, an automated system managed overseas BEPS package (explored in further detail below) have sought to align by the parent company could be responsible for the finalisation of taxation with value creation. However, it was also noted that certain these contracts. Such arrangements allowed a business to avoid a members of the Inclusive Framework consider that such measures dependent agent permanent establishment under Article 5(5). do not yet provide a comprehensive solution to the risk that Where the recommendations of Action 7 are implemented, these continues to arise from structures that shift profit to entities subject structures and arrangements would result in a permanent establish- to no or very low taxation. ment for the foreign parent company if the local sales force The proposal outlined in Pillar Two seeks to address these habitually plays the principal role leading to the conclusion of remaining BEPS challenges through the development of two inter- contracts in the name of the parent company (or for the transfer of related rules: property or provision of services by the parent company), and these a) an income inclusion rule that would tax the income of a foreign contracts are routinely concluded without material modification by branch or a controlled entity if that income was subject to tax the parent company. at an effective rate that is below a minimum rate; and Action 7 also recommended an update of the specific activity b) a tax on base eroding payments that would operate by way of a exemptions found in Article 5(4) of the OECD Model, according denial of a deduction or imposition of source-based taxation to which a permanent establishment is deemed not to exist where a (including withholding tax), together with any necessary changes place of business is used solely for activities that are listed in that to double tax treaties, for certain payments unless that payment paragraph (e.g. the use of facilities solely for the purpose of storage, was subject to tax at or above a minimum rate. display or delivery of goods, or for collecting information). The proposed amendment prevents the automatic application of these Relevant Measures of the BEPS Package exemptions by restricting their application to activities of a “preparatory or auxiliary” character. This change is particularly relevant for Permanent Establishments (Action 7) some digitalised activities, such as those involved in business-to- consumer online transactions and where certain local warehousing The possibility to reach and interact with customers remotely activities, previously considered to be merely preparatory or auxiliary through the internet, together with the automation of some business in nature, may in fact be core business activities. Under the revised functions, have significantly reduced the need for local infrastructure language of Article 5(4), these types of local warehousing activities and personnel to perform sales and other activities in a specific carried out by a non-resident no longer benefit from the specific jurisdiction. The same factors potentially create an incentive for activity exemptions usually found in the permanent establishment multinationals to remotely serve customers in multiple market definition if they are not preparatory and auxiliary in nature. jurisdictions from a single, centralised hub. These structures can present some BEPS concerns. This is the case Transfer Pricing (Actions 8–10) when the functions allocated to the staff of the local subsidiary under contractual arrangements (e.g. technical support, marketing and Business models where intangible assets are central to the firm’s promotion) do not correspond to the substantive functions performed. profitability, such as those of highly digitalised businesses, have in For example, the staff of the local subsidiary may carry out substantial some cases involved the transfer of intangible assets or their negotiation with customers effectively leading to the conclusion of associated rights to entities in low-tax jurisdictions that may have sales. Provided the local subsidiary is not formally involved in the sales lacked the capacity to control the assets or the associated risks. To of the particular products or services of the multinational group, these benefit from a lower effective tax rate at the group level, affiliates in trade structures can avoid the constitution of a dependent-agent low-tax jurisdictions have an incentive to undervalue the intangibles permanent establishment in the market jurisdiction. (or other hard-to-value income-producing assets) transferred to them. In response to these BEPS risks, Action 7 resulted in the At the same time, they could claim to be entitled to a large share of amendment of key provisions of Article 5 of the OECD Model Tax the multinational group’s income on the basis of their legal ownership Convention and its Commentary. The changes aim to prevent the of the intangibles, as well as on the basis of the risks assumed and artificial avoidance of permanent establishment status – which is the the financing provided (i.e., cash boxes). In contrast, affiliates oper- main treaty threshold below which the market jurisdiction is not ating in high-tax jurisdictions could be contractually stripped of risk, entitled to tax the business income of a non-resident. In addition, and avoid claiming ownership of other valuable assets. the 2015 Report noted that these changes could help mitigate some Actions 8–10 of the BEPS Action Plan developed guidance to aspects of the broader direct tax challenges regarding nexus, if minimise the instances in which BEPS would occur as a result of widely implemented. These expectations were primarily relevant for these structures. In particular, the guidance seeks to address the situations where businesses have some degree of physical presence prevention of BEPS by moving intangibles among group members in a market (e.g. to ensure that core resources are placed as close as (Action 8), the allocation of risks or excessive capital among possible to customers) but would otherwise avoid the permanent members of a multinational group (Action 9) and transactions which establishment threshold. would not occur between third parties (Action 10). More specifically, Action 7 provided for the amendment of the The guidance developed under BEPS Actions 8–10 was incorpor- dependent agent permanent establishment definition through ated into the OECD Transfer Pricing Guidelines in 2016 to ensure changes to Articles 5(5) and 5(6) of the OECD Model Tax that transfer pricing outcomes are aligned with value creation. While Convention. The amendments address the artificial use of commis- the Transfer Pricing Guidelines play a major role in shaping the sionaire structures and offshore rubber-stamping arrangements. transfer pricing systems of OECD and many non-OECD Some structures common to all sectors of the economy involved jurisdictions, the effective implementation of these changes depends replacing local subsidiaries traditionally acting as distributors with on the domestic legislation and/or published administrative practices of the relevant countries.

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Controlled Foreign Company Rules (Action 3) Additionally, there is a safe harbour provision for low-margin and loss-making businesses, which allows for a reduced rate of tax to be The 2015 BEPS Report on Action 3 provided recommendations in paid. The thresholds are based on an expectation that the value the form of six building blocks, including a definition of Controlled derived from users will be more material for large digital businesses, Foreign Company (“CFC”) income which sets out a non-exhaustive which have established a significant UK user base, and generate list of approaches or combination of approaches on which CFC substantial revenues from that user base. In addition, the thresholds rules could be based. Specific consideration is given to a number of are intended to ensure that the DST does not place unreasonable measures that would target income typically earned in the digital burdens on small businesses. economy, such as income from intangible property and income An important factor in the implementation of the DST is the earned from the remote sale of digital goods and services to which associated EU state aid implications. Whilst the UK is preparing to leave the CFC has added little or no value. These approaches include the EU, it is reasonable to assume that EU state aid rules will form part categorical, substance and excess profits analyses that could be of any agreement between the UK and the EU on their future relation- applied on their own or in combination with each other. With these ship. The settled case-law of the Court of Justice of the European approaches to CFC rules, mobile income typically earned by highly Union provides that, for a national measure to be classified as state aid, digitalised businesses would be subject to taxes in the jurisdiction of the measure must confer an economic advantage on companies which the ultimate parent company. This would counter offshore is: (i) not received under normal market conditions; (ii) selective; (iii) structures that result in exemption from taxation, or indefinite granted by the State or through State resources; and (iv) liable to distort deferral of taxation in the residence jurisdiction. competition and affect trade between Member States. The main question arising in respect of EU state aid tax cases is Domestic Responses the existence of selectivity. The DST would be selective on the basis that there may be a derogation from the “reference framework” UK Digital Services Tax which the DST is targeting (i.e. the group of entities which carry out in-scope business activities). The high financial thresholds antici- The UK will introduce a digital services tax (“DST”) from 1 April pated for the DST (of £500 million of global annual revenues from 2020 as a temporary response to the tax challenges arising from in-scope business activities, of which at least £25 million is generated digitalisation, with a proposed 2% tax on UK revenues (not profits) in the UK) may constitute a derogation. Any derogation from the on specific digital businesses. Draft legislation of the DST has been “reference framework” must be justified by the nature and logic of included in the Finance Bill 2019–2020. It has been suggested that the national tax system. Based on the Commission’s decision- the DST will be repealed when a universal consensual approach is making practice to date, this is usually only the case if the tax paid reached. There is no specific legislative obligation mandating such is somehow paid to the authorities in a different context. repeal, but the UK Government has committed to review the DST However, a recent legal opinion by Advocat General Kokott in before the end of 2025. case C–75/18 (Vodafone Magyarország Mobil Távközlési Zrt) concluded The DST will be levied on “in-scope activities”, namely: (a) social that a special progressive telecommunications tax imposed between media platforms, i.e. targeting revenues from businesses that monetise 2010 and 2012 in Hungary did not discriminate against foreign- users’ engagement with the platform; (b) search engines, i.e. targeting owned telecoms companies, nor did it amount to illegal state aid platforms that generate revenue by monetising users’ engagement under EU rules. Advocat General Kokott reiterated that the with the platform and with other closely integrated functions; and (c) European Court of Justice has consistently held that “state aid” online marketplaces, i.e. targeting businesses which generate revenue within the meaning of Article 107(1) of the Treaty on the by using an online marketplace platform to allow users to advertise, Functioning of the EU requires that a selective advantage must be list or sell goods and services on such platform. Certain businesses conferred upon the recipient. The opinion concluded that in are specifically excluded from the definition of in-scope activities, relation to the special telecommunications tax, the different taxation including the provision of financial or payment services, the sale of arising from a progressive rate did not constitute a selective own goods online and the provision of online content. advantage for lower-turnover undertakings (and therefore did not The DST focuses on the participation and engagement of users constitute state aid); nor can a higher-turnover undertaking rely on as an important aspect of value creation for digital business models. it in order to evade its own tax liability. A key issue of the proposed approach will be how to determine In relation to the UK DST, it is unlikely that the beneficiaries (i.e. user-created value and attribute profits to user participation. The the businesses that do not meet the DST thresholds) will pay an attribution of profits will be difficult to calculate and further amount corresponding to DST in some other way to the UK tax guidance will be required on the mechanical rules of apportionment. authorities. It would follow that this derogation cannot be justified, In addition, it will be challenging to allocate profits between the UK but the opinion in Vodafone Magyarország Mobil Távközlési Zrt demon- and different jurisdictions, particularly as international rules develop strates that the EU state aid implications of taxes such as the DST in relation to the taxation of digital services. are still evolving. The DST is designed to ensure digital businesses pay tax reflecting the value they derive from the participation of UK users. User participation UK Diverted Proﬁts Tax and Offshore Receipts in Respect of refers to the process by which users create value for certain types of Intangible Property digital businesses through their engagement and participation. The definition of “UK user” in the draft legislation is broad and provides The UK has also introduced other unilateral legislative tax measures that a UK user means “any person who it is reasonable to assume – (a) in to address the tax and BEPS challenges arising from the digital the case of an individual, is normally in the United Kingdom, (b) in any other economy, namely the Diverted Profits Tax and the Offshore case, is established in the United Kingdom”. As digital business models Receipts in respect of Intangible Property rules. develop, it is expected that the range of businesses affected by the The diverted profits tax (“DPT”) was introduced under the user participation concept will expand. Finance Act 2015 in response to the BEPS project to prevent the High financial thresholds are proposed for the DST. The DST erosion of the UK tax base. It is intended to counter aggressive tax will only be payable by businesses whose global revenues from the planning by international companies that were diverting profits from in-scope activities are at least £500 million. Tax will not be levied the United Kingdom to reduce their UK corporation tax liability. on the first £25 million of revenue from in-scope business activities The DPT rate is a punitive 25% in most cases, although higher rates linked to the participation of UK users. can apply to specific industries.

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The recent “offshore receipts in respect of intangible property” ■ The base erosion anti-abuse tax (“BEAT”), which is essentially (“ORIP”) rules took effect from 6 April 2019. A charge to tax a corporate minimum tax arising from so-called “base erosion” applies to “UK-derived amounts” if, at any time in the tax year, a payments. person is not resident in the UK or a full treaty territory, and such ■ The global intangible low-taxed income (“GILTI”) regime, UK-derived amounts arise to them. Subject to some exemptions, whereby a 10% or more US corporate shareholder of a CFC income tax is chargeable on the full quantum of the UK-derived must include the relevant share of net income of that foreign amounts arising in the tax year. The person liable for the tax charge company in its gross income. Such net income is an amount is the person receiving, or entitled to receive, the UK-derived above a deemed fixed return to that foreign company on its amounts. The new rules are designed so that a charge to UK income tangible assets (subject to certain exceptions). tax will arise to a foreign entity where UK sales supported by ■ The foreign-derived intangible income (“FDII”) regime, which intangible property (or rights over that property) are held by an entity provides for corporate tax deductions against such income in a no- or low-tax jurisdiction. which is earned directly by a US corporate. This is intended to provide an incentive against the transfer of intangibles outside French Digital Services Tax the US to low-tax jurisdictions.

France has also progressed with the implementation of unilateral Closing Remarks measures to address the challenges of taxing the digital economy. French senators have approved a temporary digital services tax. The There are considerable legal and technical complexities which multi- French bill sets out a 3% levy on turnover of companies with digital national corporations will have to take into account with the advent business models and revenues of more than €750 million globally of national and international legislative measures to address the tax and €25 million in France. The charge to tax will broadly be challenges arising from the digitalisation of the economy. Significantly, imposed on revenues which include turnover from online it should be noted that there is a recognition that the “digital advertising, the sale of data for advertising, and fees drawn from economy” cannot be ring-fenced and as such, the various measures linking users on online sales platforms. The new tax is to be will impact multinational corporations from all sectors and industries. retrospectively applied from early 2019, and it is expected to raise All these changes are taking place in the context of an uncertain about €400 million this year. political climate. Some jurisdictions have consistently noted Many other European countries, including Italy and Spain, are in opposition to tax measures designed to address the digitalisation of the process of enacting unilateral measures to tax the digital economy. the economy, and this may negatively impact international trade. In It remains to be seen whether such measures will be repealed if an addition, the outcome of Brexit negotiations are unclear and this will international consensual position based on the OECD’s Programme continue to impact industry on a UK-wide and global level. Report is reached. However, the USA has been vocal in its disap- An interesting aspect of the GloBE proposal is the income proval of national digital tax measures. In response to the French inclusion rule, which would impose a charge to tax for multi- digital services tax, the USA trade representative, Robert Lighthizer, nationals on their global income at a minimum rate, with the aim of said that “Washington” would conduct an investigation into France’s reducing incentives to shift profits to low-tax jurisdictions. The digital services tax, as it “unfairly targets American companies”. The concept of a minimum tax is not new in the international tax sphere investigation as to whether the French measures are discriminatory – the US GILTI regime aims to protect the US tax base by the and unreasonable to an extent where it will cause harm to US creation of an income inclusion based on a broad class of CFC companies was launched in July. On 26 August, a compromise was income. Similarly, domestic diverted profit tax rules, for example, as reportedly reached between the US and France, where France implemented in the UK and Australia, also have the effect of undertook to issue a tax credit accounting for the difference between imposing a tax on profits that are transferred offshore to a no- or the French DST and the eventual OECD framework. Further details low-tax jurisdiction. The broad principle of such measures is to should come in due course. ensure that income derived from one jurisdiction and subject to tax It is not known whether the USA will raise similar investigations in a foreign jurisdiction is taxed at least at a minimum level of tax. with other EU countries implementing national digital tax measures. Whilst the rate is intended to be punitive (in the case of the UK), However, it is clear that the political response to the taxation of the both are effectively a cost of doing business in the respective digital economy will be as relevant as the details of any technical jurisdiction where it is not possible to tax profits domestically under implementation. primary legislation. It is difficult to envisage how multiple domestic minimum tax rules would interact on a global level. Issues relating to sovereignty US Tax Reform over tax affairs are likely to arise, as well as the matter of how to The US has been consistently sceptical in relation to the digital determine tax allocation rights. A move towards a global minimum economy project. The reaction to the French digital services tax tax, as suggested in pillar two of the GloBE proposal, may unify the emphasised the concern that the USA has in relation to whether various domestic rules. However, it would be highly complicated to such national measures will negatively affect and restrict USA achieve this from a technical and administrative perspective. commerce. The Trump administration has also repeatedly warned One of the greatest challenges facing tax authorities around the of the potential dangers of inhibiting growth in this area, and are world will be aligning the gap between political rhetoric and legal clearly not afraid to enact unilateral measures to deal with what they reality in order to create enforceable frameworks which offer the perceive as deliberate targeting of USA businesses. clarity, certainty and coherence essential to long-term economic Following the various amendments made to USA federal tax laws growth and stability. The Programme Report is the next step in in December 2017 under the Tax Cuts and Jobs Act, the USA also reaching a consensual global solution to the tax challenges arising maintains that US multinationals do not erode tax unfairly, because from the digitalisation of the economy. However, the development the companies in question pay tax where the “value” is created. A of unilateral national digital tax measures, together with strong comprehensive summary of the changes is beyond the scope of this opposition from some jurisdictions to any taxation of the digital chapter, but the following changes should be highlighted: economy, will result in a long and complex road to 2020.

NB: This article reflects the law as of August 2019.

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

Gibson, Dunn & Crutcher LLP Tel: +44 20 7071 4266 Telephone House 2–4 Email: [email protected] Temple Avenue URL: www.gibsondunn.com London, EC4Y 0HB United Kingdom

Barbara 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. Prior to joining Gibson, Dunn & Crutcher, Ms. Onuonga trained and practised as an associate in the tax team of a City of London firm, where she also spent time on secondment with a financial services sector client.

Gibson, Dunn & Crutcher LLP Tel: +44 20 7071 4139 Telephone House 2–4 Email: [email protected] Temple Avenue URL: www.gibsondunn.com London, EC4Y 0HB United Kingdom

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

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The Growing Influence of the EU in the Tax Affairs of Member States

– A Legal Perspective Andrew Quinn

Maples Group David Burke

Introduction of Finance stated that work has commenced to bring forward the transposition process. This could lead to the introduction The influence of the EU in the affairs of the EU Member States of the rules in 2020 or 2021. continues to grow on foot of the principle of “ever closer union” (c) Financing arrangements which predate 17 June 2016 are enshrined in the 1957 Treaty of Rome. This influence has limited excluded from the interest limitation rules, under so-called the sovereignty of Member States in many areas. However, tax “grandfathering” provisions, provided the loans are not modified matters are different in that the passage of EU tax legislation subsequent to that date. In very broad terms, it is expected that requires unanimous approval. Tax is therefore regarded as an Irish financing structures involving Irish entities which hold exclusive competency of the Member States. However, this has loans or are engaged in loan origination or financing transactions changed in recent years. This chapter examines the growing should not be negatively impacted. In addition, it is expected influence of the EU in the tax affairs of the Member States and how that Irish regulated funds, such as ICAVs, will not be impacted this is likely to increase in the coming years. due to their status as investment funds. Beyond that, it is anticipated that Ireland will seek to implement the exemptions ATAD allowed for in ATAD, including for standalone entities.

The most significant incursion by the EU into the tax affairs of EU Anti-hybrid rules: Member States is the European Anti-Tax Avoidance Directive (“ATAD”) which was formally adopted on 12 July 2016 (and (a) ATAD includes measures aimed at neutralising so-called hybrid modified in 2017) after unanimous approval of all 27 Member States. mismatch arrangements in the sphere of international tax planning. ATAD contains six measures that draw inspiration from actions (b) Hybrid mismatches generally arise as a consequence of proposed by the OECD as part of its BEPS project. differences in the legal characterisation of entities or financial ATAD is noteworthy not only for achieving unanimity amongst instruments due to the interaction between the legal systems of all Member States on such significant tax measures but also for the two jurisdictions. Anti-hybrid rules seek to counter adverse tax short time between first draft and approval, a mere six months. outcomes that exploit differences in tax treatment between such An EU directive lays down certain results that must be achieved jurisdictions – for example, where the same instrument generates but each Member State is free to decide how to transpose directives a payment which is deductible in one jurisdiction but not taxable into national laws. The power of EU directives over measures in another jurisdiction. suggested by the OECD on BEPS, for example, is that directives (c) The anti-hybrid rules contained in ATAD concern the regulation must be followed in each Member State of the EU on pain of of hybrid mismatches that arise between associated taxpayers in penalty for failure to properly implement in the time required. two or more Member States or structured arrangements between The following sets out the key provisions of ATAD and considers parties in different Member States where either (i) a double their impact in Ireland. deduction, or (ii) a deduction without inclusion outcome is attributable to the differences in the legal characterisation of a Interest limitation rule: financial instrument or entity. (i) A double deduction mismatch outcome arises where an (a) Article 4 contains one of the key provisions of ATAD and expense is deductible for tax purposes twice. Where a hybrid mandates the introduction of an interest limitation rule. mismatch results in a double deduction, the deduction should Essentially, such a rule would restrict borrowing costs to 30% of be granted only in the Member State where the payment has the taxpayer’s EBITDA, subject to certain exceptions. its source. Traditionally, Ireland did not have any such fixed ratio interest (ii) A deduction without inclusion mismatch outcome covers limitation rules in place. The interest limitation rule will impact situations where a payment that is deductible for tax purposes companies based in Ireland, including trading companies, property in the payer’s jurisdiction but is not included in the taxable holding companies, the aircraft leasing sector and securitisation income of the receiving taxpayer. ATAD requires EU companies which are also known as “section 110 companies”. Member States to either delay and/or deny the deduction of (b) Ireland applied, as permitted in Article 4, to defer introduction payments, expenses or losses or warrants the inclusion of of interest limitation until 2024 on the basis that Ireland’s payments in the computation of taxable income. existing interest rules are at least equally effective to the rules (d) However, the above anti-hybrid rules only apply where the contained in ATAD. However, it is understood that the EU hybrid mismatch arises: (i) between head office and Permanent Commission does not share that view and issued a formal notice Establishment (“PE”); (ii) between two or more PEs of the to Ireland in July 2019 to begin implementation. In a tax same entity; (iii) between associated enterprises; or (iv) under a strategy paper released on 17 July 2019, the Irish Department structured arrangement.

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(i) An associated enterprise means an entity or an individual able for any foreign tax paid by the CFC on its undistributed which holds, directly or indirectly, a participation of more income. than 25% (50% in the case of a hybrid entity) in the voting rights, capital ownership or profits of another entity, as well Exit Tax: as entities that are part of the same consolidated group for financial accounting purposes or enterprises that have a (a) Ireland has introduced an ATAD compliant exit tax which significant influence in the management of the taxpayer. replaces the existing Irish exit tax regime which applies where a (ii) Where a hybrid mismatch arises as a result of a payment taxpayer moves assets or migrates its tax residence out of under a financial instrument, the “associated enterprise” concept Ireland. While the introduction of such an exit tax was required also includes a person who “acts together” with another person under ATAD, the surprise to the industry came in the timing of in respect of the voting rights or capital ownership of an its implementation with Financial Resolutions passed by the entity. That person will be treated as holding a participation Irish Parliament on 9th October 2018 bringing the regime into in all of the voting rights or capital ownership of that entity immediate effect from the midnight of that day. holding by the other person. (b) Exit tax will now be levied at 12.5% on any unrealised gains (iii) A structured arrangement is defined as “an arrangement involving where a company migrates or transfers assets (including IP a hybrid mismatch where the mismatch outcome is priced into the terms assets) out of the charge to Irish tax, including where a company of the arrangement or an arrangement that has been designed to produce ceases to be tax resident in Ireland or where a company that is a hybrid mismatch outcome, unless the taxpayer or an associated enter- resident in another Member State transfers assets from an Irish prise could not reasonably have been expected to be aware of the hybrid permanent establishment to another territory. mismatch and did not share in the value of the tax benefit resulting from (c) The exit tax will not apply where the assets which are disposed the hybrid mismatch”. of remain within the charge to Irish tax, such as where the assets (e) ATAD requires that these measures be implemented in all continue to be used as part of a trade or permanent establish- Member States by 1st January 2020 (with the exception of the ment in Ireland after the relevant transaction or where the assets rules concerning reverse hybrids which must be implemented by consist of Irish land or mining and exploration rights. 1st January 2022). (d) The new Irish ATAD-compliant exit tax does not affect the ability to avail of the participation exemption where there is a CFC Rules: deemed disposal of shares held in trading companies under an exit tax event. This should ensure that the Irish holding (a) Prior to ATAD, Ireland had very limited Controlled Foreign company regime remains attractive for structuring transactions. Company (“CFC”) rules. However, ATAD compliant CFC rules were introduced in the Finance Act 2018 with the legis- General Anti-Abuse Rule: lation taking effect for accounting periods beginning on or after 1st January 2019. Of the two available frameworks under ATAD, (a) ATAD includes a general anti-tax avoidance rule (“GAAR”) Ireland chose to adopt the “Option B” model. which applies to “non-genuine” arrangements where one of the (b) Option B focuses on CFC income which is diverted from main purposes is to obtain a tax advantage that defeats the Ireland. Broadly, CFC income is that which arises to a non-Irish object or purpose of an applicable tax law. The GAAR permits resident company from non-genuine arrangements put in place such arrangements to be disregarded. Arrangements are for the essential purpose of obtaining a tax advantage. CFC considered non-genuine if they are not put into place for valid income is attributed to the controlling company or a connected commercial reasons that reflect economic reality. company in Ireland where that controlling or connected (b) While ATAD prescribed the need to introduce a general anti- company has “significant people functions” (“SPF”) in Ireland. The abuse rule to counteract aggressive tax planning when other CFC charge is based on an arm’s length measurement of the rules don’t apply, no further action was needed in Ireland due to undistributed profits of the CFC that are attributable to the SPF. the robustness of Ireland’s longstanding GAAR in section 811 (c) The introduction of CFC rules represents a significant change of the Taxes Consolidation Act 1997. in Ireland’s corporation tax landscape and will be relevant to many clients. Other EU Tax Directives (d) Whether a CFC charge is imposed on an Irish controlling company will depend on the extent to which the CFC is As mentioned above, ATAD was not the first EU directive dealing regarded as having “non-genuine arrangements” in place. A CFC will with tax matters. However, previous directives were more “positive” be regarded as having non-genuine arrangements where: (i) the than ATAD in that they gave benefits to taxpayers and eliminated CFC would not own the assets or would not have borne the risks double taxation. which generate all, or part of, its undistributed income, but for The EU Parent Subsidiary Directive was introduced in 1990 (and relevant Irish activities or SPF being undertaken in Ireland in modified in 2003) to eliminate tax obstacles in the area of profit relation to those assets and risks; and (ii) it would be reasonable distributions between groups of companies in the EU by: to consider that the relevant Irish activities were instrumental in (a) abolishing withholding taxes on payments of dividends between generating that income. associated companies of different Member States; and (e) The concept of SPF is not defined in the Irish implementing (b) preventing double taxation of parent companies on the profits legislation but must be construed in a manner consistent with of their subsidiaries. the use of that term in the OECD report. If there is no SPF in In 2003, the EU Interest and Royalties Directive was introduced Ireland to which the management of assets and business risks to eliminate withholding tax obstacles in the area of cross-border can be attributed, no tax will arise under the new CFC rules. interest and royalty payments within a group of companies by (f) The CFC charge applies to the undistributed profits that have abolishing withholding taxes on interest payments and royalty been diverted to the low-taxed CFC pursuant to non-genuine payments arising in a Member State. Such interest and royalty arrangements. The rate of Irish tax chargeable will depend on payments are exempt from any taxes in that State provided that the the nature of the income. In Ireland, trading income is taxed at beneficial owner of the payment is a company or permanent 12.5% and non-trading income is taxed at 25%. A credit is avail- establishment in another Member State.

Corporate Tax 2020 ICLG.com © Published and reproduced with kind permission by Global Legal Group Ltd, London 18 The Growing Influence of the EU in the Tax Affairs of Member States – A Legal Perspective

State Aid Digital Tax State aid control was formally introduced into the European Union On the 21st March 2018, the Commission published its proposals law by the Treaty of Rome to prevent Member States from distorting concerning the taxation of the digital economy in an attempt to find competition within the European internal market. The state aid its own EU solution as the long debate undertaken at the OECD rules target the provision of illegal advantages, whatever their form, level since 2011 on the issue was still ongoing. The digital tax to specific companies or industries. The European Commission in package outlined general rules for the allocation of profits by its capacity as guardian of the EU competition rules is the sole body emphasising a required nexus between the generation of value and entrusted with state aid enforcement. In this role, it has shaped the the requirement to have a significant digital presence in the EU. In meaning of the concept of “state aid” over the past decade and addition, the proposals bolstered the existing criteria to ensure the challenged the tax regimes of EU Member States in a wide variety “fair and efficient” taxation of digital companies under a coherent of sectors such as energy, transport and agriculture. harmonised approach throughout the EU in order to acknowledge For state aid to exist in a tax context, there must be a reduced tax the global dimension of the issue. The EU digital tax seeks to create burden which provides a “selective advantage” to certain taxpayers. an artificial permanent establishment based on the commer- This is based on established case law from the ECJ which cialisation of user data in order to tax digital companies that generate emphasises that the “loss of tax revenue is equivalent to the consumption of profits without maintaining any physical presence in a country. State resources in the form of fiscal expenditure”.1 Therefore, it follows The digital tax package consisted of two proposed Council from this that non-selective measures of general application such as Directives. The first of these measures concerned new rules in Ireland’s 12.5% corporate tax rate do not fall within the scope of the respect of the allocation of profits in the digital context, entitling EU state aid rules. Member States to tax profits generated in their territories by both The Apple investigation was launched in February 2014 as part of EU and non-EU companies. These rules were to apply regardless a broader European Commission inquiry into the tax ruling practices of whether there was any physical presence in the Member State in of six Member States which included: Cyprus; Ireland; Luxembourg; question, provided that there was a “significant digital presence in the Malta; the Netherlands; and the United Kingdom. EU”. The second measure proposed would apply only on an interim This foray into the sphere of taxation does not constitute a new basis and introduce a 3% tax applicable to revenues generated by domain of activity for the Commission. Rather it is clear that its focus digital services which are heavily reliant on the exploitation of user on the Member State practice of issuing tax rulings to large multi- participation or user data – i.e. from the sale of online advertising national corporations is gradually intensifying. In spite of this recent space or from the sale of data generated from user provided trend, the European Commission has not historically held a general information. Following the discussions of the Economic and objection to the practice of tax rulings unless they manifestly infringed Financial Affairs Council (“ECOFIN”) on 4th December 2018, EU the “arm’s-length” principle. To this effect, the Commission alleges that finance ministers agreed to explore a possible instrument with a the wider Apple group utilised non-Irish resident entities as part of narrower scope – covering only targeted digital advertising. their organisational structure in order to internally allocate profits From an Irish perspective, whilst generally supporting the need within two Irish incorporated companies which “only existed on paper”. for reform, the Irish government has consistently opposed proposals The Commission considers that two historical tax rulings issued by to tax digital companies on turnover as opposed to profits as this the Irish Revenue Commissioners in 1991 and 2007 to the Apple would strongly benefit larger states and prevent Ireland from entities endorsed a methodology of computing taxable profits which maintaining and indeed strengthening its competitiveness. did not correspond to the economic reality of the situation and which Significantly, revenue-based taxes when compared to taxes levied on allowed these profits to escape tax. On foot of this determination, profits, affect businesses with a low profit margin to a far greater the Commission issued a recovery order compelling the Irish state to extent than those with a high profit margin. It would appear in this recover approximately €13bn, in addition to interest from Apple on respect that the Directive did not acknowledge this reality and by the basis that it had been granted illegal state aid which enabled it to extension, whether a business is profitable or loss-making. pay substantially less tax than other businesses over a number of These sentiments were reflected in a reasoned opinion of the Irish years. After having duly paid the multibillion euro tax bill into an parliament (“the Oireachtas”) made on 16th May 2018 and escrow account in accordance with the decision of the Commission, addressed to the President of the Council of the European Union. Ireland subsequently initiated its appeal of the decision before the The statement emphatically condemned the Commission proposals, European General Court which is due to be head in the autumn. labelling them an illegal encroachment upon the sovereign rights of It is understood that Apple has joined the appeal which will see Member States to impose, administer and repeal taxes. This tech- the parties involved strongly contesting the state aid allegation. In nical argument questions the legality of the Commission’s initiative this regard, the Irish Department of Finance have consistently on the basis that it breaches the fundamental principle of denied that any state aid was provided and reiterated on numerous “subsidiarity” under EU law. The position of the Oireachtas was that occasions that taxation is a “fundamental matter of sovereignty” and that EU action was not “absolutely necessary” to achieve the objective of “Ireland’s position remains that the full amount of tax was paid in this case. the Commission’s proposals. To substantiate this allegation, the Ireland did not give favourable tax treatment to Apple. Ireland does not do deals Oireachtas is relying upon a particular provision under the EU with taxpayers”.2 One pivotal aspect of the decision concerns the Treaties which entitles national parliaments to assess EU action selectivity analysis applied by the Commission. It is premised on an against the principle of subsidiarity. objective assessment of the then applicable Irish rules against an Before being implemented, the two proposals required unanimous OECD arm’s-length principle which did not form part of the Irish approval by the European Council as well as each of the 28 EU domestic law at the time. Member States (if so approved). Unanimity as distinct from Whilst the Commission has emphasised that the “decision does not Qualified Majority Voting (“QMV”) would have been required for call into question Ireland’s general tax system or its corporate tax rate”,3 it the proposed Directives to be approved on the basis that they relate clearly evidences the growing tension between the obligation to to matters of taxation. In this context, an individual Member State comply with EU rules and the capacity of Member States to express could always have used its veto in the final vote by the European their own domestic fiscal sovereignty. Furthermore, it sends a stark Council and it was anticipated at the time that smaller countries such message to large multinational corporations across all industry as Ireland, Sweden, Denmark and Finland would have done so. sectors that EU state aid rules are disregarded at their financial peril.

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The Commission proposal for an EU digital tax has largely been DAC 6 campaigned for by Member States such as France. It represents another example of the challenge which smaller states like Ireland Directive 2018/822 (colloquially known as DAC6) is an EU measure face to preserve fiscal sovereignty. In this instance, the Irish which imposes on intermediaries or taxpayers the obligation to preference for building an international consensus based on report information on a broad range of cross-border arrangements proposals from the OECD appears to have prevailed as the Council which concern taxes imposed by an EU Member State (other than were unable to reach an agreement on the EU digital services tax on VAT, customs duties and social security contributions) to their 12th March 2019 and have agreed to postpone the measure until the relevant tax authorities. DAC6 is another EU initiative inspired by end of 2020 pending further work at the OECD level. the work carried out by the OECD in the context of its broader Despite a halt of progress on an EU-wide basis and the failure to BEPS project and it applies where one of the specified hallmarks reach a consensus, the French administration enacted its own domestic outlined in the Directive are present. It is intended to facilitate the digital tax measures. Under the domestic framework a 3% tax was automatic exchange of this information between tax authorities of levied on companies with annual revenues of more than €750m arising EU Member States and to strengthen global tax transparency by from “digital activities” which includes a de minimis threshold of €25m detecting potentially aggressive tax planning with an EU cross- of those revenues being generated in France. However, in late August border element. of this year, negotiations between France and the United States of The new reporting requirements apply to “reportable cross-border America culminated in a bilateral compromise agreement being arrangements”, irrespective of whether such arrangements have a tax reached between Presidents Macron and Trump in respect of large motive. Therefore, the absence of “aggressive tax planning” does American tech multinationals. Under the agreement France will not shield an intermediary or taxpayer from potential reporting refund all digital services tax paid by such multinationals once a new obligations under DAC6. In addition, it should also be highlighted international system for taxation in the digital sector is implemented. that there is nothing preventing Member States from extending the Outside of the European context, on 29th January 2019, the regime to cover purely domestic arrangements. In any event, a OECD announced a further reform package in the sphere of inter- domestic transaction will also fall within the scope of DAC6 if it has national taxation which would colloquially become known as “BEPS tax implications for another EU Member State, thus demonstrating 2.0”. The aim of the project is to address the policy challenges a very broad territorial scope of application. which have arisen as a result of the increased digitisation of the The concept of an “arrangement” is intentionally not defined in the global economy. This objective is to be achieved by readjusting the Directive in order to encapsulate any course of action regardless of balance of taxation and profit allocation in respect of multinational whether or not it is legally binding. Similarly, the definition of “inter- corporations and scrutinising the jurisdictions where assets are mediaries” is also widely drafted and includes any person that designs, owned whilst at the same time analysing where product users or markets, organises, makes available for implementation, or manages consumers are based and therefore generating value. the implementation of a reportable cross-border arrangement. Under BEPS 2.0, it is proposed that a “two-pillar” approach is to Furthermore, this concept also encompasses any person that knows be adopted. or could be reasonably expected to know that they have provided (a) Taxing profits attributable to intangible assets – this could directly or indirectly “aid, assistance or advice” in connection with a be achieved by: reportable cross-border arrangement. However, only persons with (i) A reconsideration of transfer pricing principles could an EU nexus such as being incorporated, resident or having a recognise greater profit attribution to the value contributed permanent establishment within the European Union can be by users which are of paramount importance for many large considered intermediaries for the purposes of DAC6. multinational corporations – particularly those which are in For a reporting obligation to crystallise under DAC6, the trans- the technological sector. action must involve one or more of the specified hallmarks outlined (ii) A conceptual redefinition of “taxable presence” for businesses in the Directive. Specified hallmarks only give rise to a reportable which operate in a market without a physical presence. This transaction where one of the main benefits of the arrangement is policy objective could be achieved by using the constructs of the avoidance of tax. In general terms this is likely to apply where a “significant economic presence” or a “significant digital presence”. the tax outcome is a significant factor in how the arrangement is Utilising a revised basis for the taxation of profits generated structured and not simply incidental – for example, one may through intangibles would likely involve a formulaic approach consider a scenario involving the acquisition of loss-making which would deploy an attribution factor to give appropriate companies to reduce overall tax liability or the conversion of income weight to the user or consumer market location once the to a category which is taxed at a lower rate. Other hallmarks may materiality threshold for triggering a sufficient “nexus” in that trigger a reporting obligation even where one of the main benefits market has been reached by the entity. of the arrangement is not the avoidance of tax – for example, intra- (b) Global minimum tax group cross-border transfer of risks or assets or intra-group transfer (i) This is a global policy imperative with the objective of of hard to value intangibles. strengthening tax rights in order to counteract the negative effects of base erosion and profit shifting measures which Transfer Pricing commonly result in monies being diverted to jurisdictions with a low effective tax rate. With a view to addressing this Ireland’s transfer pricing legislation is primarily influenced by the issue, policy developments in this area will seek to develop an OECD Transfer Pricing Guidelines of 2010 and the arm’s-length income inclusion rule as well as a tax which would be levied principle. Any influence exerted by the EU on Ireland’s transfer on payments which result in base erosion. pricing policy would therefore be indirect (in the form of EU Joint (ii)For example, if the tax reform measures adopted by the USA Transfer Pricing Forum recommendations) or via state aid cases, are used as a guide for the formulation of a new income which can have an impact on the application of transfer pricing inclusion rule, this could result in the creation of a minimum principles across Europe. rate of taxation which could be applied by the parent country The most significant of these state aid cases from an Irish jurisdiction to the profits of subsidiaries above a routine perspective is the Apple case, referenced previously. From a transfer return. It is possible that this could be deployed in addition pricing perspective, the key issue was that the historic intra-group to an approach which seeks to tax or deny deductions for pricing adopted at the time had not complied with the arm’s-length payments to entities which are resident in low tax jurisdictions. principle. The legislation introduced by Ireland since then removes

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much of the uncertainty that would have existed at the time. objectives of those provisions but with the aim of benefitting from an advantage It is also notable that as a significant volume of digital or e-commerce in EU law although the conditions for benefitting from that advantage are business has proven to be easily relocated to jurisdictions traditionally fulfilled only formally”. The Court provided significant guidance on the characterised by low direct and indirect tax rates, EU harmonisation of factors that may indicate an abuse of rights including an inability to tax rates and policies has become an increasingly fundamental agenda economically use interest, rapid onward payment to non-EU entities, for bodies such as the European Commission and base protection and the absence of actual economic activity. measures such as transfer pricing legislation have assumed increased The decisions represent a development of existing EU concepts, importance. This is reflected in the EU Joint Transfer Pricing which were previously seen in VAT avoidance schemes. They appear Forum recommendations which have resulted in the implementation to depart from the traditional understanding of cases involving the of a multilateral audit mechanism which has been implemented by exercise of EU freedoms under the EU Treaty of Rome, such as the a number of Member States with resulting adjustments being applied important EU Cadbury Schweppes case which “limited” itself to in a coordinated manner. imposing a genuine and actual business requirement to avail of the In response to the increased international focus on the importance EU freedom of establishment. Here, there is a broad interpretation of robust transfer pricing policies, in 2016, a review of Ireland’s given to the term “beneficial owner” and an application of the abuse corporate tax systems, including its transfer pricing, was undertaken of rights principle. This may impact structures which are vulnerable through the Coffey Report. Subsequently, in February 2019, the to allegations of acting merely as a conduit. It is important, however, Irish Government launched a public consultation regarding Ireland’s to note that the decision should not generally impact structures transfer pricing regime in response to some of the key areas involving domestic exemptions, which are not reliant upon the EU highlighted by the report. It is anticipated that changes will be Directives. In such cases, absent amendments to the domestic law implemented in Ireland’s transfer pricing legislation by late 2019 with of the paying jurisdiction, the position should not change. effect from 1st January 2020. Going forward, it is anticipated that the trend of increased Financial Transaction Tax transfer pricing audit adjustments within Europe will continue. Further discussions on the appropriateness of existing transfer In 2019, the proposal to implement a Financial Transaction Tax pricing legislation across EU Member States, particularly in the area (“FTT”) regained momentum despite a similar proposition being of e-commerce will also be expected as tax authorities seek to find blocked by a significant majority of Member States in 2011. The common ground across different territorial tax systems. original Commission proposal for a directive introducing an EU-wide FTT was rejected by Member States such as the UK, Luxembourg ECJ Case law – Beneﬁcial Ownership Cases and Sweden in September 2011 but a revised proposal was issued on 14th February 2013 under the enhanced cooperation procedure which On 26th February 2019, the Court of Justice of the European Union allows a minimum of nine Member States to adopt EU harmon- (“CJEU”) ruled on six joined cases concerning the payment of with- isation initiatives if all Member States fail to reach an agreement. holding tax on dividends and interest by Danish companies. The We understand that it is the first time that this procedure available cases included where dividends were paid by a Danish company to under Article 329 of the TFEU is used to bring forward EU legis- a Luxembourg tax resident holding company, owned indirectly by lation in the field of taxation, otherwise typically subject to private equity funds. Interest was also paid by a Danish company to unanimous approval across the 28 EU Member States. The a Cypriot parent company, which made payments to a company in adoption of the decision authorising enhanced cooperation requires Bermuda, which in turn made payment to a US company. a qualified majority of Member States within the Council and the Whilst the Danish subsidiary paying the interest or dividends up consent of the European Parliament. The adoption of the new rules to the holding companies took the position that the dividends or then requires unanimity by the Member States participating in interest were exempt from relevant Danish taxes under the EU enhanced cooperation and the consultation of the European Parent Subsidiary Directive (“PSD”) and the EU Interest and Parliament. Thereafter, the other Member States are free to join the Royalties Directive (“IRD”) respectively, the Danish tax authorities enhanced cooperation process at any time in the future. challenged the exemptions claiming the EU tax resident holding The FTT was originally tabled by the Commission in order to companies were not the “beneficial owner” of these payments. address the economic fallout from the global financial crisis. It was The ECJ focused its analysis on whether the arrangements were designed to apply an extremely low rate of tax across a vast range “wholly artificial”, whether there was an abuse of the EU law, and in of financial transactions carried out by financial institutions in order the case of the interest payments, if the EU tax resident holding to substantially raise tax receipts without adversely impacting the company was the “beneficial owner” of the interest payment received. market or creating distortions of competition. The ECJ did not rule on the outcome but sent the cases back to the Following the withdrawal of governmental support for the FTT Danish courts for a factual determination based on its guidance. from the Estonian representatives on 16th March 2016 there are now These judgments will be extremely important in terms of the only 10 participating EU Member States committed to advancing the application of the PSD and IRD, but also on the interpretation of proposal which are Belgium, Germany, Greece, Spain, France, Italy, terms such as “beneficial owner” and “abuse of rights” in international Austria, Portugal, Slovenia and Slovakia (the “FTT Zone”). The structures. adoption of the Directive introducing the FTT will only require The ECJ first considered the meaning of a “beneficial owner”. It unanimous agreement of the participating countries, after consulting stated that in this context it must have an EU law meaning rather the European parliament. Countries which are non-participating EU than one based on the domestic law of each Member State. It stated Member States cannot therefore influence the discussions in any that the concept refers to “an entity which actually benefits from the interest meaningful way. paid to it” and not merely a “formally identified recipient”. Accordingly, Whilst consultations on the revised FTT proposal are still the test is aligned with some of the OECD concepts outlined in tax ongoing, it is accepted that the FTT will impact certain defined treaties. “financial transactions” entered into by “financial institutions” oper- Although Denmark did not have an appropriate anti-abuse law in ating within the FTT Zone through the imposition of a minimum its domestic provisions, the ECJ held that it was still entitled to deny tax rate of 0.1% for equities and bonds and 0.01% on derivatives. the benefits of Directives where there is an abusive scheme. Indeed Therefore, provided that there is an established economic link to the it stated that the Member State “must refuse to grant the benefit of the FTT Zone, it is likely that the cost of conducting such defined trans- provisions of EU law where they are relied on not with a view to achieving the actions will increase significantly in the future. It must be highlighted

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that these constitute minimum rates which could be levied and it is “When it comes to important single market questions, I want decisions in the possible that higher rates may be imposed by the constituent Council to be taken more often and more easily by qualified majority – with the members of the FTT Zone. The FTT is payable by each financial equal involvement of the European Parliament. We do not need to change the institution involved in in-scope transactions and not just by the Treaties for this. There are so-called “passerelle clauses” in the current Treaties financial institution which has an economic link to the FTT Zone. which allow us to move from unanimity to qualified majority voting in certain It is interesting to note that the FTT is ultimately being brought cases – provided the European Council decides unanimously to do so. I am also forward under the enhanced cooperation procedure. Traditionally, strongly in favour of moving to qualified majority voting for decisions on the the enhanced cooperation procedure had been utilised in policy areas common consolidated corporate tax base, on VAT, on fair taxes for the digital of broader consensus amongst Member States such as matters industry and on the financial transaction tax.” relating to patents, family law and security affairs. The use of the Article 48(7) of the Treaty on European Union (“TEU”) provides enhanced cooperation procedure in this instance is all the more for a general passerelle clause. To activate this clause, the European interesting that it takes place in the broader context of the Council must come to a unanimous decision with the consent of the Commission advocating a move away from unanimity and towards European Parliament and have no objections from national QMV in matters of fiscal policy decision-making (see further below). parliaments. There are two steps to this; the European Parliament Therefore, the FTT represents a precedent in terms of how the must approve by an absolute majority and national parliaments must enhanced cooperation procedure can be used to break the deadlock be notified of any intended use of a general passerelle clause. If they which can prevent a taxation measure from being approved at the object within six months, the proposal fails. If the preconditions are EU level. A Member State which is not a participating Member State met, the European Council can replace unanimous voting with QMV. on FTT cannot vote on FTT and cannot therefore play an active role Given the conditions attached to the use of the passerelle clause it in shaping the FTT even though counterparties in that state will be is considered unlikely that it could be used by the Commission to impacted by FTT. overcome unanimity for tax matters. Many Member States have signalled their strong opposition including Ireland, noting that Common Consolidated Corporate Tax Base taxation is a sovereign Member State competence and that decisions at Council on tax matters require unanimity. The Common Consolidated Corporate Tax Base (“CCCTB”) is a plan by the European Commission for a single set of rules that cross- Conclusion border companies could use to calculate their taxable profits in the EU, instead of needing to deal with different national systems. The The freedom of Member States to manage their own tax affairs is European Commission suggest that this will reduce the administrative seen by the European Commission as both an obstacle to the single burden, compliance costs and legal uncertainties for cross-border market and a potential source of BEPS. They have therefore companies and would significantly help to combat tax avoidance in adopted a much more active approach on tax matters in recent years. the EU. The plan was halted in 2011 but re-launched in 2016. Most significantly, the Commission pushed through direct tax legis- The new proposal would be mandatory for groups of companies lation in ATAD which includes detailed rules on interest deductibility, with consolidated turnover exceeding €750m during the financial controlled foreign companies, hybrid mismatch and exit taxation. This year, for companies established under the laws of an EU Member directly affects the tax system of each Member State. Moreover, the State, including permanent establishments. It was approved by the Commission has rigorously enforced state aid rules in the Apple case European Parliament in February 2018 and in June 2018 Germany and others. This has led to countries changing their tax rules or and France issued a common position paper which suggested a shelving proposals that might lead to state aid investigation. number of modifications that are currently under discussion within However, the most ambitious proposal of the Commission to date the EU. is to change the voting rules on tax matters and thereby remove the Any proposal on CCCTB currently requires unanimous approval Member State veto. This would pave the way to direct legislation on of all Member States to become law across the EU. It is therefore tax matters including the proposal for a common consolidated unlikely to be passed in the near future. corporate tax base. This would have a huge impact on the tax treatment of multinationals operating in the EU. However, it is considered Challenge to Member State Veto on Tax Matters unlikely that either proposal has any chance of success in the near term. While all this is going on, the CJEU continues to interpret the tax Qualified majority voting (“QMV”) is a system of weighted votes in laws of Member States so that they are consistent with the aims of the EU that requires 55% of Member States to vote in favour, the EU and EU law, especially freedom of establishment. This has representing at least 65% of the EU population, in order to pass. effectively overridden group loss relief rules in many Member States. QMV is the most common voting method in the EU, with over 80% of matters decided in this way. Endnotes Exceptions to QMV consist of certain sensitive issues, which includes taxation. Tax issues still require unanimous voting in the 1. Commission Notice 98/C 384/03 (Oct 12, 1998). EU. This means that a consensus between all 28 Member States is 2. https://www.gov.ie/en/press-release/f9be45-minister-noonan- needed in order for a decision affecting tax matters to pass. disagrees-profoundly-with-commission-on-apple/. The Commission says that some issues are so serious that EU Member 3. Commission Press Release IP – 16-2923 – https://ec.europa States should work together, such as tax fraud, tax evasion, money .eu/commission/presscorner/detail/en/IP_16_2923 laundering, climate change and VAT. In his 2017 State of the Union Address, EU Commission President Jean Claude Juncker stated that:

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Andrew Quinn is head of the Tax team 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 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 multi-jurisdictional guide. He was most recently recommended in Who’s Who Legal Corporate Tax 2018. Andrew is also the joint author of the book Taxing Financial Transactions, Irish Taxation Institute.

Maples Group Tel: +353 1 619 2038 75 St. Stephen’s Green Email: [email protected] Dublin 2 URL: www.maples.com Ireland

David Burke is a highly experienced tax specialist and advises on international transactions structured in, and through, Ireland. He works with companies, banks and investment funds and their advisors to structure and implement capital markets, structured finance, asset finance and funds transactions.

Maples Group Tel: +353 1 619 2779 75 St. Stephen’s Green Email: [email protected] Dublin 2 URL: www.maples.com Ireland

The Maples Group is a leading service provider offering clients a comprehensive range of legal services on the laws of the British Virgin Islands, the Cayman Islands, Ireland, Jersey and Luxembourg, and is an independent provider of ﬁduciary, fund services, regulatory and compliance, and entity formation and management services. The Maples Group distinguishes itself with a client-focused approach, providing solutions tailored to their speciﬁc needs. Its global network of lawyers and industry professionals are strategically located in the Americas, Europe, Asia and the Middle East to ensure that clients gain immediate access to expert advice and bespoke support within convenient time zones. For more information, please visit: www.maples.com.

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Albania Albania

Genc Boga

Boga & Associates Alketa Uruçi

1 Tax Treaties and Residence VAT is 20%, which applies to all persons (companies and entrepreneurs) having an annual turnover exceeding ALL 2,000,000 (approx. EUR 16,700). Exceptionally, persons carrying out certain specific 1.1 How many income tax treaties are currently in force in categories of activity (such as lawyers, notaries, architects, auditors, your jurisdiction? doctors, accountants and similar professions) are VAT taxpayers irrespective of their annual turnover (i.e. there is no VAT threshold). Albania has concluded tax treaties with 43 countries, 41 of which Accommodation in tourism facilities is subject to a reduced rate of are currently in force. 6%, as well as the supply of accommodation and restaurant services offered within “certified agritourism entities”. In some exceptional 1.2 Do they generally follow the OECD Model Convention or cases, the reduced rate of 6% applies to the supply of all services another model? offered within the accommodation facilities falling under the category of a “five-star hotel with special status”. Albanian tax treaties follow the OECD model. A reduced rate of 6% also applies to advertising services from audio-visual media and the supply of books. 1.3 Do treaties have to be incorporated into domestic law Exports of goods, goods in passenger baggage, the international transport of goods and passengers and related services, and services before they take effect? to international intra-governmental organisations, are subject to VAT at 0% (benefitting from VAT exemption but with a right of The Albanian Constitution requires treaties to be ratified by deduction). Parliament.

2.3 Is VAT (or any similar tax) charged on all transactions 1.4 Do they generally incorporate anti-treaty shopping or are there any relevant exclusions? rules (or “limitation on beneﬁts” articles)? VAT regulations provide for supplies exempt from VAT without a The treaties do not incorporate anti-treaty shopping rules. right of deduction. The most important are as follows: ■ Lease and sale of land. 1.5 Are treaties overridden by any rules of domestic law ■ Sale of buildings, unless the seller opts for VAT applicability. ■ Long lease of buildings (when the lease duration exceeds two (whether existing when the treaty takes effect or introduced months), unless the lessor opts for VAT applicability. subsequently)? ■ Financial services. ■ Certain services rendered by not-for-profit organisations. A treaty prevails over domestic law regardless of whether the ■ Educational services rendered by private and public educational domestic legislation existed previously or is introduced subsequently. institutions. ■ Public postal services. 1.6 What is the test in domestic law for determining the ■ Import of raw materials used for the production and packaging residence of a company? of authorised medicines. ■ Supply of newspapers, magazines and newspaper printing Entities that are established in Albania or have their place of services. effective management in Albania are considered resident. ■ Supply of services performed outside Albania by a taxable person whose place of activity or residence is in Albania. 2 Transaction Taxes ■ Supply of services relating to gambling activities and casinos. ■ Supply of services rendered by contractors and their subcon- tractors related to the exploration phase of hydrocarbon operations 2.1 Are there any documentary taxes in your jurisdiction? and import of goods during the exploration phase, when attested No, there are no documentary taxes in Albania. as such by the National Agency of Natural Resources.

2.2 Do you have Value Added Tax (or a similar tax)? If so, at 2.4 Is it always fully recoverable by all businesses? If not, what rate or rates? what are the relevant restrictions?

VAT was first introduced in 1995. In 2015, the legislation was Generally, taxpayers registered for VAT are entitled to recover the harmonised with the EU Directive on VAT. The standard rate of input VAT, provided that the VAT is charged in relation to their

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taxable activity. VAT cannot be reclaimed on recreation and accom- 3.5 If so, is there a “safe harbour” by reference to which tax modation expenses, passenger vehicles, fuel under certain limits, or relief is assured? any expenses related to the above-mentioned expenses. There is no such provision in Albanian legislation. 2.5 Does your jurisdiction permit VAT grouping and, if so, is it “establishment only” VAT grouping, such as that applied 3.6 Would any such rules extend to debt advanced by a by Sweden in the Skandia case? third party but guaranteed by a parent company?

There is no VAT grouping available in Albania. The debt-to-equity ratio is calculated without taking into consideration the source of the financing or relevant guarantees. With 2.6 Are there any other transaction taxes payable by regards to net interest expense as a percentage of EBITDA, there companies? are no explicit rules stipulating the inclusion of third-party loans in the calculation. There is a fee on the transfer of an ownership right on real estate, payable by legal entities in case of sale or donation of real estate. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non-resident, for example 2.7 Are there any other indirect taxes of which we should pursuant to BEPS Action 4? be aware? There are no such other restrictions. Except for VAT and excise, carbon and circulation taxes are levied on the production and importation of certain combustible goods 3.8 Is there any withholding tax on property rental (including fuel) in Albania. payments made to non-residents?

3 Cross-border Payments Property rental payments made to non-residents are subject to a final withholding tax at a rate of 15%, unless a double tax treaty provides 3.1 Is any withholding tax imposed on dividends paid by a for a lower rate. locally resident company to a non-resident? 3.9 Does your jurisdiction have transfer pricing rules? Dividends and profit distribution paid to non-residents are subject to a final withholding tax at a rate of 8%, unless a double tax treaty The legislation on transfer pricing is based on the Transfer Pricing provides for a lower rate. Guidelines 2010 of the Organisation for Economic Co-operation and Development (OECD). However, in case of conflicts between 3.2 Would there be any withholding tax on royalties paid by the OECD Guidelines and provisions of the Albanian legislation on this matter, the local legislation provisions will prevail. a local company to a non-resident? The legislation lays down the transfer pricing methods to be used Royalties paid to non-residents are subject to a final withholding tax by taxpayers when performing a controlled transaction, depending at a rate of 15%, unless a double tax treaty provides for a lower rate. on the specifics of the transaction. The methods described are: ■ the comparable uncontrolled price method; ■ the resale price method; 3.3 Would there be any withholding tax on interest paid by ■ the “cost plus” method; a local company to a non-resident? ■ the transactional net margin method; and ■ the profit split method. Interest paid to non-residents is subject to a final withholding tax at The method chosen by the taxpayer depends on, and should take a rate of 15%, unless a double tax treaty provides for a lower rate. into account, different circumstances. However, the legislation provides the option for the taxpayer to choose another transfer 3.4 Would relief for interest so paid be restricted by pricing method, if the taxpayer proves that none of the methods reference to “thin capitalisation” rules? listed in the legislation can be used in a reasonable way to apply the market principles in the controlled transactions. The thin capitalisation rule limits the tax deduction for interest paid Taxpayers performing controlled transactions, as defined above, on a loan (for corporate income tax purposes) to the portion of which exceed the amount of ALL 50,000,000 (approximately EUR interest paid on the loan not exceeding four times the company’s net 415,000), should present to the tax authorities (i.e. the General or assets (i.e. a debt-to-equity ratio of 4:1). The rule applies to all loans Regional Tax Directorate where the taxpayer has been registered) an taken, except for short-term loans (payable within less than one Annual Controlled Transactions Declaration, as per the format year). It does not apply to banks, finance leases or insurance provided in the respective Instruction on Transfer Pricing. companies. Additionally, in case of loans and funding from related In addition, in case the tax authorities of a country with which parties, the “net interest expense” will be considered deductible up Albania has signed a double tax treaty make a transfer pricing adjust- to 30% of EBITDA (Earnings Before Interest, Tax, Depreciation ment that results in the taxation of the profit for which the taxpayer and Amortisation). The taxpayer has the right to carry forward the has already been taxed in Albania, the Albanian taxpayer may submit non-deducted part of the interest and claim its tax deductibility in a written request to the General Tax Directorate on the respective the subsequent periods, except when the taxpayer’s ownership has adjustment to be made to the profit tax in Albania. The requested changed by more than 50%. transfer pricing adjustments may be refused or granted fully/partially within three months of the date of the submission of the request by the taxpayer.

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4 Tax on Business Operations: General The local municipality may modify the tax rates set by law. In addition, it decides on the payment schedule of the tax and on reductions for immediate payment of tax. 4.1 What is the headline rate of tax on corporate proﬁts? Albanian legislation also provides for the tax on impact on infrastructure from new constructions (infrastructure tax). In cases of As of 1 January 2019, profits are taxed at a rate of 15% for the residence or business units, the tax varies from 4% to 8% of the sale taxpayers having a total annual turnover higher than ALL price of such units. For constructions in the field of tourism, 14,000,000, whereas the taxpayers having a total annual turnover industry or for public use, the tax varies from 2% to 4% in Tirana from ALL 5,000,000 up to ALL 14,000,000 will be subject to a profit and from 1% to 3% in other municipalities. Exceptionally, for infra- tax rate of 5%. structure projects such as the construction of national roads, ports,

airports, tunnels, dams or, energy infrastructure, the tax is 0.1% of 4.2 Is the tax base accounting profit subject to the investment value (which includes the value of equipment and adjustments, or something else? machinery for the project), but not less than the cost of rehabilitating any damaged infrastructure to be replaced. Yes, the taxable profit that results from the financial statements In addition, there are a variety of national and local taxes. These prepared under and pursuant to accounting standards is adjusted as include hotel tax, royalty tax, advertising tax, etc. provided for and required by the tax regulation. 5 Capital Gains 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? 5.1 Is there a special set of rules for taxing capital gains and losses? The main adjustments consist of the following: depreciation allowances; restrictions related to thin capitalisation of loan interests and The provisions for taxing capital gains and losses have changed as other expenses (e.g. thresholds of tax deductions for representation of 1 January 2019. and sponsorship expenses); bad-debt requirements; penalties; As a general rule, capital gains are included in the business profit provisions (except for banks and insurance companies); and impair- of the entity and are taxed at the rate of 15%. In case of non- ment and revaluation of assets, etc. residents, they shall file a tax return with the Albanian tax authorities to declare and pay capital gain at the rate of 15%. 4.4 Are there any tax grouping rules? Do these allow for Exceptionally, when certain conditions are fulfilled, the tax liability relief in your jurisdiction for losses of overseas subsidiaries? is shifted to the company whose shares are being transferred. Specifically, according to the new legislation, if direct and/or No, there are no tax grouping rules. indirect ownership of stock capital or voting rights of a legal person changes by more than 20% in value or number, and the average 4.5 Do tax losses survive a change of ownership? annual turnover of this person for the last three years exceeds ALL 500 million (approx. EUR 4.2 million), the person is treated as Losses are carried forward for three consecutive years (no carry back disposing of a proportionate part of all the person’s assets immedi- is allowed). However, if, during a taxable period, direct and/or ately before the change. The person is treated as: indirect ownership of stock capital or voting rights of a person ■ receiving sales proceeds for the disposal equal to the propor- changes by more than 50% in value or number, the losses incurred tionate part of the market value of the asset at that time; and in the previous years cannot be used against the profit of the year. ■ reacquiring the asset for the same amount. The quantum of sales proceeds treated as received are reduced by 4.6 Is tax imposed at a different rate upon distributed, as the proportional cost of the asset to determine a gain or loss on the deemed disposal of the asset. If there is a gain, the gain will be opposed to retained, profits? included in calculating the income of the entity for the year in which No, there is no difference in this regard. the deemed disposal occurs. If there is a loss, the loss will be deductible (except for the case when more than 50% of ownership change is triggered). 4.7 Are companies subject to any significant taxes not The law states that where a legal person pays profits tax under this covered elsewhere in this chapter – e.g. tax on the law because of paragraph 1), any disposal of shares or comparable occupation of property? interests that caused the change is exempt from profits tax. In addition, the new provisions have introduced a notification Property tax is levied annually on all residents and non-residents who requirement for the legal entity whose shares are being transferred. own agricultural land, buildings and “terrain” in Albania. Agricultural land is classified into 10 groups and is taxed at rates 5.2 Is there a participation exemption for capital gains? varying from ALL 700 to ALL 5,600 per hectare. Buildings, from 1 April 2018, are taxed based on the market value of the building Tax legislation does not provide for a participation exemption for (previously, a fixed amount for each square metre). capital gains. The tax rate varies: from 0.05% for buildings used as a dwelling; to 0.2% for buildings used for economic activity; and to 30% of the 5.3 Is there any special relief for reinvestment? respective tax amount for the entire building, if the developer failed to complete the construction within the deadline set forth in the There is no rollover relief available in Albania, or any other relief. construction permit. The tax on buildings is paid each month. “Terrain” (defined in law as land available for building upon) is taxed at ALL 0.14 to ALL 20 per m2.

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5.4 Does your jurisdiction impose withholding tax on the 8 Taxation of Commercial Real Estate proceeds of selling a direct or indirect interest in local assets/shares? 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? There is no withholding tax on the proceeds of the sale of interest in assets/shares, but the seller must declare and pay the tax on Non-residents are taxed on the disposal of real estate in Albania, at income generated from the transaction. a rate of 15% of the realised profit.

6 Local Branch or Subsidiary? 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your 6.1 What taxes (e.g. capital duty) would be imposed upon jurisdiction? the formation of a subsidiary? Current legislation does not provide for indirect interest taxation. There are no taxes payable upon the formation of subsidiaries. 8.3 Does your jurisdiction have a special tax regime for 6.2 Is there a difference between the taxation of a local Real Estate Investment Trusts (REITs) or their equivalent? subsidiary and a local branch of a non-resident company (for Under current legislation, there is no special tax regime for REITs example, a branch proﬁts tax)? or their equivalent in Albania. There are no such differences in taxes or fees specifically designed for subsidiaries. The taxable income of branches is subject to profit 9 Anti-avoidance and Compliance tax at the same rate (15%) as any Albanian entity. 9.1 Does your jurisdiction have a general anti-avoidance or 6.3 How would the taxable proﬁts of a local branch be anti-abuse rule? determined in its jurisdiction? Albanian fiscal legislation does not provide for a general anti- Branches are taxed only on taxable income from an Albanian source. avoidance rule. However, it gives the tax authorities the right to use Taxable income is determined in the same manner as for resident alternative methods of tax assessment when verifying the lack of companies. economic substance in a transaction.

6.4 Would a branch beneﬁt from double tax relief in its 9.2 Is there a requirement to make special disclosure of jurisdiction? avoidance schemes?

Branches are considered permanent establishments; hence they may Under current legislation, there are no requirements to disclose any benefit from double tax relief. avoidance scheme.

6.5 Would any withholding tax or other similar tax be 9.3 Does your jurisdiction have rules which target not only imposed as the result of a remittance of profits by the branch? taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax avoidance? Transfers or repatriation of profits by the branch are not subject to any tax in Albania. Albanian legislation does not have specific rules to target parties other than the taxpayer committing the tax avoidance. 7 Overseas Profits 9.4 Does your jurisdiction encourage “co-operative 7.1 Does your jurisdiction tax profits earned in overseas compliance” and, if so, does this provide procedural benefits branches? only or result in a reduction of tax?

Foreign-sourced income is taxable in Albania. However, tax credit The Tax Procedure Law requires co-operative compliance before the is allowable for the amount of income tax paid overseas for the tax audit commences. Taxpayers are entitled to review the tax income derived abroad up to the amount that would have been returns before a tax audit takes place; this results in lower penalties. payable in Albania on Albanian-sourced income. 10 BEPS and Tax Competition 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting BEPS? Receipt of dividends is tax-exempt income in Albania. The Albanian Government has indicated that the additional thin 7.3 Does your jurisdiction have “controlled foreign capitalisation rule, i.e. net interest expense to EBITDA, will be intro- company” rules and, if so, when do these apply? duced in response to OECD’s project (BEPS).

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

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10.2 Has your jurisdiction signed the tax treaty MLI and 10.5 Does your jurisdiction maintain any preferential tax deposited its instrument of ratiﬁcation with the OECD? regimes such as a patent box?

Albania has signed the MLI. In addition, the Albanian parliament There are no preferential regimes in Albania. has ratified it, but the instrument of ratification has not yet been deposited with the OECD. 11 Taxing the Digital Economy

10.3 Does your jurisdiction intend to adopt any legislation to 11.1 Has your jurisdiction taken any unilateral action to tax tackle BEPS which goes beyond the OECD’s digital activities or to expand the tax base to capture digital recommendations? presence?

There are no publicly expressed intentions to adopt any legislation No, there is no action to tax digital activities in Albania. Neither is beyond the OECD’s recommendations. there an initiative to tax digital presence.

10.4 Does your jurisdiction support information obtained 11.2 Does your jurisdiction favour any of the G20/OECD’s under Country-by-Country Reporting (CBCR) being made “Pillar One” options (user participation, marketing intangibles available to the public? or signiﬁcant economic presence)?

No, CBCR-obtained information is not made available to the public. No, Albania does not favour these options.

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Genc Boga is the Founder and Managing Partner of Boga & Associates, operating in Albania and Kosovo. Mr. Boga has solid expertise as an advisor to banks, financial institutions and international investors operating in the energy, infrastructure, technology and real estate sectors. Thanks to his experience, Mr. Boga acts as a legal advisor on a regular basis for the most important international financial institutions and foreign investors intending to invest in Albania and Kosovo. He is regularly engaged by EBRD, IFC and World Bank in various investment projects in Albania and Kosovo. Mr. Boga is continuously ranked as a leading lawyer in Albania by the most reputable international directories such as Chambers and Partners, The Legal 500 and IFLR1000. He is fluent in English, French and Italian. University Law Faculty, University of Tirana, Albania (1986). University of Paris X-Nanterre, Paris, France (1988). University of Paris II-Pantheon, Sorbonne, Paris, France (1990).

Boga & Associates Tel: +355 4 225 1050 Ibrahim Rugova Str. Email: [email protected] 1019 Tirana URL: www.bogalaw.com Albania

Alketa Uruçi is a Partner at Boga & Associates, which she joined in 1999. Ms. Uruçi practises in the areas of concession and energy, where she manages energy assignments on regulatory, corporate and commercial matters, including international arbitration proceedings. She has extensive experience in providing regular tax advice to commercial companies in corporate tax, VAT and employee taxation matters, and is involved in the management of several tax aspects of mergers and acquisitions transactions, tax planning and restructuring. In addition, Ms. Uruçi has performed a number of tax and legal due diligence assignments and managed legal consultancy to international clients. She has also assisted foreign clients during international arbitration proceedings and is active as a tax litigator in the Albanian courts. Ms. Uruçi chairs the tax and legal committee of the American Chamber of Commerce in Albania. She is fluent in English and Italian. Ms. Uruçi graduated from the University of Tirana in 1999 and 2004, respectively in law and finance.

Boga & Associates Tel: +355 4 225 1050 Ibrahim Rugova Str. Email: [email protected] 1019 Tirana URL: www.bogalaw.com Albania

Boga & Associates, established in 1994, has emerged as one of the premier energy and utilities, entertainment and media, mining, oil and gas, professional law firms in Albania and Kosovo, earning a reputation for providing the highest services, real estate, technology, telecommunications, tourism, transport, quality of legal, tax and accounting services to its clients. Until May 2007, the infrastructure and consumer goods. firm was a member firm of KPMG International and the Senior Partner/Managing The firm is continuously ranked as a “top tier firm” by major directories: Partner, Mr. Genc Boga, was also the Senior Partner/Managing Partner of KPMG Chambers Global; Chambers Europe; The Legal 500; and IFLR1000. Albania. www.bogalaw.com The firm’s particularity is linked to the multidisciplinary services it provides to its clients, through an uncompromising commitment to excellence. Apart from the widely consolidated legal practice, the firm also offers the highest standards of expertise in tax and accounting services, with keen sensitivity to the rapid changes in the Albanian and Kosovo business environment. The firm delivers services to leading clients in major industries, banks and financial institutions, as well as to companies engaged in insurance, construction,

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Argentina Argentina

Walter C. Keiniger

María Inés Brandt

Marval, O’Farrell & Mairal María Soledad Gonzalez

1 Tax Treaties and Residence Convention, Argentina has adopted a simplified limitation of benefits clause (“LoB”) and the principal purpose test clause (“PPT”).

1.1 How many income tax treaties are currently in force in 1.5 Are treaties overridden by any rules of domestic law your jurisdiction? (whether existing when the treaty takes effect or introduced Argentina has 20 income tax treaties in force and has signed income subsequently)? tax treaties with the following countries: Australia; Belgium; Bolivia; Brazil; Canada; Chile; Denmark; Finland; France; Germany; Italy; In general terms, they are not. Under section 75:22 of the Argentine Mexico; the Netherlands; Norway; Russia; Spain; Sweden; Switzerland; Federal Constitution, international treaties prevail over domestic law. the United Kingdom; and Uruguay. Nevertheless, the economic reality principle (sections 1 and 2 of the Recently, the Argentine Executive signed tax treaties with Qatar, Tax Procedure Law), which is deemed to be a general anti-avoidance Turkey, China, Luxembourg, Japan and the United Arab Emirates, rule, has been invoked by the Tax Authority and courts to deny treaty but they are pending approval by the Argentine Congress. benefits to specific cases and/or arrangements.

1.2 Do they generally follow the OECD Model Convention or 1.6 What is the test in domestic law for determining the another model? residence of a company?

Most of the income tax treaties signed by Argentina follow the In principle, the place of incorporation (i.e., a company set up in OECD Model Convention and, in certain specific aspects, the UN Argentina according to Argentine law is deemed to be an Argentine Model Convention. The treaty signed with Bolivia follows the tax resident). “Pacto Andino” Model Convention. 2 Transaction Taxes 1.3 Do treaties have to be incorporated into domestic law before they take effect? 2.1 Are there any documentary taxes in your jurisdiction?

To take effect, treaties should be approved according to the process Yes. Stamp tax is a local tax levied on public or private instruments required by the Argentine Constitution. Furthermore, under section executed in Argentina or, if executed abroad, to the extent that those 75:22 of the Argentine Constitution, international treaties prevail instruments are deemed to have effects in one or more relevant over domestic law. jurisdictions within Argentina. In general, the tax rate is around 1% and this tax is calculated on the economic value of the agreement (i.e., the purchase price, fees and royalties). 1.4 Do they generally incorporate anti-treaty shopping

rules (or “limitation on beneﬁts” articles)? 2.2 Do you have Value Added Tax (or a similar tax)? If so, at Traditionally, tax treaties signed by Argentina do not include anti- what rate or rates? treaty shopping rules. However, most of the tax treaties include the beneficial owner requirement for passive income such as dividends, Yes. Argentina applies Value-Added Tax (“VAT”) at a general rate royalties and interest. Moreover, most recent treaties signed by of 21%. Argentina (e.g., tax treaties with Chile and Mexico) include general anti-treaty shopping rules. On the other hand, Argentina has signed 2.3 Is VAT (or any similar tax) charged on all transactions the Multilateral Convention to Implement Tax Treaty Related or are there any relevant exclusions? Measures to Prevent Base Erosion and Profit Shifting (“BEPS”), which – once in effect – will incorporate different anti-treaty shop- VAT applies to the sale of goods, the provision of services and the ping rules to Argentina’s treaty network. Under such Multilateral import of goods in Argentina. Under certain circumstances, services rendered outside Argentina that are effectively used or exploited in

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Argentina (including digital services), usually called “importation of 2.7 Are there any other indirect taxes of which we should services”, are deemed rendered in Argentina and thus subject to be aware? VAT. Exports of goods are not subject to VAT and services rendered in Argentina that are effectively used or exploited outside Yes. The excise tax (“impuestos internos”) is a tax that applies to a wide of Argentina are not subject to VAT. variety of items sold in Argentina (not on exports), principally on tobacco, wines, soft drinks, gasoline, lubricants, insurance premiums, 2.4 Is it always fully recoverable by all businesses? If not, automobiles, mobile services, perfumes, jewellery and precious what are the relevant restrictions? stones. The bases of the assessment and tax rate depend on each product VAT is paid at each stage of the production or distribution of goods (for example, for alcoholic drinks the nominal rate is between 20% or services, based on the value added during each of the stages. This and 26%, for beers the nominal rate is between 8% and 14% and for means that the tax does not have a cumulative effect. The tax is jewellery and precious stones the nominal rate is 20%). levied on the difference between the so-called “tax debit” and “tax credit”. The difference between “tax debit” and “tax credit”, if 3 Cross-border Payments positive, constitutes the amount to be paid to the Tax Authority. The current general rate for this tax is 21%. However, sales and imports 3.1 Is any withholding tax imposed on dividends paid by a of capital goods are subject to VAT at a lower tax rate of 10.5%. locally resident company to a non-resident? Under a recent tax reform, VAT Law provides a system to reimburse VAT credits resulting from the purchase, manufacture, preparation Yes. According to a recent tax reform, the corporate income tax rate or import of fixed assets (other than automobiles) that remain as a for resident companies and Argentine branches of foreign VAT credit for the taxpayer after six months. companies is 30% for the two fiscal years beginning on or after 1 The reimbursement will be subject to the condition that the VAT January 2018, reducing to 25% for fiscal years beginning on or after credits would have normally been absorbed within a 60-month period, 1 January 2020. The aforementioned tax reform also introduced a through VAT payable on local transactions or VAT reimbursements withholding tax on dividend distributions and branch profit related to exports. If such condition is complied with, the remittances at rates of 7% (while the applicable corporate tax rate is reimbursement will be considered definitive (i.e., the tax authorities 30%) and 13% (once the applicable corporate tax rate is reduced to will not make a request to be repaid the reimbursed amounts). 25%). Such rates could be reduced under certain treaties, to avoid Otherwise, the taxpayer will be required to reimburse the tax auth- double taxation, executed by Argentina. orities with the amount that did not meet the condition, plus interest. Exports of goods and services are exempt from VAT; a reimbursement regime is also in place for VAT credits related to the 3.2 Would there be any withholding tax on royalties paid by export activity. a local company to a non-resident?

Yes. Royalty payments will be subject to withholding tax. The 2.5 Does your jurisdiction permit VAT grouping and, if so, effective withholding rate varies, depending on the type of royalty is it “establishment only” VAT grouping, such as that applied that is being paid. For example, royalties for software licences are by Sweden in the Skandia case? subject to an effective 31.5% rate, payments for trademark licences are subject to an effective 28% rate, payments for technical assistance This is not applicable in Argentina. under certain circumstances are subject to an effective 21% rate, etc. In certain cases where a reduced rate is applicable, the local company 2.6 Are there any other transaction taxes payable by must comply with certain registration requirements of the agree- companies? ments where the royalties are agreed. In general, double tax treaties executed by Argentina reduce such rates. Yes. Turnover tax: This tax is a local tax levied on gross income. Each 3.3 Would there be any withholding tax on interest paid by of the provinces and the City of Buenos Aires apply different tax a local company to a non-resident? rates to different activities. The tax is levied on the amount of gross income resulting from business activities carried out within the Yes. The general withholding tax rate is 35%. A reduced 15.05% respective local jurisdictions. The provinces and the City of Buenos withholding tax rate is applicable if: (i) the borrower is a local Aires have entered into an agreement to prevent double taxation on financial institution governed by Law N° 21,526; (ii) the lender is a activities carried out in more than one jurisdiction. bank or a financial institution not located in a low-tax jurisdiction; Tax on debits and credits: This tax is levied on debits and credits and (iii) the transaction involves the seller’s financing of depreciable in Argentine bank accounts and on other transactions that, due to movable property (except automobiles). In general, double tax their special nature and characteristics, are similar or could be used treaties executed by Argentina reduce such rates. in substitution of a bank account, such as payments on behalf of, or in the name of, third parties. Transfers and deliveries of funds 3.4 Would relief for interest so paid be restricted by also fall within the scope of this tax, regardless of the person or entity that performs them, when those transactions are made reference to “thin capitalisation” rules? through organised payment systems as a substitute for bank The tax reform introduced by Law N° 27,430 has also replaced the accounts. Tax law and regulations allow for several exemptions to thin capitalisation rules, although many aspects still need to be this tax. The general rate of the tax is 0.6% on each credit and debit. addressed by regulations. The current rules only apply with respect An increased rate of 1.2% applies in cases where there has been a to “financial debt” (debt incurred to acquire assets or services related substitution of a bank account. 33% of the tax on debits and credits to the operation of the company is excluded) entered with related paid can be used as a credit to offset income tax liabilities. parties, whether resident in Argentina or not. The deduction of this

type of interest and negative foreign exchange differentials is limited to a fixed amount per year, which will be determined by the Executive

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Branch, or 30% of the taxpayer’s taxable income before interest and The withholding tax on dividends applies when the dividend is depreciation, whichever limit is higher. The new rules provide for a paid: (i) to an Argentine resident individual; and (ii) to a non- carry back of three years and a carry forward of five years to allocate Argentine resident (either an individual or a legal entity). interest that was not deductible when accrued. Moreover, a company may avoid the applicable limitations if it can demonstrate 4.2 Is the tax base accounting proﬁt subject to that the annual amount of interest related to financial debt, as adjustments, or something else? compared to its taxable income, is within or below the ratio of indebtedness with third parties, determined by the economic group Yes. The tax base is the accounting profit subject to adjustments. to which the company belongs. Furthermore, interest may be deducted without limitations if the company incurring the debt can 4.3 If the tax base is accounting proﬁt subject to demonstrate that the beneficiary of the interest paid the corresponding income tax for those benefits. adjustments, what are the main adjustments?

The main adjustments are related to valuation of assets, 3.5 If so, is there a “safe harbour” by reference to which tax depreciations and uncollectable credits, among others. relief is assured? 4.4 Are there any tax grouping rules? Do these allow for Please refer to our answer to question 3.4. relief in your jurisdiction for losses of overseas subsidiaries? 3.6 Would any such rules extend to debt advanced by a There are no tax grouping rules. third party but guaranteed by a parent company? 4.5 Do tax losses survive a change of ownership? There are no specific provisions in the income tax law; therefore, general rules, as described in the answer to question 3.4, would apply. Yes, although such change of ownership might preclude the transfer of tax losses if a tax-free reorganisation takes place within a two- 3.7 Are there any other restrictions on tax relief for interest year term of such change of ownership. payments by a local company to a non-resident, for example pursuant to BEPS Action 4? 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits? No, there are not. Please see our answer to question 4.1. 3.8 Is there any withholding tax on property rental payments made to non-residents? 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the Rental payments are subject to an effective income tax withholding occupation of property? of 21%. Such rate could be reduced under certain treaties, to avoid double taxation, executed by Argentina. Personal Assets Tax (also called “wealth tax”) applies on shares and other equity participations in local companies and is paid by the local 3.9 Does your jurisdiction have transfer pricing rules? company itself. The applicable rate is 0.25% on the company’s net worth, or market value if the company is listed. Yes. In general these rules follow the OECD Guidelines. Transfer pricing practices take place when an Argentine company enters into 5 Capital Gains business transactions with: (i) a related party located abroad and the prices agreed in such transactions do not reflect normal market practices, i.e., they are not at arm’s length; or (ii) a non-related party 5.1 Is there a special set of rules for taxing capital gains located in a low-tax or non-cooperative jurisdiction, as defined by and losses? the income tax law. Export and import operations with an international intermediary Capital gains obtained by Argentine companies are treated as are subject to additional scrutiny by tax authorities, as the taxpayers ordinary income. If a non-Argentine resident sells shares issued by must show that the intermediary’s fee is reasonable considering the an Argentine company, the gain – if any – is subject to a 15% tax functions, risks and assets involved in the transactions. rate calculated on the actual net gain or a presumed net gain of 90% of the gross amount of the transaction. 4 Tax on Business Operations: General Losses from the sale of shares may be set off only against profits of the same kind and the same source. The results obtained by Argentine individuals from the sale, 4.1 What is the headline rate of tax on corporate profits? transfer or disposition of shares, securities representing shares and certificates of deposit of shares that are carried out through stock According to a recent tax reform, the corporate income tax rate for exchanges or stock markets, authorised by the Argentine Securities resident companies and Argentine branches of foreign companies and Exchange Commission, will be exempt. The foregoing exemp- is 30% for the two fiscal years beginning on or after 1 January 2018, tion will also be applicable to foreign beneficiaries to the extent that reducing to 25% for fiscal years beginning on or after 1 January said beneficiaries do not reside in, and the funds do not come from, 2020. The aforementioned tax reform also introduced a withholding non-cooperative jurisdictions as defined by the income tax law. tax on dividend distributions and branch profit remittances at rates of 7% (while the applicable corporate tax rate is 30%) and 13% (once the applicable corporate tax rate is reduced to 25%). Such 5.2 Is there a participation exemption for capital gains? rates could be reduced under certain treaties, to avoid double There is no participation exemption for capital gains obtained by taxation, executed by Argentina. Argentine companies.

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5.3 Is there any special relief for reinvestment? 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident company (for Taxation on capital gains obtained upon the transfer of land or buildings, which have been held as fixed assets (“bienes de uso”) for a example, a branch profits tax)? minimum of two years, may be deferred to the extent that the whole No, except for certain specific aspects (e.g., a branch cannot be part amount obtained upon the transfer is reinvested in compliance with of a tax-free merger, while a subsidiary can). An important the following requirements: difference is regarding the Personal Assets Tax: the branches are not (i) the total amount arising from the disposal must be reinvested subject to said tax in accordance with an interpretation made by the within one year in assets of a similar nature; or Federal Supreme Court. On the contrary, local subsidiaries are (ii) the total amount arising from the disposal must be reinvested in subject to said Tax at a 0.25% rate. Apart from this difference, in the construction of a new building or the refurbishment of an general, taxation of a local branch and a subsidiary is very similar. existing building, and the construction or refurbishment works Please see the answer to question 4.1. must commence within one year as from the disposal and the works must be completed within four years. A rollover alternative is also available for depreciable assets. The 6.3 How would the taxable profits of a local branch be taxpayer may defer the capital gains arising from the sale or transfer determined in its jurisdiction? of depreciable assets if: (i) the taxpayer invested in a substitute asset; and The tax base is the accounting profit subject to adjustments, as in (ii) the sale or transfer of the fixed asset and the acquisition of the the case of a subsidiary. Please see the answer to question 4.2. new one is done within a 12-month period. If the taxpayer defers the capital gains, the tax basis of the substitute 6.4 Would a branch benefit from double tax relief in its asset will be reduced by the capital gains so reinvested. jurisdiction?

5.4 Does your jurisdiction impose withholding tax on the Yes. A local branch is deemed as an Argentine resident for tax purposes. proceeds of selling a direct or indirect interest in local

assets/shares? 6.5 Would any withholding tax or other similar tax be According to the amendments introduced by Law N° 27,430, the imposed as the result of a remittance of profits by the indirect disposal of assets in Argentina was included as a taxable branch? event under certain conditions. A presumption of income from an Argentine source was introduced into income tax law when non- Remittance of profits by a local branch is treated similarly to a dividend residents transfer shares and participations of foreign entities whose distribution by a subsidiary. Please see the answer to question 4.1. underlying assets are fully or partly located in Argentina. This new concept is in the article following Article 13 of income tax law and 7 Overseas Profits is entitled “indirect disposal of assets located in the national territory”. This concept establishes that when a non-resident transfers shares, 7.1 Does your jurisdiction tax profits earned in overseas quotas, participations and other rights representative of the capital or equity of an entity incorporated, domiciled or located abroad, the branches? resulting income will be considered as Argentine-sourced income as Yes. The income obtained by overseas branches is taxed for the long as the following conditions are met: resident parent company in Argentina as foreign-sourced income. (1) At least 30% of the value of the shares, participations or rights The profits of foreign permanent establishments are attributed to the of the foreign entity, at the time of sale or in any of the previous owner, even if such profits have not been distributed or remitted. 12 months, derives from assets that the entity owns directly or The same rule applies to the attribution of tax losses, except with indirectly in Argentina. respect to losses derived from the sale of securities, interest or units Argentine assets will be valued at their fair market value and will in foreign mutual funds, which can be offset only from foreign- include: sourced income obtained by the permanent establishment from the (i) shares, rights, quotas or other forms of ownership, control same type of transactions. According to income tax law, foreign taxes or participation in the profits of a company, fund, trust or paid will be allowed as tax credit against the Argentine tax liability to other entity incorporated in Argentina; the extent the foreign tax does not exceed the Argentine tax. (ii) permanent establishments in Argentina belonging to a non- resident person or entity; and (iii) other assets of any nature located in Argentina, or rights 7.2 Is tax imposed on the receipt of dividends by a local over them. company from a non-resident company? (2) The shares, participations or rights of the foreign entity being sold represent at least 10% of the equity of that entity, at the Yes. The receipt of dividends by a local company from a non- time of their disposal or in any of the previous 12 months. resident company is subject to income tax as foreign-sourced This provision is applicable for acquisitions made as from 1 January income. According to income tax law, foreign taxes paid will be 2018. However, the tax does not apply if the transfer takes place allowed as tax credit against the Argentine tax liability to the extent within the same economic group. the foreign tax does not exceed the Argentine tax.

6 Local Branch or Subsidiary? 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? 6.1 What taxes (e.g. capital duty) would be imposed upon Yes. CFC rules apply to foreign companies that have “fiscal person- the formation of a subsidiary? ality” (i.e., companies that are treated as local taxpayers in the jurisdictions where they are residents) in the jurisdiction where the No specific tax would be imposed upon the formation of a branch company is located and to the extent certain conditions are met, or a subsidiary.

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including the following: (i) the resident taxpayer (together with Yes. Pursuant to section 8 of the Tax Procedure Law, joint and related parties, if applicable) owns at least a 50% participation in the several liability for tax debts and penalties of a taxpayer is extended foreign entity or if, even when this participation does not exist, in to those persons who “through their fraud or negligence, facilitate fact the resident taxpayer controls said foreign entity in accordance the tax evasion”. with certain parameters mentioned in the law; (ii) the foreign entity The Criminal Tax Regime and the Criminal Code also have “does not have organization of material and personal resources to provisions in order to target any person that promotes, enables or carry out its activity” or obtains at least 50% of passive income, or facilitates tax evasion. its revenues constitute deductible expenses for resident related parties; and (iii) the income tax paid abroad is lower than 75% of the 9.4 Does your jurisdiction encourage “co-operative tax that would have corresponded with Argentine income tax rules. compliance” and, if so, does this provide procedural beneﬁts If such conditions are met, the Argentine resident shareholder should recognise the income obtained by the foreign company as if only or result in a reduction of tax? the foreign company did not exist. There is no specific provision regarding “cooperative compliance rules”.

8 Taxation of Commercial Real Estate 10 BEPS and Tax Competition

8.1 Are non-residents taxed on the disposal of commercial 10.1 Has your jurisdiction introduced any legislation in real estate in your jurisdiction? response to the OECD’s project targeting BEPS? The income arising from the sale of a real estate obtained by a non- On 29 December 2017, Argentina published Law N° 27,430 in the Argentine resident is subject to a withholding tax. The corresponding Official Gazette. Law N° 27,430 contains the following BEPS withholding tax rate is 17.5% (the approximate percentage gross-up measures: being 21.21%), since the law presumes that 50% of the amount paid ■ VAT on digital services and income tax on cryptocurrencies – abroad constitutes net income for the foreign beneficiary. By BEPS Action 1. applying a tax rate of 35% to that amount, the withholding tax rate ■ New CFC rules included in the income tax law – BEPS Action 3. becomes, in effect, 17.5%. ■ Modification of the thin capitalisation rules – BEPS Action 4. The non-resident may opt to pay tax at the rate of 35% on net ■ Anti-abuse clause included in recent Double Taxation Treaties income, instead of the presumed net income. Net income is executed by Argentina (Spain, Chile, Mexico and Brazil) – BEPS calculated by deducting the actual expenses incurred in Argentina Action 6. for obtaining the taxable income (i.e., the acquisition cost of the real ■ New definition of Permanent Establishment – BEPS Action 7. estate) from the gross amount received. ■ Regulation of Joint Determination of Prices of International

Operations – BEPS Actions 8–10. 8.2 Does your jurisdiction impose tax on the transfer of an ■ Sanctions related to Country-by-Country (“CbC”) Reporting – indirect interest in commercial real estate in your jurisdiction? BEPS Action 13. ■ Regulation of the Mutual Agreement Procedure – BEPS Action 14. Yes. Please see the answer to question 5.4. ■ Signature of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit 8.3 Does your jurisdiction have a special tax regime for Shifting – BEPS Action 15. Real Estate Investment Trusts (REITs) or their equivalent? 10.2 Has your jurisdiction signed the tax treaty MLI and No. However, there is a specific regime to encourage the devel- deposited its instrument of ratiﬁcation with the OECD? opment of housing construction for medium- and low-income populations, mutual funds or financial trusts, whose investment On 7 June 2017, Argentina signed the Multilateral Convention to objectives are: (i) real estate developments for social housing of Implement Tax Treaty Related Measures to Prevent BEPS. medium- and low-income populations; (ii) mortgage loans; and/or (iii) mortgage securities, distributions originated in rental or the result 10.3 Does your jurisdiction intend to adopt any legislation to of the sale of the assets. tackle BEPS which goes beyond the OECD’s 9 Anti-avoidance and Compliance recommendations? No, it does not. 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? 10.4 Does your jurisdiction support information obtained Yes. The general anti-avoidance rule is the economic reality principle under Country-by-Country Reporting (CBCR) being made established by the Tax Procedure Law. available to the public?

On 30 June 2016, Argentina signed the Multilateral Competent 9.2 Is there a requirement to make special disclosure of Authority Agreement on the Exchange of CbC Reports, which avoidance schemes? established a roadmap to automatically exchange CbC Reports between nations. General Resolution 4130-E implemented a No, there is not. supplementary information regime applicable to the local entity of

an MNE Group, regardless of whether such MNE Group is subject 9.3 Does your jurisdiction have rules which target not only to CbC reporting, i.e., regardless of whether the €750,000.00 taxpayers engaging in tax avoidance but also anyone who threshold is exceeded. The information must be provided annually promotes, enables or facilitates the tax avoidance? to the Federal Administration of Public Revenue (AFIP). Such information is not available to the public.

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10.5 Does your jurisdiction maintain any preferential tax Buenos Aires. The tax is levied on the regular performance of activities for a valuable consideration within a given jurisdiction. The regimes such as a patent box? rates typically vary from 3% to 5% for the sale of goods and services. No, it does not. Recently, some provinces and the City of Buenos Aires have established turnover tax withholding systems applicable to non- 11 Taxing the Digital Economy Argentine residents. For instance, the City of Buenos Aires has established a turnover tax withholding system applicable to foreign companies offering “online subscription services with access to films, TV 11.1 Has your jurisdiction taken any unilateral action to tax shows and other types of audiovisual entertainment broadcasted through the digital activities or to expand the tax base to capture digital Internet on TV sets, computers and other devices connected to the Internet” presence? (which never became effective because it has been indefinitely suspended), while the Province of Buenos Aires has established Not regarding income tax. Actions have been adopted regarding initial provisions implementing a similar turnover tax withholding VAT. Article 1 of the Law on VAT introduces a new taxable event system for non-Argentine residents. related to the provision of digital services by non-Argentine Other jurisdictions, such as the Province of Córdoba also residents abroad whose use or effective exploitation is carried out in established a turnover tax withholding regime applicable to non- Argentina, as long as the customer is not subject to the tax for other Argentine residents who perform taxable activities in the province taxable events and does not assume the quality of registered and are not registered for turnover tax purposes in the province. taxpayer. In this respect, a definition of the concept of digital The withholding should be performed by residents in the province services is introduced as subparagraph “m” of paragraph 21 of who are recipients or beneficiaries of services provided by non- subparagraph “e” of Article 3. Digital services will be understood, Argentine residents with respect to services “exploited or utilized” whatever the device used for download, display or use is, as those within the province. carried out through the internet, or any adaptation or application of protocols, platforms or technology used by the internet, or other 11.2 Does your jurisdiction favour any of the G20/OECD’s network through which equivalent services are provided that, by their nature, are basically computerised and require minimum human “Pillar One” options (user participation, marketing intangibles intervention. Various cases were also established in which digital or signiﬁcant economic presence)? services are considered. Some actions have been taken by certain Argentine provinces and Argentina did not adopt in its internal rules any of the three options the City of Buenos Aires regarding the turnover tax. The turnover regarding how taxing rights on income generated from cross-border tax is a tax imposed by each Argentine province and the City of activities in the digital economy should be allocated among countries.

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Walter C. Keiniger joined Marval, O’Farrell & Mairal in 1999 and is a partner in the tax department. He has been recognised as one of the main tax lawyers in Argentina by prestigious directories, such as Chambers & Partners, The Legal 500, World Tax and LL250. He has been awarded, back-to- back, the 2018 and 2019 Client Choice Award for Corporate Tax in Argentina. He obtained his law degree at the University of Buenos Aires, School of Law (1994), with a specialisation in Tax Law. He also holds a Master of Laws in Taxation from the University of Florida, USA (2003), a degree earned at the Graduate Tax Program of the University of Buenos Aires, School of Economics (1997) and attended a course of specialisation in Tax Law at the University of Salamanca, Spain (1998). He is a member of the Argentine Fiscal Association, the International Fiscal Association, Transnational Taxation Network (TTN) and STEP. He was visitor professor of the University of Florida (USA) and the University of Miami (USA), and teaches at UADE (Universidad Argentina de la Empresa).

Marval, O’Farrell & Mairal Tel: +54 11 4310 0100 Leandro N. Alem 882 Email: [email protected] Buenos Aires URL: www.marval.com Argentina

María Inés Brandt is a partner of the Marval, O’Farrell & Mairal Tax Department with more than 20 years’ experience in tax matters. She focuses on tax advice and planning and has outstanding expertise in the tax aspects of large, challenging corporate and finance transactions, including the design, planning and organisation of tax-efficient transactions. Before joining Marval, she was a founding partner at Tanoira Cassagne Abogados and a partner at Estudio Beccar Varela. María Inés is recognised as a leading tax lawyer by all the key legal directories, including Chambers Global, Chambers Latin America, The Legal 500 and LL250. She is a member of the Argentine Fiscal Association, regularly contributes articles to well-known legal publications and has been invited as a speaker at various conferences. She graduated with honours from the Universidad de Buenos Aires in 1993 and specialised in Tax Law in 1995 at the same university.

Marval, O’Farrell & Mairal Tel: +54 11 4310 0100 Leandro N. Alem 882 Email: [email protected] Buenos Aires URL: www.marval.com Argentina

María Soledad Gonzalez joined Marval, O’Farrell & Mairal in 2003 and is currently a senior associate in the tax department. Before joining the firm, she worked at Dr. Duloup’s Law Firm as an intern and paralegal. She graduated from the Universidad de Buenos Aires with a Law Degree in 2002 and later completed an International Program in Tax Law at the Universidad Torcuato Di Tella. María Soledad is a member of the Asociación Argentina de Estudios Fiscales, where she actively participates in different research commissions.

Marval, O’Farrell & Mairal Tel: +54 11 4310 0100 Leandro N. Alem 882 Email: [email protected] Buenos Aires URL: www.marval.com Argentina

Marval’s tax department has an unrivalled range of expertise. Our team is ■ Tax advisory and planning services for individuals. equally strong in all types of advisory work, tax planning and transactional ■ Representation of clients before the Argentine tax authorities. matters, as well as litigation before all levels of the courts. ■ Tax litigation before all levels of the local courts, including the Argentine Our tax department is renowned for assisting clients with sophisticated tax Supreme Court. structures, complex cross-border transactions and high-profile tax litigation. ■ Advising and representation before local courts regarding customs We also have unmatched experience advising clients on regional tax matters taxation. involving other Latin American jurisdictions. www.marval.com Our tax department works closely with the firm’s market-leading corporate, finance and capital markets departments, particularly in M&A and other transactions. Our tax practice covers a wide range of matters including:

■ Comprehensive tax advisory service. ■ Advising on domestic and international transactions. ■ Tax aspects of M&A, corporate reorganisations, foreign investments and international ﬁnancial transactions.

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Australia Australia

Richard Hendriks

Greenwoods & Herbert Smith Freehills Cameron Blackwood

1 Tax Treaties and Residence 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on beneﬁts” articles)? 1.1 How many income tax treaties are currently in force in Australia’s tax treaties traditionally did not incorporate anti-treaty your jurisdiction? shopping rules. However, limitation of benefits articles are included in some of Australia’s more recently negotiated treaties, including its Australia has comprehensive income tax treaties with 45 countries, treaties with the US, Japan, Germany and Israel. Other new treaties including the US, UK, most Western European countries, most East contain specific provisions within the dividend, interest and royalty and South-East Asian countries and New Zealand. articles. In addition, Australia’s domestic general anti-avoidance rule Australia has also concluded Tax Information Exchange and the diverted profits tax (see question 9.1 below) may apply to Agreements with a number of countries, including many low-tax prevent treaty shopping. jurisdictions such as the Cayman Islands. It is a signatory to the Australia’s treaties with Germany and Israel include a simplified Multilateral Convention to Implement Tax Treaty Related Measures anti-treaty shopping rule that incorporates a BEPS-style principal to Prevent Base Erosion and Profit Shifting (MLI), and to the purpose test. Multilateral Competent Authority Agreement on Automatic

Exchange of Financial Account Information (Common Reporting Standard or CRS). Australia has entered into a “Model 1” inter- 1.5 Are treaties overridden by any rules of domestic law governmental agreement with the US and enacted domestic (whether existing when the treaty takes effect or introduced legislation to give effect to the US Foreign Account Tax Compliance subsequently)? Act (FATCA). Yes, occasionally. The Agreements Act gives treaties the force of 1.2 Do they generally follow the OECD Model Convention or Australian law. To the extent that a treaty provision conflicts with domestic legislation, the treaty provision takes precedence. another model? However, specific overriding provisions found in the Agreements Australia’s income tax treaties generally follow the OECD model. Act allow Australia’s general anti-avoidance rule to operate However, the US treaty follows the US model and some differences unaffected by a treaty. exist in some other treaties. Australia’s treaties vary as to the allocation of rights to tax alienation of interests in land-rich entities. 1.6 What is the test in domestic law for determining the The Finnish, French, German, Israeli, Japanese, New Zealand, residence of a company? Norwegian, South African, Swiss, UK and US treaties provide withholding concessions and exemptions for interest paid to unrelated A company is tax-resident in Australia if it is incorporated in financial institutions and dividends paid to holding companies and Australia, or if it carries on business in Australia with central significant corporate shareholders. For details, please see questions management and control in Australia or its voting power is 3.1 and 3.3. controlled by shareholders resident in Australia. Most of Australia’s Australia’s most recently signed double tax treaties – its treaty with tax treaties include a tie-breaker for dual residency, usually by Germany, signed in November 2015, and with Israel, signed in reference to the place of effective management, though this will be March 2019 – largely give effect to the OECD’s Base Erosion and removed for some treaties pursuant to the MLI. Profit Shifting (BEPS) recommendations. The Tax Office has updated its guidance on the meaning of these tests in a recent ruling (TR 2018/5), following 2016 Australian High Court 1.3 Do treaties have to be incorporated into domestic law decision in Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation [2016] HCA 45. before they take effect?

Treaties must be incorporated into Australia’s domestic law before 2 Transaction Taxes they take effect. Each time a treaty is concluded, the International Tax Agreements Act 1953 (Agreements Act) is amended to give 2.1 Are there any documentary taxes in your jurisdiction? force of law to the treaty. Yes. Stamp duty is a documentary tax. Stamp duty is levied by the various Australian States and Territories. Although largely aligned, the duty regimes differ between the States and Territories.

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Stamp duty is levied on transfers of interests in land (including on 2.6 Are there any other transaction taxes payable by the value of plant and equipment transferred with land), the creation companies? of beneficial interests in land, transfers of shares and units in land- holder entities, motor vehicle transfers and insurance contracts at Various States impose minor licensing fees. rates of up to 7%. Victoria, New South Wales, South Australia, Western Australia, Tasmania and Queensland have introduced a 2.7 Are there any other indirect taxes of which we should foreign purchaser surcharge of up to 8% on foreign purchases of residential land. be aware? Queensland, Western Australia and the Northern Territory also Yes. Australia also imposes the following indirect taxes: levy duty on transfers of business assets such as goodwill.

A nominal amount of duty also applies to some documents, e.g. Excise duty trust deeds in New South Wales and Victoria. Excise duty is levied on some goods manufactured in Australia, While stamp duty was historically a documentary tax, avoidance- including alcohol, tobacco and petroleum. type rules can also trigger duty if transactions are effected without documents. Land tax

Land tax is imposed by each State and the Australian Capital 2.2 Do you have Value Added Tax (or a similar tax)? If so, at Territory on the value of commercial real estate. Agricultural land what rate or rates? is excluded. Broadly, the liability for land tax rests with the land- owner and the rates differ depending on the jurisdiction. The Goods and services tax (GST) is imposed on supplies that are maximum rate is 3.7% per annum for land values in excess of A$1.302 connected with Australia and on goods imported into Australia. The million in South Australia. GST rate is 10%. GST is similar in scope and operation to the Value Queensland, Victoria and New South Wales have each introduced Added Tax systems of European Union Member States. a surcharge for foreign owners of residential property at rates of up to 2% per annum. 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? Customs duty Goods imported into Australia may be subject to customs duty. Supplies that are classified as “GST-free” do not attract GST. These supplies include education, health-related services, most basic types Major bank levies of food, exports (of goods and services) and the supply of a busi- A UK-style levy on Authorised Deposit-taking Institutions (ADIs) ness as a going concern. with licensed entity liabilities of at least A$100 billion, commenced Other supplies that do not attract GST are known as “input- on 1 July 2017. Currently only five Australian banks have liabilities taxed” supplies. These include financial supplies such as a transfer of that magnitude. The levy rate is 0.015% per quarter. of shares in a company, residential rent and the sale of previously occupied residential premises. 3 Cross-border Payments The distinction is important because while neither class of supply is subject to GST, input tax credits cannot be claimed for GST 3.1 Is any withholding tax imposed on dividends paid by a included in the price of acquisitions that relate to input-taxed supplies. locally resident company to a non-resident?

2.4 Is it always fully recoverable by all businesses? If not, Dividends paid by a resident company out of untaxed profits are what are the relevant restrictions? subject to a 30% dividend withholding tax, unless the rate is reduced under an applicable treaty (generally to 15%). On the other hand, An entity is broadly entitled to claim input tax credits for things dividends paid by an Australian resident company out of post-tax acquired in the course of its business, except to the extent that the profits are exempt from dividend withholding tax. acquisition relates to input-taxed supplies (for example, financial Under the US, UK, Japanese, Finnish, New Zealand, Norwegian, supplies such as money lending or other dealings with debt or equity Swiss and German treaties (each a recently concluded or interests). Input tax credits are offset against the taxpayer’s own GST renegotiated treaty), dividend withholding tax is also reduced to nil liabilities so that only a net GST amount is payable. Apportionment where certain beneficially entitled companies (generally, listed for “mixed use” acquisitions is required. Reduced input tax credits companies, or companies that are wholly or mainly owned by a listed are available for some transactions that would otherwise be input- company or listed companies) hold at least 80% of the voting power taxed supplies (for example, transaction banking and funds transfer in the Australian company paying the dividends, and a 5% rate services, securities brokerage and trustee and custodial services). applies where any beneficially entitled company holds at least 10% of the voting power. The second concession also applies under the 2.5 Does your jurisdiction permit VAT grouping and, if so, French, Chilean, South African, Turkish and Israeli treaties, which is it “establishment only” VAT grouping, such as that applied are also recently renegotiated treaties. Finally, dividends will not be subject to dividend withholding tax by Sweden in the Skandia case? where they are paid out of “conduit foreign income”. Conduit foreign Australian GST law allows the grouping of multiple registered busi- income is essentially foreign income of the Australian company that ness entities if they are 90% commonly-owned. Both the head office is not subject to Australian tax (for example, non-portfolio dividends of a company and its branch office are treated as a single entity for – please refer to question 7.2 below) and is paid on to a foreign Australian GST purposes, although it is possible to register a branch resident as a dividend, rather than accumulated in Australia. as a separate taxpayer for GST purposes. A foreign company (whether Dividends paid by an Australian company that are effectively or not it has an Australian branch) can join an Australian GST group. connected with the Australian branch of a non-resident are taxed in Australia by assessment rather than by a withholding tax.

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3.2 Would there be any withholding tax on royalties paid by Maximum allowable debt tests Thin capitalisation rules will not deny any portion of an entity’s a local company to a non-resident? interest deductions provided that the entity’s debt is within the Royalties paid to a non-resident are subject to a 30% royalty with- maximum allowable amount. holding tax. If a treaty applies, royalty withholding tax is usually Entities that are not ADIs are allowed a “safe harbour” debt-to- reduced to 10%. Royalty withholding tax is reduced to 5% under equity ratio of 1.5:1. The safe harbour may be exceeded if a higher the Finnish, French, German, Israeli, Japanese, New Zealand, level of debt could reasonably be borrowed by the entity from Norwegian, South African, Swiss, UK and US treaties. commercial lenders. However, this “arm’s length debt” level is The term “royalty” is broadly defined in Australia’s domestic legis- judged according to strict statutory criteria (parent company support lation and includes fees paid for the use or supply of commercial is disregarded). property and rights. The term “royalty” is also defined in Australia’s Investors that are not ADIs are also allowed gearing of their treaties and can differ from Australia’s domestic legislation. In those Australian operations at up to 100% of the overall group’s world- cases, the treaty definition generally prevails. However, the payments wide gearing. could still be subject to tax under Australia’s domestic legislation, as Significantly higher debt levels are afforded to financial evident from the Full Federal Court decision in Satyam Computer institutions, including a 15:1 safe harbour. ADIs are allowed gearing Services Limited v. FCT [2018] FCAFC 172. levels referable to their regulatory prudential capital requirements. More recently negotiated treaties exclude natural resource payments and equipment royalties from royalty withholding tax. 3.6 Would any such rules extend to debt advanced by a However, interest withholding tax applies to rental payments to non- third party but guaranteed by a parent company? residents under arrangements in which cross-border leases are structured as hire-purchase arrangements. The thin capitalisation rules apply to all debt interests, including debt Royalties derived by a resident of a country with which Australia advanced by related and unrelated parties, whether Australian or has concluded a comprehensive income tax treaty, that are effectively foreign-resident and, in the case of debt advanced by an unrelated connected with an Australian branch, are treated as business profits party, whether or not it is supported by a related party. and are taxed in Australia on an income tax assessment rather than a withholding tax basis. 3.7 Are there any other restrictions on tax relief for interest

payments by a local company to a non-resident, for example 3.3 Would there be any withholding tax on interest paid by pursuant to BEPS Action 4? a local company to a non-resident? Any interest withholding tax due on interest payments by a local Interest paid to a non-resident is generally subject to a 10% interest company to a non-resident must be remitted to the Tax Office withholding tax, although interest paid on debentures and other debt before the local company is entitled to a tax deduction for the instruments (such as Eurobonds) offered publicly is exempt from interest payments. withholding tax. Australia’s transfer pricing rules (see question 3.9 below) also If the tax applies, this rate may be reduced under an applicable require Australian operations to have an arm’s length capital treaty. Under Australia’s recently concluded and renegotiated treaties structure and can therefore also restrict interest deductions beyond (e.g. the US, UK, French, Japanese, Finnish, New Zealand, the restrictions imposed by the thin capitalisation rules. Norwegian, South African, Swiss and German treaties), interest paid Australia has previously indicated that they were unlikely to change to an unrelated financial institution is also exempt from withholding the existing thin capitalisation rules in response to BEPS Action 4. tax. The recently signed Israeli treaty reduced the rate to 5%. Interest that is effectively connected with an Australian branch of 3.8 Is there any withholding tax on property rental a non-resident is taxed in Australia on an income tax assessment rather than a withholding tax basis. payments made to non-residents?

Any interest withholding tax due on interest payments by a local 3.4 Would relief for interest so paid be restricted by company to a non-resident must be remitted to the Tax Office reference to “thin capitalisation” rules? before the local company is entitled to a tax deduction for the interest payments. Australia’s thin capitalisation rules apply to foreign-controlled Australia’s transfer pricing rules (see question 3.9 below) also Australian groups (inward investors) and Australian groups that require Australian operations to have an arm’s length capital invest overseas (outward investors). The rules restrict interest structure and can therefore also restrict interest deductions beyond deductions when the amount of debt used to finance the Australian the restrictions imposed by the thin capitalisation rules. operations exceeds specified limits (see question 3.5 below).

3.9 Does your jurisdiction have transfer pricing rules? 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? Australia has transfer pricing rules that are modelled on the OECD Transfer Pricing Guidelines. The rules are contained in Australia’s Safe harbours are provided under de minimis exemptions and domestic legislation and its tax treaties. The rules apply to “non- maximum allowable debt tests. arm’s length” cross-border transactions. Guidance on what is considered “arm’s length” is provided by the Tax Office via a De minimis exemptions number of public rulings. Exemptions from the thin capitalisation rules apply to: The rules give the Tax Office the discretion to adjust non-arm’s ■ taxpayers with interest deductions of less than A$2 million; and length pricing of transactions to increase taxable income in Australia. ■ outward investors whose Australian assets make up 90% or Conversely, treaties can require Australia to reduce taxable income. more of total assets by value. The preferred methods applied in Australia to determine the appropriate arm’s length pricing of cross-border transactions are:

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■ the Comparable Uncontrolled Price method; Income tax consolidated group ■ the Resale Price method; An Australian resident head company may irrevocably elect to form ■ the Cost Plus method; an income tax consolidated group. A consolidated group consists ■ the Profit Split method; and of a head company and all its wholly-owned Australian subsidiary ■ the Transactional Net Margin method. companies, trusts and partnerships. The consolidated group is taxed To confirm that international prices are at arm’s length, taxpayers as a single entity and intra-group transactions are ignored. The head can apply for an advanced pricing agreement with the Tax Office. company is primarily liable for the group’s income tax, although Legislation enacted in 2012 also allows taxation of profits on an subsidiaries may be jointly and severally liable if it fails to pay. Broadly, independent entity basis, having regard to OECD principles, rather the tax consolidation regime allows group restructuring, pooling of than on a purely transaction-by-transaction basis. losses and other tax attributes and movement of assets within the group, without tax consequences. The tax costs of a subsidiary 4 Tax on Business Operations: General member’s assets are set at the time of joining the group and the tax costs of shares in the subsidiary are set on leaving the group. 4.1 What is the headline rate of tax on corporate profits? Losses made by overseas subsidiaries cannot be brought onshore. This is the case irrespective of income tax consolidation. The headline rate of company tax is currently 30%. A reduced 27.5% First-tier Australian companies in a wholly-owned multinational tax rate applies to companies with an annual turnover of up to A$50 corporate group that has multiple entry points into Australia may million in the 2019–20 income year. However, the lower tax rate is irrevocably elect to form a “Multiple Entry” consolidated (MEC) denied to companies with at least 80% of their turnover comprising group for income tax purposes. passive income such as dividends, interests, royalties and rent. Companies are generally required to pay tax under a “Pay As You GST Group Go” (PAYG) collection system, which requires large companies (and As a separate election, groups with 90% common ownership may be most other large taxpaying entities) to pay monthly or quarterly registered as a GST group. A GST group must nominate a instalments of estimated tax, calculated by reference to the amount representative member who is responsible for the GST liabilities of of income derived during that period. Any difference in tax payable the whole group. Supplies and acquisitions made within the group from the estimate is due, in the case of a company, five months after are ignored for GST purposes. the year’s end. 4.5 Do tax losses survive a change of ownership? 4.2 Is the tax base accounting profit subject to Companies and stock-exchange-listed trusts can utilise losses adjustments, or something else? following a change of majority ownership if they satisfy a business Broadly, Australian taxpayers are taxed on their worldwide “taxable continuity test, which compares the business undertaken before the income”, typically for the year ending on 30 June. change of ownership to the business conducted during the year Taxable income comprises “assessable income”, as defined by losses are to be utilised. Unlisted trust losses do not survive a change statute, less allowable tax deductions. The amount of assessable of ownership. income and tax deductions often varies from the amount of income and expenses recognised for accounting purposes. Tax adjustments 4.6 Is tax imposed at a different rate upon distributed, as often, therefore, produce differences between a company’s taxable opposed to retained, profits? income and its reported profits. Australian tax is generally imposed on company profits, regardless 4.3 If the tax base is accounting profit subject to of distributions. In addition, “conduit foreign income” rules allow the active foreign business income and foreign non-portfolio adjustments, what are the main adjustments? dividends of an Australian resident company to be passed on to Taxable income often differs from commercial accounting profit foreign investors (as dividends), free of Australian tax. because of: ■ different tax depreciation rates for plant and equipment; 4.7 Are companies subject to any significant taxes not ■ differences in the timing of recognition of income and covered elsewhere in this chapter – e.g. tax on the deductions for tax purposes, compared to revenue and expenses occupation of property? for accounting purposes; ■ tax concessions for certain research and development Fringe benefits tax expenditure; Fringe benefits tax (FBT) is a tax on employers on the value of non- ■ recognition of some taxable capital gains not recognised for cash “fringe benefits”, provided to their employees. Fringe benefits accounting purposes; typically include the use of motor vehicles, expense payments and ■ capitalisation of some expenses for tax purposes; low-interest loans. Employees are not taxed on these benefits. ■ in the case of consolidated groups (see question 4.4 below), The FBT rate is currently 47% of the “grossed-up” value of different calculations of the tax cost of assets; and benefits (that is, grossed-up so that the tax payable is equivalent to ■ elimination from taxable income of impairment, fair value and the tax that would be payable on an equivalent amount of salary). mark-to-market type adjustments made for commercial accounting purposes. Petroleum resource rent tax Petroleum resource rent tax is imposed on income from the recovery 4.4 Are there any tax grouping rules? Do these allow for of petroleum products from offshore petroleum projects and, since relief in your jurisdiction for losses of overseas subsidiaries? 1 July 2012, also from onshore petroleum projects. Various other natural resource royalties are also applied by the Special grouping rules apply in respect of income tax and GST. Federal Government and the States.

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Luxury car tax least 80% of the shares in the target company and pays sellers in Luxury car tax is levied at 33% of the excess of the retail value of a scrip. A reinvestment rollover is available where the ownership of new car sold in, or imported into, Australia over A$67,525 (indexed) a capital asset ends due to compulsory acquisition by the or A$75,526 (indexed), for specified fuel-efficient cars. Government or where an asset is lost or destroyed, provided it is replaced within 12 months. Wine equalisation tax Wine equalisation tax is levied at 29% of the wholesale value of wine 5.4 Does your jurisdiction impose withholding tax on the for consumption in Australia. proceeds of selling a direct or indirect interest in local

Payroll tax assets/shares? Payroll tax is a tax imposed by each State and Territory, on aggregate Purchasers of Australian real property or interests in land-rich entities wages, salaries and other employee benefits above annual threshold must withhold 12.5% of the purchase price if payable to a non- amounts ranging from A$650,000 to A$2 million, at rates of up to resident vendor. This is a non-final withholding tax and does not 6.85%. apply to transactions valued at less than A$750,000 or on-market

securities transactions. Non-resident vendors can provide purchasers 5 Capital Gains with Tax Office clearance certificates confirming that tax need not be withheld. 5.1 Is there a special set of rules for taxing capital gains An Australian agent can also be required to answer for tax payable and losses? by a non-resident principal on profits derived through the agent, and the Commissioner can, by notice, require any person controlling A comprehensive set of statutory rules within the income tax legis- money belonging to a non-resident to account for tax due by the lation includes capital gains (after netting off capital losses) in non-resident. assessable income. These rules also contain capital gains tax exemptions and 6 Local Branch or Subsidiary? concessions, including the ability to index cost bases until 19 September 1999 and, alternatively, reductions of taxable gains made 6.1 What taxes (e.g. capital duty) would be imposed upon by individuals, trusts, life insurance companies and complying superannuation funds (but not companies) on assets held for at least 12 the formation of a subsidiary? months. The reduction does not apply to gains accrued after 8 May No tax is imposed on the formation of a subsidiary. A nominal 2012 by foreign individuals, either directly or as trust beneficiaries. administrative charge is levied by the Australian corporate regulator However, non-residents are only taxable on gains from real property (ASIC) on incorporation of a company and also applies to the regis- interests (see question 5.2 below). tration of a branch of a foreign company. The rate of tax imposed on capital gains made by a company is

the same 30% tax rate imposed on income. Companies are not eligible for the gain reductions (“CGT discounts”) available to 6.2 Is there a difference between the taxation of a local individuals and complying superannuation funds. subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? 5.2 Is there a participation exemption for capital gains? Australia’s tax rules generally do not differentiate between conducting Different exemptions from capital gains tax apply to non-resident Australian operations through a subsidiary or a branch. Both forms and resident investors. of operation are subject to the same 30% corporate tax rate. However, an Australian resident subsidiary with offshore invest- Non-resident investors ments would prima facie pay Australian corporate tax on its worldwide A non-resident investor is not subject to capital gains tax on a sale income (subject to a participation exemption for the income of a of shares in an Australian company, unless the investor’s foreign branch or subsidiary, as mentioned in question 5.2 above and shareholding exceeds 10% of the company and the Australian questions 7.1 and 7.2 below, and the conduit foreign income rules company’s value is mostly attributable to Australian real property. mentioned in question 3.1 above), whereas a branch of a non- resident company would be taxed only on its Australian-sourced Resident investors income. Australian resident companies are prima facie subject to Australian tax Subsidiary company profits on which tax has been paid in on their worldwide income. However, a capital gain or loss made by Australia are able to be repatriated as dividends, free of Australian a resident company on shares in a foreign company may be reduced dividend withholding tax, and Australia does not impose a branch (in some cases to nil) under a “participation exemption”. The profits tax. resident company must have held a 10% or greater direct voting interest in the foreign company for a continuous period of 12 6.3 How would the taxable profits of a local branch be months in the last two years. In that case, the capital gain or loss is determined in its jurisdiction? reduced by the value of the foreign company’s active business assets as a percentage of the value of its total assets. A foreign company with an Australian branch is taxed on its Australian-sourced income that is attributable to that branch. Arm’s- 5.3 Is there any special relief for reinvestment? length transfer pricing rules apply to allocate profits between a branch and its offshore head office or other foreign branches. Relief for reinvestment is not available in Australia per se. However, the CGT provisions contain some “replacement asset” rollovers 6.4 Would a branch benefit from double tax relief in its which allow the deferral of tax on capital gains. They are generally jurisdiction? targeted at restructures and takeovers. A commonly used rollover (“scrip-for-scrip” rollover) is available where the bidder acquires at

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Generally yes, but Australia’s tax treaties broadly allow full taxing 8 Taxation of Commercial Real Estate rights to the source country where a treaty resident company carries on business through a permanent establishment in Australia. The 8.1 Are non-residents taxed on the disposal of commercial treaties invariably require arm’s-length principles to be applied in real estate in your jurisdiction? determining the taxable income of the branch. In these respects, Australia’s treaties broadly follow OECD treaty principles. However, Yes. Gains on the disposal of Australian commercial real estate are the branch of a non-resident generally would not be able to take currently subject to tax on an income tax assessment basis. In advantage of Australia’s treaties with a third country. addition, as mentioned in question 5.4 above, a non-final 12.5% withholding tax applies to the proceeds of substantial real estate 6.5 Would any withholding tax or other similar tax be sales by non-residents. imposed as the result of a remittance of profits by the branch? 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your No withholding tax or other tax is imposed on the remittance of jurisdiction? profits by a branch. Yes, capital gains tax applies to these sales, and the 12.5% non- 7 Overseas Profits resident withholding tax mentioned in questions 5.4 and 8.1 above also applies to them. 7.1 Does your jurisdiction tax profits earned in overseas An indirect interest is an interest in a resident or non-resident branches? entity with more than 50% of its assets comprising Australian real estate, held either directly or indirectly. However, only indirect inter- Income derived by an Australian resident company in carrying on ests of at least 10%, held for 12 of the past 24 months, are subject business at or through a permanent establishment in a foreign to tax. Treaty relief may also be available for residents of Germany. country generally will not be subject to Australian tax. Likewise, a A revenue account gain on transfer of an indirect interest in capital gain or loss made by an Australian resident company on an Australian real property is also subject to tax in Australia if sourced asset used in carrying on business at or through a permanent in Australia, applying common-law source-of-income rules. establishment in a foreign country generally will be disregarded. Australian resident companies are unable to deduct costs 8.3 Does your jurisdiction have a special tax regime for incurred to derive income earned through an offshore branch if Real Estate Investment Trusts (REITs) or their equivalent? the income is exempt. Australia uses the term “managed investment trust” (MIT) to 7.2 Is tax imposed on the receipt of dividends by a local describe domestic REITs. These trusts (or their managers) are company from a non-resident company? required to be regulated by Australian-managed fund laws, to be sufficiently widely held (there are varying thresholds for retail and A “non-portfolio” dividend paid by a foreign company to an wholesale funds) and to satisfy non-trading conditions. Australian resident company is not subject to Australian tax, whether Distributions to non-residents of MIT rental income and capital received directly or through an interposed partnership or trust. A gains are subject to a final withholding tax of 30%, or 15% if the non-portfolio dividend is a dividend from a company in which one non-resident is a resident of a country with which Australia has holds at least 10% of the voting power. The exemption is restricted concluded an information exchange agreement. (To the extent that to dividends paid on shares that are “equity” under Australian tax a distribution includes interest and dividends, those components are law. Dividends on legal form shares that are “debt” under Australian subject to interest and dividend withholding taxes.) An MIT can also tax law, such as some redeemable preference shares, are not exempt. make an election for gains on property to be taxed on capital account Other dividends received from non-resident companies are taxed rather than revenue account. in Australia, subject to a credit for any foreign tax imposed on the Investors in MITs with a single unitholder class, or that are regis- dividend. tered with (and therefore regulated by) the Australian Securities and Investments Commission, are taxed on amounts attributed to them, 7.3 Does your jurisdiction have “controlled foreign rather than distributions. Withholding tax applies to income that is attributed but retained by the fund. company” rules and, if so, when do these apply?

Australia’s “controlled foreign company” rules attribute to Australian 9 Anti-avoidance and Compliance residents a share of income earned or gains made by foreign companies they control, even though the foreign income or gains 9.1 Does your jurisdiction have a general anti-avoidance or may not be distributed. anti-abuse rule? A foreign company is a “controlled foreign company” if: ■ a group of five or fewer Australian entities, each individually Australia has a general anti-avoidance rule, contained in Part IVA of controlling at least 1% of the company, collectively controls at the tax legislation. It supplements other, more specific anti- least 50% of the company shares; avoidance rules dealing with, for example, franking credit streaming ■ a single Australian entity (and its associates) controls 40% or and dividend stripping. more of the company, unless it is controlled by another person The provisions of Part IVA are extremely broad and extend to or group; or schemes entered into with the sole or dominant purpose of ■ a group of five or fewer Australian entities (either alone or obtaining a tax benefit. A tax benefit is essentially a reduction of together with their associates) otherwise controls the company. assessable income, an increase in allowable tax deductions (including To be attributable, the taxpayer must hold at least 1% within a tax deferral beyond what would be reasonably expected), a reduction group of five controllers, or hold 10% itself. in withholding tax or access to a tax credit. The application of Part IVA is dependent on the Commissioner’s discretion, which is

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generally reserved for schemes that the Commissioner considers As mentioned in question 9.1 above, legislation was enacted in artificial or contrived. Part IVA prevails over other provisions of December 2015 to extend Australia’s general anti-avoidance law to the Australian tax legislation and Australia’s tax treaties. Where it is schemes for the avoidance of Australian permanent establishments. applied, the tax benefits are denied and administrative penalties are As also mentioned in question 9.1 above, legislation was enacted in generally imposed. June 2017 to introduce a DPT, and Australia has also introduced In December 2015, Part IVA was extended to schemes for the Country-by-Country Reporting requirements (discussed below) with avoidance of Australian permanent establishments. It applies from 1 effect from 1 January 2016. January 2016 to groups with worldwide income in excess of A$1 billion. In August 2018, Australia introduced the anti-hybrid rules, which In May 2016, Australia introduced a UK-style 40% diverted are modelled on the OECD’s BEPS recommendations. The rules profits tax (DPT). This tax commenced on 1 July 2017 and applies generally apply from 1 January 2019. to groups with worldwide income in excess of A$1 billion. Australia’s recent treaty practice has incorporated recommendations of the BEPS project and Australia’s domestic transfer pricing rules 9.2 Is there a requirement to make special disclosure of have been amended to incorporate changes to the OECD Transfer Pricing Guidelines. avoidance schemes? In June 2017, the Australian Government signed the Multilateral Australia does not yet have a special disclosure rule imposing a Convention to Implement Tax Treaty Related Measures to Prevent requirement to disclose avoidance schemes to the Tax Office in Base Erosion and Profit Shifting. advance of the company’s tax return being submitted, although a regime is being developed by the government. However, large 10.2 Has your jurisdiction signed the tax treaty MLI and company tax returns are required to report any tax position that is deposited its instrument of ratiﬁcation with the OECD? only “as likely as not to be correct”, or which is both uncertain and disclosed in the company’s or a related party’s financial statements, As mentioned in question 10.1 above, Australia signed the MLI on e.g. pursuant to the US Fin 48 accounting rule, as well as to disclose 7 June 2017. The MLI was given the force of law in Australia by the the existence of any arrangements with particular characteristics Treasury Laws Amendment (OECD Multilateral Instrument) Act which have been identified by the Tax Office. 2018, which received Royal Assent on 24 August 2018. Taxpayers may seek a Tax Office ruling for assurance about the Australia deposited its instrument of ratification with the OECD tax treatment of a potentially contentious transaction. Rulings are on 26 September 2018. binding on the Tax Office. 10.3 Does your jurisdiction intend to adopt any legislation to 9.3 Does your jurisdiction have rules which target not only tackle BEPS which goes beyond the OECD’s taxpayers engaging in tax avoidance but also anyone who recommendations? promotes, enables or facilitates the tax avoidance? In addition to the measures discussed in questions 9.1, 9.2 and 10.1 Australian law prohibits an adviser or another person promoting a above, the Australian Government has promoted a new tax trans- scheme for the dominant purpose of a tax benefit that is not reasonably parency code (i.e. voluntary public disclosure of income and taxation arguable (a “tax exploitation” scheme), or promoting any scheme on the statistics) for taxpayers with an annual turnover in excess of A$100 basis of its conformity with a Tax Office “product” ruling if the scheme million. actually implemented is materially different to the scheme ruled on. Since a May 2016 Australian Government directive, Australia’s Foreign Investment Review Board is also now actively imposing tax 9.4 Does your jurisdiction encourage “co-operative (e.g. capitalisation) conditions on the approval of significant foreign investment into Australia. compliance” and, if so, does this provide procedural beneﬁts Australia introduced a hybrid mismatch “integrity rule”, which is only or result in a reduction of tax? an extension of the OECD hybrid mismatch measures. The rules seek to prevent offshore multinationals from otherwise circum- The Tax Office applies a “risk-differentiation framework” to assess venting the hybrid mismatch rules by routing investment or taxpayer compliance risk. The framework is designed to identify the financing into Australia via an entity located in a no or low tax (10% likelihood of tax positions being taken that the Tax Office disagrees or less) jurisdiction. with. It takes into account the Tax Office’s perception of taxpayer

behaviour, its approach to business (e.g. risk appetite), its governance, and its past compliance with tax laws. 10.4 Does your jurisdiction support information obtained The assessment outcomes determine the extent of the Tax under Country-by-Country Reporting (CBCR) being made Office’s resources to monitor ongoing taxpayer compliance. Higher- available to the public? risk taxpayers are subject to continuous review, typically including comprehensive audit and intensive risk analysis. No. The Tax Office has previously noted (at an Australian Senate In addition, the new DPT applies a 40% tax rate in lieu of the 30% Estimates hearing in October 2017), that CbC reports that are general company tax rate, with an express intention that taxpayers provided to tax authorities under an international agreement are conform to cross-border tax positions that the Tax Office considers expected to be kept within the confines of the relevant tax auth- acceptable and therefore avoid DPT assessments. orities and are not expected to be made public.

10 BEPS and Tax Competition 10.5 Does your jurisdiction maintain any preferential tax regimes such as a patent box? 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting BEPS? Australia maintains a preferential tax regime for “offshore banking units” (OBUs). An OBU is a “unit” or notional division of (usually) Australia has taken a number of initiatives directed at base erosion a bank that conducts offshore banking activities. In broad terms the and profit shifting. taxable profit of an OBU is effectively taxed at 10%, rather than the

ICLG.com Corporate Tax 2020 © Published and reproduced with kind permission by Global Legal Group Ltd, London Greenwoods & Herbert Smith FreehillsXX 43 standard 30% company tax rate. However, amendments are A$75,000 threshold) are required to register for the GST. The rules expected to be made to the OBU regime following the OECD’s can also extend to companies which operate electronic platforms. concerns that the OBU regime is a “harmful tax practice”. In October 2018, the Australian Government released a discussion paper to explore further options for taxing digital business 11 Taxing the Digital Economy in Australia. In March 2019, the Australian Government announced it would focus on pursuing a long-term consensus solution at the 11.1 Has your jurisdiction taken any unilateral action to tax OECD and would not proceed with an interim measure.

digital activities or to expand the tax base to capture digital 11.2 Does your jurisdiction favour any of the G20/OECD’s presence? “Pillar One” options (user participation, marketing intangibles Yes. The expansion of Australia’s general anti-avoidance rule in or signiﬁcant economic presence)? 2015 (see question 9.1 above) was directed primarily at non-resident companies which carry on business without a permanent establish- Australia is working with the OECD’s Inclusive Framework on ment in the country. In addition, non-residents who sell digital BEPS to provide a consensus-based multilateral solution to the tax products over the internet to Australian customers (and exceed the challenges presented by the digitalisation of the economy.

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Richard Hendriks is Head of Corporate and M&A at Greenwoods, specialising in listed-company M&A and demergers, capital management, and corporate restructures, including equity and debt raisings. He has in-depth knowledge of tax consolidation, capital gains tax, executive share and option plans, and cross-border tax matters. Richard regularly acts for clients in key Australian M&A deals. In 2018 he led the Greenwoods team advising the Westfield Corporation in relation to its acquisition by Unibail-Rodamco SE for A$32.7 billion; one of the largest M&A deals in Australian corporate history. Richard also headed the team advising The Walt Disney Company on its US$71.3 billion merger with 21st Century Fox; the largest M&A deal in the world at that time. In addition to his corporate clients, Richard also acts for a number of large Australian private groups and high-net-worth individuals. In March 2019, Richard was a finalist in The Tax Institute’s Tax Adviser of the Year awards. He is also recognised as a highly regarded tax professional in International Tax Review’s World Tax 2020 guide, as a preeminent tax adviser in NSW in the current edition of Doyles Guide, and by the 2019 Australian Financial Review’s Best Lawyers ranking for Tax Law in Australia. Richard is a regular speaker on the tax aspects of M&A and capital management, and has been involved in submissions to Treasury and the ATO on tax consolidation, demergers and CGT rollover matters.

Greenwoods & Herbert Smith Freehills Tel: +61 2 9225 5971 ANZ Tower, 161 Castlereagh Street Email: [email protected] Sydney, NSW 2000 URL: www.greenwoods.com.au Australia

Cameron Blackwood specialises in advising clients on the tax complexities of mergers, acquisitions and restructures, including capital management and cross-border issues, and all aspects of employee share schemes. He also has expertise in undertaking tax due diligence for insurers providing warranty and indemnity insurance in M&A transactions. His industry knowledge is broad, and includes the mining, real estate and financial services sectors. In 2018, Cameron led the Greenwoods team advising Wesfarmers in relation to the demerger of the Coles business; the largest demerger undertaken in Australia by market value. He was also part of the team advising the Westfield Corporation in relation to its acquisition by Unibail-Rodamco SE, one of the largest M&A deals in Australian corporate history. Cameron is a member of The Tax Institute’s Large Business and International Committee and NSW Technical Committee, and regularly presents at Institute events. He has also been heavily involved in ATO and Treasury consultation on capital management, cross-border and employee share scheme issues.

Greenwoods & Herbert Smith Freehills Tel: +61 2 9225 5950 ANZ Tower, 161 Castlereagh Street Email: [email protected] Sydney, NSW 2000 URL: www.greenwoods.com.au Australia

Greenwoods & Herbert Smith Freehills is Australia’s largest specialist tax ■ International Tax Review Asia Tax Awards | 2019 advisory firm, and one of the country’s leading providers of tax services, Regional Impact Deal of the Year: Unibail acquisition of Westfield and Coles demerger from Wesfarmers with specific expertise in the Real Estate, Financial Services, Projects & Tax Disputes & Litigation Firm of the Year: Australia Infrastructure and Energy & Resources sectors. ■ National Infrastructure Awards | 2019 The firm’s award-winning Corporate and M&A team regularly advises on Project of the Year: WestConnex market-leading transactions, while the Private Wealth team advises many ■ Australasian Lawyer Innovative Firms List | 2019 of the country’s most successful private groups and emerging entrepre- ■ Best Lawyers, Australia | 2019 neurial businesses. Best Law Firm for Tax in Australia Greenwoods also provides a full range of Tax Compliance services and a ■ The Legal 500, Asia Pacific | 2019 Transfer Pricing team. Tier 1 firm for Tax Greenwoods is consistently recognised for its expertise: www.greenwoods.com.au ■ International Tax Review – World Tax | 2020 Tier 1 firm for Tax ■ Australasian Law Awards | 2019 M&A Deal of the Year and overall Australian Deal of the Year: Coles demerger from Wesfarmers ■ Financial Review Client Choice Awards | 2019 Best Law and Related Services Firm (<$50m) Best Professional Service Firm (<$50m)

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Austria Austria

Clemens Philipp Schindler

Schindler Attorneys Martina Gatterer

1 Tax Treaties and Residence override treaty law as “lex posterior”, but Austria has not enacted any tax treaty override legislation so far. However, Austrian tax authorities take the view that tax treaty law does not limit the application 1.1 How many income tax treaties are currently in force in of domestic anti-abuse provisions. For example, the Annual Tax Act your jurisdiction? 2018 introduced CFC rules (see question 7.3) for permanent establishments (applicable for business years starting 1 January 2019) Austria has an extensive network of income tax treaties, with 89 overriding the rules of treaties for permanent establishments. treaties currently in force (as of 1 June 2019). In addition, Austria has concluded seven tax information exchange agreements with 1.6 What is the test in domestic law for determining the Andorra, Gibraltar, Guernsey, Jersey, Mauritius, Monaco and St. Vincent & the Grenadines. Furthermore, the Convention on Mutual residence of a company? Administrative Assistance in Tax Matters and the Multilateral A corporation will be deemed tax-resident in Austria if either its legal Convention to Implement Tax Treaty Related Measures to Prevent seat (place which is designated as such in its articles of association) Base Erosion and Profit Shifting are applicable. or its place of management is situated in Austria. The place of

management is defined as the centre from which the activities of the 1.2 Do they generally follow the OECD Model Convention or company are effectively directed from a management perspective; another model? whereas in the past the focus was mainly on where the relevant decisions are taken (usually proven by board meeting minutes), the Austrian tax treaties generally follow the OECD Model Convention, tax authorities now increasingly also take into account where such with certain minor modifications. Double taxation of dividends, decisions are communicated and implemented by the management. interest and royalties is mostly eliminated by the credit method under Resident companies are subject to unlimited taxation in Austria on Austrian tax treaties, while double taxation of other income is their worldwide income. avoided by the exemption method. Some of the tax treaties contain Based on the tax treaties concluded by Austria, a company is tax-sparing provisions for different types of income, such as royalties considered to be resident in the state in which the place of its and interest. effective management is located. In practice, the domestic term “place of management” is understood in the same way as “place of 1.3 Do treaties have to be incorporated into domestic law effective management”. before they take effect? 2 Transaction Taxes After ratification by the Austrian Federal President and the two chambers of Austrian parliament, tax treaties apply directly without 2.1 Are there any documentary taxes in your jurisdiction? further incorporation into domestic law. The Austrian Stamp Duty Act (Gebührengesetz – GebG) contains an 1.4 Do they generally incorporate anti-treaty shopping exhaustive list of legal transactions that are subject to Austrian stamp rules (or “limitation on beneﬁts” articles)? duty provided that a signed written deed is executed and a nexus to Austria exists. Legal transactions such as, inter alia, lease agreements Austria has no general policy to include anti-avoidance rules in tax (exemption for residential lease agreements), assignments, surety- treaties that go beyond the rules in the OECD Model Convention, but ships and mortgages are covered by the stamp duty provisions at Austrian courts rely on the general anti-abuse rules (see question 9.1 rates of between 0.8% and 1% of the contract value. No stamp duty for further details). On the request of the tax treaty partner, a few is levied on share transfer agreements, furthermore on loan and treaties incorporate such rules. For example, the tax treaty concluded credit agreements signed after 31 December 2010. with the United States includes a limitation-on-benefits clause. Signing a written deed on a stamp-dutiable transaction in Austria will trigger stamp duty. Due to a broad interpretation of the term 1.5 Are treaties overridden by any rules of domestic law “signed written deed”, even if the contract is not signed in Austria, bringing a written deed originally signed outside Austria into Austria (whether existing when the treaty takes effect or introduced may result in the necessary nexus to Austria for a stamp-dutiable subsequently)? transaction. In addition, any written reference to the contract/transaction that is signed by only one of the parties to the transaction but In general, the tax treaty provisions prevail over domestic law as “lex is then handed over (sent) to another party or (in certain circum- specialis”. Technically, a provision introduced subsequently could stances) to a third party, could provide sufficient evidence of the

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transaction to give rise to stamp duty. The term “written deed” be claimed for the related expenses. Accordingly, holding entities comprises even email communication carrying an electronic or often provide such VAT-able services (e.g. accounting, procurement digital signature (details are disputed), which gives evidence of a or IT services) to other (group) entities, to recover some input VAT. stamp-dutiable transaction (e.g. mentioning of a lease or assignment agreement by a party thereto). 2.5 Does your jurisdiction permit VAT grouping and, if so,

is it “establishment only” VAT grouping, such as that applied 2.2 Do you have Value Added Tax (or a similar tax)? If so, at by Sweden in the Skandia case? what rate or rates? The Austrian Value Added Tax Act provides that the effects of a VAT is levied at all levels of the supply of goods and services with VAT tax group are limited to the Austrian parts of the company. the right to deduct input VAT to the extent the recipient thereof Therefore, it is possible, under current legislation, to include an qualifies as an entrepreneur. Austria’s VAT Act is based on the EU Austrian permanent establishment of a foreign company (but not Council Directive on the common system of VAT. the entire company) into an Austrian VAT tax group. Services The standard rate is 20%. A reduced rate of 10% applies, inter between the foreign head office and the domestic permanent alia, to food, books, newspapers and periodicals, passenger transport establishment are thus taxable. The Austrian tax authorities interpret and renting of residential immovable property. As of 1 January the provisions in place in line with the Skandia case. 2016, a second reduced rate of 13% has been introduced (including accommodation in hotels (as of 1 May 2016), and various 2.6 Are there any other transaction taxes payable by recreational and cultural services). companies? 2.3 Is VAT (or any similar tax) charged on all transactions Real estate transfer tax is levied on every acquisition of domestic real or are there any relevant exclusions? estate and, in some cases, also if shares in corporations or interests in partnerships that directly own real estate are transferred. In There are two types of exemption from VAT: an exemption under particular, the transfer of buildings and land, building rights and which credit for input VAT is not possible; and an exemption which buildings on third-party land falls within the scope of the Austrian entitles the taxpayer to credit for input VAT. real estate transfer tax, whereas the transfer of machinery and plants The first type of exemption includes banking, finance and is not subject to real estate transfer tax. insurance-related transactions, the disposal of shares, the leasing or In short, the real estate transfer tax is 3.5% (reduced rates apply letting of immovable property for commercial purposes, the supply between specific family members and in the case of a transfer of of land and buildings, health and welfare services, and supplies by shares in corporations or interests in partnerships or reorganisations) charitable organisations. For most of these transactions, there is an and it is irrelevant whether it is acquired by an Austrian or a foreign option for standard VAT treatment (i.e. VAT has to be charged, but citizen or resident. with the benefit that credit for input VAT may be claimed). For the In sale and purchase transactions, the tax base of the real estate rental of land and buildings for commercial purposes, the option to transfer tax is the amount of consideration for the transfer (fair charge VAT is only applicable if the tenant uses the object to render market value) – at least the value of the real estate. In the absence services that are subject to VAT. of a consideration (e.g. if shares are transferred), special rules deter- The second type of exemption includes exports, intra-community mine the relevant tax base. In general, taxation is based on the fair supplies, the supply of services consisting of work on movable market value of real estate property. property acquired or imported for the purpose of undergoing such In addition to real estate transfer tax, a registration duty for the work, and the supply of services when these are directly linked to land register at a rate of 1.1%, also based on the purchase price or the transit or the export of goods. the fair market value, is levied if a new owner is registered (i.e. not The supply of services and the delivery of goods of an entrepre- if shares are transferred, as the owner of the real estate does not neur, who operates his business domestically and whose turnover change in such case). does not exceed an amount of EUR 30,000 p.a. (regime for small entrepreneurs – Kleinunternehmerregelung), are exempt from VAT 2.7 Are there any other indirect taxes of which we should without credit for input VAT. be aware? 2.4 Is it always fully recoverable by all businesses? If not, Austrian Capital Duty (a 1% tax on equity contributions by the direct what are the relevant restrictions? shareholder) has been abolished as of 1 January 2016. Due to EU legislation, such capital duty cannot be reintroduced. A deduction or refund for input VAT is available to both resident Austrian Insurance Tax applies on the payment of insurance and non-resident entrepreneurs, if the respective supplies are used premiums for several types of insurance contracts. to render supplies that are not VAT-exempt under the first type (without the entitlement to claim credit for input VAT), with 3 Cross-border Payments financial institutions being the most relevant example. An entrepreneur is any person (individual or legal entity) conducting a business independently in order to realise earnings (though not necessarily 3.1 Is any withholding tax imposed on dividends paid by a profits), regardless of nationality or residence. locally resident company to a non-resident? If an entrepreneur renders both VAT-able and VAT-exempt supplies, only the input VAT attributable to the VAT-able supplies Dividends paid to a non-resident are subject to a withholding tax of can be recovered. Input VAT deduction is only allowed if an invoice 27.5%. that fulfils certain formal requirements has been provided by the A reduction or relief from withholding tax might be available supplier. based on a tax treaty or the EU Parent-Subsidiary Directive. It should be noted that holding companies (including acquisition According to the Austrian rules implementing the EU Parent- vehicles) are usually not entitled to claim credit for input VAT, unless Subsidiary Directive, there is no withholding tax on dividends if (i) they also provide VAT-able services, in which case input VAT may the parent company has a form listed in the EU Parent-Subsidiary Directive, (ii) the parent company owns (directly or indirectly) at least

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10% of the capital in the subsidiary, and (iii) the shareholding has equity ratio has to be analysed on a case-by-case basis. Having said been held continuously for at least one year. that, higher debt-to-equity ratios have also been accepted. Provided that certain documentation requirements (including a tax residence confirmation for the foreign recipient, which needs to be 3.6 Would any such rules extend to debt advanced by a issued by the foreign tax authorities on a special tax form) are met, third party but guaranteed by a parent company? a reduction or relief can be granted at source. No relief at source is granted in cases of potential tax avoidance, e.g. in case of holding No. However, debt provided by unrelated parties is to be taken into companies with little or no substance in the state of residence (i.e. account when determining the debt-to-equity ratio. if the recipient is a company that does not have an active trade or business, employees and business premises). If no reduction or 3.7 Are there any other restrictions on tax relief for interest relief was granted at source, companies can apply for a refund. In the course of the refund procedure, the company has to provide payments by a local company to a non-resident, for example evidence that the interposition of the foreign company does not pursuant to BEPS Action 4? constitute an abusive arrangement. If such refund procedure was successful, a simplified procedure is applied in the following three No, there are no other restrictions on tax-deductibility of interest years. paid to third (i.e. unrelated) parties. In cases of interest payments to As a further option, a refund of withholding tax on dividends can related parties, limitations apply to avoid base erosion if the interest also be claimed by a foreign corporation resident in the EU to the income is not sufficiently taxed abroad (see question 10.1). extent that the Austrian company is not relieved from its withholding Although not limited to cross-border payments in other obligation, so long as the tax withheld is not creditable in the jurisdictions, one should note that Austria, as of today, has no recipient’s home state under a double taxation treaty. interest barrier rule. Accordingly, interest payments made to third parties are always tax-deductible. However, as a result of the OECD BEPS project, it is worth noting that the Anti-BEPS Directive 3.2 Would there be any withholding tax on royalties paid by provides for such interest barrier rule to be implemented by the EU a local company to a non-resident? Member States before and applied as of 1 January 2019. In this respect, it is still under discussion whether provisions Royalties paid to a non-resident are subject to a withholding tax of regarding the non-deductibility of interest payments to low-taxed 20%. group companies may be considered equally effective in order to A reduction or relief from withholding tax might be available avoid the application of the interest barrier rule as from 2019. While based on a tax treaty or the EU Interest and Royalties Directive. the EU Commission denied this in December 2018, the Austrian tax According to the Austrian rules implementing the EU Interest and administration is still of the opinion that the existing provisions in Royalties Directive, there is no withholding tax on royalties if (i) the connection with interest payments to related parties are sufficient as parent company has a form listed in the EU Interest and Royalties national implementation. It is expected that the EU Commission Directive, (ii) the parent company owns directly at least 25% of the will initiate proceedings against Austria in that respect. capital in the subsidiary, and (iii) the capital holding has been held continuously for at least one year. The procedures for the application of reduction or relief, as well 3.8 Is there any withholding tax on property rental as for a refund, are the same as for dividends. payments made to non-residents?

Such payments would not be subject to withholding tax, but the 3.3 Would there be any withholding tax on interest paid by rental payments that relate to domestic real estate would be subject a local company to a non-resident? to limited taxation and the non-residents would be obliged to file a tax return for the rental payments. Interest paid to non-resident corporations is generally not subject to withholding tax. 3.9 Does your jurisdiction have transfer pricing rules? 3.4 Would relief for interest so paid be restricted by Austria has generally adopted the OECD Transfer Pricing Guidelines. reference to “thin capitalisation” rules? The Austrian Ministry of Finance has issued transfer pricing guidelines as well, which are based on the OECD Guidelines. Despite the fact that there are no Austrian statutory rules on thin Therefore, transactions between related corporations, as well as capitalisation, as a matter of administrative practice and case law, profit attributions to permanent establishments, must be at arm’s loans provided by related parties to an Austrian company may be length. There is also an obligation to prepare documentation for considered “hidden” equity and thus not be treated as debt if the transfer prices in inter-group transactions. Austrian corporation is too thinly capitalised (taking into account Under Austrian procedural law, a formalised advance ruling debt provided by unrelated parties). In such case, interest payments procedure can be filed to determine the applicable transfer prices. are reclassified as dividends for Austrian tax purposes, and accord- Furthermore, there are provisions about documentation obligations ingly are not deductible and are subject to withholding tax. (as mentioned below at question 10.3). However, an interest barrier rule is foreseen under the Anti-BEPS Directive (national implementation is expected closer to the 4 Tax on Business Operations: General implementation deadline).

4.1 What is the headline rate of tax on corporate proﬁts? 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? Generally, Austrian corporations are subject to the corporate income tax levied over their profits, at a rate of 25%. Please note that before While there is no official “safe harbour” rule, the Austrian tax auth- the announcement of new elections the government planned to orities generally accept debt-to-equity ratios of around 4:1 to 3:1. reduce the corporate income tax rate from 25% to 23% in 2022, and However, this can only serve as guidance and the adequate debt-to- further from 23% to 21% in 2023.

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There is an annual minimum corporate income tax (i.e. which became a group member, a goodwill amortisation over a period of 15 applies irrespective of the actual income and thus also in a loss years (capped at 50% of the purchase price) was applied, leading to an situation) of EUR 500 p.a. for a limited liability company in the first additional tax deduction. For shares acquired after 28 February 2014, five years after incorporation and EUR 1,000 p.a. during the next five this option is no longer available. Goodwill amortisations from trans- years. Thereafter, the minimum corporate income tax is raised to actions before that date can be continued, if the goodwill amortisation EUR 1,750 p.a. The minimum corporate income tax for a stock influenced the purchase price of the shares. In this context, it should corporation amounts to EUR 3,500 p.a. also be noted that the restriction of this goodwill amortisation to domestic targets violated EC law, according to case law. 4.2 Is the tax base accounting proﬁt subject to adjustments, or something else? 4.5 Do tax losses survive a change of ownership?

Companies are obliged to keep books according to the commercial The tax loss carry-forwards of a corporation are, in general, not law rules; the accounting profits based on Austrian generally affected by a change of ownership. However, there are two exemp- accepted accounting principles (GAAP) then serve as the basis for tions. determining the tax base. The accounting profits are then adjusted Loss carry-forwards can expire if the “economic identity” of the for certain positions as per the section below. company is no longer given in connection with an acquisition of the shares for consideration (Mantelkauf ). The law specifies that the “economic identity” is lost if there is a significant change of the 4.3 If the tax base is accounting proﬁt subject to shareholder structure, the organisational structure and the business adjustments, what are the main adjustments? structure of the company. Generally, all three criteria have to be met cumulatively in order to apply, taking into account not only the time The main adjustments include: of the acquisition, but also the following months (up to ■ tax-exempt income (e.g. income from dividends and capital gains approximately one year). subject to the participation exemption); Furthermore, loss carry-forwards can expire in a reorganisation if ■ non-deductible expenses (e.g. profit distributions, certain the business unit that caused the losses does not exist anymore or is expenses in relation to company cars, certain representation reduced in such a way that it cannot be considered comparable to expenses, directors’ fees exceeding EUR 500,000, expenses in the business unit in which the losses occurred. connection with tax-free income, interest or royalties paid to

related parties in low-tax jurisdictions); and ■ differences in the calculation of provisions, in depreciation rates 4.6 Is tax imposed at a different rate upon distributed, as and regarding valuation (impairment) rules for other assets and opposed to retained, proﬁts? liabilities. No. Both retained and distributed profits are taxed at the same rate at the level of the corporation (i.e. only corporate income tax), but 4.4 Are there any tax grouping rules? Do these allow for additional taxes may apply at the shareholder level when the profits relief in your jurisdiction for losses of overseas subsidiaries? are then distributed. By comparison, in the case of a partnership, the profits are immediately taxed at the progressive income tax rate According to the Austrian group taxation regime, a group parent if the partner is an individual or at the rate of 25% corporate income company can form a tax group with a subsidiary if the parent tax if the partner is a corporation, irrespective of whether or not company exercises financial control over the subsidiary (i.e. the they are distributed, so that no further tax is triggered upon parent owns more than 50% of the capital and voting power in the distribution to the partners. subsidiary).

Eligible group members include both resident companies and non-resident companies; in the case of the latter, however, this is 4.7 Are companies subject to any signiﬁcant taxes not only if they are resident in an EU Member State or in a third state covered elsewhere in this chapter – e.g. tax on the with which Austria has concluded a comprehensive administrative occupation of property? assistance agreement regarding the exchange of information. With regard to Austrian group members, 100% of the profit/loss An annual real estate tax on all domestic immovable properties is of the company is attributed to and taxed at the level of the parent levied at a basic federal rate, multiplied by a municipal coefficient on company (i.e. irrespective of the participation held), while losses of assessed value of real estate for tax purposes (Einheitswert). The basic non-resident group members are only attributed to the group parent federal rate is usually 0.2% and the municipal coefficient ranges up to the extent of the direct participation of the lowest resident group to 500%. member in the non-resident group member (profits are not attributed at all). Losses attributed to the Austrian parent company 5 Capital Gains in the past have to be recaptured in Austria if the non-resident group member offsets the losses with its own income in subsequent years 5.1 Is there a special set of rules for taxing capital gains (or fails to do so despite being entitled to) or if the non-resident group member exits the Austrian tax group. The foreign losses have and losses? to be calculated on the basis of Austrian tax law, but they can only Capital gains and losses derived from the sale or other disposal of be offset to the extent a loss also exists according to foreign tax law. business property are taxed as ordinary business income of a Special rules for the recovery of losses apply in case of the company at normal rates (in the case of individuals, reduced rates liquidation of a non-resident group member. Additionally, foreign apply to certain capital gains). losses shall be deductible only to the extent of 75% of the total profit generated by all domestic group members and the parent company. 5.2 Is there a participation exemption for capital gains? In general, write-offs on participations in group members are not Capital gains derived from the sale of shares in a foreign corporation tax-deductible (the rationale is that losses can be offset from other may be exempt under the International Participation Exemption (see profits anyway). For shares acquired in an Austrian target that

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question 7.2). By comparison, there is no exemption for capital 6.4 Would a branch beneﬁt from double tax relief in its gains derived from the sale of shares in a domestic corporation. jurisdiction?

5.3 Is there any special relief for reinvestment? The branch as such would not be entitled to tax treaty benefits, as it is not a legal person. Only the head office would be able to claim treaty No, there is no rollover relief available for companies in relation to protection. However, the branch can, in fact, in many cases benefit capital gains. It should, however, be noted that the regime applicable from treaty relief as a consequence of the anti-discrimination clauses to Austrian private foundations, which often are the shareholders of contained in most Austrian tax treaties or on the basis of EC law. Austrian companies, provides for such relief if the private foundation reinvests within a period of 12 months. 6.5 Would any withholding tax or other similar tax be

imposed as the result of a remittance of proﬁts by the 5.4 Does your jurisdiction impose withholding tax on the branch? proceeds of selling a direct or indirect interest in local assets/shares? There is no such taxation in Austria.

There is a withholding tax of 27.5% on proceeds from shares sold 7 Overseas Proﬁts over a securities account at an Austrian credit institution. This does not apply to the sale of limited liability companies. For the sale of Austrian real estate, a withholding tax of 30% is 7.1 Does your jurisdiction tax proﬁts earned in overseas levied. branches?

Austrian companies are taxed on their worldwide income, including 6 Local Branch or Subsidiary? income from overseas branches. In most cases, such income will be exempt in Austria based on an applicable double tax treaty (only very 6.1 What taxes (e.g. capital duty) would be imposed upon few Austrian treaties foresee the credit method for business profits). the formation of a subsidiary? If there is no treaty in place with the respective country, relief from double taxation is granted via unilateral measures under certain On 1 January 2016, the former capital duty of 1% levied on equity circumstances. It is worth noting that the CFC rules (see question contributions was abolished, therefore no taxes are due upon forma- 7.3) for permanent establishments foresees taxation of profits tion. earned in overseas branches in Austria under certain circumstances.

6.2 Is there a difference between the taxation of a local 7.2 Is tax imposed on the receipt of dividends by a local subsidiary and a local branch of a non-resident company (for company from a non-resident company? example, a branch proﬁts tax)? Austrian legislation grants a participation exemption for the A branch will be taxed as a permanent establishment of the foreign dividends received from a domestic corporation. head office, while a subsidiary is a separate taxable entity. The profits An exemption also applies to dividends received from a foreign (subject to corporate income tax) of a permanent establishment can corporation, as well as to capital gains thereof, which are also exempt be remitted to the head office without any tax consequences. In from taxation (unless the parent company opts for taxation) if the contrast, the taxed profits of a subsidiary have to be distributed as a following conditions are fulfilled (international participation exemption): dividend (subject to withholding tax). Besides that, there are no ■ the participation amounts to at least 10%; further differences between the taxation of a local subsidiary and a ■ the participation is held uninterruptedly for at least one year; local branch of a non/resident company. In particular, there is no ■ the foreign corporation is comparable to an Austrian corpor- branch profit tax in Austria. ation (or an entity enumerated in the Annex to the EU Transactions between the subsidiary and the foreign parent have Parent-Subsidiary Directive, in which case this is met in almost to comply with the “arm’s length” principle. On the other hand, a all cases); and permanent establishment cannot conclude contracts with the head ■ the “switch-over” provision is not applicable. office, as both are considered to be one legal entity. Therefore, it Furthermore, portfolio dividends (i.e. dividends from a can be more burdensome in practice to determine and allocate an participation under 10%; no minimum percentage or holding period appropriate profit to the permanent establishment, as compared to is required) received from either a foreign corporation listed in the a subsidiary. Annex to the EU Parent-Subsidiary Directive, or from a foreign corporation, which is comparable to an Austrian corporation, either 6.3 How would the taxable proﬁts of a local branch be resident in an EU Member State or resident in a jurisdiction which has a broad exchange of information clause in its double tax treaty determined in its jurisdiction? with Austria, will be exempt from Austrian income tax as well as long For the calculation of the taxable profit, a permanent establishment as the “switch-over” provision is not applicable. It should be noted will be treated as a notional “independent enterprise”. A functional that this exemption only applies to dividends, thus capital gains from analysis has to be conducted, which is based on “significant people a participation under 10% are always taxable. functions”. Functions, risks and assets, as well as an appropriate The participation exemption will not apply if the dividend amount of capital, have to be allocated to the permanent establish- distributed to the Austrian company is tax-deductible by the foreign ment to determine the arm’s length profit of the permanent corporation in its home jurisdiction. This is now also the standard establishment. Besides a transfer pricing concept, there is also a under the EU Parent-Subsidiary Directive. requirement to have separate tax accounts for the permanent The “switch-over” provision, i.e. that the income is taxable with establishment (while, according to the prevailing view in legal a tax credit for the foreign corporate tax paid by the subsidiary, writing, there is generally no such obligation under commercial law). applies to low-taxed passive income of qualified international participations and qualified portfolio investments of at least 5%.

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Following this, the switchover to the credit-method will be triggered A non-resident company is taxed on the disposal of real estate if (i) the foreign subsidiary predominantly achieves low-taxed passive located in Austria at a corporate income tax rate of 25%. A non- income, and if (ii) the CFC legislation (see question 7.3) is not resident individual is taxed on the disposal of real estate located in applicable. Austria at a special tax rate of 30%. The “switch-over” provision, as implemented by the Annual Tax Act 2018, is applicable if the following two conditions are 8.2 Does your jurisdiction impose tax on the transfer of an cumulatively fulfilled: indirect interest in commercial real estate in your jurisdiction? ■ the foreign subsidiary generates predominantly interest income or other income from financial assets, royalties or other The transfer of an indirect interest in real estate does not trigger intellectual property income, dividends and income from the sale (corporate) income tax, but could trigger real estate transfer tax. of shares, financial leasing income, income from activities of However, real estate transfer tax is triggered if 95% of the shares of insurance companies and banks and other financial activities as a company that directly holds Austrian real estate are consolidated well as income from settlement companies (sources of income in the hands of one shareholder (Anteilsvereinigung) or a group of referred to as “passive income”); and shareholders within the meaning of the Austrian group taxation ■ the income of the foreign subsidiary is subject to an effective regime. Furthermore, if within a period of five years 95% or more corporate income tax lower than 12.5% considering the foreign of the partnership interests of a partnership that directly holds real income calculated based on Austrian tax law and the factual paid estate are transferred, this triggers real estate transfer tax (under the foreign tax (“low taxation”). scope of this rule, this can include several transactions with different Further details regarding the two conditions – passive income and purchasers). In each case, the real estate transfer tax amounts to low taxation – are stipulated in a decree published by the Ministry 0.5% of the fair market value of the real estate. Shares held by of Finance. The mentioned switchover mechanism for international trustees are to be attributed to the trustor for the purposes of participations and portfolio investments applies for business years calculating the 95% threshold. If Austrian real estate is transferred starting 1 January 2019. in the course of a reorganisation (Umgründung) under the It is worth noting that interest expenses directly related to the debt Umgründungssteuergesetz (UmgrStG), the real estate transfer tax will financing of the acquisition of a participation are deductible even if likewise be 0.5% of the fair market value of the real estate. the income is exempt under the participation exemption, if applicable.

8.3 Does your jurisdiction have a special tax regime for 7.3 Does your jurisdiction have “controlled foreign Real Estate Investment Trusts (REITs) or their equivalent? company” rules and, if so, when do these apply? A REIT that is established based on the Austrian Real Estate The Annual Tax Act 2018 implemented the standards set by the EC Investment Fund Act is subject to a special tax regime. Such special Anti-Tax Avoidance Directive and introduced CFC rules for tax regime may also be applicable to REITs established under foreign “controlled foreign companies” and permanent establishments. law (Sec 42 of the Austrian Real Estate Investment Fund Act). The According to these new provisions, specific non-distributed passive REIT itself is not treated as a taxable entity. Rather, it is treated as income (e.g. interest income or other income from financial assets, a transparent entity where the income earned is attributed to the unit royalties or other intellectual property income, taxable dividends and owner, regardless of whether it is distributed or not (comparable to income from the sale of shares, financial leasing income, income a partnership). Besides income from the renting of property, interest from activities of insurance companies and banks and other financial on liquid reserves and profit distributions from Austrian real estate activities as well as income from settlement companies) of a companies, the profit of an Austrian REIT also includes valuation controlled foreign subsidiary is included in the corporate tax base of gains from the annual revaluation of the real estate properties of the the Austrian parent company by applying the CFC rule. The precon- funds, regardless of whether they are realised or not. Profits from ditions for such attribution of income of the foreign company are a REIT or from the sale of the REIT certificates are generally that the subsidiary: (i) is directly or indirectly controlled (50% of subject to withholding tax at a rate of 27.5% as of 1 January 2016. voting rights or capital or rights to profit); (ii) is situated in a low-tax Please note that several major Austrian real estate companies are not country (meaning that the effective corporate income tax paid by the established as fund-type vehicles based on the Austrian Real Estate subsidiary is lower than 12.5% considering the foreign income Investment Fund Act, but rather as non-transparent corporations calculated based on Austrian tax law and the factual paid foreign tax); subject to the ordinary tax regime. and (iii) does not carry out any significant economic activity in terms of personnel, equipment, assets and premises. Low-taxed passive 9 Anti-avoidance and Compliance income shall only be attributed to the Austrian parent company if it amounts to more than one third of the income of the foreign company. To avoid any potential double taxation triggered by the 9.1 Does your jurisdiction have a general anti-avoidance or CFC rules a tax credit for actually paid foreign taxes and a reduction anti-abuse rule? of taxable capital gains by the amount of profits (forming part of such capital gain) which have already been subject to the Austrian Sec 22 of the Austrian Federal Fiscal Code (Bundesabgabenordnung – tax pursuant to the CFC rules are provided. Further details BAO) provides that tax liability cannot be avoided by an abuse of regarding the two conditions – passive income and low taxation – legal forms or methods offered by civil law (“abuse of law”). This are stipulated in a decree published by the Ministry of Finance. The is assumed in cases where transactions are entered into, or entities new CFC rules apply for business years starting 1 January 2019. are established, solely for the purpose of obtaining special tax advantages. If such an abuse has been established, the tax auth- 8 Taxation of Commercial Real Estate orities may compute the tax as if such abuse had not occurred. Generally, tax abuse is only assumed in a multi-step situation (i.e. the taxpayer takes more than one step to avoid or reduce the tax). 8.1 Are non-residents taxed on the disposal of commercial Furthermore, if a taxpayer can demonstrate substantial business real estate in your jurisdiction? reasons for a structure chosen, tax abuse may be rebutted. The Annual Tax Act 2018 introduced a legal definition of “misuse/abuse” in Sec 22 BAO based on EC Anti-Tax Avoidance

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Directive. Following this, abuse shall exist “when a legal arrangement, 10 BEPS and Tax Competition which may include one or more steps, or a sequence of legal arrangements, is inappropriate in terms of economic purpose. Inappropriate are those arrangements that, disregarding the associated 10.1 Has your jurisdiction introduced any legislation in tax savings, no longer make sense, because the essential purpose or one response to the OECD’s project targeting BEPS? of the essential purposes is to obtain a tax advantage, which is contrary to the aim or purpose of the applicable tax law. There is no abuse, if As a reaction to the BEPS project, a provision was introduced by the there are valid economic reasons that reflect the economic reality”. Austrian Tax Amendment Act 2014, stating that interest expenses The new definition of “misuse/abuse” applies to circumstances or royalties are no longer deductible from the tax base of an Austrian that will be implemented after 1 January 2019. corporation in the case that, cumulatively: Additionally, Sec 23 BAO provides that an act or transaction not ■ the interests or royalties are paid to an Austrian company or a seriously intended by the parties (“sham transaction”) but performed foreign company that is comparable to an Austrian company; only to cover up facts that are relevant for tax purposes will be ■ the interests or royalties are paid to a company which is directly disregarded, and that taxation will be based on the facts the taxpayer or indirectly part of the same group of companies or is sought to conceal. influenced directly or indirectly by the same shareholder; and Furthermore, Sec 24 BAO provides specific provisions in ■ the interest or royalty payments in the state of residence of the connection with the attribution of business assets, in particular with receiving company are: (i) not subject to tax because of a regard to security ownership, trusteeship, beneficial ownership and personal or objective exemption; (ii) subject to tax at a rate lower joint ownership. This provision says that in general, assets are to be than 10%; or (iii) subject to an effective tax at a rate lower than attributed to their beneficial owner. Here the “substance over form” 10% due to any available tax reduction. principle applies. This is the case if a person is in a position to It is not relevant whether the tax at a rate lower than 10% is based exercise those rights which are distinctive for ownership such as the on the domestic law of the state of residence of the receiving use, consumption, amendment, pledge and sale of the assets, and if company or the applicable double taxation treaty concluded between such person is simultaneously entitled to exclude any third party on Austria and the respective state of residence. a permanent basis from having an impact on the assets. If the receiving entity is not the beneficial owner, the respective conditions have to be investigated at the level of the beneficial owner (e.g. in certain back-to-back refinancing scenarios). 9.2 Is there a requirement to make special disclosure of That regulation is effective to all payments carried out since 28 avoidance schemes? February 2014, irrespective of when the corresponding contract was concluded. The Austrian government is of the opinion that the No, currently there is no specific disclosure requirement for avoidance existing provisions in connection with interest payments to related schemes. However, the EU Directive of 25 May 2018 amending parties is sufficient as national implementation of the EC Anti-Tax Directive 2011/16/EU as regards mandatory automatic exchange of Avoidance Directive. information in the field of taxation in relation to reportable cross- Furthermore, hybrid structures have been substantially limited: the border arrangements provides for a reporting obligation in connection participation exemption will not apply if the dividend distributed to with international tax planning models and has to be implemented by the Austrian company is tax-deductible by the foreign corporation the EU Member States until 31 December 2019. The Directive in its home jurisdiction. This is now also the standard under the EU already provides for a reporting obligation for those tax planning Parent-Subsidiary Directive. models whose first implementation step took place after 25 June 2018. In addition, the Tax Reform Act 2020 (legislative draft under It is therefore to be expected that tax planning models already initiated discussion) foresees anti-avoidance rules targeting hybrid cross- in 2018 will also be affected by the obligation to notify. border structures. Specific structures leading to a tax deduction in In Austria, a legislative draft for the new EU Notification Act is one state without any corresponding taxable income in the other state available. It is worth noting that notaries, attorney-at-laws, certified (Deduction/No Inclusion) as well as structures enabling a double tax public auditors and certified public tax advisors shall be exempt from deduction in two different states (Double Deduction) shall be notification obligations. That draft takes over the EU requirements prevented. The new provisions shall apply to specific structures in many areas. The final legislation remains to be seen. defined by law (e.g. hybrid financial instrument, hybrid transfer,

hybrid entities, hybrid PE and unconsidered PE) and shall lead to tax 9.3 Does your jurisdiction have rules which target not only deduction of expenses failed and/or taxable income in Austria as well taxpayers engaging in tax avoidance but also anyone who as to tax deduction of expenses failed in Austria. The new rules for promotes, enables or facilitates the tax avoidance? hybrid cross-border structures shall apply as of 1 January 2020.

No, there are no special rules with regard to anyone who promotes, 10.2 Has your jurisdiction signed the tax treaty MLI and enables or facilitates tax avoidance. However, tax evasion deposited its instrument of ratiﬁcation with the OECD? (Abgabenhinterziehung) and tax fraud (Abgabenbetrug) are subject to criminal prosecution pursuant to the Austrian Fiscal Criminal Act Austria has signed the Multilateral Convention to Implement Tax (Finanzstrafgesetz). In the course of such criminal proceedings, persons Treaty Related Measures to Prevent Base Erosion and Profit Shifting who assist tax evasion and tax fraud are also subject to penalties. in June 2017 and deposited its instrument of ratification with the OECD in September 2017. The MLI entered into force in Austria 9.4 Does your jurisdiction encourage “co-operative as of 1 July 2018. compliance” and, if so, does this provide procedural beneﬁts only or result in a reduction of tax? 10.3 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond the OECD’s No, Austria does not encourage “co-operative compliance” and, there- recommendations? fore, there are no procedural benefits or reduction of tax provided. No. Currently there are no legislative plans which go beyond what is recommended in the OECD’s BEPS reports besides the new

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regulations implemented by the Annual Tax Act 2018 (see questions 11 Taxing the Digital Economy 7.2, 7.3 and 9.1), the new regulations regarding hybrid cross-border structures foreseen in the draft of the Tax Reform Act 2020 (see 11.1 Has your jurisdiction taken any unilateral action to tax question 10.1) and the new provisions regarding an introduced digital corporate tax on online advertising stipulated in the draft of digital activities or to expand the tax base to capture digital the Tax Amendment Act 2020 (see question 11.1). presence?

The Tax Amendment Act 2020 (legislative draft under discussion) 10.4 Does your jurisdiction support information obtained introduces a digital corporate tax on online advertising applying as under Country-by-Country Reporting (CBCR) being made of 1 January 2020. Such digital corporate tax shall apply to digital available to the public? groups of entities with a worldwide turnover of EUR 750 million and an Austria-wide turnover of EUR 25 million. The assessment The Austrian legislator adopted the Transfer Pricing Documentation base shall be the remuneration received by the online advertising Act, which includes documentation and reporting obligations for a agent and the tax rate shall be 5% of the assessment base. multinational group of companies (CBCR). These obligations Furthermore, taxation and stronger reporting requirements for essentially apply for business years starting from 1 January 2016. online brokerage platforms like Airbnb shall be implemented. The received documentations are not made available to the public, but forwarded to the competent tax authorities of the EU Member 11.2 Does your jurisdiction favour any of the G20/OECD’s States where companies of the multinational group are resident. “Pillar One” options (user participation, marketing intangibles 10.5 Does your jurisdiction maintain any preferential tax or signiﬁcant economic presence)? regimes such as a patent box? Currently, Austria does not favour any of the G20/OECD’s “Pillar One” options. The further development remains to be seen. No, there is no preferential tax regime such as a patent box. In this context, however, it should be noted that there are various tax incentives for research and development activities.

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Clemens Philipp Schindler is a Founding Partner of Schindler Attorneys. Before establishing the firm, Clemens spent six years as a Partner at Wolf Theiss, where he led some of the firm’s most prestigious transactions and headed its Brazil operations. Prior to that, he practised with Haarmann Hemmelrath in Munich and Vienna, as well as with Wachtell, Lipton, Rosen & Katz in New York. In his work, Clemens focuses on corporate and tax advice in relation to public and private mergers and acquisitions, private equity and corporate reorganisations (such as mergers, spin-offs and migrations), most of which have a cross-border element. Furthermore, he specialises in international holding structures, including charter financing and leasing operations, as well as private client work. In addition to law degrees from the University of Vienna (Dr. iur.) and the New York University School of Law (NYU Law) (LL.M.), Clemens holds degrees in business administration from the Vienna University of Economics and Business Administration (Dr. rer. soc. oec.). He is admitted in Austria both as an attorney-at-law and as a certified public tax advisor. Mr. Schindler is ranked by international legal directories such as Chambers Global, Chambers Europe, The Legal 500, IFLR1000, Handelsblatt, Best Lawyers and Who’s Who Legal. The German legal directory JUVE lists him as one of Austria’s top 20 corporate and M&A lawyers, whereas the Austrian business magazine TREND named him among Austria’s top 10 lawyers in both the M&A as well as the tax section. Besides their Austrian listings, Chambers Global and Chambers Europe acknowledge his Brazilian expertise in a special ranking on outstanding expertise in foreign jurisdictions.

Schindler Attorneys Tel: +43 1 512 2613 Kohlmarkt 8–10 Email: [email protected] 1010 Vienna URL: www.schindlerattorneys.com Austria

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

Schindler Attorneys Tel: +43 1 512 2613 Kohlmarkt 8–10 Email: [email protected] 1010 Vienna URL: www.schindlerattorneys.com Austria

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

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Brazil Brazil

Maria Carolina Maldonado Mendonça Kraljevic

Lopes Muniz Advogados Camila de Arruda Camargo

1 Tax Treaties and Residence (“ITBI”) is levied on the onerous transfer of real estate, at a rate generally ranging from 1% to 3%; and the State Inheritance and Donation Tax (“ITCMD”) is levied on the non-onerous transfer of 1.1 How many income tax treaties are currently in force in property, as donations or inheritance, the maximum rate of which is your jurisdiction? 8%.

Currently, there are 33 income tax treaties in force in Brazil. 2.2 Do you have Value Added Tax (or a similar tax)? If so, at

what rate or rates? 1.2 Do they generally follow the OECD Model Convention or another model? Yes, there are taxes similar to VAT: (i) the Social Contributions on Gross Revenue (“PIS” and They generally follow the OECD Model Convention. “Cofins”), the rates of which are generally 1.65% and 9.25% respectively; 1.3 Do treaties have to be incorporated into domestic law (ii) the Federal Tax on Manufactured Products (“IPI”), the rate of before they take effect? which varies according to the essentiality of the product, generally ranging from 0% to 15%, but reaching 300% in the Yes, after being signed, the treaties must be approved by the case of cigarettes, for example; and Congress and ratified by the President to be incorporated into the (iii) the State Tax on Circulation of Goods and Interstate and legislation as domestic law. Intercity Transportation and Communication Services (“ICMS”), the rate of which generally ranges from 12% to 19% 1.4 Do they generally incorporate anti-treaty shopping according to the goods, the service and the state to which the tax is due. rules (or “limitation on beneﬁts” articles)? There are discussions in the Brazilian Congress about unifying Most of the income tax treaties only have beneficial owner clauses, these taxes and the Municipal Services Tax (“ISS”). but no limitation on benefits clauses. 2.3 Is VAT (or any similar tax) charged on all transactions 1.5 Are treaties overridden by any rules of domestic law or are there any relevant exclusions? (whether existing when the treaty takes effect or introduced There are relevant exclusions: subsequently)? ■ The sale of fixed assets is exempt from PIS and Cofins. ■ The export of goods and services is exempt from PIS, Cofins, The treaties are overridden by the Constitution when the treaty IPI and ICMS. provisions conflict, formally or materially, with it. In case of conflict ■ Most food and pharmaceutical products are subject to a zero IPI between the treaty provisions and a previous domestic law, the treaty rate. prevails. In case of conflict between the treaty provisions and a ■ ICMS is not levied on: (i) interstate operations with petroleum, newly introduced domestic law, the domestic law prevails. lubricants and electricity; and (ii) communication service of

sound broadcasting and free reception of sounds and images. 1.6 What is the test in domestic law for determining the ■ IPI is not levied on electric energy, petroleum products, fuels residence of a company? and Brazilian minerals. ■ IPI and ICMS are not levied on: (i) the sales of books, news- For tax purposes, legal entities incorporated in Brazil are considered papers, periodicals and printing paper; (ii) the sales of residents, as well as branches, agencies or representations of foreign phonograms and music video phonograms produced in Brazil entities. containing work of Brazilian authors, as well as their supporting materials; and (iii) gold transactions when defined as a financial 2 Transaction Taxes asset or a foreign exchange instrument.

2.1 Are there any documentary taxes in your jurisdiction? 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? There are no documentary taxes in Brazil. However, there are taxes on the transfer of real estate: the Municipal Real Estate Transfer Tax Those taxes are not always fully recoverable.

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PIS and Cofins are only recoverable under the “non-cumulative Yes. Generally, the royalties paid to a non-resident are subject to regime”, under which the company may take credits on the amount IRRF at a 15% or 25% rate if the beneficiary is resident in a country paid for the acquisitions of goods for resale and inputs needed for or region with favoured taxation. Some income tax treaties currently industrialisation or service provision, among others. in force in Brazil limit the taxation on the payments of royalties to IPI is only recoverable by industrial establishments, its equivalents up to a 10% rate. and importers. The IPI levied on the acquisition of inputs (raw The remittance of royalties is also subject to the Contribution of materials) is only recoverable if the input is integrated into a new Intervention in the Economic Domain (“CIDE/Royalties”), at a product subject to taxation or consumed in its industrialisation 10% rate, and to the IOF, currently at a 0.38% rate, both levied on process. the local company and not withheld from non-residents. ICMS is not recoverable: (i) by service companies; (ii) by companies The local company may also be subject to the ISS if the royalties that chose a simplified tax regime on revenue; (iii) on the purchase are considered a payment for a service rendered in Brazil, or to the of materials for use and consumption; and (iv) on the purchase of PIS and Cofins, if the royalties are considered a payment for the goods or services unrelated to the business of the establishment. import of services. Generally, PIS, Cofins, ICMS and IPI are also not recoverable on the acquisition of goods, services or inputs whose output is not 3.3 Would there be any withholding tax on interest paid by subject to taxation. a local company to a non-resident?

2.5 Does your jurisdiction permit VAT grouping and, if so, Yes, interest paid to a non-resident is subject to IRRF at a 15% or is it “establishment only” VAT grouping, such as that applied 25% rate if the payment goes to a company located in a country or by Sweden in the Skandia case? region with favoured taxation. Note that countries or regions with favoured taxation are different from those with “preferred tax No. ICMS and IPI are calculated individually by establishments and regimes”. Countries or places with favoured taxation are those that are also due in intercompany and intergroup operations. There are do not tax income or that tax it at a rate lower than 20%, or whose cases in which the legislation allows ICMS and/or IPI to be collected legislation does not allow access to information regarding the centrally by a single branch of the company, but never by a branch corporate composition of legal entities, their ownership or the of another company, even if it belongs to the same group. identification of the beneficial owner. On the other hand, preferred tax regimes are those that present one of the following requirements: (i) do not tax the income earned in the country and abroad or tax it 2.6 Are there any other transaction taxes payable by at a rate lower than 20%; (ii) grant a tax advantage to a non-resident companies? without the requirement of conducting substantive economic activity in the country or conditioned on the non-exercise of Yes, there are other transaction taxes, such as: substantive economic activity; or (iii) do not allow access to informa- (i) the Municipal Services Tax (“ISS”) on all services not subject to tion related to the corporate composition, ownership of assets or the ICMS and listed by the law, the rate of which generally rights or the economic operations carried out by the companies. ranges from 2% to 5% depending on the type of service and the

city to which the tax is due; (ii) the Federal Tax on Financial Transactions (“IOF”) on trans- 3.4 Would relief for interest so paid be restricted by actions such as credit, foreign currency exchange, securities and reference to “thin capitalisation” rules? insurance, the rate of which varies according to the transaction and may be changed at any time by the President; Yes, the thin capitalisation rules depend on the lender being a related (iii) the Import Tax (“II”), the rate of which varies according to the party or a resident of a country or region with favoured taxation or imported goods; and under a preferred tax regime. Generally, the sum of the debts with all (iv) the Export Tax (“IE”), which is rarely due. related parties may not exceed two times the sum of the participation of all related parties in the net worth; that is, a limit of a 2:1 debt/equity ratio is applied. If the lender resides in a country or 2.7 Are there any other indirect taxes of which we should region with favoured taxation or is under a preferred tax regime, the be aware? sum of the debts with all residents in countries or regions with favoured taxation or under preferred tax regimes may not exceed 0.3% There may be other indirect taxes depending on the business or the of the Brazilian company’s net worth, that is, a 0.3:1 debt/equity ratio product, such as the Tax for the Telecommunication Services limit is applied. In such cases, there are additional requirements that Universalization Fund (“FUST”) and the Tax for the Telecommunication should be met. In case of non-compliance with those rules, the inter- Technology Development Fund (“FUNTTEL”), owned by the ests paid would not be deductible from the IRPJ and CSLL bases. companies that provide telecommunications services.

3 Cross-border Payments 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured?

3.1 Is any withholding tax imposed on dividends paid by a There is no such safe harbour. locally resident company to a non-resident? No, the dividends paid by a locally resident company are exempt 3.6 Would any such rules extend to debt advanced by a from Withholding Income Tax (“IRRF”). Brazilian companies can third party but guaranteed by a parent company? opt to distribute interest on equity (“JCP”), which is deductible from the IRPJ and the CSLL bases and is subject to IRRF at a 15% rate. Yes, the thin capitalisation rules are also applicable if the guarantor, attorney or any intervening party is a related person.

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

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3.8 Is there any withholding tax on property rental No, the tax rate remains the same. payments made to non-residents? 4.7 Are companies subject to any signiﬁcant taxes not Yes, there is withholding tax at a 15% rate on property rental covered elsewhere in this chapter – e.g. tax on the payments made to non-residents. This tax rate will increase to 25% occupation of property? if the payment goes to a person located in a country or region with favoured taxation. Yes, there is also the Municipal Tax on Urban Real Estate (“IPTU”), the Federal Tax on Rural Real Estate (“ITR”), the State Tax on 3.9 Does your jurisdiction have transfer pricing rules? Motor Vehicle Property (“IPVA”) and the Social Contributions on Payrolls. Other taxes may apply depending on the business devel- Yes, the Brazilian transfer pricing method is based on the “traditional oped by the company. methods”, with fixed profit margins (comparison, resale and cost- plus). Due to the fixed profits margins used to determine the 5 Capital Gains transfer pricing in Brazil, the effective price of the transaction may differ from the presumption established by the Brazilian legislation. This differs from the transactional methods, also provided for by the 5.1 Is there a special set of rules for taxing capital gains OECD, that privileges the actual conditions of the operations. and losses? Brazil might change its transfer pricing rules in the future to become an OECD member. Yes, the income on capital gains earned by non-residents are subject to income tax at a rate that ranges from 15%, for gains up to BLR 5 4 Tax on Business Operations: General million, to 22.5%, for gains higher than BLR 30 million. The capital gains earned by residents in a country or region with favoured taxation are subject to tax at a 25% rate. The tax must be withheld 4.1 What is the headline rate of tax on corporate proﬁts? by the buyer or his proxy, when the buyer is also a non-resident. Losses accrued by non-residents cannot be offset against capital gains. The corporate profits are subject to Corporate Income Tax (“IRPJ”)

at a 15% rate, plus an additional 10% rate on the amount that exceeds R$20,000.00 per month, and to Social Contribution on Net Profits 5.2 Is there a participation exemption for capital gains? (“CSLL”) at a 9% rate or 15% rate for companies considered as There is no such participation exemption. financial institutions, or offering private issuance and capitalisation.

5.3 Is there any special relief for reinvestment? 4.2 Is the tax base accounting proﬁt subject to adjustments, or something else? There is no special relief for reinvestment.

Yes, the tax base accounting profit is subject to the additions and exclusions provided for in the tax law. Generally, the normal and 5.4 Does your jurisdiction impose withholding tax on the usual expenses, necessary for the company’s activity, are deductible proceeds of selling a direct or indirect interest in local from the IRPJ and CSLL bases, regardless of their accounting assets/shares? treatment. Yes, direct or indirect interest in local assets/shares are subject to 4.3 If the tax base is accounting proﬁt subject to income tax on the capital gain, even if the seller and the buyer are non-residents. adjustments, what are the main adjustments? The main adjustments are: (i) costs, expenses and any other amounts 6 Local Branch or Subsidiary? deducted from the net income which are not deductible from the real profit, such as the expenses regarding accounting provisions and 6.1 What taxes (e.g. capital duty) would be imposed upon expenses with defaulted credits that do not meet the requirements the formation of a subsidiary? for its deductibility; and (ii) income, revenue and any other amounts not included in the net income that must be computed in the actual The formation of a subsidiary by a foreign company is only subject profit, such as the adjustments arising from the transfer pricing to Federal Tax on Financial Transactions (IOF-Exchange), currently methods. levied at 0.38%.

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6.2 Is there a difference between the taxation of a local each year, regardless of the actual distribution of such profits. If the Brazilian company does not hold control over the foreign subsidiary and a local branch of a non-resident company (for company and other requirements are met, the profits are generally example, a branch proﬁts tax)? taxed on a cash basis when distributed; however, where the law determines or if the taxpayer chooses, they may be taxed on an No, the local subsidiary and the local branch of a non-resident are accrual basis. The amount of tax paid abroad may be offset against subject to the same taxation in Brazil. the tax due in Brazil.

6.3 How would the taxable proﬁts of a local branch be 8 Taxation of Commercial Real Estate determined in its jurisdiction? 8.1 Are non-residents taxed on the disposal of commercial The local branch, as for all Brazilian companies, is subject to taxation on the real profit, as determined by the offsetting of income and real estate in your jurisdiction? expenses provided by the tax legislation. However, the taxpayer can Yes, the disposal of commercial real estate is subject to income opt for a taxation on the presumed profit if there is no legal taxation on the capital gain on a rate that ranges from 15%, for gains restriction, such as annual revenues exceeding R$78,000,000.00. In up to BLR 5 million, to 25%, for gains earned by residents in a the taxation under the presumed profit regime, there is an country or region with favoured taxation, as set forth in question 5.1 assumption of the percentage of revenue corresponding to the above. profit that ranges from 1.6% to 32% of the revenue for IRPJ and from 12% to 32% for CSLL. 8.2 Does your jurisdiction impose tax on the transfer of an 6.4 Would a branch beneﬁt from double tax relief in its indirect interest in commercial real estate in your jurisdiction? jurisdiction?

Yes, a branch can benefit from double tax relief in Brazil, which can Yes, the transfer of an indirect interest in commercial real estate is be granted by an income tax treaty or by the legislation that auth- subject to income taxation on the capital gain, as set forth in ques- orises the application of reciprocity treatment. Under the reciprocity tion 5.1 above. treatment rules, if an income is taxed abroad, the tax on that income may be used as a credit to reduce the Brazilian tax if the foreign 8.3 Does your jurisdiction have a special tax regime for country provides the same treatment regarding the income earned Real Estate Investment Trusts (REITs) or their equivalent? and taxed in Brazil. There are no REITs in Brazil, but rather Real Estate Investments 6.5 Would any withholding tax or other similar tax be Funds (“FII”), which are condominiums without legal personality, whose capital is divided into quotas, that invest in real estate imposed as the result of a remittance of proﬁts by the properties or companies. Provided that some requirements are met, branch? income and capital gains arising from real estate investments earned by FIIs are exempt from income tax and IOF. The financial income No. The remittance of profits regularly taxed in Brazil is currently earned by FIIs is subject to withholding income tax at rates that exempt from taxation. range from 15% to 22.5%, depending on the period of the invest-

ment. Income and capital gains distributed by the FIIs, as well as 7 Overseas Proﬁts income and capital gains earned upon the disposal or redemption of quotas by the FIIs, are subject to income tax at a 20% rate. If the 7.1 Does your jurisdiction tax proﬁts earned in overseas FII has more than 50 quota holders and its quotas are subject to branches? negotiation in a stock exchange or in an organised market, the income distributed can be exempt from taxation. Yes, profits and gains earned abroad through subsidiaries and controlled or affiliated companies are subject to IRPJ and CSLL in 9 Anti-avoidance and Compliance Brazil.

9.1 Does your jurisdiction have a general anti-avoidance or 7.2 Is tax imposed on the receipt of dividends by a local anti-abuse rule? company from a non-resident company? Yes. There is a legal provision authorising the administrative auth- Yes, the receipt of dividends is subject to IRPJ and CSLL by the ority to disregard acts or transactions practised for the purpose of Brazilian company. In case of subsidiaries and branches abroad, the disguising the occurrence of the triggering event or the nature of income will be fully added to the corporate income due in Brazil as the elements constituting the tax obligation. However, this provision of December 31 of the year in which it was made available; thus, no depends on its regulation by an additional law, which has not yet additional income taxation is due on the receipt of dividends. been edited. Moreover, the inflow and outflow of funds in connection to invest- While such regulation is pending, the tax authority may charge ments abroad are subject to IOF-Exchange at the current rate of taxes when it is proven that the taxpayer or a third party has acted 0.38%. with intent, fraud or simulation. Moreover, civil law provides that, in the event of abuse of legal 7.3 Does your jurisdiction have “controlled foreign personality, characterised by misuse of purpose or confusion of company” rules and, if so, when do these apply? ownership, the judge may disregard the legal entity so that the effects of certain obligations may be extended to the private assets of Yes, Brazil has “CFC” rules aiming at taxing the profits earned by directors or shareholders who benefited from the abuse. subsidiaries and controlled companies abroad on December 31 of

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9.2 Is there a requirement to make special disclosure of 10.3 Does your jurisdiction intend to adopt any legislation to avoidance schemes? tackle BEPS which goes beyond the OECD’s recommendations? There are currently no requirements to make special disclosure of avoidance schemes. No, Brazil currently has no plans to adopt BEPS legislation beyond the OECD’s recommendations. 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who 10.4 Does your jurisdiction support information obtained promotes, enables or facilitates the tax avoidance? under Country-by-Country Reporting (CBCR) being made available to the public? Yes. There is a legal provision that provides for the liability of persons with a common interest in the triggering event. Taxpayers No. Nonetheless, the Brazilian CBCR rule does not regulate the argue that common interest occurs when the parties are on the same availability of such information to the public. Usually, the informa- side of the legal business that triggers the taxation. However, tax tion provided to the IRS is protected by tax secrecy. authorities apply this provision more broadly to reach any party that could have gained from the transaction. 10.5 Does your jurisdiction maintain any preferential tax

regimes such as a patent box? 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural beneﬁts Yes, there is the Special Tax Regime for the Information Technology only or result in a reduction of tax? Services Export Platform (“REPES”) that benefits companies engaged in the development of software or the provision of services If the taxpayer decides to, spontaneously, pay overdue debts before of information technology, that commit to export part of its goods any inspection by the Revenue Services, that taxpayer is granted a and services. Under such regime, the company that meets the fine amnesty. On the federal level, compliant companies can benefit requirements is subject, among others, to a partial exemption from customs clearance on export and import transactions. Besides regarding IPI, PIS and Cofins and a wider deduction of costs and that, the State of São Paulo enacted a law providing facilities for expenses from the IRPJ and CSLL bases. taxpayers who constantly comply with state tax legislation. The Federal Government is also studying the possibility of creating a 11 Taxing the Digital Economy positive tax register to favour taxpayers who comply with tax legislation. 11.1 Has your jurisdiction taken any unilateral action to tax

digital activities or to expand the tax base to capture digital 10 BEPS and Tax Competition presence?

10.1 Has your jurisdiction introduced any legislation in For the time being, there are no significant plans to expand the tax response to the OECD’s project targeting BEPS? base to capture digital presence. Both States and Municipalities aim to tax digital activities, breaching legal certainty. Furthermore, there Yes, for example, Brazil has adopted the country-by-country is a tax reform proposal under analysis by the Congress that, if exchange relationships, aiming to exchange financial and corporate approved, would capture the taxation of digital activities. information on multinational groups of companies. Thus, parent companies of multinational groups must report annually to the IRS 11.2 Does your jurisdiction favour any of the G20/OECD’s information on revenue, income, tax collection, number of employers, capital, assets, activities, etc. Moreover, Brazil has “Pillar One” options (user participation, marketing intangibles established the obligation for some Brazilian companies to inform or signiﬁcant economic presence)? the IRS of the entire chain of companies up to the final beneficiary. For the time being, no. 10.2 Has your jurisdiction signed the tax treaty MLI and deposited its instrument of ratiﬁcation with the OECD?

No, Brazil is not a signatory of the MLI.

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Maria Carolina Maldonado Mendonça Kraljevic is a partner at Lopes Muniz Advogados, where she is responsible for the Tax Law department of the firm. She has over 15 years of experience working in the legal profession as a legal consultant in the tax area. Maria Carolina is a graduate of law (Mackenzie University) and accounting (Trevisan Business School). She is a post-graduate in international tax law (IBDT) and is studying for her Master’s in tax law at the Catholic University of São Paulo. Maria Carolina is also the author of several articles on tax law.

Lopes Muniz Advogados Tel: +55 11 3038 0726 Av. Brigadeiro Faria Lima Email: [email protected] 1656, 5º andar URL: www.almlaw.com.br São Paulo – SP Brazil

Camila Pelizaro de Arruda Camargo is a lawyer at Lopes Muniz Advogados, where she is the coordinator of the Tax Law department of the firm. She has over 16 years of experience working in the legal profession as a legal consultant. Camila is a graduate of law (Mackenzie University), a post-graduate in tax law (Catholic University of São Paulo) and holds a Master’s degree in business administration in tax management (FIPECAFI).

Lopes Muniz Advogados Tel: +55 11 3038 0711 Av. Brigadeiro Faria Lima Email: [email protected] 1656, 5º andar URL: www.almlaw.com.br São Paulo – SP Brazil

Since the firm’s foundation in 1975, we have focused on delivering comprehensive legal services with credibility, ethics and high standards of excellence to local and multinational clients. We are recognised as a multi-field action firm, known for solutions that grant security for our clients and give them the confidence to face their legal challenges. Our work model is based in specialised teams, led by one or more partners, that participate in finding solutions and strategies for each case, assuring the high level of quality for which we are recognised. www.almlaw.com.br

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Chile Chile

Jessica Power

Carey Ximena Silberman

1 Tax Treaties and Residence Stamp Tax ranges from 0.066% up to 0.8% of the principal amount, depending on the maturity date (from one month or less up to 12 months or more). Loans without a maturity date or which 1.1 How many income tax treaties are currently in force in are payable on demand are subject to a tax of 0.332%. your jurisdiction? Chile has 33 tax treaties. Additionally, there is one tax treaty 2.2 Do you have Value Added Tax (or a similar tax)? If so, at subscribed by Chile – with the United States of America (“US”) – what rate or rates? which has not yet entered into force. Yes, Value-Added Tax (“VAT”) exists at a 19% rate.

1.2 Do they generally follow the OECD Model Convention or 2.3 Is VAT (or any similar tax) charged on all transactions another model? or are there any relevant exclusions? Yes, except for the treaty with the US (not yet in force), which follows the US model. As a general rule, VAT applies on: (i) customary sales of local movable and immovable property (excluding land); (ii) commercial, 1.3 Do treaties have to be incorporated into domestic law industrial and intermediary services provided or used in Chile; and (iii) special cases (e.g., imports, software licensing, among others). before they take effect? Thus, the main exclusions refer to the sale of land and Once treaties are ratified by the Chilean Congress and published in professional services. the Official Gazette, they become effective and enforceable, and are Also, imports of working capital assets for the development of considered part of the domestic legislation. specific projects (e.g., mining, industrial, energy, among others), exports and certain payments for services rendered abroad are VAT- exempt. 1.4 Do they generally incorporate anti-treaty shopping

rules (or “limitation on beneﬁts” articles)? 2.4 Is it always fully recoverable by all businesses? If not, Yes, most of the tax treaties have anti-treaty shopping rules and what are the relevant restrictions? recently enacted treaties also have limitation on benefits clauses. Chile is also a signatory party to the Multilateral Convention to VAT taxpayers can offset the VAT surcharged in their own sales Implement Tax Treaty Related Measures of BEPS Actions (“MLI”). (“Fiscal Debit”) against the VAT paid for in the acquisition of goods or services (“Fiscal Credit”). Fiscal Credit balance can be carried forward indefinitely. 1.5 Are treaties overridden by any rules of domestic law Exporters and VAT taxpayers acquiring fixed assets and (whether existing when the treaty takes effect or introduced complementary services are entitled to request a VAT Fiscal Credit subsequently)? refund. Other taxpayers consider the VAT paid as a cost or as an No. Pursuant to the Political Constitution of Chile and the Vienna expense (see question 4.2 below). Convention (to which Chile is a signatory party), tax treaties should not VAT paid for goods or services used for activities partly subject be overridden by Chilean domestic laws, either existing or subsequent. to VAT is proportionally granted as Fiscal Credit. VAT paid is not granted as a Fiscal Credit when: (i) acquiring goods or services not related to the taxpayer’s business, or used in 1.6 What is the test in domestic law for determining the activities exempted or not subject to VAT; (ii) acquiring or maintaining residence of a company? vehicles, station wagons or similar when not being the main business; and (iii) the invoice paid is deemed to be false or when issued by The place of incorporation determines the residence of a company. taxpayers not performing activities subject to VAT (unless certain

formalities are taken by the taxpayer when paying the invoice). 2 Transaction Taxes

2.1 Are there any documentary taxes in your jurisdiction?

Stamp Tax is applicable to documents evidencing loans.

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2.5 Does your jurisdiction permit VAT grouping and, if so, 3.3 Would there be any withholding tax on interest paid by is it “establishment only” VAT grouping, such as that applied a local company to a non-resident? by Sweden in the Skandia case? Yes. Interest payments are generally subject to a 35% WHT. A No. Each VAT taxpayer must calculate, declare and pay its Fiscal reduced 4% WHT applies on interest payments to foreign banks or Debit, even when it is part of the same group of related companies. financial institutions. Tax treaties can also reduce the applicable WHT (from 5% to 15%).

2.6 Are there any other transaction taxes payable by 3.4 Would relief for interest so paid be restricted by companies? reference to “thin capitalisation” rules? The transfer of motorised vehicles is subject to a transaction tax of 1.5% on the highest between the sale price and the vehicle’s fiscal Yes. Local Thin-Cap Rules apply to payments subject to reduced valuation. WHT rates made to related parties abroad, when the borrower is in an “excessive indebtedness” situation (i.e., total worldwide debt exceeds three times the borrower’s adjusted tax equity). Payments 2.7 Are there any other indirect taxes of which we should to related parties attributed to excessive indebtedness will be be aware? proportionally levied with a 35% sole tax borne by the Chilean debtor, with a credit for the WHT paid. The following indirect taxes should be noted:

1. additional tax of 15% or 50% on the first sale or import, customary or not, of some sumptuary goods (e.g., gold and 3.5 If so, is there a “safe harbour” by reference to which tax platinum jewels); relief is assured? 2. additional tax from 10% to 31.5% on the sale or import, customary or not, of energising, hypertonic or substitutes drinks; The 3:1 debt-equity ratio established by the Thin-Cap Rules is liquors, distilled whiskies, wines and other alcoholic beverages; supposed to be a safe harbour provision for the reduced WHT rate 3. additional tax from 52.6% to 59.7% on the sale or import of for interest payments between related parties. cigars, cigarettes and tobacco; and 4. additional tax on the first sale or import of gasoline or diesel, 3.6 Would any such rules extend to debt advanced by a equal to 1.5 of a Monthly Tax Unit or UTM (approximately third party but guaranteed by a parent company? USD 100) per cubic metre of diesel, and 6 UTM per cubic metre in case of gasoline, which is also adjusted by adding or deducting Yes, Thin-Cap Rules apply to third-party debts guaranteed by a a variable component provided in Law No. 20.943. related party, including back-to-back structures. A tax reform bill was submitted before the Chilean Congress on rd August 23 , 2018 for its discussion (the “Tax Reform”). The Tax 3.7 Are there any other restrictions on tax relief for interest Reform proposes the application of VAT over the provision of payments by a local company to a non-resident, for example digital services through digital platforms. pursuant to BEPS Action 4? 3 Cross-border Payments Tax treaty relief is subject to the usual limitations (i.e., effective beneficiary and compliance requirements) and local formal 3.1 Is any withholding tax imposed on dividends paid by a requirements (i.e., tax residence certificate and a sworn statement). locally resident company to a non-resident? 3.8 Is there any withholding tax on property rental Yes. Foreign individuals or entities are subject to a 35% Withholding Tax (“WHT”) on dividends from Chile. The WHT must be payments made to non-residents? withheld, declared and paid by the local payer. The 35% WHT on Yes. Rental payments for assets located in Chile are subject to a 35% dividends applies regardless of the existence of a tax treaty by virtue WHT. of the “Chile clause”. A reduced 1.75% WHT applies as a sole tax over the gross A tax credit for either 100% or 65% of the Corporate Tax paid amounts paid for by the lease (with or without purchase option) of by the local company is granted against such WHT, depending on imported capital goods that fulfil certain requirements. the applicable tax regime (see question 4.6 below). Tax treaties may also offer reduced WHT rates.

3.2 Would there be any withholding tax on royalties paid by 3.9 Does your jurisdiction have transfer pricing rules? a local company to a non-resident? Yes. Chilean transfer pricing rules (“TP Rules”) entitle the IRS to Yes. Royalties are generally subject to a 30% WHT. A reduced 15% challenge values in cross-border related transactions when they are rate applies in some cases (e.g., use of utility models, industrial not at arm’s length. designs, patents, use and exploitation of computer programs, among others). However, if the foreign beneficiary is a resident in a tax- 4 Tax on Business Operations: General haven jurisdiction, WHT is increased to 30%. Royalties paid for the use of standard software are WHT-exempt. Tax treaties can also reduce the WHT applicable on royalties (from 4.1 What is the headline rate of tax on corporate proﬁts? 5% to 15%). At the Chilean company level, the Corporate Tax rate is 25% or 27%

depending on the company’s income tax regime (see question 4.6 below), calculated annually on its worldwide taxable income on a cash or accrual basis.

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4.2 Is the tax base accounting proﬁt subject to 5 Capital Gains adjustments, or something else? 5.1 Is there a special set of rules for taxing capital gains In general, the net taxable income must be determined according to and losses? full accounting records, and it is equal to the accrued and received income less deductible costs and expenses, and subject to certain Capital gains are subject to the general tax regime (i.e., Corporate adjustments. Tax plus Final Taxes). The same applies to capital losses, which are Expenses are tax deductible if certain legal requirements are met tax-deductible provided that certain requirements are met. (i.e., necessary to generate the taxable income of the period, accrued However, special rules may apply for individuals in the case of or paid, not deducted as cost, from the corresponding exercise and capital gains arising from the sale of shares, real estate, mining evidenced to the IRS). property, water rights, bonds, intellectual property and industrial property, among others. 4.3 If the tax base is accounting proﬁt subject to adjustments, what are the main adjustments? 5.2 Is there a participation exemption for capital gains?

The main adjustments refer to monetary correction of the assets and Capital gains derived from the sale of shares by individuals not keeping liabilities generally under local inflation and exceptionally under full accounting records are considered non-taxable income, provided foreign currency denomination. that: (i) the buyer is not a related party to the seller; and (ii) the gains do not exceed 10 Annual Tax Units (UTA, approx. USD 8,350). 4.4 Are there any tax grouping rules? Do these allow for Capital gains resulting from a non-habitual and non-related sale of shares acquired before January 31st, 1984 are considered non- relief in your jurisdiction for losses of overseas subsidiaries? taxable income. Also, a full tax-exemption applies on the sale of No. However, taxpayers must recognise in Chile the tax result of shares of publicly listed stock corporations that are regularly traded, foreign permanent establishments (“PE”) including tax losses. provided specific requirements are met.

4.5 Do tax losses survive a change of ownership? 5.3 Is there any special relief for reinvestment?

Under a change of ownership (i.e., owners acquiring or completing Some companies have the option to reduce its taxable income up to directly or indirectly at least 50% of the shares or rights to the profits an amount of 50% of the reinvested taxable income, if certain of the company), the company’s losses can be used provided that requirements are met, with a cap of 4,000 indexed units (“UF”). certain requirements are met regarding the operational company’s business and assets. 5.4 Does your jurisdiction impose withholding tax on the

proceeds of selling a direct or indirect interest in local 4.6 Is tax imposed at a different rate upon distributed, as assets/shares? opposed to retained, proﬁts? In general, 35% WHT applies on capital gains derived from the direct The Chilean income tax system is a two-level integrated system. transfer of Chilean assets and shares of local companies. Corporate Tax paid by the company at the first level can be totally or The indirect transfer of Chilean assets and shares through the sale partially credited against owners’ income taxes (“Final Taxes”): of foreign shares, equity rights, quotas, bonds or other titles or rights 1. Income-attribution regime: a 25% Corporate Tax applies at the may be taxed if: first level and the income is attributed to the owners who pay Final a) the foreign titles represent 10% or more of the offshore entity Taxes, regardless of whether it is distributed or not; and Corporate and the underlying Chilean assets: (a) proportionally amount to Tax is fully granted as a credit. equal or higher than UTA 210,000 (approx. USD 175 million); 2. The total tax burden for foreign owners under this regime is 35%. or (b) represent 20% or more of the fair market value of the 3. Semi-integrated income regime: a 27% Corporate Tax applies at ownership in the offshore company; or the first level and Final Taxes are triggered upon profits’ effective b) the sold foreign entity is domiciled or incorporated in a tax- distribution, only with a credit for 65% of the Corporate Tax paid haven jurisdiction, unless certain requirements are met and at the company level (except for dividends remitted to a tax treaty evidenced before the IRS. resident, where a 100% Corporate Tax credit is granted; this also Exceptionally, indirect taxation does not apply in case of business applies to tax treaties subscribed by Chile but not in force, such as reorganisations, provided certain requirements are met. the tax treaty with the US, until 2021). The total tax burden for foreign owners under this regime is 44.45%. 6 Local Branch or Subsidiary? The Tax Reform intends to re-establish a single fully integrated tax regime (i.e., Final Taxes triggered upon distribution and Corporate Tax fully creditable). 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? 4.7 Are companies subject to any signiﬁcant taxes not Chilean tax is not levied on the incorporation of an entity. covered elsewhere in this chapter – e.g. tax on the However, the development of investment, commercial and occupation of property? industrial activities, among others, is subject to the municipal licence tax (see question 4.7 above). Commercial, investment and industrial activities are generally subject to an annual municipal licence tax at rates ranging from 0.25% to 0.5%, applied through the company’s adjusted tax equity, capped at approximately USD 550,000 per year.

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6.2 Is there a difference between the taxation of a local A foreign entity is deemed to be controlled if the taxpayer: (i) holds 50% or more of its equity, profits or voting rights; (ii) has the subsidiary and a local branch of a non-resident company (for authority to appoint the majority of its board; and/or (iii) is entitled example, a branch proﬁts tax)? to amend its bylaws unilaterally. Additionally, entities located in a preferential tax regime’s jurisdiction are presumed to be controlled. As a general rule, Chilean branches are subject to the same income taxation as subsidiaries (i.e., two-level system with Corporate Tax and Final Taxes on taxable distributions). 8 Taxation of Commercial Real Estate However, subsidiaries are subject to Corporate Tax on their worldwide income, whereas branches and other PEs are subject to 8.1 Are non-residents taxed on the disposal of commercial taxation on results attributable to them. real estate in your jurisdiction?

6.3 How would the taxable proﬁts of a local branch be Yes. Non-residents are subject to ordinary income taxation for capital gains arising from the sale of any kind of real estate located determined in its jurisdiction? in Chile (i.e., Corporate Tax and WHT). Results attributable to PEs must consider income, cost and expenses However, individuals who do not keep full accounting records are originated from (a) the PE’s activities in Chile and abroad, and (b) not subject to income taxes of up to 8,000 indexed units (UF, approx. assets allocated in or used by the PE, whether located in Chile or USD 317,000), provided that certain requirements are met. On the abroad. excess, a 35% WHT applies. This benefit is not capped at UF 8,000 st However, if the books of the PE are not sufficient to determine for these sellers where the real estate is acquired before January 1 , its effective income, the IRS is empowered to assess such net taxable 2004. income as a percentage of the PE’s gross income or total assets, in relation to those of the parent company. 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your 6.4 Would a branch beneﬁt from double tax relief in its jurisdiction? jurisdiction? The ITL taxes the indirect transfer of real estate when the indirect No, because a branch is not considered a tax resident in Chile. transfer thresholds are met (see question 5.4 above).

6.5 Would any withholding tax or other similar tax be 8.3 Does your jurisdiction have a special tax regime for imposed as the result of a remittance of proﬁts by the branch? Real Estate Investment Trusts (REITs) or their equivalent?

Distributions of taxable profits by a branch or PE have the same Currently, there is no special tax regime for REITs. tax treatment as distributions made by Chilean companies. Hence, they are subject to a 35% WHT with a total or partial credit 9 Anti-avoidance and Compliance for the Corporate Tax paid by the PE (see question 4.6 above). Distributions of exempt or non-taxable income and capital 9.1 Does your jurisdiction have a general anti-avoidance or reductions could be WHT-exempt. anti-abuse rule?

7 Overseas Proﬁts Domestic law contains a general overreaching anti-avoidance rule (“GAAR”), which is a substance-over-form control rule under which 7.1 Does your jurisdiction tax proﬁts earned in overseas the IRS is entitled to challenge the tax consequences derived from branches? legal forms when there is abuse or simulation.

Yes. As a general rule, foreign-source income is recognised in Chile 9.2 Is there a requirement to make special disclosure of on a cash basis, except in the case of foreign branches or other PEs, avoidance schemes? where the PE’s income is taxed on an accrual basis. There is not a general requirement to disclose avoidance schemes. 7.2 Is tax imposed on the receipt of dividends by a local However, taxpayers are required by the IRS to permanently company from a non-resident company? provide information by means of filing sworn affidavits.

Yes, as ordinary income (i.e., Corporate Tax and Final Taxes upon 9.3 Does your jurisdiction have rules which target not only distribution). taxpayers engaging in tax avoidance but also anyone who A foreign tax credit is granted for the taxes paid abroad on such promotes, enables or facilitates the tax avoidance? dividends, with certain limitations and requirements. Individuals or legal entities involved in the design or plan of acts, 7.3 Does your jurisdiction have “controlled foreign contracts or businesses deemed to be abusive or simulated may be company” rules and, if so, when do these apply? subject to a fine of up to 100% of the avoided taxes. Persons facilitating false tax documentation can also be subject to Yes. Under local CFC rules, foreign passive income of a controlled fines and criminal sanctions. entity is recognised in Chile on an accrual basis.

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Chilean domestic law does not contemplate general “co-operative The CBCR must be submitted annually by the local controller or compliance” programmes. parent company of a multinational group, in case (i) the group’s Regarding the matter of TP, advance pricing agreements (“APAs”) consolidated income is equal or higher than EUR 750 million, or (ii) between the taxpayer and the IRS could be agreed. the Chilean company has been designated by the controller or parent Additionally, taxpayers may request tax rulings from the IRS to company as its substitute to submit the CBCR in its country of tax give certainty regarding specific transactions or structures. residence. However, the information provided to the Chilean tax Also, the IRS is prevented from retroactively assessing taxes when authority is not made public. a taxpayer has relied, in good faith, on a criterion set forth in a ruling or other official document (while the IRS does not issue a new ruling 10.5 Does your jurisdiction maintain any preferential tax stating a different criterion). regimes such as a patent box? 10 BEPS and Tax Competition There is no patent box regime in Chile for revenue deriving from intellectual property licensing. 10.1 Has your jurisdiction introduced any legislation in However, certain transfers of intellectual property can be income- response to the OECD’s project targeting BEPS? tax exempt (see question 5.1 above).

The most important amendments to tackle BEPS Actions up to this 11 Taxing the Digital Economy date are: TP rules; GAAR (see section 9 above); CFC rules (see question 7.3 above); and Sworn Statements regarding CBCR (see 11.1 Has your jurisdiction taken any unilateral action to tax question 10.3 below) and global tax characterisation, among others. Also, Chile is a signatory party to the MLI and to the CBCR digital activities or to expand the tax base to capture digital Multilateral Competent Authority Agreement. presence? Moreover, the Tax Reform bill proposes a “digital tax” on new digital business models (see questions 2.7 above and 11.1 below). No. However, the Tax Reform includes diverse hypotheses of digital services provided by foreign individuals or entities through digital 10.2 Has your jurisdiction signed the tax treaty MLI and platforms as activities levied with VAT and subject to a 19% tax. deposited its instrument of ratiﬁcation with the OECD? Chile is a signatory party to the MLI. However, it has not yet de- 11.2 Does your jurisdiction favour any of the G20/OECD’s posited its instrument of ratification. “Pillar One” options (user participation, marketing intangibles or signiﬁcant economic presence)? 10.3 Does your jurisdiction intend to adopt any legislation to Chile does not currently follow the G20/OECD’s “Pillar One” tackle BEPS which goes beyond the OECD’s options (see question 11.1 above). recommendations?

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

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Jessica Power has been a partner at Carey since 2008 and is co-head of the Tax Group. She has broad experience advising domestic and foreign clients on corporate and personal tax planning, local and international tax consulting, M&A, foreign investment transactions and tax litigation. She has been recognised by several international publications, being awarded Lawyer of the Year in Tax by Best Lawyers (2014). She was also highlighted as one of 100 female leaders in Chile by El Mercurio (2008/2015). She is the Founder and mentor of the “Learning to Lead” programme for women lawyers and, also, a member of the IFA. Jessica graduated from Universidad de Chile (Summa Cum Laude, JD, 1999), from which she also holds a degree in Tax Law.

Carey Tel: +56 2 2928 2214 Isidora Goyenechea 2800, piso 43 Email: [email protected] Las Condes, Santiago URL: www.carey.cl Chile

Ximena Silberman is an associate in Carey’s Tax Group. She advises clients on personal and corporate tax planning, local and international tax consulting and tax litigation. She is a teaching assistant of Civil Law and Tax Law at Universidad de Chile. She also co-authored the Chilean chapter of the ICLG to: Corporate Tax (2019). She graduated from Universidad de Chile (Summa Cum Laude) and was granted the Carey Award as the best student of Tax Law (2010).

Carey Tel: +56 2 2928 2214 Isidora Goyenechea 2800, piso 43 Email: [email protected] Las Condes, Santiago URL: www.carey.cl Chile

Carey is Chile’s largest law firm, with more than 270 legal professionals. Carey is a full-service firm. The corporate, litigation and regulatory groups include highly specialised attorneys covering all areas of law. The firm’s clients list includes some of the world’s largest multinationals, international organisations and important local companies and institutions. The firm’s lawyers have graduated from the best law schools in Chile and most of its mid and senior level associates have graduate degrees from some of the world’s most prominent universities. Several are also currently university professors. The firm is an effective bridge between legal systems. Most of its partners and senior associates have worked in North America, Asia and Europe as foreign or regular associates with leading international law firms, or as in- house counsel for major corporations or international institutions. www.carey.cl

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China China

Libin Wu

M&T Lawyers Ting Yue

1 Tax Treaties and Residence 2 Transaction Taxes

1.1 How many income tax treaties are currently in force in 2.1 Are there any documentary taxes in your jurisdiction? your jurisdiction? Yes, China has stamp tax, which is imposed on certain categories of China has signed 107 tax treaties with other countries/jurisdictions, documents that are exhaustively listed in the “Interim Regulation of 100 of which are in force as of September 2019. In addition, there the People’s Republic of China on Stamp Tax”, including, for are tax arrangements which are in force between Mainland China, example: Hong Kong and Macao, respectively. 1. contracts or vouchers of the nature of a contract with regard to purchases and sales, processing, contracting of construction projects, property leasing, cargo transportation, warehousing 1.2 Do they generally follow the OECD Model Convention or storage, loans, property insurance or technology; another model? 2. documents for the transfer of property rights; 3. business account books; Yes, the tax treaties currently in force in China generally follow the 4. certificates for rights or licences; and OECD Model Convention with some adjustments. 5. other vouchers that are taxable as determined by the Ministry of

Finance. 1.3 Do treaties have to be incorporated into domestic law before they take effect? 2.2 Do you have Value Added Tax (or a similar tax)? If so, at No. The treaties have to be ratified by the Standing Committee of what rate or rates? the National People’s Congress before taking effect. Yes, China has Value-Added Tax. There are two types of taxpayers

in China: general taxpayers; and small-scale taxpayers. For general 1.4 Do they generally incorporate anti-treaty shopping taxpayers, the applicable VAT rates include 0%, 6%, 9% and 13%, rules (or “limitation on beneﬁts” articles)? depending on the specific business in which the taxpayer is engaged. The applicable tax rate for small-scale taxpayers is 3%. Yes, the tax treaties signed by China generally incorporate anti-treaty shopping rules. 2.3 Is VAT (or any similar tax) charged on all transactions

or are there any relevant exclusions? 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced While VAT is generally charged on all transactions, there are certain subsequently)? exclusions. Certain specified items are exempted from VAT, such as: nursing and education services provided by nurseries and kinder- No. It is a well-established constitutional principle in China that no gartens; and elderly care services provided by elderly care institutions. treaty is overridden by any rule of domestic law (whether existing Also, some items can be refunded upon collection of VAT; for when the treaty takes effect or introduced subsequently). example, if the actual VAT burden on a general taxpayer providing pipeline transportation services for such services is more than 3%, 1.6 What is the test in domestic law for determining the the portion of the actual VAT burden exceeding 3% shall be refunded upon the collection thereof. residence of a company?

For the purposes of the Enterprise Income Tax Law, the residence 2.4 Is it always fully recoverable by all businesses? If not, identity of a company shall be determined based on the test of place what are the relevant restrictions? of incorporation and place of actual management. According to Article 2 of the Enterprise Income Tax Law, “resident enterprises” Yes, at present, VAT that is charged on taxable transactions and refers to enterprises that are incorporated in China in accordance incurred by a business enterprise is generally recoverable by way of with the law, or that are incorporated in accordance with the law of a tax credit or refund. the foreign country whose place of actual management is in China.

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2.5 Does your jurisdiction permit VAT grouping and, if so, 3.7 Are there any other restrictions on tax relief for interest is it “establishment only” VAT grouping, such as that applied payments by a local company to a non-resident, for example by Sweden in the Skandia case? pursuant to BEPS Action 4?

No. This is not permitted. This is not applicable.

2.6 Are there any other transaction taxes payable by 3.8 Is there any withholding tax on property rental companies? payments made to non-residents?

Yes, there are some transaction taxes in China, including, but not Yes, the rate of withholding tax on rental fees is generally 10%. In limited to, Consumption Tax and Automobile Acquisition Tax. addition, under some treaties, the rental fees are considered as royalties income. 2.7 Are there any other indirect taxes of which we should be aware? 3.9 Does your jurisdiction have transfer pricing rules?

Yes, there are various indirect taxes in China, such as Consumption Yes, the Chinese transfer pricing rules apply to both cross-border Tax, Customs Duty, Environmental Protection Tax and Stamp Tax. and domestic transactions between associated companies. Under China’s current tax system, tax authorities have the power to adjust 3 Cross-border Payments transfer prices if the intercompany transactions do not reflect arm’s length terms.

3.1 Is any withholding tax imposed on dividends paid by a 4 Tax on Business Operations: General locally resident company to a non-resident?

Yes, a 10% withholding tax applies to dividends and bonuses earned 4.1 What is the headline rate of tax on corporate proﬁts? from a Chinese company for the non-resident taxpayer, unless it qualifies for a reduced withholding tax rate under the applicable The rate of corporate income tax shall be 25%. Qualified small, double tax treaty. low-profit enterprises are given the reduced enterprise income tax rate of 20%. High-tech enterprises to which the State needs to give key support are given the reduced enterprise income tax rate of 15%. 3.2 Would there be any withholding tax on royalties paid by For non-resident enterprises that meet certain requirements, the a local company to a non-resident? applicable tax rate shall be 10%.

Yes, a 10% withholding tax shall normally be imposed on royalties, 4.2 Is the tax base accounting proﬁt subject to unless the applicable double tax treaty provides tax relief. adjustments, or something else? 3.3 Would there be any withholding tax on interest paid by Yes. The tax base on enterprise income tax is the taxable income a local company to a non-resident? which is calculated based on the balance of an enterprise’s total income in each taxable year deducted by non-taxable income, tax- Yes. A 10% withholding tax shall normally be imposed on interest exempted income, various deductions and permitted offset of losses paid by a local company to a non-resident, unless the applicable in the previous year(s). double tax treaty provides tax relief.

4.3 If the tax base is accounting proﬁt subject to 3.4 Would relief for interest so paid be restricted by adjustments, what are the main adjustments? reference to “thin capitalisation” rules? The main adjustments include, but are not limited to, the treatment China has a thin capitalisation regime which applies to domestic, as of expenditures for public welfare donations, employees’ welfare, well as cross-border, transactions. labour unions, entertainment, employees’ education and advertisement The Chinese thin capitalisation rules deny deductibility of interest and sales promotions. when a company’s annual average ratio of debt to equity exceeds 5:1 for financial enterprises and 2:1 for other types of enterprises. 4.4 Are there any tax grouping rules? Do these allow for

relief in your jurisdiction for losses of overseas subsidiaries? 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? The head office is responsible for calculation of the total amount of taxable income of the enterprise, including all the non-legal person This is not applicable. branches thereof, as well as the amounts of tax payable; however, it does not allow for relief for losses of overseas subsidiaries. 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company? 4.5 Do tax losses survive a change of ownership?

Yes, under the thin capitalisation rules in China, debt advanced by a Generally, yes. A change of ownership does not restrict a corpor- third party and guaranteed by a parent company would generally be ation from utilising its accumulated tax losses that the corporation treated as related party debt, and shall be subject to the thin incurred in prior years, usually within five years from the taxable year capitalisation rules. in which the losses occurred.

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4.6 Is tax imposed at a different rate upon distributed, as of the original value of the fixed assets and the self-owned current funds; for other business account books, it is CNY5 for each document. opposed to retained, proﬁts?

No, it is not. 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident company (for 4.7 Are companies subject to any significant taxes not example, a branch profits tax)? covered elsewhere in this chapter – e.g. tax on the Yes. A local subsidiary established in accordance with Chinese law, occupation of property? being a separate legal entity, will be subject to Chinese corporate Yes. A company established in China may also be subject to Real income tax on its worldwide income in the same manner as any Estate Tax, Land Use Tax, Stamp Tax, Vehicle and Vessel Tax, other domestic Chinese corporation. However, the branch of a non- Automobile Tax in business operation, etc. resident company will only be subject to Chinese corporate income tax on the income sourced from China, or income occurring outside China but having an actual connection with the branch. 5 Capital Gains 6.3 How would the taxable profits of a local branch be 5.1 Is there a special set of rules for taxing capital gains determined in its jurisdiction? and losses? The branch shall be considered as a separate business entity to No, there are no special rules for taxing capital gains and losses. For calculate its profit in China. the purpose of income taxes imposed on a company (not an

individual) in China, generally all of the taxable income of a company is aggregated, regardless of whether such income is clas- 6.4 Would a branch beneﬁt from double tax relief in its sified as capital gains or ordinary/business profits. jurisdiction?

Yes, a branch may benefit from double tax relief in its jurisdiction. 5.2 Is there a participation exemption for capital gains?

There is no participation exemption for taxation on capital gains. 6.5 Would any withholding tax or other similar tax be However, under some treaties, the non-resident company can apply imposed as the result of a remittance of proﬁts by the for a lower rate according to the applicable tax treaty. branch?

5.3 Is there any special relief for reinvestment? If the branch is a permanent establishment, it will be subject to enterprise income tax at 25%. Yes, the profits received by a non-resident company from a resident enterprise in China temporarily will not be subject to the withholding 7 Overseas Proﬁts tax, if such profits are used for direct investment projects and fields which are encouraged and not banned. 7.1 Does your jurisdiction tax proﬁts earned in overseas

branches? 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local Yes, resident enterprises shall pay enterprise income tax with respect assets/shares? to their worldwide income, which include the profits earned in overseas branches. Yes, non-resident enterprises that have not set up institutions or Non-resident enterprises that have set up institutions or establish- establishments in China, or have set up institutions or establishments ments in China shall pay enterprise income tax in relation to but the income obtained by the said enterprises has no actual China-sourced income obtained by the institutions or establish- connection with such institutions or establishments, shall pay enter- ments, and income occurring outside China but having an actual prise income tax in relation to their income originating from China. connection with the institutions or establishments. Besides that, according to the Announcement of the State Administration of Taxation [2015] NO.7, where a non-resident 7.2 Is tax imposed on the receipt of dividends by a local enterprise indirectly transfers equities and other properties of a company from a non-resident company? Chinese resident enterprise to evade its obligation of paying corporate income tax by implementing arrangements that are not for Yes, but the tax paid outside China may be offset from the payable bona fide commercial purposes, such indirect transfer shall, in accord- tax of the current period. The offset limit is the payable tax ance with the provision of Article 47 of the Corporate Income Tax calculated in accordance with provisions of Law of the People’s Law, be re-identified and recognised as a direct transfer of equities Republic of China on Enterprise Income Tax in respect of the and other properties of the Chinese resident enterprise. income of such item. The portion in excess of the offset limit may be made up within the next five years. 6 Local Branch or Subsidiary? 7.3 Does your jurisdiction have “controlled foreign 6.1 What taxes (e.g. capital duty) would be imposed upon company” rules and, if so, when do these apply? the formation of a subsidiary? Yes. China has its own “controlled foreign company” (CFC) rules In order to form a Chinese subsidiary, the business account books and if such rules are applied to any particular overseas subsidiary, of such subsidiary must be prepared, which is subject to Stamp such CFC subsidiary’s net profits (but not its net losses) shall belong Duty. The business account books for capitals is 0.05% of the sum to such resident enterprise’s taxable income of the current period, in proportion to their shareholding percentages.

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8 Taxation of Commercial Real Estate 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural beneﬁts 8.1 Are non-residents taxed on the disposal of commercial only or result in a reduction of tax? real estate in your jurisdiction? Yes. The Chinese tax authorities encourage corporations to Yes. The income derived by non-residents from disposal of cooperate with them and to voluntarily disclose certain information commercial real estate situated in China shall be taxed in China, and for compliance purposes. However, it will not reduce any tax. the rate of withholding income tax is 10%. 10 BEPS and Tax Competition 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your 10.1 Has your jurisdiction introduced any legislation in jurisdiction? response to the OECD’s project targeting BEPS?

Yes, it does. Yes, China has introduced legislation in response to Action 13, “Guidance on Transfer Pricing Documentation and Country-by- Country Reporting”. The Chinese Government introduced new 8.3 Does your jurisdiction have a special tax regime for legislation to adopt the three-tiered documentation approach Real Estate Investment Trusts (REITs) or their equivalent? comprising the filing of the country-by-country report, master file and local file, which is applicable to any fiscal year beginning on or This is not applicable. after January 1, 2016.

9 Anti-avoidance and Compliance 10.2 Has your jurisdiction signed the tax treaty MLI and deposited its instrument of ratiﬁcation with the OECD? 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? Yes, China has signed the tax treaty MLI on June 7, 2017, but has not deposited its instrument of ratification with the OECD. Yes, China does have a general anti-avoidance rule. According to the Administrative Measures for the General Anti- 10.3 Does your jurisdiction intend to adopt any legislation to Avoidance Rule (for Trial Implementation), a tax avoidance arrangement has the following features: tackle BEPS which goes beyond the OECD’s 1. taking the acquisition of tax benefits as the sole purpose or main recommendations? purpose; and 2. acquiring tax benefits by using a tax avoidance arrangement No, it does not. whose form is permitted in accordance with the tax laws but is not consistent with its economic substance. 10.4 Does your jurisdiction support information obtained Tax authorities shall make the special tax adjustment by referring under Country-by-Country Reporting (CBCR) being made to other similar arrangements with reasonable commercial purpose available to the public? and economic substance, based on the principle of substance over form. The adjustment methods include: No, such information is not available to the public. 1. re-determining the nature of all or part of the transactions under the arrangement; 10.5 Does your jurisdiction maintain any preferential tax 2. denying the existence of a party to the transaction for taxation purposes, or deeming such party and the other transaction regimes such as a patent box? parties as the same entity; No, China does not maintain any preferential tax regimes such as a 3. re-determining the nature of the relevant income, deduction, tax patent box. There are certain tax regimes for special tax credits and incentives, overseas tax credits and others, or re-allocating the deductions on certain research and development costs in China. split among the transaction parties; or

4. any other reasonable method. 11 Taxing the Digital Economy 9.2 Is there a requirement to make special disclosure of 11.1 Has your jurisdiction taken any unilateral action to tax avoidance schemes? digital activities or to expand the tax base to capture digital No. There is no special disclosure rule for avoidance schemes in presence? China. This is not applicable. 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who 11.2 Does your jurisdiction favour any of the G20/OECD’s promotes, enables or facilitates the tax avoidance? “Pillar One” options (user participation, marketing intangibles or signiﬁcant economic presence)? No, it does not. This is not applicable.

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Libin Wu is a tax lawyer with more than 12 years’ experience in advising PRC domestic companies and MNCs. His practice areas cover the PRC tax risk assessment, tax planning, transactional tax analysis and tax due diligence for clients in various industries, such as manufacturing, finance, telecom, IT, real estate, offshore oil exploration, etc. He also has solid experience in negotiating with PRC tax authorities for tax disputes and applications for tax incentive treatment. Prior to joining M&T Lawyers, Mr. Wu worked in the Beijing office of King & Wood Mallesons (PRC). He is a PRC Certificated Tax Agent and is licensed to practise law in China. Mr. Wu’s working languages are English and Mandarin.

M&T Lawyers Tel: +86 10 5629 2579 No. 219, Binheyihao villa Email: [email protected] Jiangtai East Road URL: http://en.minterpku.com Chaoyang District, Beijing China

Ting Yue is a tax consultant, specialising in tax risk assessment, tax planning, transactional tax analysis, tax dispute resolution, etc.

M&T Lawyers Tel: +86 10 5629 2579 No. 219, Binheyihao villa Email: [email protected] Jiangtai East Road URL: http://en.minterpku.com Chaoyang District, Beijing China

Our focus and unparalleled experience in the Chinese tax-related service field Our value is to render our clients with optimised tax advice and solutions. distinguish us from other full-scale law service firms and boutique law firms. Being backed up by the scholars at Peking University and other academic As a rising star, M&T Lawyers is dedicated to providing tailored tax advices institutions, as well as our senior consultants being former tax officials, and solutions to enterprises and individuals, and to provide recommendations enables us to provide accurate, detailed and pragmatic advice and solutions and decision support to government agencies. for clients. Our professionals are mainly from Peking University, other reputable http://en.minterpku.com academies and research institutions, more than 80% of whom have a Master’s degree or above. The main professionals of M&T Lawyers also hold qualification certificates of lawyers and Certified Taxation Agents or other related qualifications.

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Cyprus Cyprus

Petros Rialas

Totalserve Management Limited Marios Yenagrites

1 Tax Treaties and Residence The residence of the company is determined by the place where the management and control is situated/exercised from. The term “management and control” is not specifically defined in 1.1 How many income tax treaties are currently in force in the legislation, but, in practice, it generally follows OECD guidelines your jurisdiction? in relation to the “effective” place of management and control.

There are currently 65 bilateral double tax agreements, out of which 2 Transaction Taxes 64 treaties have been ratified and entered into force. The treaties with the USSR, the Socialist Federal Republic of Yugoslavia and the Czechoslovak Socialist Republic are still in force with regards to 2.1 Are there any documentary taxes in your jurisdiction? some of their former constituent states. It is noted that Cyprus is Stamp duty is imposed on documents (contracts and written agree- considered to have one of the most attractive tax treaties with certain ments) relating to assets located in Cyprus and/or things or matters non-EU countries like Russia, Ukraine, India and South Africa. taking place in Cyprus. Stamp duty is imposed on the value of the

agreement at rates between 0.15% and 0.20%, with the first €5,000 1.2 Do they generally follow the OECD Model Convention or document value being exempt, and with a maximum cap of €20,000 another model? stamp duty per stamp-able agreement. The person legally liable to pay stamp duty is the purchaser. The due Cyprus’ treaties have always followed the OECD Model Convention. date for payment is within 30 days from the day of signing the agree- Older treaties are continuously being updated to come in line with ment. Penalties are imposed for late payment, but the non-stamping the latest OECD treaty model and guidelines. of a stamp-able document does not render the legal/commercial validity of the document invalid. 1.3 Do treaties have to be incorporated into domestic law before they take effect? 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? Yes, treaties must first be incorporated into domestic law by way of ratification. In any case, it is noted that in accordance with the Cyprus VAT follows and complies with the EU VAT Directive. Cyprus domestic legislation, there is no withholding tax on payments VAT is imposed on the provision of goods and services in of dividend, interest or royalty (provided the related rights are used Cyprus, as well as on the acquisition of goods from the European outside Cyprus) towards non-Cyprus residents (individuals or Union and the importation of goods into Cyprus. Taxable persons companies). charge VAT on their taxable supplies (output VAT) and are charged VAT on goods and services they receive (input VAT). 1.4 Do they generally incorporate anti-treaty shopping The standard VAT rate is 19%. Certain supplies are subject to the rules (or “limitation on beneﬁts” articles)? reduced rates of 5% or 9%, some are zero-rated, and some are exempt. Generally, if the value of annual taxable supplies exceeds or is Generally, no. Nevertheless, certain treaties do contain limitation of expected to exceed €15,600, registration is compulsory. The option of benefits articles; specifically, the treaties with Belgium, Canada, the voluntary registration exists in case of taxable supplies below €15,600. Czech Republic, France, Germany, the Russian Federation, the VAT returns are submitted quarterly, and payment of VAT must United Kingdom and the United States. be made by the tenth day of the second month following the month in which the tax period ends. 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced 2.3 Is VAT (or any similar tax) charged on all transactions subsequently)? or are there any relevant exclusions?

No. Treaties take precedence over domestic law. Certain supplies are zero-rated, for instance the exportation of goods, the supply/charter/hire/repair/maintenance of sea-going vessels and aircrafts, the supply of services to meet the direct needs 1.6 What is the test in domestic law for determining the of sea-going vessels and aircrafts and the transportation of passengers residence of a company? from Cyprus to other countries and vice versa.

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Furthermore, certain supplies are exempt from the scope of VAT, 3.3 Would there be any withholding tax on interest paid by for instance the leasing of immovable property (under conditions; see a local company to a non-resident? below), most banking, financial and insurance services, most hospitals, medical and dental care services, certain cultural, educational and Outbound interest paid by a Cypriot resident company to a non- sports activities, etc. resident is not subject to withholding tax in Cyprus. The difference between zero-rated and exempt supplies is that businesses making exempt supplies are not entitled to recover the 3.4 Would relief for interest so paid be restricted by VAT charged on the purchases, expenses or imports. As of 13 November 2017, the leasing or rental of immovable reference to “thin capitalisation” rules? property to a taxable person for the purpose of carrying out taxable An interest limitation rule has been introduced with effect from 1 business activities is subject to VAT at the standard rate of 19%, with January 2019, according to which ‘exceeding borrowing costs’ the exception of buildings used for residential purposes. Moreover, (EBCs) are tax deductible in the tax year in which they are incurred, as of 2 January 2018, the sale of undeveloped building land by a only up to 30% of the company’s earnings before interest, tax, person, intended for the erection of one or more fixed structures, is depreciation and amortisation (EBITDA), subject to a de minimis subject to VAT at the standard rate of 19%, when the supply is EBCs threshold of €3,000,000. carried out as part of that person’s economic activities. EBCs are defined as the amount by which deductible borrowing

costs (interest expense and other costs economically equivalent to 2.4 Is it always fully recoverable by all businesses? If not, interest) of a company exceeds the taxable interest revenues and what are the relevant restrictions? other economically equivalent taxable revenues of the company. Unutilised EBCs can be carried forward for up to five years. Generally, yes. It should be noted that input VAT cannot be recovered in the following cases: 3.5 If so, is there a “safe harbour” by reference to which tax ■ Acquisitions used for making exempt supplies. ■ Purchase, import or hire of saloon cars. relief is assured? ■ Entertainment expenses (except for staff entertainment). As mentioned above, a de minimis EBCs threshold of €3,000,000 ■ Housing expenses of directors. applies.

In addition, the interest limitation rule does not apply for stan- 2.5 Does your jurisdiction permit VAT grouping and, if so, dalone entities, financial institutions, loans concluded prior to 17 is it “establishment only” VAT grouping, such as that applied June 2016 (grandfathering) and long-term public infrastructure by Sweden in the Skandia case? projects in the EU.

VAT grouping is possible, on an optional basis. The wording of Article 3.6 Would any such rules extend to debt advanced by a 32 of the VAT Law was amended during 2012 to include the exact third party but guaranteed by a parent company? wording of Article 11 of the EU VAT Directive. Certain criteria need to be met to prove the existence of a group for VAT grouping purposes. The interest limitation rule extends to such cases as well.

2.6 Are there any other transaction taxes payable by 3.7 Are there any other restrictions on tax relief for interest companies? payments by a local company to a non-resident, for example No transaction taxes are payable by companies. pursuant to BEPS Action 4?

Interest expense incurred by a Cypriot company, whether payable to 2.7 Are there any other indirect taxes of which we should a resident or a non-resident, is tax deductible to the extent that it is be aware? incurred for income-generating purposes. If the interest expense relates to the acquisition of non-business No other indirect taxes. assets which do not produce taxable income, then such interest expense is restricted for tax purposes accordingly. There is a specific 3 Cross-border Payments exception where such interest can be tax allowable if it relates to the acquisition of shares in a 100% subsidiary whose assets are used for 3.1 Is any withholding tax imposed on dividends paid by a business purposes. locally resident company to a non-resident? In cases of related-party financing/loans, the transaction (e.g. interest charged) must be made on an arm’s-length basis. Otherwise, Outbound dividends paid by a Cypriot resident company towards the Cyprus tax authorities reserve the right to impose tax adjust- non-residents (individuals or companies) are not subject to with- ments in order to reflect the deviation from the arm’s-length holding tax in Cyprus. This is a specific provision contained within principle. Usually, this is done in the form of notional interest the domestic legislation. and/or disallowance of certain related interest expense.

3.2 Would there be any withholding tax on royalties paid by 3.8 Is there any withholding tax on property rental a local company to a non-resident? payments made to non-residents?

Royalties paid by a local company to a non-resident are exempt from Outbound rental payments made by a Cypriot resident company to withholding tax, provided that the royalties are earned on rights that are a non-resident are not subject to withholding tax in Cyprus. used outside Cyprus. If the rights are used within Cyprus, tax is with- However, Cyprus sourced rental income is taxable in Cyprus held at 10%, except on cinematographic rights where the rate is 5%. accordingly.

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3.9 Does your jurisdiction have transfer pricing rules? For companies falling within the new intellectual property (IP) regime, 80% of the qualifying profit earned from qualifying assets is Article 33 of the Cyprus Income Tax Law provides that transactions allowed as a tax-deductible expense (refer to question 10.5 for more between related parties need to be carried out at arm’s-length terms details). and conditions. Expenses of private motor vehicles (saloon cars) are not allowed, In addition, the Ministry of Finance has issued an interpretative irrespective of whether the motor vehicles are used in the business Circular in June 2017, providing guidance on the tax treatment of or not. intra-group back-to-back financing arrangements. In brief, such Business entertainment expenses are restricted if in excess of 1% arrangements should comply with the arm’s-length principle and of turnover, or if they are in excess of €17,086 (whichever is the should be supported by an appropriate transfer pricing study. lowest). Simplification measures are provided for companies which carry out a purely intermediary activity (i.e. granting loans to related parties 4.4 Are there any tax grouping rules? Do these allow for which are refinanced by loans from related entities). relief in your jurisdiction for losses of overseas subsidiaries?

4 Tax on Business Operations: General Companies which belong to the same “group” for tax purposes may utilise group loss relief. The tax loss of one company (the 4.1 What is the headline rate of tax on corporate profits? “surrendering company”) for a particular tax year can be claimed by another company of the group (the “claimant company”) and set Tax on corporate profits is charged at a uniform rate of 12.5%. off against the taxable profits of that company for that particular However, the effective Cyprus tax may be much lower or even year. Tax losses brought forward from previous years are not taken zero due to certain tax exemptions. Refer to question 4.3 below. into account for group relief purposes. Two companies are deemed to be part of a group for loss relief 4.2 Is the tax base accounting profit subject to purposes if one is a 75% subsidiary of the other, or if both are 75% subsidiaries of a third company, either directly or indirectly. adjustments, or something else? As of 2015, an entity which is tax resident in another EU Member Adjustments may be imposed on the tax base accounting profit. State is also eligible to surrender tax losses to a Cypriot group company, provided that the surrendering EU company has exhausted all available means for set-off or carry forward of its 4.3 If the tax base is accounting profit subject to losses in its own state of tax residence, or in another Member State adjustments, what are the main adjustments? where an intermediary holding company is located. Group loss relief is allowed when both the surrendering company Incomes and the claimant company are part of the same group for the whole Certain types of income are exempt from Corporation Tax, such as: year of the assessment. In case of a newly incorporated company ■ Dividend income, subject to easy-to-meet conditions (unless during the year of assessment, such a company is considered to be claimed as tax deductible by the foreign paying company – e.g. part of the group for the whole year of the assessment. in the case of certain hybrid instruments).

■ Profit from sale of shares and other qualifying “titles” (e.g. options, debentures and bonds). 4.5 Do tax losses survive a change of ownership? ■ Interest not arising from the ordinary activities or closely related Yes, and they can be carried forward and utilised against the taxable to the ordinary activities of the company – e.g. bank deposit profits of the next five years, except for the following cases: interest (although such interest is subject to Special Defence a) within any three-year period, there is a change in the ownership Contribution (SDC) at a rate of 30%). of the shares of the company and a substantial change in the ■ Profit from an overseas Permanent Establishment (PE) (under nature of the business of the company; or conditions, and subject to clawback rules). b) at any time since the scale of the company’s activities has ■ Foreign exchange gains, with the exception of gains from diminished or has become negligible, and before any substantial trading in foreign currencies and related derivatives. reactivation of the business there is a change in the ownership ■ Double tax relief by way of credit is unilaterally allowable, of the company’s shares. whereby foreign tax can be deducted from Cyprus tax resulting If any of the above two cases applies, then no loss which has been from the same income. incurred before the change in the ownership of the shares of the

company shall be carried forward in the years subsequent to such Expenses change. Any expenses which have not been incurred wholly and exclusively for the production of taxable income are disallowed for the purpose of calculating a company’s taxable profit. 4.6 Is tax imposed at a different rate upon distributed, as Interest expense incurred for the acquisition of non-business opposed to retained, proﬁts? assets (which do not generate taxable income) is restricted for tax purposes – with the exception of the acquiring of a 100% subsidiary To the extent that the ultimate beneficial owner is a non-resident, or (under conditions). Cyprus resident but non-domiciled for Cyprus tax purposes, then A notional interest deduction (NID) in the form of a notional there is no tax on actual distributed dividends and the below-stated expense is allowed annually on new equity introduced in the business deemed dividend distribution provisions do not apply. as of 1 January 2015. This is calculated by applying, on the new equity, Actual dividends distributed to Cyprus residents and domiciled a reference rate based on the interest rate of the 10-year government individuals are subject to 17% Cyprus tax (SDC). This tax is paid at bond of the country in which the new equity is invested, or the source when the dividend is paid by a Cyprus company and in cases equivalent Cyprus bond rate (whichever is the highest) increased by where it is paid by a foreign company, then the physical shareholder 3%. Benefit is restricted to 80% of the taxable profit before the has the obligation to declare the dividend and account for the deduction of the NID. Anti-avoidance provisions also apply. relevant tax.

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At the same time, to the extent that the ultimate beneficial owner 6 Local Branch or Subsidiary? of a Cyprus resident company is a Cyprus tax resident individual and domiciled in Cyprus for tax purposes, a Cypriot company with Cyprus resident beneficial shareholders (company or individual) is 6.1 What taxes (e.g. capital duty) would be imposed upon deemed to have distributed 70% of its after-tax profits, in the form the formation of a subsidiary? of dividends, to its shareholders within two years from the end of the year of assessment, reduced by any relevant actual dividend Upon registration of a Cypriot company, a fixed amount of €105 is payments made during this period. Such deemed dividend is subject payable, irrespective of the amount of the company’s share capital. to the same aforementioned 17% defence tax. There is no capital duty payable if the shares are issued at their Anti-avoidance provisions apply. nominal value. There is a €20 flat duty payable if the shares are issued at a premium.

5.1 Is there a special set of rules for taxing capital gains In Cyprus, the local branch of a foreign company will be taxed in the same manner as if it were a company. In the jurisdiction of the and losses? foreign company, one would need to look at the applicable relevant Capital Gains Tax (CGT) is imposed on gains from the disposal of provisions and, in most cases, any resulting Cyprus tax could be immovable property situated in Cyprus, at a rate of 20%, after index- available (e.g. if provided by the relevant double tax treaty) for ation allowance. However, in case of companies whose primary double tax relief in that foreign jurisdiction. activity is real estate, gains from the disposal of immovable property are treated as normal business profits and are subject to Corporation 6.4 Would a branch benefit from double tax relief in its Tax at 12.5%. jurisdiction? CGT is also imposed on the gains from the disposal of shares in companies which hold an immovable property in Cyprus. Yes, if so provided by the double tax treaty between Cyprus and that In addition, as of 17 December 2015, CGT is also imposed on particular jurisdiction. the disposal of shares in companies which hold, directly or indirectly, shares in companies which own an immovable property in Cyprus 6.5 Would any withholding tax or other similar tax be and at least 50% of the market value of their shares emanates from imposed as the result of a remittance of profits by the branch? the market value of that immovable property. Notwithstanding the above, in case of an immovable property There is no such withholding tax. that has been acquired between 16 July 2015 and 31 December 2016, the gain from the subsequent sale of such property shall be exempt 7 Overseas Profits from the imposition of CGT.

7.1 Does your jurisdiction tax proﬁts earned in overseas 5.2 Is there a participation exemption for capital gains? branches? The gains from the disposal of shares are specifically tax-exempt, Profits of a Cypriot tax resident company which derive from a PE except in the case where the company whose shares are being situated outside Cyprus are exempt from tax in Cyprus, provided disposed owns immovable property situated in Cyprus (certain that either of the following two conditions is met: exceptions apply, e.g. in the case of a publicly listed company) – also a) the PE directly or indirectly engages in less than 50% of the refer to question 5.1 above. activities which lead to investment income; or

b) the foreign tax burden on the income of the PE is not substan- 5.3 Is there any special relief for reinvestment? tially lower than the tax burden in Cyprus (in practice, an effective tax rate of at least 6.25% is deemed to satisfy this condition). No, there is no special relief for reinvestment. The exemption of PE profits is subject to clawback rules, i.e. if deductions for tax losses of the PE have been allowed in previous 5.4 Does your jurisdiction impose withholding tax on the years, then an amount of profits equal to the tax losses allowed shall proceeds of selling a direct or indirect interest in local be included in the chargeable income. assets/shares? 7.2 Is tax imposed on the receipt of dividends by a local No, there is no such withholding tax. company from a non-resident company?

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

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a) the foreign company paying the dividend directly or indirectly arrangements which are non-genuine, and whose main purpose (or engages less than 50% in activities which lead to investment one of the main purposes) is to obtain a tax advantage that defeats income; or the object or purpose of the applicable tax law, shall be ignored for b) the foreign tax burden on the income of the foreign entity is not the purpose of calculating the corporate tax liability. An arrangement substantially lower than the tax burden in Cyprus (in practice, an (or series of arrangements) may comprise more than one step or part. effective tax rate of at least 6.25% is deemed to satisfy this For the purposes of the GAAR, an arrangement or a series of condition). arrangements shall be considered as non-genuine, to the extent that If neither of the above conditions is met, dividend income they are not put into place for valid commercial reasons which reflect received by the Cypriot entity is subject to SDC at 17%. economic reality. In cases where the GAAR kicks in, then the tax liability shall be 7.3 Does your jurisdiction have “controlled foreign calculated in accordance with the provisions of the Cyprus Income Tax Law. company” rules and, if so, when do these apply?

Cyprus has introduced controlled foreign company (CFC) rules with 9.2 Is there a requirement to make special disclosure of effect as of 1 January 2019. According to these, the non-distributed avoidance schemes? income of a company that qualifies as a CFC, which is derived from non-genuine arrangements put in place for the essential purpose of There is no such requirement. obtaining a tax advantage, shall be included in the taxable income of the Cypriot-resident entity that controls the CFC. 9.3 Does your jurisdiction have rules which target not only The income to be included in the tax base of the Cypriot control- taxpayers engaging in tax avoidance but also anyone who ling entity is restricted to the amounts generated through the assets and risks which are linked to the important roles people carried out promotes, enables or facilitates the tax avoidance? by the Cypriot entity. This is indirectly covered in the Anti-Money Laundering Law, under For the purpose of the above, a CFC is defined as a non-Cypriot “predicate offences”. resident entity, or a foreign PE of a Cyprus tax resident entity, the profits of which are not subject to or are exempt from tax in Cyprus, when the following conditions are met: 9.4 Does your jurisdiction encourage “co-operative a) a Cypriot resident entity, either by itself or together with its compliance” and, if so, does this provide procedural beneﬁts associated enterprises, holds, either directly or indirectly, more only or result in a reduction of tax? than 50% of the voting rights, or more than 50% of the capital, or is entitled to receive more than 50% of the profits of the This is not applicable in Cyprus. foreign entity; and b) the actual corporate tax paid on the profits of the foreign entity 10 BEPS and Tax Competition or the foreign PE is lower than 50% of the tax that would have been imposed if such profits were subject to tax in Cyprus, in 10.1 Has your jurisdiction introduced any legislation in accordance with the provisions of the Cyprus Income Tax Law. response to the OECD’s project targeting BEPS?

8 Taxation of Commercial Real Estate In late 2016, Cyprus signed and became part of the Multilateral Competent Authority Agreement on Country-by-Country Reporting 8.1 Are non-residents taxed on the disposal of commercial (CBCR), and the Ministry of Finance issued a relevant Decree real estate in your jurisdiction? shortly afterwards. The Decree is in accordance with Action 13 of the Base Erosion and Profit Shifting (BEPS) project and introduces Yes. CGT at 20% is charged on profits from the disposal of real a mandatory CBCR requirement for multinational groups generating estate, whether commercial or not – refer to question 5.1. consolidated annual turnover in excess of €750 million. On 7 June 2017, Cyprus signed the Multilateral Convention to 8.2 Does your jurisdiction impose tax on the transfer of an implement measures to prevent BEPS, in line with Action 15 of the BEPS project. Once the Convention is ratified, a principal purpose indirect interest in commercial real estate in your jurisdiction? test will be incorporated into Cyprus’ double tax treaties, where Yes. The gains from disposal of shares in companies which hold an treaty benefits will be denied in cases where the transactions of immovable property in Cyprus is subject to CGT. Please refer to arrangements are effected with the principal purpose in mind being question 5.1 for more details. to obtain treaty benefits. The Income Tax Law was amended in October 2016 in order to align the current Cyprus IP tax legislation with the provisions of 8.3 Does your jurisdiction have a special tax regime for Action 5 of the OECD’s BEPS project. The revised IP regime Real Estate Investment Trusts (REITs) or their equivalent? complies with the guidance prescribed in Action 5 regarding following a nexus approach, i.e. the existence of a direct link between the The Cypriot tax legislation does provide for REITs, but there is no qualifying income and qualifying expenses contributing to that income. differentiation in the relevant Cyprus tax treatment. Cyprus has signed the Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Account 9 Anti-avoidance and Compliance Information (MCAA), as one of the early adopters. For the purpose of transposing the provisions of the Anti-Tax 9.1 Does your jurisdiction have a general anti-avoidance or Avoidance Directive (ATAD) into the local legislation, the Income anti-abuse rule? Tax Law has been amended during April 2019 to incorporate an interest limitation rule (refer to question 3.4), a CFC rule (refer to A general anti-abuse rule (GAAR) has been introduced with effect as question 7.3) and a general anti-abuse rule (refer to question 9.1). of 1 January 2019, and provides that an arrangement or a series of The amendments have retroactive effect as of 1 January 2019.

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10.2 Has your jurisdiction signed the tax treaty MLI and In brief, an amount equal to 80% of the qualifying profits earned from qualifying intangible assets is allowed as a tax-deductible deposited its instrument of ratiﬁcation with the OECD? expense. A modified nexus approach is followed, whereby for an Cyprus has signed the MLI on 7 June 2017, but it has not yet intangible asset to qualify for the benefits of the regime, there needs deposited its instrument of ratification with the OECD. to be a direct link between the qualifying income and the taxpayer’s own qualifying expenses contributing to that income. Having said the above, the Cyprus IP regime is fully compliant with 10.3 Does your jurisdiction intend to adopt any legislation to international developments in the tax treatment of IP income and tackle BEPS which goes beyond the OECD’s OECD’s guidance. The IP regime has been reviewed by the EU Code recommendations? of Conduct and has been assessed as fully compatible with EU standards. Cyprus follows the recommendations of the OECD, as per the BEPS Action Plan. 11 Taxing the Digital Economy

10.4 Does your jurisdiction support information obtained 11.1 Has your jurisdiction taken any unilateral action to tax under Country-by-Country Reporting (CBCR) being made digital activities or to expand the tax base to capture digital available to the public? presence?

Cyprus has adopted and issued the relevant Decree in relation to No such action, noting that income resulting from digital activities CBCR, in accordance with the relevant EU Directive. There are no is, in principle, taxed as income of a revenue nature, unless it falls provisions for information obtained under CBC reporting to be under a specifically aforementioned exempt category. made available to the public and, to our knowledge, this is not intended or supported. 11.2 Does your jurisdiction favour any of the G20/OECD’s “Pillar One” options (user participation, marketing intangibles 10.5 Does your jurisdiction maintain any preferential tax or signiﬁcant economic presence)? regimes such as a patent box?

Cyprus has an IP box regime, which has been amended during 2016, Cyprus does not favour any single option over the other two. in order to be in line with the recommendations of Action 5 of the Having said that, Cyprus fully supports and follows any proposals BEPS Action Plan. which aim at addressing BEPS issues, including the allocation of Grandfathering provisions exist up to June 2021 for IP assets that taxing rights on income generated from the digital economy. have already qualified under the previous IP box regime.

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Petros Rialas is a Director and the Head of the International Tax Planning Department of Totalserve Management Limited. He is a Fellow Chartered Certified Accountant with many years of experience in international tax planning, corporate taxation and trusts. His academic background includes a Degree from the University of Manchester and a Master’s Degree from City University, London. He is a member of the Society of Trust and Estate Practitioners (STEP) and the International Tax Planning Association (ITPA). His vocational background includes a two-year employment in the auditing line of service in London, and five years in the tax services division of a Big Four firm in Cyprus. Petros is a regular contributor of technical articles to local and foreign industry publications, and has been a frequent speaker at various conferences and seminars in Cyprus and abroad.

Totalserve Management Limited Tel: +357 25 866 000 Totalserve House Email: [email protected] 17 Gregoriou Xenopoulou Street URL: www.totalserve.eu 3106 Limassol Cyprus

Marios Yenagrites is a graduate of the London School of Economics, from which he holds a BSc degree in Accounting and Finance. He is a Fellow Chartered Accountant (FCA), a Member of the Institute of Certified Public Accountants of Cyprus (ICPAC) and holds the Advance Diploma in International Taxation (ADIT). He has also served as Secretary of ICPAC’s Corporate Governance, Internal Audit and Risk Management Committee. Prior to joining Totalserve Management Limited, Marios worked in the tax departments of two Big Four accounting firms for a number of years, thereby gaining a solid background and experience in all matters relating to Cyprus taxation. In his current position, Marios is involved in providing tax consultancy services to a wide array of clients, as well as undertaking tax planning and tax structuring projects.

Totalserve Management Limited Tel: +357 25 866 000 Totalserve House Email: [email protected] 17 Gregoriou Xenopoulou Street URL: www.totalserve.eu 3106 Limassol Cyprus

Totalserve Management Limited is a renowned, award-winning global service provider specialised in the fields of international tax planning, corporate, trusts and fiduciary services worldwide. Other services pertaining to legal, accounting and auditing are also offered through associated firms. Headquartered in Limassol, Cyprus, the group maintains a jurisdictional presence across four continents, with offices in Luxembourg, London, Moscow, Warsaw, Athens, Sofia, Bucharest, Tortola (BVI), Johannesburg and Cape Town. Our professionals are multidisciplinary and multinational, comprising experienced accountants, bankers and tax and legal consultants. The fusion of these expertise, combined with long-established international affiliations, yields optimal comprehensive solutions with a global perspective. www.totalserve.eu

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Finland Finland

Niklas Thibblin

Waselius & Wist Mona Numminen

1 Tax Treaties and Residence 2 Transaction Taxes

1.1 How many income tax treaties are currently in force in 2.1 Are there any documentary taxes in your jurisdiction? your jurisdiction? Please see question 2.6 below regarding transfer tax. Finland has a fairly extensive treaty network, with approximately 72 income tax treaties currently in force. 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? 1.2 Do they generally follow the OECD Model Convention or another model? Finnish VAT legislation gives effect to the relevant EC Directives. There are three rates of VAT: Finnish tax treaties generally follow the OECD model, with some ■ the standard rate of VAT is 24% and applies to any supply of inevitable variation from one treaty to the next. goods or services which is not exempt or subject to the reduced rate of VAT; ■ the reduced rates of VAT are 14% (e.g. foodstuff and restaurant 1.3 Do treaties have to be incorporated into domestic law and catering services); and before they take effect? ■ 10% (e.g. passenger transportation, hotel services, theatre, sporting events, medicine and books). Yes. A tax treaty must be incorporated into Finnish law and this is

done by way of a statutory instrument by Parliament. 2.3 Is VAT (or any similar tax) charged on all transactions 1.4 Do they generally incorporate anti-treaty shopping or are there any relevant exclusions? rules (or “limitation on beneﬁts” articles)? The exclusions from VAT are as permitted or required by the Directive on the Common System of VAT (2006/112EC) (as In general, Finnish tax treaties do not incorporate anti-treaty shop- amended), and some examples of exempt supplies are: ping rules. However, the treaty with the US contains a “limitation ■ the sale and letting of real estate (however, a lessor of real estate of benefits” clause and the treaties with the UK and Ireland contain may opt for VAT); a “limitation of relief ” clause. Pursuant to case law, domestic anti- ■ medical services; avoidance rules can be applied in case of artificial cross-border ■ educational services; arrangements. ■ insurance services; and

■ banking and other financial services. 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced 2.4 Is it always fully recoverable by all businesses? If not, subsequently)? what are the relevant restrictions?

No, but the Finnish general and special anti-avoidance rules (the When goods and services are supplied for a business subject to VAT, “GAAR” and the “SAARs”, discussed in question 9.1 below) can, in input VAT is fully recoverable. If only a part of the business is principle, apply if there are abusive arrangements seeking to exploit subject to VAT, only the VAT related to this business is recoverable. particular provisions in a double tax treaty, or the way in which such Certain goods or services used for entertainment purposes are, provisions interact with other provisions of Finnish tax law. however, excluded from the general right of deduction.

1.6 What is the test in domestic law for determining the 2.5 Does your jurisdiction permit VAT grouping and, if so, residence of a company? is it “establishment only” VAT grouping, such as that applied Skandia A company which is incorporated in Finland will automatically be by Sweden in the case? resident in Finland. Unlike in some jurisdictions, a company Yes. Finance and insurance companies may opt for VAT grouping. incorporated outside Finland may not be considered resident in The registration is made in the name of the “representative Finland by applying the concept of effective place of management member”, who is responsible for completing and submitting a single (although it could create a permanent establishment in Finland). VAT return and making VAT payments or receiving VAT refunds

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on behalf of the group. All members of the group remain jointly According to domestic Finnish tax laws, interest payments to a non- and severally liable for any VAT debts of the group. A Finnish resident are normally exempt from tax in Finland. branch must generally treat its supplies to the overseas head office as taxable supplies in circumstances where the overseas head office 3.4 Would relief for interest so paid be restricted by is VAT-grouped in its jurisdiction and the branch does not belong reference to “thin capitalisation” rules? to the VAT group. Finland has no thin capitalisation rules, but the deductibility of 2.6 Are there any other transaction taxes payable by interest expenses is limited under a separate regime. Under the companies? interest limitation regime, interest expenses are fully deductible against any interest income. The potential restriction of any interest Transfer of shares in Finnish companies and real property located exceeding the interest income (i.e. net interest expenses) depends on in Finland is subject to transfer tax. Exceptions apply to listed shares three tests that are applied on a stand-alone Finnish company level: and share transfers between non-residents of Finland. 1. Net interest expenses may be fully deducted if the total amount The rate of transfer tax is 4% of the purchase price of real of net interest expenses does not exceed EUR 500,000 during property, 1.6% of the purchase price of the shares in an ordinary the fiscal year. limited liability company and 2% of the purchase price of the shares 2. Where the above limit is exceeded, net interest may only be in a real estate company (including real estate holding companies and deducted up to an amount equal to 25% of the taxable business housing companies). The transfer tax base also includes any debt or profits before interests and depreciations. Received and paid liabilities of the acquired entity (towards the seller or a third party) group contributions are taken into account in the calculation of assumed by the buyer based on the transfer agreement, provided that the taxable business profits. Any amount of interest so the assumption of such debt or liabilities accrues to the benefit of restricted may be carried forward indefinitely and deducted the seller. against unused capacity in later years. 3. To the extent that interest is paid to a non-related party, it can 2.7 Are there any other indirect taxes of which we should be deducted up to EUR 3 million even when exceeding the above 25% limit. However, it shall be noted that interest be aware? expenses paid to a non-related party are considered first. For Customs duties are generally payable on goods imported from example, if interest is also paid to a related party and the overall outside the EU. Excise duties are levied on particular classes of amount exceeds EUR 500,000, interest expenses paid to a goods (e.g. alcohol, tobacco, electricity and fuel). Insurance premium related party can only be deducted to the extent the 25% rule is tax is charged on the receipt of a premium by an insurer under a not exhausted. taxable insurance contract. 3.5 If so, is there a “safe harbour” by reference to which tax 3 Cross-border Payments relief is assured?

3.1 Is any withholding tax imposed on dividends paid by a The so-called “safe harbour” rule stipulates that the restrictions on interest deductibility are not applied if the borrower company’s locally resident company to a non-resident? equity ratio (equity vs total balance) is equal to or higher than the Dividends paid by a Finnish company to non-residents are, in same ratio calculated on the basis of a consolidated group balance principle, subject to Finnish withholding tax of either 20% or 30%. sheets of the ultimate parent (“balance sheet test”). The balance However, in reality, such withholding is prevented or reduced by the sheet test can only be applied to consolidated balance sheets that provisions of the EC Parent-Subsidiary Directive (90/435/EEC) or have been prepared in an EU or EEA Member State or a State with an applicable tax treaty. Under most tax treaties, the withholding tax which Finland has concluded a tax treaty. Further, the balance sheet rate is usually reduced to 0–15% on dividends paid to persons should be prepared according to the international accounting entitled to the treaty benefits. standards or alternatively according to the domestic bookkeeping act Further, dividends paid to a recipient residing in an EEA Member of the EU or EEA Member State. If the balance sheet of the State are also exempt from tax to the extent that a Finnish recipient ultimate parent has been prepared by using other accounting would, under corresponding circumstances, be partly or fully exempt standards than the taxpayer’s, the consolidated balance sheet must, from tax. This can grant an exemption from withholding tax (for in principle, be presented by the taxpayer as a conversion as if it had example, for certain foreign investment funds or charitable entities). been completed under the same accounting standards as the The withholding tax relief is based on EU law and may give foreign taxpayer’s balance sheet. investors the right to a retroactive tax refund claim. 3.6 Would any such rules extend to debt advanced by a 3.2 Would there be any withholding tax on royalties paid by third party but guaranteed by a parent company? a local company to a non-resident? Yes. Third-party debt may be reclassified as a related-party debt; for Royalties paid to a non-resident are subject to a withholding tax at instance, in circumstances where the third-party debt is secured by the rate of either 20% or 30%, unless tax treaty provisions or the a receivable of a related party. EC Interest and Royalty Directive (2003/49/EC) reduce or prevent taxation in Finland. Royalties paid to a Finnish permanent establish- 3.7 Are there any other restrictions on tax relief for interest ment of a non-resident company are taxed as income of the payments by a local company to a non-resident, for example permanent establishment and no withholding tax is levied. pursuant to BEPS Action 4?

3.3 Would there be any withholding tax on interest paid by In addition to general transfer pricing rules (see question 3.9 below), a local company to a non-resident? the Finnish GAAR may be applied in respect of arrangements that do not correspond to their actual purpose and meaning, which have as their main purpose the securing of a tax advantage.

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3.8 Is there any withholding tax on property rental 4.7 Are companies subject to any signiﬁcant taxes not payments made to non-residents? covered elsewhere in this chapter – e.g. tax on the occupation of property? Rents paid to a non-resident are considered Finnish-source income and such income must normally be declared in Finland in accordance The owner of real estate is required to pay real estate tax equal to a with the ordinary tax assessment procedure (and taxed accordingly). fixed percentage of the calculated value of real estate (i.e. the land area) and the buildings located thereon. The real estate tax value 3.9 Does your jurisdiction have transfer pricing rules? differs, as such, from the tax base value, the book value and the market value of the real estate and the buildings. The rate of real Yes. Finnish transfer pricing rules apply to both cross-border and estate tax is set by the municipality in which the real estate is located. domestic transactions between related parties. If the Finnish tax However, the minimum and maximum statutory tax rates that the authorities do not accept that pricing is at arm’s length, the applied municipalities may apply vary between 0.41% and 6%. pricing can be challenged under transfer pricing adjustment rules. 5 Capital Gains 4 Tax on Business Operations: General 5.1 Is there a special set of rules for taxing capital gains 4.1 What is the headline rate of tax on corporate proﬁts? and losses?

The corporate income tax rate is currently 20%. There are no Corporation tax is chargeable on “profits”, which includes both planned reductions at the moment, although Finland will closely regular business income and capital gains. There is, however, a monitor the changes in other developed and neighbouring countries. separate regime for computing certain capital gains. In circumstances where the participation exemption does not apply, capital 4.2 Is the tax base accounting proﬁt subject to losses can only be used against capital gains and not against regular adjustments, or something else? business income.

In general terms, tax follows the commercial accounts subject to 5.2 Is there a participation exemption for capital gains? adjustments. Yes. The participation exemption regime allows business-conducting 4.3 If the tax base is accounting proﬁt subject to companies to dispose of certain shares without a Finnish tax charge. Capital gains realised by a Finnish company on the sale of shares are adjustments, what are the main adjustments? tax-exempt provided that: Certain expenses are not deductible for tax purposes and there are (i) the shares belong to the selling company’s fixed assets and the certain differences between the depreciation of assets for accounting shareholding is deemed to be a part of the seller’s business and tax purposes; for instance, concerning machinery and buildings. income source (in comparison with the general income source); There are also some tax-free income items such as tax-free capital (ii) the selling company owns at least 10% of the capital of the gains (see question 5.2 below) and dividends. company being sold; (iii) the selling company has held such participation for at least one year; and 4.4 Are there any tax grouping rules? Do these allow for (iv) the disposed shares are not shares in a housing or real estate relief in your jurisdiction for losses of overseas subsidiaries? company. The company whose shares are sold must, furthermore, reside in The concept of consolidated income tax returns is unknown in Finland, in another EU Member State or in a country with which Finland. However, under the group contribution regime, group Finland has concluded a tax treaty. Further, private equity investors contributions between two Finnish-resident companies or may not benefit from the participation exemption. Where the permanent establishments are deductible, provided that certain participation exemption regime applies, any losses incurred from the preconditions are met. A group contribution is similarly taxable disposal are non-deductible. income for the receiving entity. The group contribution regime does not allow cross-border loss relief. 5.3 Is there any special relief for reinvestment? 4.5 Do tax losses survive a change of ownership? It is possible to make a deduction in relation to (i) insurance compensation received due to the destruction of fixed assets if the When more than 50% of shares in a company or its immediate new assets are acquired or the old ones are repaired within two years, parent company change ownership during a tax year, the right to or (ii) sold business premises if new premises are acquired within carry forward tax losses from that year and previous years is two years. forfeited. The tax authorities may grant a dispensation to allow the utilisation of forfeited tax losses. 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local 4.6 Is tax imposed at a different rate upon distributed, as assets/shares? opposed to retained, proﬁts?

No, it is not. No withholding tax is imposed. However, please see question 8.1 below.

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6 Local Branch or Subsidiary? 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? 6.1 What taxes (e.g. capital duty) would be imposed upon Under the revised Finnish CFC rules that have been in force since the formation of a subsidiary? 1 January 2019, the CFC’s income tax is taxable as the shareholders’ There are no taxes imposed on the formation of a subsidiary. income and actual distributions are exempted. The new CFC regime also applies to non-tax residents of Finland, in case their participation in the CFC relates to their permanent establishment in 6.2 Is there a difference between the taxation of a local Finland. A non-resident company controlled by a Finnish tax subsidiary and a local branch of a non-resident company (for resident may generally be regarded as a CFC, if the CFC is liable to example, a branch profits tax)? income tax in its domicile at a rate less than 60% of the effective Finnish corporate income tax rate (meaning generally that the A Finnish-resident subsidiary would pay corporate tax on its world- corporate income tax rate applicable to a CFC should currently be wide income and gains, whereas a Finnish branch (permanent 12% or less). The CFC regime contains two exceptions. First, it establishment) would be liable to corporation tax only on the net does not apply to entities that are actually resident in another EEA profit attributable to the branch. There is no separate branch profit country and carry out genuine economic activities there. Second and tax. similarly, the CFC regime does not apply to entities outside the EEA, provided that the entity in question is actually resident in the said 6.3 How would the taxable profits of a local branch be jurisdiction and carries out genuine economic activities there. determined in its jurisdiction? However, the application of the latter exception requires that the non-EEA jurisdiction concerned is not regarded as a non-co-oper- Assuming that the local branch of a non-resident company is within ative jurisdiction and the relevant authorities have agreed upon and the Finnish statutory definition of a “permanent establishment” actually conducted an information exchange sufficient for the (which, in most circumstances, will be decided by the provisions in purposes of the CFC regime. Finally, the income of a non-EEA an applicable tax treaty), it will, at the outset, be treated for tax entity must be primarily accrued from specific activities (e.g. indus- purposes as though it were a distinct and separate entity dealing trial production or shipping). The previous industry and tax treaty independently with the non-resident company. Generally, all jurisdiction exceptions have been revoked as such. branches (permanent establishments) are required to arrange bookkeeping in accordance with Finnish GAAP and are taxed accordingly 8 Taxation of Commercial Real Estate (subject to certain adjustments). 8.1 Are non-residents taxed on the disposal of commercial 6.4 Would a branch benefit from double tax relief in its real estate in your jurisdiction? jurisdiction? Capital gains derived from the sale of real property (whether No, apart from non-discriminatory rules (in the case that the branch commercial or private) located in Finland, as well as gains derived forms a permanent establishment). from the sale of shares in Finnish real estate and housing companies and Finnish limited liability companies, more than 50% of whose 6.5 Would any withholding tax or other similar tax be assets consist of real estate in Finland, are generally subject to tax in imposed as the result of a remittance of profits by the Finland. Tax treaty exemptions may apply to certain share disposals.

branch? 8.2 Does your jurisdiction impose tax on the transfer of an No, it would not. indirect interest in commercial real estate in your jurisdiction? 7 Overseas Proﬁts Yes, please see question 8.1 above. 7.1 Does your jurisdiction tax proﬁts earned in overseas branches? 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent? As a general rule, and subject to tax treaty provisions, Finland taxes the profits earned in overseas branches of Finnish-resident Yes. However, the Finnish REIT scheme remains limited to companies. residential housing only. Under the REIT scheme, to benefit from corporate tax exemption, REITs (i.e. Finnish limited liability 7.2 Is tax imposed on the receipt of dividends by a local companies) must be listed on a public stock exchange or a multilateral trading facility (“MTF”) within the EEA, with no single company from a non-resident company? shareholder owning, directly or indirectly, more than 9.99% of the Foreign dividends and Finnish dividends are treated in the same way. share capital. At least 80% of the value of the assets of a REIT Dividends from foreign subsidiaries are generally exempt in the must also consist of real estate that is used primarily for residential hands of a Finnish parent company, whereas portfolio dividends purposes, and the activities of the REIT must be limited to the from listed companies are fully taxable if the recipient has an owner- letting of properties (or activities closely related thereto). The capital ship stake of less than 10% in the paying listed entity. Dividends structure of a REIT must furthermore be such that its potential debt derived from non-tax-treaty countries outside the EU are, however, financing does not exceed 80% of its balance sheet total. Moreover, fully taxable in Finland. the REIT must distribute at least 90% of its annual profits to shareholders as dividends.

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9 Anti-avoidance and Compliance 10 BEPS and Tax Competition

9.1 Does your jurisdiction have a general anti-avoidance or 10.1 Has your jurisdiction introduced any legislation in anti-abuse rule? response to the OECD’s project targeting BEPS?

Yes. If a transaction has been given a legal form that does not Yes. An updated provision regarding the contents of transfer pricing correspond with its actual nature or meaning or if the legal form of documentation and CBCR requirements (see question 10.4) have the transaction does not correspond to the actual behaviour of the been introduced. Prior to the introduction of the BEPS project, taxpayer, the GAAR or SAARs may be applied and taxes can be Finland had already introduced interest deduction limitation rules reassessed as if the actual form of the transaction had been used. similar to those in BEPS Action 4 (see questions 3.4, 3.5 and 3.6). Case law on the application of the GAAR and SAARs has, in several instances, covered scenarios where a series of transactions have been 10.2 Has your jurisdiction signed the tax treaty MLI and subject to re-characterisation, especially where no adequate commer- deposited its instrument of ratiﬁcation with the OECD? cial reasons have been shown for the transaction. Yes, Finland signed the MLI on 7 June 2017 and deposited its 9.2 Is there a requirement to make special disclosure of instrument of acceptance on 25 February 2019. avoidance schemes? 10.3 Does your jurisdiction intend to adopt any legislation to The Ministry of Finance is currently preparing a government bill on tackle BEPS which goes beyond the OECD’s the implementation of the EU Directive 2018/822/EU under which certain arrangements would be reportable. This new legislation is recommendations? expected to come into force on 1 January 2020. The disclosure In general, no. However, Finland is obligated to implement the EU regime would apply without limitations to arrangements executed on directives, some of which may go beyond the OECD’s or after 1 July 2020, but it would, also to a certain extent, be recommendations. applicable to arrangements that have been executed on 25 June 2018

or later. 10.4 Does your jurisdiction support information obtained 9.3 Does your jurisdiction have rules which target not only under Country-by-Country Reporting (CBCR) being made taxpayers engaging in tax avoidance but also anyone who available to the public? promotes, enables or facilitates the tax avoidance? At least at the moment, no.

There are no specific rules. However, the Finnish Penal Code includes provisions regarding tax crimes that are also applicable to 10.5 Does your jurisdiction maintain any preferential tax parties promoting or facilitating tax crime. Mere tax avoidance does regimes such as a patent box? not, as such, constitute a tax crime. No such regimes currently exist.

9.4 Does your jurisdiction encourage “co-operative 11 Taxing the Digital Economy compliance” and, if so, does this provide procedural beneﬁts only or result in a reduction of tax? 11.1 Has your jurisdiction taken any unilateral action to tax The Finnish Tax Administration has recently promoted the use of digital activities or to expand the tax base to capture digital so-called “preliminary discussions” for the clients of the Large presence? Taxpayers’ Office, i.e. mainly companies belonging to a larger group. Preliminary discussions should be carried out prior to any trans- No, it has not. action, and the advice given in such discussions is generally binding on the tax authorities. The preliminary discussions do not result in 11.2 Does your jurisdiction favour any of the G20/OECD’s a reduction of tax, but may provide indirect procedural benefits “Pillar One” options (user participation, marketing intangibles through the “protection of trust” principle. However, if the subject matter is complex or subject to interpretation, there is a lack of case or signiﬁcant economic presence)? law, or the parties disagree with respect to the tax treatment of the In principle, Finland considers the global level of discussion on the transaction, the taxpayer is normally, in the preliminary discussions, taxation of digital services as a good thing. However, Finland does advised to apply for an advance tax ruling from the Finnish Tax not favour any of the options as such. Administration.

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Niklas Thibblin is the Managing Partner of Waselius & Wist. He has over 15 years of experience from domestic and cross-border tax matters in complex high-profile cases. He has, for instance, advised in numerous domestic and multi-jurisdictional group restructurings and transactions, as well as tax filings relating to such arrangements. He regularly acts as counsel in proceedings before the Finnish tax authorities and administrative courts, including the Supreme Administrative Court. Niklas is recognised as leading tax lawyer by several legal ranking directories, such as Chambers Global and Chambers Europe, The Legal 500, Who’s Who Legal and Best Lawyers.

Waselius & Wist Tel: +358 9 668 95277 Eteläesplanadi 24 A Email: [email protected] 00130 Helsinki URL: www.ww.fi Finland

Mona Numminen joined Waselius & Wist in 2017 as an Associate Lawyer. Her main practice areas include tax and corporate structuring, mergers and acquisitions, and corporate and commercial law. Mona has previous experience from Roschier Attorneys Ltd., where she worked as an Associate in their tax and structuring practice.

Waselius & Wist Tel: +358 9 668 95211 Eteläesplanadi 24 A Email: [email protected] 00130 Helsinki URL: www.ww.fi Finland

Waselius & Wist renders advice primarily in all areas of domestic and international business taxation, including mergers and acquisitions, restructurings as well as other ﬁnancial transactions. Many of our assignments have an international dimension. Waselius & Wist’s tax team provides strategic tax advice early on in the transactional process, whether domestic or cross-border in nature, to ensure efﬁcient tax structures. In addition to our involvement in the structuring of transactions, we advise on the documentation to implement transactions. Waselius & Wist’s tax team also has substantial experience in assisting clients in administrative proceedings on taxation issues. Waselius & Wist has a well- established tax dispute resolution practice and has successfully represented clients in a wide range of disputes with the tax authorities. www.ww.fi

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France France

Tirard, Naudin Maryse Naudin

1 Tax Treaties and Residence 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced 1.1 How many income tax treaties are currently in force in subsequently)? your jurisdiction? Bilateral tax treaties override domestic law. France benefits from an impressive tax treaties network which applies to corporate tax, but also (depending on each treaty) to 1.6 What is the test in domestic law for determining the individual income tax, wealth taxes (ISF and IFI), gift and/or residence of a company? inheritance tax as well as other French taxes. Approximately 130 bilateral income tax treaties are currently in force. Article 209-1 of the French Tax Code (“FTC”) provides that French or foreign resident companies are taxable in France on all profits 1.2 Do they generally follow the OECD Model Convention or made on business carried out in France under the territoriality principle. The concept of “business carried out in France” is not another model? defined in the legislation. Cases have, however, held that the Bilateral tax treaties signed by France follow, as a general rule, the requirement is established when there is a routine commercial OECD model. Variations of this model allow France to apply the activity carried out in a place of business or through a representative specificities of French internal law. As an example, the concept of or by operations comprising “cycle commercial complet d’activité”. This “société à prépondérance immobilière” (real estate company) is very often concept is very close to the definition of a permanent establishment developed. The more recently negotiated amendments or tax provided by the OECD model. treaties are more sophisticated than the previous ones and allow Under the French principle of restricted territoriality, profits (or France to apply its extensive tax scope. losses) realised by a French company from business carried out outside France are not subject to French corporate tax.

1.3 Do treaties have to be incorporated into domestic law 2 Transaction Taxes before they take effect?

Tax treaties enter into force after the ratification process has been 2.1 Are there any documentary taxes in your jurisdiction? duly accomplished by each contracting state. No documentary taxes exist per se in France. However, the sale of shares of French companies and of French or foreign companies 1.4 Do they generally incorporate anti-treaty shopping qualifying as sociétés à prépondérance immobilière are subject to transfer rules (or “limitation on beneﬁts” articles)? duties under certain conditions. Transfer of goodwill is also subject to transfer duties. The most recently negotiated tax treaties or amendments of existing tax treaties state that anti-treaty shopping rules apply, for example, to dividends and interest. 2.2 Do you have Value Added Tax (or a similar tax)? If so, at France also signed, on 7 June 2017, the multilateral instrument what rate or rates? (“MLI”) covering 83 jurisdictions. Among others, MLI’s main purposes are to limit base erosion profit shifting (“BEPS”) through European VAT rules apply in France, which is a member of the treaty abuse (Action 6 of the BEPS project), improve dispute resol- European Union. The standard VAT rate applicable amounts to ution, prevent the artificial avoidance of permanent establishment 20%. Three other rates may apply depending on the nature of status and neutralise the effects of hybrid mismatch arrangements. goods or services (10%, 5.5% and 2.1%). The MLI entered into force on 1 July 2018 in five countries: Slovenia; Austria; Isle of Man; Jersey; and Poland. The MLI will enter into force 2.3 Is VAT (or any similar tax) charged on all transactions on 1 October 2018 in four other countries: United Kingdom; Sweden; or are there any relevant exclusions? Serbia; and New Zealand. On 12 July 2018, the law authorising the ratification of the MLI by the French Parliament was published. The All European exclusions apply in France. Some activities are MLI should enter into force in France in 2019 depending on the date excluded from the VAT scope such as, for example, certain banking of the ratification of the instrument by the French Parliament. and financial transactions, as well as insurance and reinsurance The MLI will affect the interpretation of bilateral tax treaties activities. The renting out and sale of residential real estate are also signed by France and therefore further cross-border transactions. excluded from the VAT scope under certain conditions.

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2.4 Is it always fully recoverable by all businesses? If not, Under Directive 90/435/EEC relating to parent and subsidiary companies (“EU Parent-Subsidiary Directive”), dividends are what are the relevant restrictions? exempt from withholding tax if the recipient is a company resident A taxpayer may recover VAT charged on goods and services used to in an EU country and has held at least 5% of the shares of the realise the turnover, subject to VAT. The main exception to this French subsidiary for at least two years. However, as from 1 January principle is VAT on cars. 2016, the EU Directive 2015/121 adopted on 27 January 2015 added an anti-abuse provision to the EU Parent-Subsidiary Directive. Under this new provision, withholding tax exemption only applies 2.5 Does your jurisdiction permit VAT grouping and, if so, if the main motivation of the ownership structure was not to benefit is it “establishment only” VAT grouping, such as that applied from such an exemption. As a result, ownership structures by Sweden in the Skandia case? considered artificial will no longer benefit from the EU Parent- Subsidiary Directive. The concept of VAT grouping does not exist in France. Under Finally, the French Administrative Supreme Court recently stated certain conditions, companies in the same group may elect to that tax treaty provisions only apply assuming the resident of the centralise the payment of VAT. Among other conditions, the “head” other contracting state is effectively taxed in his country of company should hold at least 50% of the share capital of its residence. As a consequence, a person exempted in his country of subsidiaries and all companies within the group should have the residence by reason of his legal status or activities may no longer same tax year period. benefit from the provisions of a double tax treaty signed with France. 2.6 Are there any other transaction taxes payable by This recent interpretation of the tax treaties by the French companies? Administrative Supreme Court entails many difficulties, in the opinion of the authors. The French tax authorities will system- Registration duties are due on the transfer of real estate, “fonds de atically refuse to apply tax treaties, while the other contracting states commerce” (goodwill) or clientele and company shares. allow their residents “tax incentives” in comparison to the French (The sale price of commercial property and/or clientele is subject tax treatment suffered by French residents. to registration duties at a rate of 3% for amounts between €23,000 and €200,000, and 5% for greater amounts.) 3.2 Would there be any withholding tax on royalties paid by Purchases of French real estate are subject to registration duties a local company to a non-resident? at rates which may vary depending on the location of the real estate. A French notary should be appointed. Registration duties, including Unless tax treaties state otherwise, royalties are, as a general rule, the notary’s fees, may reach 7%. subject to a 33.33% withholding tax. When the recipient is resident The rate of registration duties applicable to the company’s shares in a non-cooperative country, royalties are subject to a 75% with- varies depending on the nature of the shares transferred: holding tax. ■ transfers of shares of a “société par actions simplifiée” (“SAS”) or a “société anonyme” running an industrial or commercial activity are 3.3 Would there be any withholding tax on interest paid by subject to transfer duties at a rate of 0.1%; ■ transfers of shares of a “société à responsabilité limitée” (“SARL”) a local company to a non-resident? running an industrial or commercial activity are subject to As a general rule, no withholding tax is levied on interest paid by a transfer duties at a rate of 3%; and French company, except of course when the recipient is resident in ■ transfers of shares of any company (French or foreign) whose a non-cooperative country. assets are mainly composed of real estate property located in

France (that is more than 50% of their market value) are subject to transfer duties at a rate of 5%. 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? 2.7 Are there any other indirect taxes of which we should Like many other countries, France has legislation providing for be aware? certain limitations on the deduction of interest expenses, including thin capitalisation rules. However, as these different limitation rules France is the kingdom of indirect taxes. apply altogether, their articulation may be difficult to deal with. Numerous indirect taxes apply to goods such as wines and French companies liable for corporate tax can only deduct from alcoholic beverages, hydrocarbons, cigarettes, sugar, oils, etc. their annual taxable basis 75% of the net interest expenses occurring

during the same year, unless the interest amount does not exceed €3 3 Cross-border Payments million (“General interest deductibility limitation”). In addition, the deduction of interest on loans granted by related 3.1 Is any withholding tax imposed on dividends paid by a parties is disallowed when the lender is liable to tax on the interest locally resident company to a non-resident? received from the borrowing company up to an amount which is less than a quarter of the French tax burden it would have been subject Unless tax treaties state otherwise, dividends are subject to a French to corresponding to: withholding tax at the rate of: ■ 8.33% for fiscal years starting 1 January 2018; ■ 12.8% when paid to non-resident individuals; ■ 7.75% for fiscal years starting 1 January 2019; ■ 30% when paid to non-resident companies; and ■ 7% for fiscal years starting 1 January 2020; ■ 75% when paid to residents of a non-cooperative state (i.e. a ■ 6.63% for fiscal years starting 1 January 2021; and state which has not signed an exchange of information treaty ■ 6.25% for fiscal years starting 1 January 2022. with France). Interest paid by a French borrowing company can be disallowed However, most tax treaties signed by France provide either a for French corporate tax purposes if its amount exceeds, reduced rate or a withholding tax exemption. cumulatively, the following three ratios:

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■ 1.5 times the company’s share capital (debt-equity ratio); 3.9 Does your jurisdiction have transfer pricing rules? ■ 25% of the company’s earnings results before tax (interest coverage ratio); and France has developed transfer pricing legislation, which states that ■ the amount of interest received from affiliates (net paid interest). the correct transfer price for a particular transaction between related Once the ratios have been met, the portion of interest which parties must be that which the parties would have agreed at arm’s exceeds the highest of those is not deductible from the taxable length. results unless either of the following applies: In order to determine the tax owed by companies that depend on ■ it does not exceed €150,000 per year; or or control enterprises outside France, any profits transferred to those ■ the borrowing company can prove that the overall debt-equity enterprises indirectly through increases or decreases in purchase or ratio of the group to which it belongs exceeds or equals its own selling prices or by any other means must be added back into the debt-equity ratio. taxable income shown in the companies’ accounts. The same Subject to restrictions, the portion of non-deductible interest procedure applies to companies that depend on an enterprise or a from a year’s taxable results can be deducted from the following group that also controls enterprises outside France. fiscal year’s results at a 5% reduction per financial year as from the To enforce article 57 of the FTC, the French tax authorities must second year. prove both that a dependent relationship existed between the parties The deductible interest rate paid to an affiliate company cannot involved in the transaction under review, and that a transfer of exceed a certain percentage, which is published every year (1.67% for profits occurred. fiscal years ended between 31 December 2017 and 30 January 2018). French legislation also requires certain companies to provide Finally, within a French tax consolidation group, the deduction of significant documentation to the French tax authorities in relation a portion of interest paid by a tax group is disallowed and added to transfer pricing. back into the global taxable income when a member company acquires the shares of either of the following: 4 Tax on Business Operations: General ■ a “head” company controlling, directly or indirectly, the purchasing company; that is, the acquiring company and the 4.1 What is the headline rate of tax on corporate proﬁts? purchased company become members of the same group; or ■ a company controlled directly or indirectly by the “head” The standard corporate tax rate is 33.33%. However, there is an company. exception for companies having an annual turnover inferior to €7.63 France, as an EU Member State, will have to implement in its million and fulfilling certain conditions, which are subject to a domestic legislation provisions complying with the Anti-Tax corporate income tax (“CIT”) rate of 15% for the fraction of their Avoidance Directive (“ATA Directive”) by 31 December 2018. As net profit lower than or equal to €38,120. a consequence, the general limitation of the deduction of interests Small and medium-sized enterprises (“SMEs”) starting their fiscal paid by taxpayers (i.e. 30% of the taxpayers’ EBITDA) provided by year on or after 1 January 2017, benefit from a reduced CIT of 28% the ATA Directive will affect or replace the French General interest on the fraction of their net profit which does not exceed €75,000. deductibility limitation. Companies eligible for the 15% rate of CIT continue to benefit from this reduced rate, and will be subject to the 28% rate only on the 3.5 If so, is there a “safe harbour” by reference to which tax fraction of their net profit exceeding €38,120 and lower or equal to relief is assured? €75,000. For fiscal years starting on or after 1 January 2018, a 28% CIT rate Assuming the borrowing company demonstrates that its debt-equity applies on the first €500,000 of taxable profit of all companies. ratio does not exceed the debt-equity ratio of its group, the thin Taxable profit in excess of €500,000 are subject to a 33.33% CIT rate. capitalisation rules described below do not apply. For fiscal years starting on or after 1 January 2019, a 28% CIT rate will apply on the first €500,000 of taxable profit of all companies. 3.6 Would any such rules extend to debt advanced by a Taxable profits in excess of €500,000 will be subject to a 31% CIT rate. third party but guaranteed by a parent company? For fiscal years starting on or after 1 January 2020, a 28% CIT rate Thin capitalisation rules also apply in this case; see our answer to will apply for all companies. question 3.4. For fiscal years starting on or after 1 January 2021, a 26.5% CIT rate will apply for all companies. For fiscal years starting on or after 1 January 2022, a 25% CIT rate 3.7 Are there any other restrictions on tax relief for interest will apply for all companies. payments by a local company to a non-resident, for example Moreover, companies subject to CIT with turnover exceeding €1 pursuant to BEPS Action 4? billion would be subject to a 15% exceptional contribution on their CIT and companies subject to CIT with turnover exceeding €3 billion All general anti-avoidance rules aimed at preventing internal and/or would be subject to a 15% additional contribution on their CIT. international tax evasion may also apply (see our answer to question However, these contributions are temporary and will only apply for 9.1). the financial years ended between 31 December 2017 and 30 December 2018. 3.8 Is there any withholding tax on property rental French corporate tax is established on a strict territorial basis; that payments made to non-residents? is, it is assessed on French source income and not on a worldwide basis. No withholding tax applies on property rental payments. Non- Double tax treaties may, however, allow France, under specific resident companies owning real estate properties located in France circumstances, to tax certain foreign source income. should comply with French accounting obligations and file an annual As regards the taxation of distributed income, two co-existing corporate tax return. parent-subsidiary regimes are applicable, based, respectively, on French domestic tax law and on EU regulations.

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These regimes allow a qualifying parent company to benefit from losses incurred by its overseas subsidiaries can be offset against reduced taxation on certain transactions on capital gains realised by profits realised in France. the parent company on the sale of participations and dividends received from its subsidiaries. 4.5 Do tax losses survive a change of ownership? French tax law also provides a tax consolidation regime (“intégration fiscale”); see our answer to question 4.4. For French tax purposes, a change of ownership does not alter the Large companies subject to corporate tax may also be liable to an carrying forward of tax losses, except if the activity of the company additional contribution at the rate of 3.3%, assessed on the amount is substantially modified. of corporation tax due exceeding €763,000. The additional contribution does not apply to companies whose annual turnover 4.6 Is tax imposed at a different rate upon distributed, as does not exceed €7.63 million, provided that at least 75% of the opposed to retained, profits? company is owned by individuals or by companies that themselves fulfil these conditions. A consolidated group (see our answer to The validity of the additional 3% contribution applied on profits question 4.4) is liable to pay this additional contribution if its global distributed by French companies has been considered by the turnover exceeds €7.63 million. European Court of Justice as contrary to EU law. The Finance Bill See also our answer to question 4.6 relating to profits distributed for 2018 suppresses the 3% contribution for dividend payments by a French company to its shareholders. made on or after 1 January 2018. French corporate tax is pre-paid in four instalments (in March, June, September and December). Please note in this respect that a fifth instalment was added for certain companies through the 2017 4.7 Are companies subject to any significant taxes not Finance Bill. The debit/credit of corporate tax is due/refunded by covered elsewhere in this chapter – e.g. tax on the 15 May the following year. occupation of property? Losses incurred by a company subject to corporation tax can be carried forward without time limits. However, the offsetting of France applies a lot of indirect taxes. Among others, the territorial losses is limited to 50% of the current year’s profits insofar as the economic contribution (“TEC”) and the annual 3% tax should be profits exceed €1 million. Any unused losses remain carried forward noted. to the following years. The TEC replaced the former business tax (“taxe professionnelle”) in 2010. This is a local tax levied by the French departments and 4.2 Is the tax base accounting profit subject to regions, made up of the following components: ■ the “cotisation foncière des entreprises”, which is based on the rental adjustments, or something else? value of the real estate property used for the company’s business; and The determination of the taxable income is based on the company’s ■ the “cotisation sur la valeur ajoutée des entreprises”, which is based on accounting year, corrected to specific tax adjustments. the added value by the business on a yearly basis.

The overall amount of TEC due by the company cannot exceed 4.3 If the tax base is accounting proﬁt subject to 3% of the annual “added value” produced by the company. adjustments, what are the main adjustments? The annual 3% tax is due by French and foreign companies owning (directly or indirectly) one or more real estate properties The income of companies taxable under corporate tax law is deter- located in France, the market value of which exceeds that of all mined by adjusting accounting profits and losses in conformity with other French movable/financial assets owned by the same company. specific tax regulations. In practice, because there are many legal exemptions, this tax is only The major adjustments involved are the reintegration in the due when the real estate located in France is not used for business taxable income of the corporate tax itself and certain expenses and the identity of the ultimate owners has not been disclosed to the considered unnecessary or extraneous to the purposes of the French tax authorities, or one of the intermediary companies company, such as grants and subsidies granted to other companies. involved in the ownership structure is based in a country which has Some income, however, is subject to special tax provisions (notably, not signed an exchange of information treaty with France, or repor- certain long-term capital gains, industrial property and trademarks, ting obligations have not been completed. and income from subsidiaries). French tax law also provides that companies which are not subject to VAT on less than 10% of their preceding year’s turnover are 4.4 Are there any tax grouping rules? Do these allow for subject to a tax on salaries (“taxe sur les salaires”), based on wages paid relief in your jurisdiction for losses of overseas subsidiaries? on a progressive scale ranging between 4.25% and 20%.

French tax law provides for a tax consolidation regime, allowing a 5 Capital Gains parent company to be liable for corporate tax (plus an additional contribution) on behalf of its whole group. The consolidated group 5.1 Is there a special set of rules for taxing capital gains includes French subsidiaries (foreign subsidiaries are excluded) which are liable to corporate tax and have a share capital 95% of which is and losses? held (directly or indirectly) by the parent company. A subsidiary can Capital gains are, as a general rule, included in the corporate tax basis also be a part of a consolidated group when more than 95% of its and then subject to corporate tax as explained in question 4.1. share capital is held indirectly by a foreign EU company. However, specific provisions allow one to apply a more favourable Under the tax consolidation regime, profits and losses incurred by tax regime to capital gains on certain assets. all companies of the group are aggregated to determine a tax- Capital gains on the sale of shares qualifying as a “participation consolidated net result. Intra-group transactions are neutralised. exemption” may benefit from a partial exemption (see our answer As explained in questions 1.6 and 4.2 above, French corporate tax to question 5.2). is applied on a strict territorial basis, under which neither losses Capital gains on the sale of intellectual property, patents and incurred abroad by a company running a business in France nor assimilated assets are, under certain conditions, subject to corporate tax at a reduced rate of 15%.

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Capital gains realised on the sale of listed shares of real estate Assuming the seller is resident in a non-cooperative state or companies (“sociétés à prépondérance immobilière”) are subject to a 19% territory, the withholding tax is increased to 75% on the capital gain reduced corporate tax. Shares of real estate companies which are amount. We are convinced that this rule restricts the free movement not listed are still subject to corporate tax at standard rates (see ques- of capital. tion 4.1). Finally, capital gains on certain qualifying venture capital, mutual 6 Local Branch or Subsidiary? funds and investment companies, may, under certain conditions (they should be owned for more than five years, among other conditions), 6.1 What taxes (e.g. capital duty) would be imposed upon benefit either from a reduced rate of taxation of 15% or from a full exemption. the formation of a subsidiary? No tax would be imposed upon the formation of a French 5.2 Is there a participation exemption for capital gains? subsidiary by a foreign company.

Sale of companies’ shares benefits from a partial exemption (amounting to 88%) if, among other conditions, the shares have been 6.2 Is there a difference between the taxation of a local held for more than two years. subsidiary and a local branch of a non-resident company (for example, a branch proﬁts tax)? 5.3 Is there any special relief for reinvestment? As a general rule, there are very few differences between the taxation No special relief for reinvestment applies in France at the moment. of a locally formed subsidiary and a local branch set up by a non- resident company. Because a branch (as opposed to a subsidiary) does not benefit 5.4 Does your jurisdiction impose withholding tax on the from a legal personality different to that of its head office, interest, proceeds of selling a direct or indirect interest in local as well as royalties paid by a French branch to its foreign head office, assets/shares? is not deductible for French tax purposes. Unless a treaty applies, corporate tax profits transferred by a French Unless tax treaties provide otherwise, withholding taxes are levied in branch to its foreign head office are subject to a 30% withholding tax. France either in the case of the sale of a real estate property located A 75% withholding tax applies when the non-resident company is in France by a foreign company, or in the case of the sale of resident in a non-cooperative state or territory. Once again, we are company shares (French or foreign), as described below. convinced that this rule restricts the free movement of capital. The sale of a real estate property located in France by a foreign company is subject to a withholding tax amounting to 33.33%. 6.3 How would the taxable proﬁts of a local branch be Depending on the seller’s country of residence, the taxable basis of this withholding tax may vary. determined in its jurisdiction? Assuming the seller is a company resident in a Member State of The French branch would only be subject to French corporate tax the EEA, the 33.33% withholding tax is levied on the difference on profits realised in France, just as a French subsidiary would have between the sale price and net book value of the real estate property. been (see our answer to question 4.1). Assuming the seller is a company resident in a state which is not

a member of the EEA, the 33.33% withholding tax is levied on the difference between the sale price and the purchase price of the real 6.4 Would a branch benefit from double tax relief in its estate, less an amount corresponding to 2% of the purchase value jurisdiction? of the real estate per year of ownership of the sold real estate property. We are convinced that this rule restricts the free movement Branches of foreign companies are not considered resident for the of capital, as does the obligation to appoint a French tax representative. application of tax treaties, and therefore cannot benefit from their A withholding tax is also levied in case of sale of shares by a provisions. foreign company, which varies depending on the quality of the company sold and on the quality of the seller. 6.5 Would any withholding tax or other similar tax be Assuming the company (French or foreign) sold qualifies as a real imposed as the result of a remittance of profits by the branch? estate company (“société à prépondérance immobilière”), the withholding tax is levied at the rate of 33.33% on the difference between the sale Please see our answer to question 6.3. price and the purchase price if the seller is a foreign company. If the seller is subject to CIT, the withholding tax levied at the 7 Overseas Profits time of the sale of the French real estate or of the shares of the real estate company (“société à preponderance immobilière”) is a prepayment 7.1 Does your jurisdiction tax profits earned in overseas of corporate tax (at the standard rate of 33.33%), which is computed at the end of the fiscal year during which the real estate is sold. branches? Assuming the 33.33% withholding tax exceeds the corporate tax due As explained above, according to the strict territorial regime of at standard rates (see question 4.1), the excess can be refunded by a French corporate tax, profits realised by overseas branches of a claim filed to the French tax authorities. French company are not taxable in France. Assuming the French company sold does not qualify as a real

estate company and that more than 25% of its share capital is held by a foreign company at the time of the sale or at any time during 7.2 Is tax imposed on the receipt of dividends by a local the five years preceding the sale, a 33.33% withholding tax applies company from a non-resident company? which is a final payment. If the shares of the company are owned and sold by an individual a withholding tax of 12.80% is levied. The As a general rule, dividends from abroad received by a French withholding tax paid is also considered as a final payment of income company are subject to French corporate tax. tax.

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However, according to the French parent-subsidiary tax regime, An abuse of law may be characterised when either the operation assuming the French company owns more than 5% of the shares of or the scheme used is fictitious or the taxpayer researched a literal the distributing company for more than two years, dividends benefit application of a provision or decision that is contrary to the intention from a 95% exemption for corporate tax purposes. This favourable of the lawmaker and was motivated only by the intention of avoiding regime does not apply when the subsidiary is resident in a non- or reducing its tax burden. A penalty at the rate of either 40% or cooperative state or territory. 80% applies when an abuse of law is deemed to have occurred. The theory of abnormal management act (“acte anormal de gestion”) 7.3 Does your jurisdiction have “controlled foreign allows the French tax authorities to disregard an operation which has not been realised in the best interest of the company. company” rules and, if so, when do these apply? These general provisions may be difficult to apply because the Article 209 B of the FTC provides that when a French company, French tax authorities may conclude that an “abus de droit” or “acte subject to corporate tax, either realises a business enterprise in a low- anormal de gestion” exists. tax jurisdiction or controls directly or indirectly (for more than 5% This is the reason why specific anti-avoidance provisions have if the company is listed; 50% in other cases) the capital of a been introduced in the FTC which presume the existence of tax company located in a low-tax jurisdiction, profits realised by such a avoidance. Then the taxpayer should (sometimes) prove the absence company are subject to corporate tax in France even if they have not of the intention of avoidance in order to escape the application of been distributed to the French shareholder. the presumption imposed by the law. This is the case for: article 57 of the FTC (see our answer to ques- 8 Taxation of Commercial Real Estate tion 3.9); article 209 B of the FTC (see our answer to question 7.3); article 238 A of the FTC; and article 155 A of the FTC. According to article 238 A of the FTC, any payments made by a 8.1 Are non-residents taxed on the disposal of commercial French company benefitting a company located in a low-tax country real estate in your jurisdiction? are not deductible for French tax purposes. According to article 155 A of the FTC, payments received by a Foreign companies selling real estate located in France are subject to non-resident (individual or company) corresponding to the remuner- a 33.33% withholding tax, as explained in question 5.4 above. ation of services rendered by a French taxpayer are, under certain conditions, taxable in France. 8.2 Does your jurisdiction impose tax on the transfer of an Finally, as explained before, any dividends, royalties, capital gains indirect interest in commercial real estate in your or income from a French source are subject to a 75% withholding jurisdiction? tax when paid to a resident in a non-cooperative state or territory. As explained in question 3.4, as an EU Member State, France will Unless tax treaties provide otherwise, foreign companies are subject have to implement in its domestic legislation ATA Directive- to a 33.33% withholding tax on the sale of shares of companies compliant provisions by 31 December 2018 (with the provisions (French or foreign) owning (directly or indirectly) real estate applying from 1 January 2019). properties located in France and having a fair market value exceeding the fair market value of other assets they own, as explained in ques- 9.2 Is there a requirement to make special disclosure of tion 5.4. avoidance schemes?

8.3 Does your jurisdiction have a special tax regime for The requirement to make special disclosure of avoidance schemes Real Estate Investment Trusts (REITs) or their equivalent? has not yet been introduced into French tax law.

France does not recognise the concept of REITs. However, French 9.3 Does your jurisdiction have rules which target not only tax law provides for a specific optional regime applying, under certain taxpayers engaging in tax avoidance but also anyone who conditions, to listed real estate companies (“sociétés d’investissements promotes, enables or facilitates the tax avoidance? cotées”). A French corporate tax exemption is granted provided that the major part of their results are distributed to their shareholders, Article 1741 of the FTC provides that the voluntary fraudulent corresponding to 95% of their rental income, 60% of their capital avoidance of taxation can give rise to a penalty amounting to gains and 100% of dividends received from their subsidiaries. €500,000 and an imprisonment sentence of five years. Under certain aggravating circumstances, the fine can be increased to €2 million 9 Anti-avoidance and Compliance and the imprisonment sentence to seven years. Article 1742 of the FTC, in combination with articles 121-6 and 9.1 Does your jurisdiction have a general anti-avoidance or 121-7 of the French Criminal Code, provides that anyone facilitating anti-abuse rule? the fraudulent avoidance of taxation by assisting or advising the perpetrators of such offence can also be sentenced. The FTC provides numerous anti-avoidance or anti-abuse of law Moreover, a draft law is being discussed in French Parliament, of rules. which the purpose is to strengthen the sentences against fraudsters who Some of them have a very wide scope and may function to violate the principles of equality in relation to public burdens and of prevent internal and international tax avoidance (the theory of “abus free consent to taxation. One of the main provisions of this bill is the de droit” or “acte anormal de gestion”). Others are specifically dedicated creation of administrative sanctions against third parties facilitating tax to preventing international tax evasion. and social fraud in order to punish not only the perpetrators of the The French tax authorities may use the theory of abuse of law fraud, but also its “engineers”, who spread fraudulent schemes. (“abus de droit”) provided by article L64 of the Tax Procedure Handbook (“livre des procédures fiscales”) to challenge an operation (or 9.4 Does your jurisdiction encourage “co-operative a series of operations) which allow the taxpayer to avoid, reduce or compliance” and, if so, does this provide procedural beneﬁts postpone a French tax. only or result in a reduction of tax?

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The sentences provided for by article 1741 of the FTC can be halved 10.4 Does your jurisdiction support information obtained if the perpetrator or an accomplice in the abovementioned offences under Country-by-Country Reporting (CBCR) being made enables the French tax or judicial authorities to identify other participants in the same offences. available to the public? Article 109 of the Finance Bill for 2017 also introduced, At the beginning of 2016, the European Commission published a temporarily, the possibility for the FTA to compensate individuals draft directive to fight against fiscal fraud, including a country-by- providing information on existing “infringements” of the provisions country reporting mechanism. This draft was adopted on 25 May of the FTC (i.e. absence of reporting, tax avoidance arrangements, 2016, amending Directive 2011/16/EU as regards the mandatory etc.). This provision entered into force on 1 January 2017, and the automatic exchange of information in the field of taxation. The system is supposed to be tested for two years. Member States have to apply their rules no later than 5 June 2017.

However, the French Parliament took the lead and from 1 January 10 BEPS and Tax Competition 2016 imposed an obligation to report accounting and taxable results country-by-country. Companies which hold foreign subsidiaries or 10.1 Has your jurisdiction introduced any legislation in branches, establish consolidated accountings and realise a response to the OECD’s project targeting BEPS? consolidated turnover of over €750 million, are subject to this specific reporting obligation. The France Country-by-Country France has already introduced legislation in response to the OECD’s report shall be filed at the latest on 31 December 2018 for the fiscal project targeting BEPS, as a specific mechanism which aims to strive year closing 31 December 2017. against the effects of hybrid mismatch arrangements. Within the scope of this legislation, when a company which is subject to CIT is 10.5 Does your jurisdiction maintain any preferential tax bonded to another company, wherever it is located in France or in a regimes such as a patent box? foreign country, the loan’s interests are deductible only if the borrowing company shows that the lending company is subject to French legislation provides for multiple grants and tax incentives to income tax on the same interests. attract new investors. They take the form of tax credits and exemp- On 7 June 2017, France signed the MLI to amend its tax treaties tions at both a national and regional level. Investors must meet strict in line with the OECD BEPS principles. On 12 July 2018, the law criteria to apply for these. authorising the ratification of the MLI by the French Parliament was The main incentive provided by French tax legislation is the published. The MLI should enter into force in France in 2019 “R&D tax credit” (“credit d’impôt recherche”), which is a corporate tax depending on the date of the ratification of the instrument by the incentive based on the research and development expenditure French Parliament. The MLI provides notably for substance-over- incurred by any trading company located in France, regardless of form and anti-treaty shopping provisions that are mandatory for all sector and size. This mechanism allows all companies to benefit signatory States. from a 30% (under €100 million) or 5% (exceeding €100 million) partial refund (either by way of tax reduction or tax reimbursement). 10.2 Has your jurisdiction signed the tax treaty MLI and This mechanism was extended to innovation expenditures incurred deposited its instrument of ratiﬁcation with the OECD? by SMEs, offering a yearly tax credit of 20% for up to €400,000 of expenses (that is, a yearly tax credit of €80,000). On 7 June 2017 France signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (“MLI”). 11 Taxing the Digital Economy France deposited its instrument of ratification on 26 September 2018. The MLI has therefore entered into force on 1 January 2019 11.1 Has your jurisdiction taken any unilateral action to tax for France’s Covered Tax Agreements with jurisdictions that have deposited the instrument of ratification on or before 30 September digital activities or to expand the tax base to capture digital 2018. presence?

France introduced a Digital Services tax in July 2019 (Article 1 of 10.3 Does your jurisdiction intend to adopt any legislation to the Law 2019-759 of 24 July 2019), codified in the French tax Code tackle BEPS which goes beyond the OECD’s (Article 299 et seq.), with a retroactive effect as at 1 January 2019. recommendations? This so-called GAFA tax is meant to be a temporary tax, since France is waiting for the OECD global project for a harmonised France largely follows the recommendations of the OECD’s BEPS taxation of digital services (expected by 2020). reports. Sometimes, it requires more transparency in regard to This tax is based on the Proposal for a EU COUNCIL transfer pricing. Companies, when they are controlled by tax auth- DIRECTIVE dated 21 March 2018, laying down rules relating to the orities, have to provide the French tax authorities with a copy of the corporate taxation of a significant digital presence. rulings from which they benefit in other countries, in addition to other reporting obligations provided by the OECD’s transfer pricing 11.2 Does your jurisdiction favour any of the G20/OECD’s recommendations. “Pillar One” options (user participation, marketing intangibles or signiﬁcant economic presence)?

France favours the Pillar One options aiming reallocating the rights to impose based on a significant economic presence criterion, i.e. based on a strong link with the consumer’s market (i.e. taxing the consumption).

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Maryse Naudin began her career in the tax department of one of the major accounting firms, where she was in charge of the real estate practice and the South East Asia region, prior to co-founding Tirard, Naudin. She now has more than 35 years’ experience in advising and defending varied clientele, from multinational corporations to high-net-worth individuals, in relation to cross-border tax issues. She has a particular expertise in advising foreign investors acquiring French real estate property, as well as French clients with foreign interests. Ms. Naudin also has a wealth of expertise in matters relating to trust aspects in a civil law environment, European taxation and, in particular, tax litigation with respect to community freedoms. She is the co-founder and former secretary of the French branch of STEP, and a former chairman of the International Estate Planning Commission of the Union Internationale des Avocats. She is a member of the international Academy of Estate and Trust Law and the American College of Trust and Estate Counsel.

Tirard, Naudin Tel: +33 1 53 57 36 00 9 rue Boissy d’Anglas Email: [email protected] 75008 Paris URL: www.tirard-naudin.com France

Tirard, Naudin is a highly reputed Paris-based boutique law firm co-founded in 1989 by Jean-Marc Tirard and Maryse Naudin, which specialises in international tax and estate planning (including trusts), tax representation and litigation in all aspects of French taxation, with a particular emphasis on international tax issues. The firm’s experience in the trust field is virtually unique in France. Its client base includes corporate clients, who come both for its special expertise in negotiating with the French tax authorities and for its experience of structuring international transactions. It also acts for high-net- worth private clients and their families who need help in resolving complex tax and inheritance issues. It has considerable expertise in property tax issues and the creation of efficient structures for non-resident investors. Tirard, Naudin acts regularly as “lawyer’s lawyers”, providing specialist support for other firms and their clients. The firm’s two founding partners are now assisted by Ouri Belmin, who is in charge of Tirard, Naudin’s team in Paris. www.tirard-naudin.com

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Germany Germany

Dr. Gunnar Knorr

Oppenhoff & Partner Marc Krischer

1 Tax Treaties and Residence 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? 1.1 How many income tax treaties are currently in force in Germany applies Value Added Tax (“VAT”) to most supplies and your jurisdiction? services. The general VAT rate is 19%, while a reduced rate of 7% is available for some products and services. Germany currently has double tax treaties for taxes on income with

96 countries. 2.3 Is VAT (or any similar tax) charged on all transactions 1.2 Do they generally follow the OECD Model Convention or or are there any relevant exclusions? another model? Exports to territories outside the EU are exempt from the application of German VAT. VAT is not charged on banking German treaties follow the OECD Model Convention, with services and insurances. Insurances are, however, subject to Germany using the exemption method. insurance tax. Some medical services are also exempt from VAT.

1.3 Do treaties have to be incorporated into domestic law 2.4 Is it always fully recoverable by all businesses? If not, before they take effect? what are the relevant restrictions? Treaties need to be formally ratified by parliament and published in VAT is only fully recoverable for businesses that generally provide the Federal Gazette to become effective. This may take some time supplies or services that would, if carried out domestically, be subject after the conclusion of a tax treaty. to VAT.

1.4 Do they generally incorporate anti-treaty shopping 2.5 Does your jurisdiction permit VAT grouping and, if so, rules (or “limitation on beneﬁts” articles)? is it “establishment only” VAT grouping, such as that applied In the most recent tax treaties, limitation on benefits rules have been by Sweden in the Skandia case? included. Most older treaties do not have such rules. Germany allows for VAT grouping if entities are under joint control and are connected both economically and organisationally. 1.5 Are treaties overridden by any rules of domestic law

(whether existing when the treaty takes effect or introduced 2.6 Are there any other transaction taxes payable by subsequently)? companies? Germany has specific limitation on benefits rules, pursuant to which Other than real estate transfer tax and, potentially, taxes on income treaty eligibility cannot be claimed in situations that are deemed abusive, derived from capital gains, Germany does not generally charge trans- e.g. if an entity is purely interposed for treaty shopping purposes. action taxes.

1.6 What is the test in domestic law for determining the 2.7 Are there any other indirect taxes of which we should residence of a company? be aware? A company is resident in Germany if it has its corporate seat or Insurance tax at a rate of 19% (usually) is levied on insurance place of management in Germany. premiums (the rate varies for some types of insurance). The supply

of combustibles and energy is subject to energy tax. 2 Transaction Taxes

2.1 Are there any documentary taxes in your jurisdiction?

Germany does not levy stamp duty, however, where entities transfer owned real estate, real estate transfer tax may apply. Also, transfers that require notarisation are subject to notarisation costs.

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3 Cross-border Payments 3.8 Is there any withholding tax on property rental payments made to non-residents? 3.1 Is any withholding tax imposed on dividends paid by a There currently is no withholding tax on property rental payments locally resident company to a non-resident? made to non-residents. These non-residents will, however, be subject to German taxation with regard to their rental income. In principle, Germany levies a 25% withholding tax on dividends plus a surcharge of 5.5% of that tax, both on domestic and foreign recipients. Corporate recipients can obtain a reduction of the with- 3.9 Does your jurisdiction have transfer pricing rules? holding tax to 15%, even if they cannot benefit from a tax treaty. Treaty withholding rates vary from 0% up to 15% through the Germany applies the OECD transfer pricing guidelines alongside various treaties, with the most common rates being 5% for specific provisions in the German Foreign Tax Act, which significant shareholdings and 15% for smaller shareholdings. predominantly relate to a shift of functions across borders.

3.2 Would there be any withholding tax on royalties paid by 4 Tax on Business Operations: General a local company to a non-resident? 4.1 What is the headline rate of tax on corporate proﬁts? Germany applies a 15% withholding tax on royalties paid to non- Corporate income tax is charged at 15% plus 5.5% of solidarity German recipients. Where tax treaties apply, these rates will usually surcharge thereon, resulting in a combined rate of 15.825%. On top be reduced or eliminated through the application of the treaty. In of that, business tax will apply at local rates, which range from 7% such case, taxes withheld can be refunded or the withholding up to currently 32%. Most commonly, business tax rates will be obligation can be reduced or lifted upon application prior to the somewhere between 14% and 17.5%. respective payment.

4.2 Is the tax base accounting proﬁt subject to 3.3 Would there be any withholding tax on interest paid by adjustments, or something else? a local company to a non-resident? The tax base profit is generally derived from the German GAAP Interest payments are not generally subject to withholding tax. In commercial accounts, with some adjustments for tax-specific rules. some specific cases, where interest is received from a bank by a non- bank, withholding tax may be applied. 4.3 If the tax base is accounting proﬁt subject to 3.4 Would relief for interest so paid be restricted by adjustments, what are the main adjustments? reference to “thin capitalisation” rules? The most significant deviations from commercial accounts stem from the valuation of pension liabilities, whose tax value is Germany does not apply thin capitalisation rules, but relies on the significantly lower than the GAAP value. Some provisions of the interest barrier rule. Pursuant to this rule, taxpayers cannot offset German GAAP on the valuation of stock and fixed assets are not more than 30% of their taxable EBITDA against interest expenses, applied consistently for tax accounting purposes. unless some further exemptions apply. If the overall interest expense is less than EUR three million, interest is generally fully deductible. 4.4 Are there any tax grouping rules? Do these allow for 3.5 If so, is there a “safe harbour” by reference to which tax relief in your jurisdiction for losses of overseas subsidiaries? relief is assured? Germany allows domestic tax grouping within closely held German groups, provided that adequate profit-and-loss pooling agreements The interest barrier rule need not be applied if the taxpayer can prove are concluded for a minimum period of five years and provided that that his overall indebtedness is not higher than that of the overall group. the agreements are duly executed. There is no relief for foreign

losses, as well as no inclusion of foreign income, in the tax group. 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company? 4.5 Do tax losses survive a change of ownership?

As outlined under question 3.4 above, interest limitation rules in In essence, Germany applies change-of-control rules that prevent Germany apply irrespective of whether interest is paid to related the acquisition of losses carried forward on an isolated basis. Thus, parties or third parties. Accordingly, there is no difference between a change in ownership encompassing more than 50% of the shares parent guaranteed and unguaranteed debt. in a company through acquisition by one acquirer results in the forfeiture of the loss carried forward, unless specific exemptions are 3.7 Are there any other restrictions on tax relief for interest applicable. These exemptions relate either to hidden reserves payments by a local company to a non-resident, for example remunerated in the purchase price for an entity, or to an application pursuant to BEPS Action 4? to maintain the loss carried forward whilst maintaining the business activity in which the loss was incurred. Apart from CFC rules, there are no specific provisions addressing this outside the general interest limitation rules. 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, proﬁts?

There is only one tax rate for both distributed and retained earnings.

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4.7 Are companies subject to any significant taxes not Differences may stem from the allocation of profits between branch and head office versus the contractual allocation of duties covered elsewhere in this chapter – e.g. tax on the between subsidiary and parent. Whilst allocation of functions under occupation of property? contracts may be possible between independent legal entities, the same may not be true for a branch and its head office, since they are Germany levies a land charge, which usually is paid by the tenants the same legal entity and cannot, therefore, conclude agreements. under applicable rent agreements, however, this tax is primarily collected from the landlord by the Revenue. Various individual types of taxes apply, depending on the nature 6.3 How would the taxable profits of a local branch be of a company’s business. E.g., most insurances are subject to 19% determined in its jurisdiction? insurance tax on premiums collected and certain goods are subject to specific charges (such as spirits). Germany follows the Authorised OECD Approach on the allocation of profits to a permanent establishment. 5 Capital Gains 6.4 Would a branch benefit from double tax relief in its 5.1 Is there a special set of rules for taxing capital gains jurisdiction? and losses? The branch itself is not eligible for treaty protection, as it is not a taxpayer. The head office will not usually be eligible for treaty Capital gains received by corporates will effectively be 95% tax protection under German treaties vis-à-vis third countries, but would, exempt. Where earnings are distributed as dividends, the exemption under the interpretation used by the German authorities, have to rely is contingent on a 10% ownership criterion, which has to be met at on its domestic treaty network, as it would have been subject to the beginning of the year in which a dividend is paid. double taxation should income be allocated to several places. Individuals receiving capital gains will be taxed on only 60% of In turn, however, any allocation of income to the branch rather than the respective capital gains. In turn, only 60% of the associated the head office is subject to full treaty protection under the respective costs will be tax deductible. treaties Germany concluded. Whether the branch profits taxed in

Germany are exempt or whether there is a credit for the German tax 5.2 Is there a participation exemption for capital gains? depends on the choice of tax relief made by the home state.

There is no further relief other than those shown above. 6.5 Would any withholding tax or other similar tax be 5.3 Is there any special relief for reinvestment? imposed as the result of a remittance of proﬁts by the branch?

Individuals receiving capital gains from a share sale may be able to roll Given that profits from the branch are already subject to full taxation over up to EUR 500,000 of capital gains on assets re-invested in the in Germany, there is no separate withholding tax on profit repat- two years following the capital gain, subject to further restrictions. riations from a branch or permanent establishment.

5.4 Does your jurisdiction impose withholding tax on the 7 Overseas Proﬁts proceeds of selling a direct or indirect interest in local 7.1 Does your jurisdiction tax proﬁts earned in overseas assets/shares? branches? There is no general withholding tax on such gains relating to assets, In essence, Germany taxes a taxpayer’s worldwide income. Only apart from specific rules on certain capital gains, for which banks where a tax treaty applies will foreign profits usually be exempt from may be required to withhold taxes. This relates to stock exchange German taxation. trades in shares and similar transactions, but does not cover any

disposal of assets or shares. 7.2 Is tax imposed on the receipt of dividends by a local 6 Local Branch or Subsidiary? company from a non-resident company? Dividend income received by a taxpayer who is resident in Germany 6.1 What taxes (e.g. capital duty) would be imposed upon is taxable in Germany irrespective of its country of origin. the formation of a subsidiary? The formation of a subsidiary results in incurring registration fees, 7.3 Does your jurisdiction have “controlled foreign but does not give rise to a taxable event as such. Going forward, the company” rules and, if so, when do these apply? income allocable to the subsidiary will be subject to income tax. Germany has specific CFC rules in the German Foreign Tax Act. Under these rules, income taxed at a rate of less than 25% earned in 6.2 Is there a difference between the taxation of a local a controlled foreign company will be added to the taxable income subsidiary and a local branch of a non-resident company (for of the German controlling shareholder if it does not meet certain example, a branch proﬁts tax)? activity criteria. The taxable income for these purposes is calculated pursuant to German tax rules. A foreign company is a controlled Essentially, both a branch and a subsidiary are subject to the same company if German taxpayers, whether affiliated with one another tax rules. Therefore, profits allocable to a German branch or or not, in total hold more than 50% of the voting power in the permanent establishment are subject to (corporate, if branch of a foreign company. For passive investment income, a 1% participation corporation) income tax and solidarity surcharge at a combined rate threshold applies. of 15.825%, as well as the local trade tax at local rates.

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8 Taxation of Commercial Real Estate already implemented into domestic German law. This relates both to interest limitation rules as well as to strategies of addressing hybrids.

8.1 Are non-residents taxed on the disposal of commercial 10.2 Has your jurisdiction signed the tax treaty MLI and real estate in your jurisdiction? deposited its instrument of ratiﬁcation with the OECD? Germany generally taxes any income from the disposal of German Whilst Germany has signed the MLI, it has not been ratified yet. real estate, unless this is expressly exempted from taxation under an The government stated that it planned on ratifying the MLI in 2019 applicable tax treaty. at the beginning of the year but has not introduced the

corresponding legislation yet. 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your jurisdiction? 10.3 Does your jurisdiction intend to adopt any legislation to The transfer of ownership in real estate owning partnerships and tackle BEPS which goes beyond the OECD’s companies can, under certain further requirements, trigger real estate recommendations? transfer tax. There currently are legislative initiatives to tighten these rules, resulting in a relatively broad application of real estate transfer Germany has taken the measures it saw fit to enact both ATAD 1 tax to most indirect transfers of real estate. and ATAD 2 into domestic law. Furthermore, hidden distributions received by German taxpayers are only (95%) tax-exempt if the taxpayer can demonstrate corresponding treatment as taxable 8.3 Does your jurisdiction have a special tax regime for income at the level of the paying entity. Real Estate Investment Trusts (REITs) or their equivalent? Under German law, REITs are tax-exempt. In turn, the investors 10.4 Does your jurisdiction support information obtained will be fully taxable with the income obtained from a REIT. under Country-by-Country Reporting (CBCR) being made available to the public? 9 Anti-avoidance and Compliance Under domestic rules, information provided by taxpayers in the 9.1 Does your jurisdiction have a general anti-avoidance or course of their taxation is strictly confidential. Accordingly, Germany does not support making CBCR publicly available. anti-abuse rule? Germany has a long-standing general anti-avoidance rule, under 10.5 Does your jurisdiction maintain any preferential tax which artificial structures aimed solely at obtaining a tax advantage regimes such as a patent box? are disregarded. Whilst Germany does not offer patent boxes and similar reduced tax 9.2 Is there a requirement to make special disclosure of rates for specific income, it has, in 2019, introduced a tax-based incentive for r&d. Upon application, companies can obtain a tax avoidance schemes? credit of up to 25% of their German R&D employment cost. The credit is limited to EUR 500 thousand in order to mainly focus on Such requirement will come with the implementation of the EU SMEs for this benefit to apply. DAC 6 directive into domestic German law. This implementing legislation is currently pending, the first published draft restricts reporting requirements to cross-border transactions, in line with the 11 Taxing the Digital Economy minimum requirements set forth by DAC 6. 11.1 Has your jurisdiction taken any unilateral action to tax 9.3 Does your jurisdiction have rules which target not only digital activities or to expand the tax base to capture digital taxpayers engaging in tax avoidance but also anyone who presence? promotes, enables or facilitates the tax avoidance? Germany aims to introduce non-unilateral measures to tackle the In essence, the implementation of DAC 6 will provide that advisors challenges of taxing the digital economy. can report a model and obtain a reporting number to alleviate their clients from having to report the structure themselves. 11.2 Does your jurisdiction favour any of the G20/OECD’s “Pillar One” options (user participation, marketing intangibles 9.4 Does your jurisdiction encourage “co-operative or signiﬁcant economic presence)? compliance” and, if so, does this provide procedural beneﬁts There is no official position on whether any option in Pillar One is only or result in a reduction of tax? a preferred option. In unofficial statements, there have been some German constitutional law forbids a reduced tax rate based solely on hints that a global minimum taxation would potentially remove the co-operative compliance. necessity to implement any of the Pillar One instruments, as it would deter taxpayers from undesired tax planning. Furthermore, the 10 BEPS and Tax Competition OECD’s recently published paper on the unified approach to Pillar One ties in with positions previously taken by the Federal German Tax Audit. 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting BEPS?

Germany has been a strong proponent of the BEPS project. That said, several of the instruments foreseen in the BEPS project were

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Dr. Gunnar Knorr specialises in tax advice on mergers and acquisitions and corporate financing, in particular regarding cross-border transactions, the structuring and restructuring of corporate groups and advice on tax audits, including proceedings before fiscal courts. Gunnar is a partner of Oppenhoff & Partner. He was an associate and managing associate at Oppenhoff & Rädler/Linklaters LLP from 2002 to 2007. He studied law at the Universities of Cologne and Bonn (Dr. iur.). He has been a Tax Adviser since 2005. During his legal training he worked for two of Deloitte’s predecessor companies, in London and Paris, and at the Commission of the European Communities, Brussels. Dr. Gunnar Knorr is also a lecturer at the Frankfurt School of Finance and lectures on the mergers and acquisitions Master’s programme.

Oppenhoff & Partner Tel: +49 221 2091 541 Konrad-Adenauer-Ufer 23 Email: [email protected] Cologne, 50668 URL: www.oppenhoff.eu Germany

Marc Krischer (LL.M.) specialises in providing tax and balance sheet advice in M&A matters and in the structuring and restructuring of corporate groups, as well as advice on external audits and extrajudicial and judicial legal remedies. He also advises on VAT and Insurance Premium Tax matters and tax compliance requirements. A further focus of his activities is national and international accounting law. Marc Krischer is a partner and has been a tax adviser at Oppenhoff & Partner since 2008. During his vocational training he worked at PricewaterhouseCoopers (PwC) in Frankfurt am Main and Ford-Werke AG in Cologne. From 2003 to 2008 he worked in the tax law department of Hecker, Werner, Himmelreich & Nacken and Morison Köln GmbH WPG. He completed his vocational training as an assistant tax consultant and studied business law in Cologne (Diploma), as well as taxation in Münster (Master of Laws). He also qualified as a German CPA in 2009 (Wirtschaftsprüfer in eigener Praxis).

Oppenhoff & Partner Tel: +49 221 2091 541 Konrad-Adenauer-Ufer 23 Email: [email protected] Cologne, 50668 URL: www.oppenhoff.eu Germany

Legal skills and business sense Corporate Responsibility and Diversity We help entrepreneurs and enterprises to reach their goals, providing As a matter of course, our lawyers and employees are engaged in social and individual solutions rather than just identifying problems. Our lawyers have cultural activities, be it privately or within our firm. For many years we have worked in the various industries for many years and are well acquainted with supported charities and NGOs in their work; we are a member of ProBono the markets and their leading players. Deutschland e.V. By signing the Charter of Diversity we have committed to mutual respect, Added value esteem and the recognition of diversity within corporate culture. Our ambition is to provide added economic value by giving personal and comprehensive advice. We select our lawyers accordingly and train them Innovative since more than 110 years extensively before gradually transferring responsibility to them. The cooperation of three lawyers in Cologne in 1908 subsequently developed into one of the leading commercial law firms, crossing new legal and Efficiency through experience economic frontiers. We have continued this tradition as Oppenhoff & Partner We have gained many years of experience in the relevant fields of law and since 2008. specific industries which enables us to build efficient teams in order to www.oppenhoff.eu develop better solutions.

Teamed-up with the best worldwide Our lawyers have many years of experience in handling cross-border cases in leading international law ﬁrms. Today, we advise companies from all over the world on their business transactions in Germany as well as German entrepreneurs operating in the global economy. We work with leading law ﬁrms in major jurisdictions on a regular basis.

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Greece Greece

Panagiotis Pothos

KYRIAKIDES GEORGOPOULOS Law Firm Emmanouela Kolovetsiou-Baliafa

1 Tax Treaties and Residence 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced 1.1 How many income tax treaties are currently in force in subsequently)? your jurisdiction? According to the Greek Constitution, international treaties ratified Greece has entered into Double Tax Treaties (“DTTs”) with the by Greece prevail upon any domestic provision and therefore may following 57 countries: Albania; Armenia; Azerbaijan; Bosnia- not be overridden by any (other than constitutional) existing or Herzegovina; Canada; China; Egypt; Georgia; Iceland; India; Israel; subsequently introduced domestic provision. the Republic of Korea; Kuwait; Mexico; Moldova; Morocco; Norway; Qatar; Russia; the Republic of San Marino; Saudi Arabia; 1.6 What is the test in domestic law for determining the Serbia; South Africa; Switzerland; Tunisia; Turkey; Ukraine; the residence of a company? United Kingdom; the United Arab Emirates; the USA; Uzbekistan; and all EU Member States. An entity or other legal person should be considered as tax resident in Greece if one of the following conditions are met: 1.2 Do they generally follow the OECD Model Convention or ■ it has been incorporated/established according to the Greek legislation; another model? ■ it has its registered office in Greece; or Almost all income tax treaties that Greece has entered into have been ■ the place of effective management is in Greece, for any period drafted alongside the OECD Model Tax Convention on Income and of time within a fiscal year. Capital. By exception, the treaties with the USA and the UK (being The assessment of the effective management of an entity or legal the oldest ones) deviate from the Model as they were concluded person is made on a facts-and-circumstances basis taking into before the adoption of its first draft in 1963. account particularly: (i) the place of the day-to-day management; (ii) the place of strategic decisions; (iii) the place of the annual general meeting of the shareholders/partners; (iv) the place where the 1.3 Do treaties have to be incorporated into domestic law books/records are kept; (v) the place of the meeting of the Board before they take effect? of Directors or other executive management board; and (vi) the place of residence of the Directors. The place of residence of the Greece follows the dualistic approach as regards international treaty shareholders/partners may also be taken into account. law. Therefore, according to the Greek Constitution, tax treaties are domestically enacted upon ratification, promulgated by the President of the Hellenic Republic and published in the Official Government 2 Transaction Taxes Gazette. 2.1 Are there any documentary taxes in your jurisdiction? 1.4 Do they generally incorporate anti-treaty shopping Stamp duty (1% to 3%, increased by a supplementary charge equal rules (or “limitation on beneﬁts” articles)? to 20% on each rate levied in favour of the Agricultural Insurance Organisation) is levied on certain transactions, documents, which are Tax treaties concluded by Greece do not generally incorporate anti- not subject to VAT, e.g., cash withdrawals, commercial loan agree- treaty shopping rules, with the following exceptions: ment, etc. (a) the Greece-Luxembourg tax treaty precludes from its provisions the so-called “Luxembourgian holding company”; (b) the Greece-USA tax treaty provides for a “limitation of bene- 2.2 Do you have Value Added Tax (or a similar tax)? If so, at fits” clause; and what rate or rates? (c) certain tax treaties contain anti-abuse provisions denying the application of treaty benefits, in case interest and royalty Greek VAT Law follows the European Council Directive on the payments are effected for the purposes of taking advantage of common system of value-added tax. The standard rate is 24%. treaty provisions. There are reduced rates of 13% and 6% depending on the nature of On 7 June 2017, Greece signed the Multilateral Convention to goods/services. A 30% reduction on these rates applies in certain Implement Tax Treaty Related Measures to prevent BEPS, in which Aegean islands until 31 December 2019. a number of anti-treaty shopping rules are included.

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2.3 Is VAT (or any similar tax) charged on all transactions An annual contribution of 0.6% is imposed on the average outstanding monthly balance of any loan/credit granted by a foreign or are there any relevant exclusions? or a Greek financial institution to a Greek entity/legal person. VAT applies to all stages of production and distribution of goods, provision of services and intra-community acquisition or imports of 3 Cross-border Payments goods from abroad, against a consideration. Greek VAT law provides for two categories of exemptions: i) 3.1 Is any withholding tax imposed on dividends paid by a exemption with the right to deduct VAT; and ii) exemption without locally resident company to a non-resident? the right to deduct VAT (e.g. services of hospitals, medical and para- medical professions, supply of goods and services closely related to Dividends paid to non-residents are subject to a 10% withholding social welfare and insurance, etc.). tax, subject to tax treaty relief. Profits derived from a permanent establishment of a foreign entity are not subject to any withholding 2.4 Is it always fully recoverable by all businesses? If not, tax upon distribution. No withholding tax applies on dividend what are the relevant restrictions? distributions, provided that the conditions of the EU Parent- Subsidiary Directive are satisfied, subject to the anti-abuse rules. Taxable persons are entitled to deduct VAT, provided that the goods/services purchased are wholly employed for transactions 3.2 Would there be any withholding tax on royalties paid by subject to VAT or exempt transactions with the right to deduct. a local company to a non-resident? There are a number of expenditures for which input VAT is not deductible, e.g. hotel accommodation, food, drink and tobacco. Royalties paid to non-resident entities are subject to a 20% with- If taxable persons are involved in both taxable and exempt holding tax, subject to tax treaty relief. No withholding tax applies activities, VAT on expenditure, which may not be directly attributable on royalty payments, provided that the conditions for the EU to either activity, should be computed on a pro rata basis. Interest and Royalty Directive are met. At the end of each VAT period, excess output tax is paid to the tax authorities, whereas excess input tax is either carried forward or 3.3 Would there be any withholding tax on interest paid by refunded. a local company to a non-resident? 2.5 Does your jurisdiction permit VAT grouping and, if so, Interest payments are subject to a 15% withholding tax in Greece, is it “establishment only” VAT grouping, such as that applied subject to tax treaty relief. No withholding tax applies on interest by Sweden in the Skandia case? payments, provided that the conditions of the EU Interest and Royalty Directive are met. No, in Greece VAT grouping is not permitted. 3.4 Would relief for interest so paid be restricted by 2.6 Are there any other transaction taxes payable by reference to “thin capitalisation” rules? companies? Greek domestic law provides for an interest limitation rule in line Other transaction taxes payable by companies are as follows: with ATAD. According to the latter, any exceeding borrowing costs 1. For Stamp Duty we refer to question 2.1. (e.g., interest expenses exceeding interest revenues) are tax deductible 2. Real Estate Transfer Tax is imposed on the higher between the up to 30% at EBITDA. The aforementioned rule does not apply to objective value and the market value of the property sold and is companies, which incur interest expenses of less than EUR 3 borne by the buyer at a percentage of 3.09% (including the million. municipality surcharge), except from the first sale of new buildings for which the building licence was issued on or after 1 3.5 If so, is there a “safe harbour” by reference to which tax January 2006, for which VAT applies. relief is assured? 3. Transaction tax of 0.2% on the sale of shares listed on the Athens Stock Exchange. There is no safe harbour by reference to which tax relief is assured. However, “interest limitation rule” (we refer to question 3.4) does 2.7 Are there any other indirect taxes of which we should not apply to several types of financial undertakings, such as credit be aware? institutions, insurance companies and specific institutions for occupational retirement. Capital concentration tax of 1% is imposed on certain types of capital injections, specifically provided by law. The issuance of share 3.6 Would any such rules extend to debt advanced by a capital upon formation of a company is exempt from capital third party but guaranteed by a parent company? concentration tax. Custom duties are imposed on imports from non-EU countries Interests from loans guaranteed by a parent company are deductible, according to the Community Customs Code and the Common on the condition that the amount of the net interest expenditure External Customs Tariff. posted in the company books does not override the threshold of Excise duties on tobacco products, alcohol and alcoholic drinks and EUR 3 million per year. fuels (heating and transportation) are imposed in line with EU law. A special luxury tax is levied on certain categories of goods, 3.7 Are there any other restrictions on tax relief for interest considered as “luxury goods”, such as aircraft, seaplanes and helicopters of private use. payments by a local company to a non-resident, for example Private and public passenger vehicles, vehicles for the transport pursuant to BEPS Action 4? of goods, and motorcycles (either imported or locally produced) are subject to classification duties, which are assessed on the basis of the Any expenses that are related to tax exempt income should be non- vehicles’ engine size and, in the case of used vehicles, their age. deductible for Greek tax purposes.

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Greece is required to transpose the EU Directive regarding hybrid benefit of the taxpayer; (ii) they should correspond to real trans- mismatches with third countries. actions, which are effected in line with the arm’s length principle; and Interest expenses on loans with third parties are deductible (other (iii) they should be recorded in the taxpayer’s accounting books and than bank loans/interbank loans and bond loans issued by corpor- should be evidenced by appropriate documentation. ations), to the extent that they do not exceed the interest that would arise Besides the aforementioned criteria, there are also special if the rate was equal to the rate of overdraft account loans to non- deductibility restrictions, e.g.: (i) restriction on any expense related financial operations as it is indicated in the Statistical Bulletin of the to the purchase of goods/services of more than EUR 500, where Bank of Greece for the nearest period preceding the date of borrowing. (partial/total) payment was not performed via bank payment In addition, interest payments to tax residents in non-cooperative interest; (ii) fines/penalties; and (iii) the interest limitation rule is states (i.e., non-EU States are defined by domestic law) or states with described under question 3.4. a preferential tax regime (i.e., these states are also defined by Depreciations of assets for tax purposes are provided by domestic domestic law) are not tax deductible, unless the taxpayer proves that tax law. these expenses relate to real and ordinary transactions and do not result in a transfer of profits, income or capital for the purposes of 4.4 Are there any tax grouping rules? Do these allow for tax avoidance or tax evasion. relief in your jurisdiction for losses of overseas subsidiaries? We also refer to question 4.3 and to the transfer pricing rules in case of intra-group interest payments. No, there are no tax grouping rules in Greece.

3.8 Is there any withholding tax on property rental 4.5 Do tax losses survive a change of ownership? payments made to non-residents? In principle, tax losses are carried forward for five years. The No, there is no withholding tax on property payments made to non- carrying forward of the tax losses of an entity/legal person is not residents in Greece. acceptable, in case the following conditions are (cumulatively) met: (i) during a tax year, the entity’s/legal person’s capital or voting rights 3.9 Does your jurisdiction have transfer pricing rules? changes directly or indirectly at a percentage of more than 33%; and (ii) in the same/following tax year as of the year of the afore- Yes, in the case where entities/legal persons perform transactions mentioned change, another change occurs as regards the nature of the with associated entities on economic/commercial terms that deviate activity of the entity/legal person (in which the participation/voting from the terms that would apply in transactions between rights are acquired) to an extent of more than 50% of the turnover in independent parties, any profits that would have been realised if the comparison to the previous year. transaction would be compliant with the arm’s length principle (but were not realised due to the deviation from arm’s length terms), 4.6 Is tax imposed at a different rate upon distributed, as should be included in the tax base of such entity/legal person. opposed to retained, proﬁts? In addition, any corporate reorganisation, which can be considered as a domestic/cross-border reorganisation of functions, assets, risks There is no difference in tax rates between distributed and retained and business opportunities, which is performed by associated earnings. However, in the case of capitalisation or distribution of entities/legal persons or where associate’s entities/legal persons are profits that have not suffered any corporate income tax, the amount involved, should be performed at arm’s length. capitalised or distributed is subject to corporate income tax.

4 Tax on Business Operations: General 4.7 Are companies subject to any signiﬁcant taxes not covered elsewhere in this chapter – e.g. tax on the 4.1 What is the headline rate of tax on corporate proﬁts? occupation of property? The corporate tax rate is 27% for 2020. The nominal corporate tax Legal persons and entities that own real estate in Greece are subject rate is gradually reduced over the next four years, i.e., 26% for fiscal to ENFIA as of the 1st January of each year. ENFIA comprises: (i) year 2021; and 25% for fiscal years 2022 onwards. the main ENFIA, which is assessed at rates depending on various

parameters (e.g. surface, location etc.); and (ii) the supplementary 4.2 Is the tax base accounting proﬁt subject to ENFIA. adjustments, or something else? In addition, a special real estate tax is imposed on companies, which hold ownership or usufruct on immovable property located Taxable profits should be computed after the deduction from the in Greece at a rate of 15%. However, several exemptions are total business income, of the tax deductible expenses, the tax provided by the law, e.g., listed entities. depreciations and provisions for bad debts. Any revenues derived by an entity or legal person is considered as stemming from business 5 Capital Gains activities, including revenues from the transfer of assets and liquidation proceeds. Taxable profits are determined each tax year, as set out in the entity’s/legal person’s Profit and Loss account, 5.1 Is there a special set of rules for taxing capital gains following the Greek Accounting Standards or the International and losses? Accounting Standards (“IAS”), after an adjustment of income for tax purposes. Capital gains derived by corporations are taxed as ordinary business profits at the corporate income tax rate.

4.3 If the tax base is accounting proﬁt subject to 5.2 Is there a participation exemption for capital gains? adjustments, what are the main adjustments? No, there is no participation exemption in Greece. The deduction of expenses for tax purposes are subject to general conditions, notably: (i) the expenses should be incurred for the

5.3 Is there any special relief for reinvestment? exemption regime applies to inter-company dividends by virtue of the Parent-Subsidiary Directive provided that certain conditions are met. No, there is no special relief for reinvestment. 7.3 Does your jurisdiction have “controlled foreign 5.4 Does your jurisdiction impose withholding tax on the company” rules and, if so, when do these apply? proceeds of selling a direct or indirect interest in local Greek domestic law provides for controlled foreign company assets/shares? (“CFC”) rules that are in line with ATAD. According to these rules, No, Greece does not impose withholding tax on the proceeds of provided that a foreign entity/legal person/foreign permanent selling a direct or indirect interest. establishment is treated as CFC (subject to certain criteria), its non- distributed income should be included in the tax base of the Greek 6 Local Branch or Subsidiary? taxpayer.

6.1 What taxes (e.g. capital duty) would be imposed upon 8 Taxation of Commercial Real Estate the formation of a subsidiary? 8.1 Are non-residents taxed on the disposal of commercial No capital duty is imposed upon the formation of a subsidiary. For real estate in your jurisdiction? Greek Société Anonyme an additional 0.1% duty is payable on capital to the competition committee. Capital gain on the disposal of commercial real estate located in Greece should be subject to Greek taxation.

6.2 Is there a difference between the taxation of a local 8.2 Does your jurisdiction impose tax on the transfer of an subsidiary and a local branch of a non-resident company (for indirect interest in commercial real estate in your example, a branch proﬁts tax)? jurisdiction? No, there is no difference. Capital gains earned by individuals that arise from the transfer of real estate or participations which attract more than 50% of their value 6.3 How would the taxable proﬁts of a local branch be directly or indirectly from real estate and do not constitute income determined in its jurisdiction? from business operations are taxed at a rate of 15%. The effect of the above provision has been suspended until 31 December 2019. The computation of taxable income of a Greek branch follows the

same rules as those provided for companies. 8.3 Does your jurisdiction have a special tax regime for 6.4 Would a branch beneﬁt from double tax relief in its Real Estate Investment Trusts (REITs) or their equivalent? jurisdiction? Real estate investment companies (“REICs”), which engage exclusively in the acquisition and management of real estate property A Greek branch of a foreign entity is subject to corporate income and could be considered as the equivalent of REITs in Greece tax at the same rates applicable to resident companies. A Greek benefit from several tax exemptions, notably: branch of a foreign head office enjoys the benefits derived from the ■ Exemption from corporate income tax with the exception of non-discrimination provision included in the income tax treaties dividends acquired in Greece. signed by Greece. ■ Exemption from Real Estate Transfer Tax in case of acquisition

of real estate by REICs. 6.5 Would any withholding tax or other similar tax be ■ Exemption from capital gain taxation deriving from the transfer imposed as the result of a remittance of proﬁts by the of real estate property and the transfer of shares. branch? ■ Dividends distributed by a REIC are exempt from income tax. REICs are subject to tax with a rate set at 10% of the applicable No, no other taxes would be imposed. European Central Bank intervention rate (Interest Reference rate) increased by one point and calculated on the average of the invest- 7 Overseas Proﬁts ments, plus any available funds, at their current value.

7.1 Does your jurisdiction tax proﬁts earned in overseas 9 Anti-avoidance and Compliance branches? 9.1 Does your jurisdiction have a general anti-avoidance or Tax resident entities are subject to tax for their worldwide income. anti-abuse rule? Therefore, profits derived from overseas branches should be included in the Greek corporate tax base. There is a general anti-avoidance rule (“GAAR”) in line with ATAD. Based on the Greek GAAR, for the purposes of calculating the 7.2 Is tax imposed on the receipt of dividends by a local corporate tax liability, Greece shall ignore an arrangement or a series of arrangements which, having been put into place for the main company from a non-resident company? purpose or one of the main purposes of obtaining a tax advantage In principle, dividends received by a local company from a non- that defeats the object or purpose of the law, are not genuine having resident company in Greece (subject to any foreign tax regard to all relevant facts and circumstances. An arrangement may credit/exemption by virtue of any applicable double tax treaty or comprise more than one step or part. An arrangement or a series domestic law) are taxed as business income. However, a participation thereof shall be regarded as non-genuine to the extent that they are

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not put into place for valid commercial reasons which reflect 10.2 Has your jurisdiction signed the tax treaty MLI and economic reality. Finally, for the purposes of determining whether deposited its instrument of ratiﬁcation with the OECD? an arrangement should be considered as genuine, the provision provides for an indicative list of situations that are considered as Please refer to question 10.1. non-genuine arrangements.

10.3 Does your jurisdiction intend to adopt any legislation to 9.2 Is there a requirement to make special disclosure of tackle BEPS which goes beyond the OECD’s avoidance schemes? recommendations? No. Greece will be required to implement European Council Greece is required to implement the EU Directive regarding hybrid Directive 2018/822/EU (DAC6) in domestic law. mismatches with third countries.

9.3 Does your jurisdiction have rules which target not only 10.4 Does your jurisdiction support information obtained taxpayers engaging in tax avoidance but also anyone who under Country-by-Country Reporting (CBCR) being made promotes, enables or facilitates the tax avoidance? available to the public? A person who assists or instigates another person or collaborates Please refer to the question 10.1. with another person for the purposes of commitment of tax avoidance is liable for the same penalties as the taxpayer. In addition, a person who by any means knowingly collaborates 10.5 Does your jurisdiction maintain any preferential tax or offers immediate assistance in committing tax evasion is subject regimes such as a patent box? to punishment as a primary accessory in the crime. There is a preferential tax regime with respect to shipping companies and business services centres. 9.4 Does your jurisdiction encourage “co-operative

compliance” and, if so, does this provide procedural beneﬁts 11 Taxing the Digital Economy only or result in a reduction of tax?

No, “co-operative compliance” is not encouraged in Greece. 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture digital 10 BEPS and Tax Competition presence? In the course of OECD BEPS Action, Greece has established a “use 10.1 Has your jurisdiction introduced any legislation in and enjoyment rule” applicable to broadcasting, telecommunications response to the OECD’s project targeting BEPS? and electronic services provided to non-VAT taxable persons. Specifically, if the place of supply of the above services is a non-EU The Greek transfer pricing rules explicitly refer to the most updated country but the service is used and enjoyed in Greece, in the sense OECD Transfer Pricing Guidelines for Tax Administrations and that the customer is in Greece at the time of supply, it will be taxable Multinational Enterprises (Circular 1097/2014) and therefore render in Greece. any updates immediately effective in Greek Law. In compliance with article 12 of the OECD Model Tax Greece has signed a multilateral competent authority agreement Convention and in accordance with the reservation expressed on the for the automatic exchange of CBC reports and Greece application of article 12 from Greece, article 38 of the Greek implemented EU 2016/881 Directive (“DAC 4”) as regards Income Tax Code covers in the definition of royalties, among others, mandatory automatic exchange of information in the field of the right to use software for commercial exploitation and personal taxation. use as well as the payment for advisory services provided elec- A mutual administrative procedure provision has been included in tronically through a problem solving database. the Greek domestic law.

Greece has implemented Anti-Avoidance Tax Directive 1 in its domestic tax law and is required to further implement Anti- 11.2 Does your jurisdiction favour any of the G20/OECD’s Avoidance Tax Directive 2. “Pillar One” options (user participation, marketing intangibles Greece has signed the Multilateral Convention to Implement Tax or signiﬁcant economic presence)? Treaty Related Measures to Prevent BEPS. However, Greece has not ratified/approved MLI and has not effected such Convention Yes, Greece was one of the Member States that signed a letter asking into force. It should be mentioned that several reservations to the the European Commission to develop a proposal to target the digital provisions of MLI have been made by Greece. economy.

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Panagiotis Pothos heads the KG law’s tax department, while he is a member of the firm’s private wealth practice. Panagiotis combines a unique expertise in business and personal taxation, having a particular focus on corporate and M&A taxation, international taxation, taxation of financial transactions, VAT and indirect taxation, real estate taxation, inheritance and donation taxation, shipping taxation and private wealth structuring. He advises multinational groups, domestic listed and privately held entities, high-net-worth individuals and family offices, as well as foreign counsels and practitioners on their Greek tax issues. Further, he assists clients in structuring their cross-border investments and complex corporate and financial transactions. Panagiotis is a distinguished litigator, representing corporate and private clients before the tax authorities and all levels of administrative courts. Additionally, he supports individuals and families on the tax and legal aspects of the management of their private wealth. Panagiotis is a member of the Taxation Committee of the American-Hellenic Chamber of Commerce, he is a regular speaker in domestic and international tax conferences, as well as a contributor in tax journals and publications.

KYRIAKIDES GEORGOPOULOS Law Firm Tel: +30 210 817 1509 Dimitriou Soutsou 28 Email: [email protected] Athens, 115 21 URL: www.kglawfirm.gr Greece

Emmanouela Kolovetsiou-Baliafa joined KG Law Firm in 2017. As a junior associate, she regularly supports the tax team in various topics mainly on tax planning and tax advising of both domestic and international clients in matters of direct and indirect taxation. She specialises on tax dispute resolution and litigation, handling cases related to tax audits and public revenues.

KYRIAKIDES GEORGOPOULOS Law Firm Tel: +30 210 817 1539 Dimitriou Soutsou 28 Email: [email protected] Athens, 115 21 URL: www.kglawfirm.gr Greece

KYRIAKIDES GEORGOPOULOS (KG) Law Firm is a leading Greek multi-tier American Bar Association, the Antitrust Alliance, the Employment Law business law firm and the largest in Greece, dating back to the 1930s and Alliance, the European Employment Lawyers Association, the International recognised as one of the most prestigious law firms in Greece. Fiscal Association, etc. and frequently publish in major international journals The firm numbers over 100 highly skilled lawyers who are actively involved in and books. the provision of legal services to high profile Greek and international clients in KG is a founding member of South East Europe Legal Group (SEE Legal) – complex and innovative cross-border deals. www.seelegal.org, a regional alliance of major law firms from 12 countries in With offices in Athens and Thessaloniki, our multi-disciplinary teams set the South East Europe, established in 2003. Working together on cross-border standards for commercially aware, responsive service in the most complex transactions, SEE Legal is the largest local legal team in South East Europe, and sophisticated legal issues. KG pioneered in the Greek market by with more than 450 lawyers organised in cross-jurisdictional practice groups. becoming ISO certified since 2006 and still remains one of a handful of ISO Our firm’s performance is consistently ranked highly by the most prestigious 9001 certified law firms in Greece. of international directories, such as Chambers & Partners Global, Chambers & For more than 50 years KG has been the preferred choice for US and European Partners Europe, The Legal 500 EMEA, as well as IFLR1000. international law firms seeking local legal counsel in Greece renowned for www.kglawfirm.gr delivering legal services at the most demanding international standards of professional quality and client service. We continue to develop and sustain multi-generational relationships with high-profile partners in major international and global law firms, as well as the exchange of expertise and intellectual capital that only such enduring relationships can produce. Our partners and lawyers are prominent participants in international practice law institutions and networks, such as the International Bar Association, the

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Hong Kong Hong Kong

Vivien Teu

Vivien Teu & Co LLP Kenneth Yim

1 Tax Treaties and Residence in order to obtain a Certificate of Resident Status from the Inland Revenue Department (the “IRD”).

1.1 How many income tax treaties are currently in force in 1.5 Are treaties overridden by any rules of domestic law your jurisdiction? (whether existing when the treaty takes effect or introduced Hong Kong has a quickly expanding double tax agreements (“DTA”) subsequently)? network. As of August 2019, it has concluded 41 DTAs of which 40 are effective at the moment. Currently, seven tax information Where a DTA has been concluded, the domestic law position may exchange agreements (“TIEAs”) have been concluded and are be over-ridden by the DTA if the pertinent conditions are satisfied effective. The Government aims to expand Hong Kong’s DTA (but not the other way around). network, especially with respect to countries along the so-called ‘Belt and Road’ business initiative, with a view to bringing the total 1.6 What is the test in domestic law for determining the number of DTAs to at least 50 over the next few years. residence of a company?

1.2 Do they generally follow the OECD Model Convention or A company is resident in Hong Kong if its central management and another model? control is exercised in Hong Kong in the relevant year of assessment. However, under Hong Kong’s territorial basis of taxation, the In principle, Hong Kong follows the OECD Model Convention in chargeability to tax is generally determined on the source of income negotiating and concluding DTAs and TIEAs. rather than on residence status. The residence status can be relevant in the application of DTA provisions with other jurisdictions though. 1.3 Do treaties have to be incorporated into domestic law

before they take effect? 2 Transaction Taxes Typically, DTAs concluded with other jurisdictions are subject to ratification. More specifically, a bill would have to be passed by the 2.1 Are there any documentary taxes in your jurisdiction? Legislative Council (“LegCo”) before it is enacted into law. The transfer of Hong Kong stock is subject to the imposition of Hong Kong stamp duty on the instrument of transfer. The rate of 1.4 Do they generally incorporate anti-treaty shopping stamp duty on the transfer of Hong Kong stock is currently 0.2% rules (or “limitation on beneﬁts” articles)? of the higher of the consideration or the market value of the stock transferred. The stamp duty is payable by the seller and purchaser Hong Kong does not incorporate limitation of benefits (“LOB”) equally (i.e. 0.1% each), while the Stamp Duty Ordinance (“SDO”) clauses in the DTAs that have been concluded so far. Nonetheless, stipulates that any person who purchases Hong Kong stock, as either most of the existing DTAs concluded by Hong Kong already a principal or agent, is required to execute a contract note that is contain specific provisions to prevent treaty abuse under specific liable to stamp duty at the rate of 0.1% on the consideration or value articles (e.g. those on dividends, interest and royalties), based on of the shares bought and sold. whether one of the main purposes of the arrangement or trans- Under the SDO, stamp duty relief may be applied on a convey- action is to obtain treaty benefits. ance of an interest in stock between group companies with at least Accordingly, Hong Kong has opted to adopt a principal purpose a 90% common shareholding subject to satisfying certain conditions. test (“PPT”) only in respect of the ‘Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting’ (“MLI”), under which a person will not be 2.2 Do you have Value Added Tax (or a similar tax)? If so, at granted benefits under a DTA if obtaining such benefits is one of what rate or rates? the principal purposes of the transactions or arrangements involved. Furthermore, Hong Kong’s domestic tax law also contains general Currently, Hong Kong does not have a VAT or GST regime. anti-avoidance provisions to deny a tax benefit if a transaction is entered into for the sole or dominant purpose of enabling the 2.3 Is VAT (or any similar tax) charged on all transactions taxpayer to obtain such tax benefit. Moreover, in practice, both or are there any relevant exclusions? Hong Kong incorporated entities and foreign-incorporated entities must have an appropriate level of business substance in Hong Kong This is not applicable.

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2.4 Is it always fully recoverable by all businesses? If not, 3.4 Would relief for interest so paid be restricted by what are the relevant restrictions? reference to “thin capitalisation” rules?

This is not applicable. Currently, Hong Kong does not have thin capitalisation rules.

2.5 Does your jurisdiction permit VAT grouping and, if so, 3.5 If so, is there a “safe harbour” by reference to which tax is it “establishment only” VAT grouping, such as that applied relief is assured? by Sweden in the Skandia case? This is not applicable. This is not applicable. 3.6 Would any such rules extend to debt advanced by a 2.6 Are there any other transaction taxes payable by third party but guaranteed by a parent company? companies? This is not applicable. This is not applicable. 3.7 Are there any other restrictions on tax relief for interest 2.7 Are there any other indirect taxes of which we should payments by a local company to a non-resident, for example be aware? pursuant to BEPS Action 4?

This is not applicable. Hong Kong has specific limitations on the deduction of certain interest expenses, particularly with respect to interest paid to non- 3 Cross-border Payments residents, even before BEPS. However, Hong Kong does not impose withholding tax on interest. 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 3.8 Is there any withholding tax on property rental payments made to non-residents? Hong Kong does not impose withholding tax on dividend payments made by a resident company to residents or non-residents. Payments of fees for rental or management services are not subject to withholding tax in Hong Kong. 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? 3.9 Does your jurisdiction have transfer pricing rules?

In short, the following types of payments are effectively subject to Historically, Hong Kong had no statutory transfer pricing rules and a (deemed) withholding tax (of 4.95% or 4.5% on the gross amount the IRD relied on the general provisions in the Inland Revenue paid to corporations, respectively, unincorporated businesses and Ordinance (“IRO”), case law and (since 2009) practice notes to deal individuals): with transfer pricing issues. On 13 July 2018, Hong Kong’s transfer ■ sums derived from the exhibition or use of cinematograph or pricing regime was enacted to codify and reaffirm the taxpayers’ and television films or tapes, sound recording or advertising material IRD’s common understanding that transactions between ‘closely connected with such film, tape or recording which are deemed connected persons’ (which are typically determined on the basis of to arise in Hong Kong because of their exhibition or use in participation in the management, control and capital of another or Hong Kong; and of common participation by/through a third party) must follow the ■ sums derived from the use of or the right to use a patent, design, arm’s length principle, consistent with the OECD’s transfer pricing trademark, copyright material, secret process or formula or other guidelines. Recently, the IRD provided guidance to facilitate property of a similar nature which are deemed to arise in Hong taxpayers’ understanding of the specific requirements through prac- Kong because of the use of or the right to use such property in tice notes. Hong Kong. Under (transfer pricing) ‘Rule 1’, the IRD is empowered to adjust A new deeming provision which aligns the taxation of income profits or losses where a transaction (or series of transactions) from intellectual property (“IP”) with value creation contributions between related parties (including a Hong Kong resident enterprise in Hong Kong, applies to any assessment beginning on or after 1 and its overseas branch) departs from the transaction(s) that would April 2019. More specifically, where a person has contributed in have been entered into between independent persons, in cases where Hong Kong to the development, enhancement, maintenance, this gives rise to a potential Hong Kong tax advantage. The burden protection or exploitation (“DEMPE”) of an IP and income is of proof on whether the amount of a taxpayer’s income or loss derived by a non-Hong Kong resident that is an associate of that stated in its tax return is arm’s length lies with the taxpayer. ‘Rule 1’ person from the use of or a right to use such IP outside Hong Kong, applies to transactions for the year of assessment 2018/19 and the part of the income which is attributable to the value creation onwards. contributions in Hong Kong will be regarded as a taxable trading ‘Rule 2’ is the effective adoption of the OECD’s authorised receipt arising in or derived from a trade or business carried on in approach for attributing profits to a permanent establishment. In Hong Kong. this regard, the arm’s length principle also applies to dealings between different parts of an enterprise such as between the non- resident head office and a permanent establishment in Hong Kong. 3.3 Would there be any withholding tax on interest paid by ‘Rule 2’ applies as of the year of assessment 2019/20. a local company to a non-resident? It is worth noting that a formal regime for advance pricing arrangement (“APA”) has also been established to facilitate taxpayers Hong Kong does not impose withholding tax on interest payments entering into unilateral APAs or bilateral APAs involving other made by a resident company to residents or non-residents. jurisdictions.

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A ‘two-tiered’ profits tax rates regime (instead of the previous flat Property rates, based on the estimated annual letting value, are levied rate of 16.5%) applies to any year of assessment commencing on or as a tax on the occupation of property on a quarterly basis. after 1 April 2018. The rate for the first HK$2 million of profits of corporations will be lowered to 8.25%. Assessable profits exceeding 5 Capital Gains that amount will continue to be subject to the rate of 16.5%. For unincorporated businesses (i.e. partnerships and sole proprietor- 5.1 Is there a special set of rules for taxing capital gains ships), the two-tiered rates will be set at 7.5% and 15%, respectively. and losses? As a result, a tax-paying corporation or unincorporated business may save up to HK$165,000, respectively, HK$150,000 each year. Gains of a capital nature are specifically exempt from the charge of profits tax. Whether a gain is regarded as capital or revenue in nature 4.2 Is the tax base accounting proﬁt subject to is a question of facts and depends on the particular circumstances adjustments, or something else? of each case. Generally speaking, considering the frequency of a fund’s normal course of business for the buying and selling of For Hong Kong profits tax purposes, the tax base is determined on investments, gains and losses derived from the purchase and sale of the (audited) accounting profit subject to tax adjustments. Hong investments would in practice usually be regarded from a profits tax Kong applies a territorial basis of taxation, whereby tax is imposed perspective as in the nature of revenue. Conversely, capital losses on assessable income or profits arising in or derived from Hong are not deductible for profits tax purposes. Kong sources, or deemed as such. It is also worth noting that amendments to the IRO have been made to allow taxpayers to elect 5.2 Is there a participation exemption for capital gains? fair value accounting for tax reporting purposes. This provides the legal basis for a practice that has been endorsed by the IRD and As both capital gains and dividends are not chargeable to profits tax, removes unnecessary uncertainty for taxpayers who prefer to adopt there is no such need for a participation exemption in Hong Kong. this tax reporting basis. 5.3 Is there any special relief for reinvestment? 4.3 If the tax base is accounting proﬁt subject to adjustments, what are the main adjustments? In accordance with profits of a capital nature not being taxed, there is no special relief for re-investments in this regard. Income of a capital nature (i.e. dividends and capital gains) fall outside the scope of chargeability to profits tax. Expenses, where 5.4 Does your jurisdiction impose withholding tax on the revenue in nature and incurred in the production of (Hong Kong) proceeds of selling a direct or indirect interest in local assessable profits, are, in principle, tax deductible. Typical adjustments in this regard include depreciation and amortisation in respect assets/shares? of capital expenditure, intangible assets and interest. There is no (withholding) tax on acquisitions that take the form of

a purchase of shares of a company as opposed to a purchase of its 4.4 Are there any tax grouping rules? Do these allow for business and assets. Taxpayers are (only) subject to profits tax on relief in your jurisdiction for losses of overseas subsidiaries? their profits arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong, except for any Currently, Hong Kong does not have any tax grouping rules. profits realised from sales of capital assets, which are not within the chargeable scope of profits tax. As such, sellers are able to dispose 4.5 Do tax losses survive a change of ownership? of equity investments free of profits tax. In contrast, sales of certain assets may trigger a recapture of Losses of a revenue nature can generally be carried forward capital allowances claimed and possibly higher transfer duties indefinitely and set off against chargeable profits in the future. (depending on the assets involved). However, asset purchases do However, losses may not be carried back. have benefits, e.g. the potential to obtain deductions for the financing In principle, a transfer of shares in a Hong Kong company does costs incurred on funds borrowed to finance the acquisition of busi- not affect the availability of the tax losses of that company, unless ness assets. the change in the company’s shareholders is effected for the sole or dominant purpose of using the tax losses of the Hong Kong 6 Local Branch or Subsidiary? company. Any unused tax losses incurred by the transferor cannot be transferred to the transferee on the sale of the business or the 6.1 What taxes (e.g. capital duty) would be imposed upon assets of the transferor. the formation of a subsidiary? 4.6 Is tax imposed at a different rate upon distributed, as The capital duty levied on Hong Kong companies was abolished on 1 opposed to retained, proﬁts? June 2012. A relatively small business registration fee and levy are charged for the business registration certificate which, in principle, Both the retention and distribution of profits made by Hong Kong every person who carries on a trade or business in Hong Kong must companies are not chargeable to tax. have applied for within one month from the business commencement date.

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6.2 Is there a difference between the taxation of a local 8 Taxation of Commercial Real Estate subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? As branches and subsidiaries are taxed on the same basis and at the same rates, there are theoretically no noteworthy differences, though Non-residents investing in real estate are subject to the general practical differences could arise in respect of (amongst others) the taxation principles of the IRO where the source of rental income attribution of profits and expenses between the head office and the and profits derived from the sale of real estate are determined on branch, which are less likely to be an issue with a subsidiary. the basis of the location of the property in question. (Only) income in connection with properties situated within Hong Kong is in 6.3 How would the taxable profits of a local branch be principle subject to profits tax in Hong Kong. To determine the nature of the gain upon the sale of Hong Kong- determined in its jurisdiction? situated real estate, the IRD will generally consider various factors Under Hong Kong’s territorial basis of taxation, as explained above, to distinguish capital from revenue, including but not limited to the the chargeability to tax is determined on the source of income as taxpayer’s intention, the length of the ownership of the property, the opposed to the residence status. As such, a non-resident can also be financial ability to hold the asset for long-term purposes, whether held liable to tax in Hong Kong in respect of assessable profits any work had been carried out to improve the property’s value, the which are attributable to a trade or business carried on in Hong steps undertaken to lease out the property or reasons for not letting Kong and which have a Hong Kong source. In practice, the IRD out the property, the rate of return obtained by leasing out as has clarified that the concept of carrying on business in Hong Kong opposed to the return obtained from selling, whether the sale was is generally broader than the definition of permanent establishment incidental or part of a series of transactions, etc. (Only) revenue in the IRO and DTAs concluded by Hong Kong. Dealings between income is assessable. a non-resident enterprise and its branch are covered by ‘Rule 2’ for Apart from profits tax, the transfer of Hong Kong real estate is transfer pricing as noted under question 3.9 above. subject to stamp duty, whereby the rate depends on the value of the immovable property based on the ad valorem rates prescribed in the SDO. An exemption may apply for the conveyance of an interest in 6.4 Would a branch benefit from double tax relief in its immovable property between companies with at least a 90% jurisdiction? common shareholding if certain conditions are satisfied under the SDO. On the basis that the residential property in question has been Hong Kong’s territorial basis of taxation serves, to a large extent, as held for more than 36 months, no special stamp duty (“SSD”) will a measure of unilateral relief from double taxation, since most be triggered upon the transfer. persons are not taxed on non-Hong Kong sourced income. A The transfer of real estate may also trigger buyer’s stamp duty deduction would (only) be available for foreign tax paid in (“BSD”) consequences, but these are generally the responsibility of connection with interest or profits from the disposal or redemption the purchaser (in practice, usually both the BSD and the AVD are of certificates of deposit and bills of exchange which are deemed contractually shifted to the purchaser). to be derived from a trade or business carried on in Hong Kong. As In addition to profits tax and stamp duty, property tax is in most persons are not taxed on foreign income, the deduction is principle charged on the owners of land and/or buildings in respect actually limited to financial institutions. of the income derived in this connection (the standard rate is currently 15%). Notwithstanding this, a company subject to profits 6.5 Would any withholding tax or other similar tax be tax may apply for an exemption from property tax where the imposed as the result of a remittance of profits by the property is used by the company for the production of profits branch? chargeable to profits tax. Property tax is in principle creditable against profits tax. Hong Kong does not have a branch profits/remittance tax. Last but not least, property rates are levied on the occupation of properties. The rateable values are generally based on the estimated 7 Overseas Profits (annual) letting value, which can be obtained from the Commissioner of Rating and Valuation.

7.1 Does your jurisdiction tax proﬁts earned in overseas 8.2 Does your jurisdiction impose tax on the transfer of an branches? indirect interest in commercial real estate in your As explained above, only items of income which have a source in jurisdiction? Hong Kong are subject to profits tax, and Hong Kong does not have a branch profits/remittance tax. Both transfers of immovable property and Hong Kong shares are generally subject to stamp duty (including transfers of shares in a 7.2 Is tax imposed on the receipt of dividends by a local Hong Kong company which owns Hong Kong real estate).

company from a non-resident company? 8.3 Does your jurisdiction have a special tax regime for Dividend income received by a local company from a non-resident Real Estate Investment Trusts (REITs) or their equivalent? company is generally not subject to profits tax in Hong Kong, as they are not Hong Kong-sourced. Hong Kong does not have a specific tax regime for REITs or equivalents. However, in Hong Kong, REITS are regulated by the 7.3 Does your jurisdiction have “controlled foreign Securities and Futures Commission (“SFC”) which is given the power, under the Securities and Futures Ordinance (“SFO”), to company” rules and, if so, when do these apply? authorise collective investment schemes (which include mutual funds Hong Kong does not have controlled foreign company rules. and unit trusts) to be offered to the retail public. In order to be auth-

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orised as a REIT, the structure and investment restrictions of the books of account or other records or falsifies or authorizes the scheme has to comply with the SFC Code on REITs and the scheme falsification of any books of account or records; or (g) makes use would also apply to be listed on the Hong Kong Stock Exchange. of any fraud, art, or contrivance, whatsoever or authorizes the use Profits tax exemption applicable to SFC authorised funds shall also of any such fraud, art, or contrivance, commits an offence.” apply to REITs that are authorised funds. 9.4 Does your jurisdiction encourage “co-operative 9 Anti-avoidance and Compliance compliance” and, if so, does this provide procedural beneﬁts only or result in a reduction of tax? 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? Currently, Hong Kong does not have an official programme to implement the OECD’s initiatives in developing co-operative Hong Kong has general anti-avoidance rules (“GAAR”) in the IRO, compliance. However, Hong Kong generally encourages co-oper- in respect of which transactions which reduce the amount of tax ative compliance by having put mechanisms in place for advance payable and which appear to be artificial or fictitious may be (tax) rulings (“ATRs”) on how any provision of the Inland Revenue disregarded by the tax authorities in determining the taxpayer’s Ordinance applies to a taxpayer or the arrangement specified in the assessable profits, particularly to dissuade the shifting of assessable application for a ruling or, for transfer pricing matters, advance income from a Hong Kong resident to a closely connected non- pricing agreements (“APAs”). While ATRs and APAs do not result resident person. Further, there are various specific anti-avoidance in the reduction of tax, the rulings provide upfront certainty rules in the IRO. regarding the tax position prior to filing profits tax returns.

9.2 Is there a requirement to make special disclosure of 10 BEPS and Tax Competition avoidance schemes? 10.1 Has your jurisdiction introduced any legislation in There is no specific legislation which aims to make special response to the OECD’s project targeting BEPS? disclosures of avoidance schemes. However, the IRD has expressed its view in practice notes that GAAR will be invoked where taxpayers Hong Kong has committed to the implementation of the four book profits offshore with a view to avoiding Hong Kong tax. In minimum standards of OECD’s BEPS Action Plan, namely: (i) particular, the IRD pays close attention to transactions where countering harmful tax practices (Action 5); (ii) preventing treaty taxpayers have entered into transactions with closely-connected non- abuse (Action 6); (iii) imposing country-by-country (“CbC”) repor- resident person, which would have to be reported in the profits tax ting (Action 13); and (iv) improving the cross-border dispute return at hand. Upon request by the IRD, taxpayers are obliged to resolution regime (Action 14). provide information to substantiate claims that the profits in ques- Meanwhile, Hong Kong has aligned the provisions in the IRO tion are not sourced in Hong Kong. with the relevant international tax requirements. On 29 December 2017, the Inland Revenue (Amendment) (No. 6) Bill 2017 was 9.3 Does your jurisdiction have rules which target not only published in the Gazette and subsequently enacted as Inland taxpayers engaging in tax avoidance but also anyone who Revenue (Amendment) No. 6 Ordinance 2018. As such, Hong Kong enabled its participation in the Multilateral Convention on promotes, enables or facilitates the tax avoidance? Mutual Administrative Assistance in Tax Matters by aligning the IRO There is no specific legislation that aims to target anyone, other than with initiatives on international tax co-operation, including the auto- the taxpayer, who promotes, enables or facilitates tax avoidance. matic exchange of financial account information in tax matters and However, there are rules on tax evasion under the IRO, which combating base erosion and profit shifting. More specifically, Hong applies to both taxpayers and any other persons who assist taxpayers Kong has codified transfer pricing rules, spontaneous exchange of to evade tax. information with regard to tax rulings, country-by-country reporting It is worth noting that under the Hong Kong Anti-Money requirements and cross-border dispute resolution mechanism, et Laundering and Counter-Terrorist Financing Ordinance, ‘money cetera. laundering’ is defined as “an act intended to have the effect of making any property: (a) that is the proceeds obtained from the 10.2 Has your jurisdiction signed the tax treaty MLI and commission of an indictable offence under the laws of Hong Kong, deposited its instrument of ratiﬁcation with the OECD? or of any conduct which if it had occurred in Hong Kong would constitute an indictable offence under the laws of Hong Kong; or At the time of signing (on 7 June 2017), Hong Kong (represented by (b) that in whole or in part, directly or indirectly, represents such Mainland China) submitted a list of 36 DTAs (i.e. the vast majority proceeds, not to appear to be or so represent such proceeds”. of the jurisdictions that form part of Hong Kong’s DTA network, Under the IRO, ‘tax evasion’ is an indictable tax offence fulfilling excluding Mainland China) that Hong Kong would like to have the above ‘money laundering’ definition, which constitutes a covered as tax treaties to be amended through the MLI. In addition, predicate offence for money laundering in Hong Kong: “Any person (China on behalf of) Hong Kong also submitted a provisional list of who wilfully with intent to evade or to assist any other person to reservations and notifications in respect of the various provisions of evade tax: (a) omits from a return made under this Ordinance any the MLI. Consistent with Hong Kong’s usual DTA negotiation sum which should be included; (b) makes any false statement or policies, Hong Kong (only) implements the minimum standards of entry in any return made under this Ordinance; (c) makes any false the MLI, including the provisions addressing Action 6 (preventing statement in connection with a claim for any deduction or allowance treaty abuse) and Action 14 (improving cross-border dispute resol- under this Ordinance; (d) signs any statement or return furnished ution mechanisms) of the BEPS package (while opting out of the under this Ordinance without reasonable grounds for believing the remaining articles) to minimise any unintended impact on taxpayers. same to be true; (e) gives any false answer whether verbally or in Under the IRO, the Chief Executive in Council (“CE-in-C”) is writing to any question or request for information asked or made in empowered to give effect to any tax agreements which have been accordance with the provisions of this Ordinance; (f) prepares or made by Hong Kong with more than one government of any terri- maintains or authorizes the preparation or maintenance of any false tories outside Hong Kong, or have been made by the Central

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People’s Government (in Beijing) and applied to Hong Kong. As 10.5 Does your jurisdiction maintain any preferential tax such, the CE-in-C can make an order to declare that the MLI regimes such as a patent box? arrangements shall have effect, subject to negative vetting by the LegCo. Once this process has been completed, Hong Kong shall Although Hong Kong does not have a patent box regime, it does deposit the Instrument of Ratification, Acceptance or Approval of have various other preferential tax regimes and concessions, such as the MLI to the OECD. (but not limited to) profits tax exemption for funds (regardless of their location of central management and control, subject to meeting 10.3 Does your jurisdiction intend to adopt any legislation to certain conditions for profits tax exemption on qualifying or tackle BEPS which goes beyond the OECD’s specified assets or transactions), a notional tax regime for profits in recommendations? connection with qualifying aircraft leasing and/or management activities, qualifying corporate treasury centres, tax concessions for As explained above, Hong Kong has (only) committed to the gains derived from qualifying debt instruments, concessions for implementation of the four minimum standards of the BEPS package. captive insurers reinsurance companies, enhanced tax deductions for qualifying R&D expenditure, outright or accelerated tax deductions for qualifying environmentally friendly investments, etc. 10.4 Does your jurisdiction support information obtained

under Country-by-Country Reporting (CBCR) being made 11 Taxing the Digital Economy available to the public?

Hong Kong’s transfer pricing documentation requirements are 11.1 Has your jurisdiction taken any unilateral action to tax consistent with the OECD’s three-tiered standardised approach digital activities or to expand the tax base to capture digital which includes the Master File, Local File and CbC report. More presence? specifically, Hong Kong resident ultimate parent companies of multinational enterprises with consolidated revenue over HK$6.8 Currently, the IRO does not contain any provisions that deal billion (i.e. approximately EUR 750 million) in the previous year of specifically with e-commerce. As such, to determine if income in assessment, or Hong Kong entities that are nominated as surrogate connection with digital activities are assessable profits, the general filing entities, are required to prepare and submit a CbC report to taxation principles (and relevant case law) and the (above-explained) the IRD. A CbC report must be prepared for accounting periods ‘deeming provisions’ with respect to sums which are chargeable to beginning on or after 1 January 2018, in principle, within 12 months profits tax as royalties or licence fees for IP under the IRO apply vis- after the end of the accounting period to which the report relates. à-vis in this regard. Nonetheless, to provide clarity on the IRD’s For Hong Kong taxpayers belonging to a group of which the opinion on the taxation of e-commerce businesses, a specific prac- ultimate parent company is resident overseas and the consolidated tice note on the taxation of e-commerce was issued in July 2001. revenue exceeds the relevant threshold (stipulated in that Broadly speaking, the IRD has been taking a neutral approach jurisdiction’s laws or regulations), the local filing of a CbC report in regarding the tax treatment of e-commerce businesses. The IRD Hong Kong is not required if: (i) the ultimate parent company’s has expressed its view that e-commerce is treated on the same basis jurisdiction of tax residence has neither participated in the as ‘conventional’ forms of business and no particular business form Convention on Mutual Administrative Assistance in Tax matters nor should have either an advantage or a disadvantage for profits tax entered into a DTA or TIEA with Hong Kong; or (ii) the relevant purposes in Hong Kong. DTA/TIEA between such jurisdiction and Hong Kong does not allow any automatic exchange of information. 11.2 Does your jurisdiction favour any of the G20/OECD’s CbC reports are not made available to the public. In accordance “Pillar One” options (user participation, marketing intangibles with the OECD’s Report Transfer Pricing Documentation and or signiﬁcant economic presence)? Country-by-Country Reporting, Action 13 – 2015 Final Report, the IRD has expressed (in its practice notes) that the Commissioner of Hong Kong has not expressed any (formal) opinion on the Inland Revenue will (only) use the information in a CbC report for: ‘Programme of Work to Develop a Consensus Solution to the Tax (a) a high-level transfer pricing risk assessment; (b) the assessment Challenges Arising from the Digitalisation of the Economy’ yet. of other BEPS-related risks (including raising enquiries in the course Nonetheless, since Hong Kong has been using its utmost efforts to of a tax audit or investigation); and (c) economic and statistical comply with evolving international standards and is committed to the analysis where appropriate. ongoing implementation of (the four minimum standards of) the OECD’s BEPS Action Plan (including Action 5 on countering harmful tax practices), it is expected that the Government will continue its positive approach in taking necessary measures once a unified approach has been reached by the G20/OECD in (presumably) 2020.

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Vivien Teu is the founding and managing partner of Vivien Teu & Co LLP. She has extensive and in-depth experience as a corporate and commercial lawyer specialising in the financial services sector, funds and wealth management. Vivien carries diverse legal practice with top tier and magic circle firms in the areas of tax, trusts, banking and financial services, investment funds, securities regulatory and financial institutions set-up as well as mergers & acquisitions. Along with a significant in-house counsel experience at a global investment firm, Vivien brings unique insights and practical commercial approaches in her practice, and with a particular focus on China. Vivien’s experience in the areas of asset management covers diverse forms of investment funds, including the Hong Kong SFC authorisation of retail funds (including UCITS funds and domestic HK fund series), the Mainland-Hong Kong Mutual Recognition of Funds, China-theme investment funds including QFII and RQFII China A Share Funds, RMB Fixed Income Funds, Stock Connect, accessing China-Interbank Bond Market, and advising in relation to ETFs and REITs. Vivien also regularly advises on China outbound investments, structured finance and securitisation, SFC licensing and regulatory matters, Hong Kong securities compliance advice; and assisting clients from diverse backgrounds with establishing private investment funds including hedge funds, private equity funds, real estate funds, institutional segregated account mandates and other investment arrangements, advising on fund distribution matters, custody structure, investment and trading matters. Vivien’s experience also includes joint ventures or mergers & acquisitions of financial institutions or asset management firms, private equity and private M&A, advising on shareholders agreements, corporate governance, general corporate and commercial legal issues, private and corporate trusts, tax issues and tax structuring.

Vivien Teu & Co LLP Tel: +852 2969 5300 17th Floor, 29 Wyndham Street Email: [email protected] Central URL: www.vteu.co Hong Kong

Kenneth Yim specialises in the tax-efficient (re)structuring of cross-border transactions for asset managers, investors and family offices in or involving Asia. His international tax planning experience includes tax considerations in respect of fund formation, M&A, joint-ventures, finance, IP, real estate, insurance, estate planning, employment, e-commerce and supply-chain management in a cross-border context. He also supports taxpayers in tax disputes and negotiations on advance tax rulings. Previously, Kenneth worked for the Hong Kong office of a global professional services firm where his last position was head of tax, respectively, a ‘Big Four’ accountancy firm where he provided and coordinated tax advice for financial institutions with business across Asia-Pacific. Before relocating to Asia in 2011, he worked as a tax lawyer in the Netherlands where he developed a particular interest and experience in tax structuring with respect to Western and Asian inbound and outbound transactions.

Vivien Teu & Co LLP Tel: +852 2969 5300 17th Floor, 29 Wyndham Street Email: [email protected] Central URL: www.vteu.co Hong Kong

Vivien Teu & Co LLP is a Hong Kong corporate and commercial law firm wealth management practice. The team has also strengthened an ESG focus established with the philosophy of a boutique law firm, with particular focus of its investment funds and corporate practice, as well as working with char- on the areas of investment funds, asset management and financial services, ities, foundations, social enterprises and impact investors, seeing these as securities and regulatory, tax and trusts. The lawyers at the firm carry in-depth natural and necessary extensions of its existing practice areas. Hong Kong and international legal practice experience, combined with deep The firm’s tax advisory capability is an integral part of its corporate and and broad knowledge of China and regional markets, regularly advising inter- commercial practice and a value-add where required, and augments its asset national and local corporations, Hong Kong and China financial institutions management and financial services practice. such as commercial and private banks, securities companies, investment www.vteu.co management and private equity firms on cross-border matters with Hong Kong and/or China elements. Besides corporate and commercial practice, Vivien Teu & Co LLP combines the specialist knowledge and experience of its asset management and financial services practice in advising financial institutions including securities brokers, asset management firms, private banks and trust service providers. The firm increasingly serves high-net-worth private clients and entrepreneurs in private trusts, tax, corporate and investment matters, in its wider financial services and

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Indonesia Indonesia

Mul & Co Mulyono

1 Tax Treaties and Residence The Director General of Tax (“DGT”) has issued DGT Regulation Number PER-10/PJ/2017 (“PER-10”), a new guideline for tax treaties implementation. The DGT sets out several 1.1 How many income tax treaties are currently in force in conditions, including administrative and beneficial ownership criteria your jurisdiction? that must be fulfilled, in order for the non-resident taxpayer to be eligible for the reduced rate in the tax treaty. In practice, with the There are currently 68 income tax treaties in force in Indonesia. issuance of this regulation, the DGT can “override” the eligibility of Indonesia has also participated in the signing of the Multilateral the non-resident taxpayers for the tax treaty benefits in the situation Convention to Implement Tax Treaty Related Measures to Prevent that all or some of the conditions in PER-10 are not fulfilled. Base Erosion and Profit Shifting (“MLI”) on June 7, 2017.

1.6 What is the test in domestic law for determining the 1.2 Do they generally follow the OECD Model Convention or residence of a company? another model? Article 2 paragraph (3) letter b of Income Tax Law states that a Since it is a developing country, Indonesia largely adopts the UN resident tax subject shall be any entity that is established or domiciled Model in developing tax treaties, with the combination of several in Indonesia, except certain units of government agencies. A fully principles in domestic taxation laws. Some of the Indonesian tax foreign-owned company that is established and domiciled in treaties might be modified from the UN Model or OECD Model, as Indonesia is considered to be an Indonesian tax resident, even a result of the negotiation process among the jurisdictions. though the key management and commercial decisions are taken outside Indonesia. 1.3 Do treaties have to be incorporated into domestic law before they take effect? 2 Transaction Taxes

For the tax treaties to be in force, they must follow the legalisation 2.1 Are there any documentary taxes in your jurisdiction? process. Based on Law Number 24 of 2000 on International Agreements, the legalisation process of international agreements in In Indonesia, the documentary taxes called Stamp Duty are levied relation to tax matters is done through the issuance of a Presidential based on Law Number 13 of 1985 on Stamp Duty and Government Regulation that legalises the tax treaty. The Government of the Regulation Number 24 of 2000. Generally, the Stamp Duty is Republic of Indonesia will then submit the copy of the Presidential imposed to the documents, such as agreements or other letters that Regulation that legalises the tax treaty to the House of are made for the purpose to be used as: evidence for actions, facts, Representative to be evaluated. or other civil matters; notarial/land titles registrar deeds; and letters that contain a monetary amount of above Rp 1,000,000. The tariff 1.4 Do they generally incorporate anti-treaty shopping of Stamp Duty ranges from Rp 3,000 to Rp 6,000 depending on the rules (or “limitation on beneﬁts” articles)? type and the nominal amount stated in the documents.

Most of the tax treaties with Indonesia do not incorporate limitation 2.2 Do you have Value Added Tax (or a similar tax)? If so, at on benefits clause articles, except for few tax treaties, e.g., Russia. what rate or rates? However, Indonesia has recently updated its domestic anti-treaty abuse rule. Please refer to question 9.1. In addition to direct tax, such as income tax, Indonesia also imposes indirect taxes, such as Value-Added Tax (“VAT”) at the rate of 10%, 1.5 Are treaties overridden by any rules of domestic law in accordance with Law Number 8 of 1983 on VAT, as lastly (whether existing when the treaty takes effect or introduced amended by Law Number 42 of 2009 (“VAT Law”). In general, the VAT rate is 10%. There are several transactions that are imposed subsequently)? by VAT with the tariff of 0% (e.g., export transactions) or exempted Article 32A of Law Number 7 of 1983 on Income Tax, as lastly by VAT. amended by Law Number 36 of 2008 (“Income Tax Law”) states that the Indonesian government has the authority to enter into a tax 2.3 Is VAT (or any similar tax) charged on all transactions treaty with other jurisdictions. It is also stated that the tax treaty is or are there any relevant exclusions? lex specialis in nature in relation to domestic income tax law.

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The VAT Law adopts a negative list approach, of which Article 4A 26 withholding tax at the rate of 20%. The withholding tax is paragraph (2) and (3) of VAT Law define the list of goods and payable when the dividend is declared by the company. services that are not subject to VAT. All of the other goods and Most of the applicable Indonesian tax treaties generally provide a services are considered as Taxable Goods and Services that are reduced rate of withholding tax on dividends at the source country subject to VAT. to be 10–15%. Several tax treaties provide a lower rate for substan- Further, the VAT Law and the implementing regulations define tial ownership holding. For example, in the Indonesia-Hong Kong the criteria for a small entrepreneur, which is the entrepreneur Tax Treaty, if a beneficial owner (a company) in Hong Kong holds (taxpayer) that has an annual gross turnover of not more than Rp directly at least 25% of the equity of the Indonesian company paying 4.8 billion. The taxpayers that do not fulfil this annual turnover the dividends, the dividend is subject to withholding tax at a reduced threshold are not mandatorily stipulated as Taxable Entrepreneurs rate of 5%. for VAT purposes and, therefore, the delivery of goods and services by the small entrepreneurs is not subject to VAT. 3.2 Would there be any withholding tax on royalties paid by

a local company to a non-resident? 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? Similar to the dividends payment, in the absence of a tax treaty, the royalties paid by an Indonesian tax resident company to a foreign tax There are several restrictions for the Input VAT to be credited in the resident are subject to Article 26 withholding tax at a rate of 20%. periodic VAT returns, such as: The withholding tax is payable at the time stated in the contract or a. the Input VAT that is acquired before the taxpayers are at the time the invoice is issued. stipulated as Taxable Entrepreneurs, before the Taxable Indonesian tax treaties generally provide a reduced withholding Entrepreneur starts commercial production, or that is not tax rate on royalties to be 10–15%. In a few tax treaties, e.g., tax directly related to the business activities; treaties with Hong Kong, Qatar and the United Arab Emirates b. the Input VAT from the acquisition and maintenance of motor (“UAE”), the reduced withholding tax rate is 5%. vehicles in the form of sedan and station wagon, except as commodities for sale or for rent; 3.3 Would there be any withholding tax on interest paid by c. the Input VAT of which the tax invoice does not fulfil the a local company to a non-resident? formal provisions; and d. the Input VAT that is collected by issuing a tax assessment, or is Based on Income Tax Law, the Article 26 withholding tax at the rate discovered during a tax audit. of 20% is also applied on interest paid by an Indonesian tax resident company to a foreign tax resident. The withholding tax is payable 2.5 Does your jurisdiction permit VAT grouping and, if so, at the time the interest is due to the creditors. is it “establishment only” VAT grouping, such as that applied In most of the applicable Indonesian tax treaties, they generally by Sweden in the Skandia case? provide a reduced rate of withholding tax at the source country; 10– 15%. In the Tax Treaty with Kuwait and the UAE, the reduced rate VAT grouping for several entities is not permitted in Indonesia. Based of withholding tax is 5%. on current VAT Law, in case a company has several branches in different locations, each branch must be stipulated separately as the 3.4 Would relief for interest so paid be restricted by company’s branches and must conduct a separate VAT administration. reference to “thin capitalisation” rules? In this situation, the company’s branches are allowed to request for centralisation of VAT administration in one selected location. Article 18 paragraph (1) of Income Tax Law provides the authority to the Ministry of Finance to determine the maximum Debt-to- 2.6 Are there any other transaction taxes payable by Equity Ratio (“DER”) to compute the Taxable Income. In 2015, companies? the Ministry of Finance issued a regulation that determines the maximum allowable DER amount that determines the interest In the case of a land and/or building transfer transaction, there is deductibility. Please see question 3.5. final income tax (payable by the seller) and duty on the acquisition of land and/or building rights (payable by the purchaser). A transfer 3.5 If so, is there a “safe harbour” by reference to which tax transaction of a motor vehicle ownership is subject to duty of motor relief is assured? vehicle transfer (regional tax). Based on the Ministry of Finance Regulation Number 169/ 2.7 Are there any other indirect taxes of which we should PMK.010/2015 (“PMK-169”), for the CIT calculation, the threshold be aware? for DER is 4:1. If the actual DER exceeds 4:1, the amount of deductible interest expense must be adjusted proportionately to an Certain luxury goods (vehicle and non-vehicle) are imposed with the allowable amount based on the 4:1 ratio. Luxury Goods Sales Tax, the rate being between 10% and 200%. The amount of debt for the purpose of calculating DER is the Depending on the regions and type of businesses, there are also monthly average debt balance during a certain fiscal year or part of several applicable regional taxes, such as entertainment tax, cigarettes the fiscal year. The amount of equity for the purpose of calculating tax, advertising tax, parking tax, and hotel tax. DER is the monthly average equity balance during a certain fiscal year or part of the fiscal year. In case the equity is zero or negative, 3 Cross-border Payments all of the interest expense is non-deductible. The debt includes a long-term debt, as well as short-term debt, including interest-bearing trade payables. The total equity includes equity based on the 3.1 Is any withholding tax imposed on dividends paid by a financial accounting standard and non-interest bearing loans from locally resident company to a non-resident? related parties. In the absence of a tax treaty, the dividends paid by an Indonesian tax resident company to a foreign tax resident are subject to Article

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3.6 Would any such rules extend to debt advanced by a 4 Tax on Business Operations: General third party but guaranteed by a parent company? 4.1 What is the headline rate of tax on corporate proﬁts? PMK-169 also states that any interest payable to a related party must be calculated in accordance with the arm’s length principle. The The general Corporate Income Tax (“CIT”) rate in Indonesia is DGT is authorised to readjust the value of interest payment to a 25%. There are several facilities regarding the CIT rate applied for related party according to the arm’s length principle. Please also see companies that fulfil certain criteria, as follows: question 3.9. a. a company that has an annual gross turnover up to Rp 50 billion A debt by a third party but guaranteed by a parent company does is allowed the 50% reduction from the general CIT rate (12.5%) not create a related-party relationship. The related-party relationship for the proportion of Taxable Income of the gross turnover up criteria based on Article 18 paragraph (4) of Income Tax Law is as to Rp 4.8 billion; follows: b. a company that is listed in the stock exchange where a minimum a. the taxpayer that has capital participation directly or indirectly of 40% of the shares are traded in stock exchange and fulfil of a minimum of 25% at other taxpayer; a relationship between other criteria, is allowed a 5% lower rate compared to the general a taxpayer with a minimum participation of 25% at the other CIT rate (20%); two or more taxpayers; or a relationship between two or more c. a company that has an annual gross turnover of no more than taxpayers mentioned latter; Rp 4.8 billion can be imposed with final income tax of 0.5% b. the taxpayer that controls the other taxpayer or two or more from the gross turnover maximum of three years; or taxpayers that are under the same control both directly and d. a company that makes investments with a certain minimum indirectly; or investment value in several pioneering industries may receive a c. there is a family relation both biologically and by marriage in reduction of the CIT rate of up to 100% for a period of five to vertical and/or horizontal lineage of the first degree. 20 years, depending on the total investment value.

3.7 Are there any other restrictions on tax relief for interest 4.2 Is the tax base accounting proﬁt subject to payments by a local company to a non-resident, for example adjustments, or something else? pursuant to BEPS Action 4? Yes. The tax base for computing the CIT is Taxable Income. At the There are currently no other restrictions on tax relief for interest end of the fiscal year, the taxpayers are required to make fiscal payments by a local company to a non-resident company (with no reconciliations from the accounting profit to calculate the Taxable related-party relationship). Income, which is the Taxable Revenue (gross revenue) deducted with any Deductible Expenses.

3.8 Is there any withholding tax on property rental 4.3 If the tax base is accounting proﬁt subject to payments made to non-residents? adjustments, what are the main adjustments? In general, Article 6 of the Indonesian tax treaties provides taxation rights to the country where the property is located and does not There are several types of adjustments in the fiscal reconciliations provide any reduced withholding tax rate. Therefore, any property to derive the Taxable Income from the accounting profits, as follows: rental payments from an Indonesian tax resident to foreign tax a. Taxable Revenue: Excluding revenues that are 1) not included as residents for any property located in Indonesia are subject to Article income tax object, and 2) already subject to final income tax. 26 withholding tax at the rate of 20%. b. Deductible Expenses: 1) temporary difference, such as differences in timing of recognition of fiscal depreciation and accounting depreciation; and 2) permanent difference; several 3.9 Does your jurisdiction have transfer pricing rules? expenses are non-deductible for CIT calculation, such as The transfer pricing regulations in Indonesia are based on Article 18 expenses to create allowance (e.g., allowance for doubtful paragraph (3) of Income Tax Law. The DGT then issued an accounts), expenses for personal interest of shareholders, implementing transfer pricing regulation, DGT Regulation Number benefit-in-kind, administrative sanctions. PER-43/PJ/2010 on Implementation of Arm’s Length Principle (“ALP”) among Taxpayers that have a related-party relationship, as 4.4 Are there any tax grouping rules? Do these allow for amended by DGT Regulation Number PER-32/PJ/2011. The relief in your jurisdiction for losses of overseas subsidiaries? scope of the ALP application covers: a. the transactions conducted between domestic taxpayers or No, there are no tax grouping rules in Indonesia. Based on Permanent Establishments (“PE”) in Indonesia with an elucidation or Article 4 paragraph (1) Income Tax Law, the losses affiliated foreign tax resident; and from overseas operations cannot be deducted in calculating CIT. b. the transactions conducted with the other domestic taxpayers or PEs in Indonesia that have a related-party relationship, which aim 4.5 Do tax losses survive a change of ownership? to utilise different tax tariffs, such as final and non-final income tax for certain businesses, imposition of sales tax on luxury The tax losses of a (private and public) limited liability company goods, and transactions conducted with oil and gas contractors. survive change of ownership, without certain threshold limitation. Further, in line with BEPS Action 13, Indonesia has also introduced The tax loss carry-forward is valid for the period of five years. Ministry of Finance Regulation Number 213/PMK.03/2016 (“PMK- Based on Ministry of Finance Regulation Number 52/ 213”) and DGT Regulation Number PER-29/PJ/2017 (“PER-29”), PMK.010/2017, the taxpayers that will conduct mergers can request which provide the detailed provisions on Country-by-Country for the use of a book value for transfer of the assets of the merger Reporting (“CbCR”). The Transfer Pricing Documentation consists companies. In this case, the recipient company of the assets that use of the Master File (“MF”), Local File (“LF”), and/or CbCR. The the book value for the transfer is not allowed to use the tax loss content of MF, LF, and CbCR is generally similar with recommendations carry-forward from the transferor company. set out in the BEPS Action Plan 13.

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4.6 Is tax imposed at a different rate upon distributed, as In general, Article 13 of the Tax Treaties with Indonesia provides Indonesia the taxing rights for alienation of property situated in opposed to retained, proﬁts? Indonesia by a foreign tax resident. There is an applicable final The CIT is generally imposed at the end of the fiscal year towards income tax imposed to a direct transfer of land and/or building at the Taxable Income. Please also refer to question 4.1 for the CIT the rate of 2.5%. rate. Currently, there is no additional tax if the profits are “retained” A direct transfer of an Indonesian company’s shares by a foreign by the companies. tax resident is subject to Article 26 withholding tax of an effective The distribution of profits towards the company’s shareholders is rate of 5%. In the case of an indirect transfer of shares, the Minister taxed upon the declaration of the dividend. There is no mandatory of Finance issues the Ministry of Finance Regulation Number obligation for the domestic companies to declare dividends annually. 258/PMK.03/2008 which regulates that an Article 26 withholding The restrictions for distribution of profits in the form of dividends tax with an effective rate of 5% is imposed to a transfer of shares are subject to Law Number 40 of 2007 on Company Law. of a special purpose company (“SPC”) (that is established in a tax In the case of a PE, in addition to the CIT, the profits after tax haven country) which has a related-party relationship with a are also subject to additional Branch Profit Tax at the end of the company in Indonesia. A direct transfer of shares that is publicly fiscal year with the general rate of 20% (or tax treaty rate). traded in the stock market is imposed with the final income tax at the rate of 0.1%. Please also refer to questions 5.1 and 8.2.

4.7 Are companies subject to any signiﬁcant taxes not 6 Local Branch or Subsidiary? covered elsewhere in this chapter – e.g. tax on the occupation of property? 6.1 What taxes (e.g. capital duty) would be imposed upon Depending on the regions where the company is located and the the formation of a subsidiary? type of businesses of the companies, there are several taxes to be paid by the companies. Please refer to questions 2.6 and 2.7. The In order to form an Indonesian subsidiary company, the article of Property Tax is also payable by the company in case the property is incorporation of the subsidiary must be prepared by an Indonesian owned by the company. Notary, which is subject to Stamp Duty in the amount of Rp 6,000. Further, the company’s subsidiary must be registered in the Ministry 5 Capital Gains of Law and Human Rights (“MOLHR”) and subject to certain Non-Tax State Revenue duty.

5.1 Is there a special set of rules for taxing capital gains 6.2 Is there a difference between the taxation of a local and losses? subsidiary and a local branch of a non-resident company (for In general, the Indonesian Income Tax Law adopts a wide meaning example, a branch proﬁts tax)? of an “income” as referred to an “additional economic benefit in whatever forms and names”. Article 4 paragraph (1) letter d of the From an Indonesian legal point of view, Indonesia does not Income Tax Law clearly states that capital gains arising from the recognise a branch as a separate legal entity. A local “branch” of a transfer of assets are included as Taxable Income (similar to income non-resident company must be registered as a PE in Indonesia. In from ordinary/business profits). The capital gains are taxed upon general, a PE is subject to general CIT as in the case of a general realisation, which means that the unrealised gains resulting from the company. Please refer to question 6.3 for the Taxable Revenue fair value adjustments of assets are not taxable in computing CIT. Object and allowable Deductible Expenses for a PE. There are also A transfer of land and/or building is subject to a special provision several specific tax rate treatments for PEs depending on the type on final income tax at a rate of 2.5% for the seller and 5% duty on of business, such as PEs that act as a trade representative office, acquisition of land and/or building rights for the purchaser. A conduct shipping, and airline businesses. transfer of shares that are publicly traded in the stock market is also In addition to the CIT, the PE is also subject to additional Branch subject to a special provision of final income tax at the rate of 0.1% Profit Tax at the rate of 20% (or a reduced rate depending on the from the total sale value. applicable tax treaty), unless the profits are reinvested back in Indonesia. For a local subsidiary company of a non-resident company, the 5.2 Is there a participation exemption for capital gains? tax treatment is the same as a locally owned company, except the There is no participation exemption for taxation on capital gains. dividends declared and distributed to the foreign shareholder are subject to Article 26 withholding tax at the rate of 20% (or a reduced rate in the applicable tax treaty). 5.3 Is there any special relief for reinvestment? In the context of Branch Profit Tax for a PE, the Branch Profit Tax 6.3 How would the taxable proﬁts of a local branch be is not imposed if the profits are re-invested back in Indonesia. determined in its jurisdiction? Please also refer to question 6.4. There is no special relief in the context of dividend payments that Article 5 of Income Tax Law states that the Taxable Revenue Object are used for reinvestment in Indonesia. The dividends paid to an (gross revenue) for a PE, is as follows: Indonesian company’s shareholder by its Indonesian subsidiary with a. revenue from business or activities of the PE and from the a minimum of 25% share ownership are considered as Non-Taxable owned assets; Income. b. revenue from the Head Office from business or activities, sale of goods, or delivery of services in Indonesia that is similar to 5.4 Does your jurisdiction impose withholding tax on the the ones conducted by the PE in Indonesia; and c. other revenues (such as interest, royalty, service fees, gift) that proceeds of selling a direct or indirect interest in local are received or earned by the Head Office, as long as there is an assets/shares? effective relationship with the assets or activities of the PE that generates the incomes.

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The expenditures that are related towards the above revenues can 7.3 Does your jurisdiction have “controlled foreign be deducted in computing the Taxable Income. Further, in company” rules and, if so, when do these apply? calculating the Taxable Income: a. the Head Office administrative expenditures that are allowed to Indonesia has the general provision on Controlled Foreign Company be deducted are the expenditures that are related to the business (“CFC”) rules in Article 18 paragraph (2) of Income Tax Law. activities of the PEs; Indonesia has amended its implementing regulation on CFC by b. the payments to the Head Office that cannot be deducted as issuing Ministry of Finance Regulation Number 107/PMK.03/2017 Deductible Expenses, such as: royalties or other remunerations (“PMK-107”). The Indonesian taxpayer must pay tax by recognising in connection with the use of assets, patents, or other rights; a deemed dividend to the extent that the profits of the CFC are not remunerations in connection with the management fees or other distributed to the Indonesian taxpayer in the form of actual fees; and interest, except interest for banking business; and dividends (“Deemed Dividend”). c. the payments received in letter (b) above that are received by the There is no change in the timing for the recognition of the Head Office are not considered as Taxable Objects by the PEs, Deemed Dividend, i.e., the 4th month after the deadline submission except for interests related to the banking businesses. of the CFC annual income tax return, or the 7th month after the end of the fiscal year, if the CFC has no obligation to submit an annual 6.4 Would a branch beneﬁt from double tax relief in its income tax return or if there is no submission deadline of the annual jurisdiction? income tax return. PMK-107 regulates that the Deemed Dividend must be imposed A branch from an overseas entity shall be treated as a PE. In on directly owned CFCs (“Direct CFCs”) and indirectly owned addition to the general CIT rate, the PE is subject to Branch Profit CFCs (“Indirect CFCs”). The definition of a Direct CFC is similar Tax, based on Article 26 paragraph (4) of Income Tax Law, unless to that given in previous regulations and in line with Article 18 para- the profits are re-invested back in Indonesia. Please also refer to graph (2) of the Income Tax Law, which states that a Direct CFC is question 6.2. a foreign non-listed company that is directly owned at least 50% by The reinvestment must be done at the end of the following fiscal an Indonesian taxpayer; or is directly owned at least 50% collectively year at the latest. The PE must also submit a written notification by several Indonesian taxpayers. Although Article 18 paragraph (2) regarding the type of capital investment, realisation of reinvestment, of the Income Tax Law has already provided the definition of a and/or the commencement of commercial production for the newly CFC (which is similar to the Direct CFC definition) and mandated established company to the registered Tax Office. the Ministry of Finance to only determine the timing of the In general, Article 10 of the Tax Treaties with Indonesia provides recognition of the Deemed Dividend, PMK-107 has “expanded” the a reduced rate of the Branch Profit Tax of the PE situated in definition of CFC and indirectly introduced the definition of an Indonesia to be 5–15%. Several tax treaties, such as with Thailand Indirect CFC, which is a foreign non-listed company in which at least and Sri Lanka, do not provide such relief and therefore, the PE is 50% of the shares are: owned by a Direct CFC and/or an Indirect subject to Branch Profit Tax, as regulated in the domestic taxation CFC; jointly owned by an Indonesian taxpayer and another regulations. Indonesian taxpayer through a Direct and/or an Indirect CFC; or jointly owned by a Direct and/or and an Indirect CFC. 6.5 Would any withholding tax or other similar tax be The Deemed Dividend is calculated from profit after tax of a Direct CFC and profit after tax of an Indirect CFC multiplied by the imposed as the result of a remittance of proﬁts by the percentage ownership of the Direct CFC. The profit after tax is branch? generally based on the accounting standard in the CFC country of residence, deducted by the income tax payable in the respective In principle, the profits after tax by the branch (treated as a PE in country. Based on this calculation, it can be inferred that generally, Indonesia) are already subject to the Branch Profit Tax at the end of all of the profit after tax from the CFC in that particular year should the fiscal year. Therefore, the remittance of the profits by the be recognised as Deemed Dividend income for the Indonesian branch is not subject to additional withholding tax. taxpayer.

7 Overseas Proﬁts 8 Taxation of Commercial Real Estate

7.1 Does your jurisdiction tax proﬁts earned in overseas 8.1 Are non-residents taxed on the disposal of commercial branches? real estate in your jurisdiction? Indonesia adopts a Worldwide Income principle, of which all of the Most of the tax treaties with Indonesia (Article 6 of Tax Treaty) (domestic and overseas) incomes that are received by the companies provide the taxation rights to the source country (Indonesia) for any domiciled in Indonesia (including profits from overseas branches) income derived by any property situated in Indonesia. are taxable in Indonesia. However, based on the elucidation of Based on Government Regulation Number 34 of 2016, the Article 4 paragraph (1) of Income Tax Law, the loss from overseas transfer of land and/or building is subject to final income tax at the branches is non-deductible in computing the Taxable Income. rate of 2.5% from the gross value of transfer which is applied for

the seller. There are few exceptions applied, i.e., 1% for basic 7.2 Is tax imposed on the receipt of dividends by a local housing and very basic housing, and 0% for transfer of land and/or company from a non-resident company? building to government- or state-owned enterprises. Generally, the tax base that is used in the context of the sale and purchase of land Yes. The dividends from a non-resident company are also subject and/or building is the actual transaction value or, in the case of an to a general CIT rate in Indonesia. Any withholding tax applied in affiliated-party transaction, is the fair value of the assets. the source country is allowed to be credited in the same fiscal year up to a certain amount to the total tax payable in Indonesia.

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8.2 Does your jurisdiction impose tax on the transfer of an 5. sufficient and adequate employees with specific expertise and skills suitable for business activity; indirect interest in commercial real estate in your 6. active business or activities, other than income in the form of jurisdiction? a dividend, interest, and/or royalty from Indonesia; and b. there is no direct or indirect transaction arrangement for the In some treaties, e.g., Tax Treaties with Hong Kong, in the case of a purpose to obtain tax treaty implementation, such as: transfer of an Indonesian company’s shares where the majority of 1. tax expense reduction; and/or its assets constitute land and/or building in Indonesia by a foreign 2. double non-taxation. tax resident, the transaction is still considered as a transfer of an The active business or activity is the actual active business or ordinary company’s shares (not a land and/or building transfer) and activity that is shown by the expenses incurred, efforts made, or is subject to withholding tax in Indonesia at the effective rate of 5% sacrifices that happened, which is directly related to the business or (with certain exceptions). activity to earn, collect, and maintain income, including significant

activities carried out by the foreign tax resident to maintain the 8.3 Does your jurisdiction have a special tax regime for continuity of the entity. Real Estate Investment Trusts (REITs) or their equivalent? This DGT regulation also provides the definition of an agent, a nominee, and a conduit. An agent is defined as a person or entity that Government Regulation Number 40 of 2016 and Ministry of is acting as an intermediary and conducts activities for and/or on Finance Regulation Number 37/PMK.03/2017 provide regulations behalf of other parties. A nominee is an individual or person that on income tax on the income from real estate with the scheme of legally has the asset and/or income (legal owner) for the interest or certain collective investment contracts (“KIK”). In this scheme, the based on the mandate from the actual party that has the asset and/or real estate is owned by an SPC, of which a 99.9% share is owned by enjoys the benefit of the income. A conduit as a company that the collective investment contract. receives the benefit of a tax treaty in relation to the income originating Any income that is received or earned by the taxpayer from the from Indonesia, meanwhile the economic substance of the income is transfer of real estate to the SPC or the KIK, is subject to final owned by a person or entity in the other country that will not receive income tax at the rate of 0.5% from the gross value of the transfer the benefit of the tax treaty if the income is directly received. of real estate. The final income tax must be self-paid by the taxpayer Further, this DGT regulation also provides a definition of a prior to the deeds, decisions, or any agreements related to transfer Beneficial Owner, as follows: of real estate to the SPC or the KIK being signed by the authorised a. for an individual foreign tax resident, not acting as an agent or officer. nominee; or b. for a corporate foreign tax resident, they must fulfil the 9 Anti-avoidance and Compliance following provisions: 1. not acting as an agent, a nominee, or a conduit; 9.1 Does your jurisdiction have a general anti-avoidance or 2. has control to use or enjoy funds, asset, or the rights that anti-abuse rule? originate income from Indonesia; 3. not more than 50% of the income is used to fulfil the In principle, Indonesia adopts a substance-over-form rule obligation to another party; (recognition of income, in whatever names and forms), as reflected 4. borne risk on the asset, capital, or other obligations; and in Articles 4, 23, and 26 of Income Tax Law. Further, Article 26 5. do not have an obligation (written and not written) to pass paragraph (1a) of Income Tax Law has also introduced the general partial or whole income received from Indonesia to another concept of beneficial ownership. party. In 2018, the Director General of Tax has issued Director General A foreign tax resident can request for a refund in case of the of Tax Regulation Number PER-25/PJ/2018 (“PER-25”) regarding excess of tax withholding and/or collecting in relation to tax treaty the updated tax treaty implementation procedure. There are four implementation: main conditions for using the tax treaty facility that the foreign a. incorrect tax treaty implementation; resident must follow: b. late fulfilment of administrative requirement to implement a tax a. the income recipient is not an Indonesian tax resident; treaty after the withholding and/or collecting; or b. the income recipient is an individual or an entity that is a c. Mutual Agreement Procedure. domestic tax resident in the tax treaty partner country or jurisdiction; 9.2 Is there a requirement to make special disclosure of c. there is no misuse of a tax treaty; and avoidance schemes? d. the income recipient is a beneficial owner, in case it is required in the tax treaty. There are currently no mandatory requirements to make a special PER-25 provides a stricter definition on the criteria of misuse of disclosure of avoidance schemes. the tax treaty and a beneficial owner. The misuse of a tax treaty is considered to not exist, in the case where: 9.3 Does your jurisdiction have rules which target not only a. a foreign tax resident has: 1. the economic substance of the entity establishment or trans- taxpayers engaging in tax avoidance but also anyone who action implementation; promotes, enables or facilitates the tax avoidance? 2. the same legal form with the economic substance of the entity establishment or transaction implementation; Article 43 of Law Number 6 of 1983 on General Taxation 3. business activity that is managed by own management and the Provisions and Procedures, as lastly amended by Law Number 16 of GTP Law management has sufficient authority to conduct the trans- 2009 (“ ”), states that a representative, a proxy, employee action; of taxpayers, or other parties that request, jointly participate, suggest, 4. a sufficient and adequate fixed asset and a non-fixed asset to or assist in tax criminal actions can also be subject to criminal penalty conduct business activity in the tax treaty partner country or and administrative sanctions. jurisdiction, other than an income generating asset in Indonesia;

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9.4 Does your jurisdiction encourage “co-operative there are several additional requirements beyond the BEPS Action Plan 13, for example, the LF must be supplemented with the copy compliance” and, if so, does this provide procedural beneﬁts of the agreement/contract for significant transaction and informa- only or result in a reduction of tax? tion related to financial statement. For CbCR, the DGT requires the taxpayer to also attach the working paper (according to the format Article 8 of Indonesian Income Tax Law provides the opportunity regulated by the DGT) as part of the CbCR. for the taxpayers to voluntarily make amendments to tax returns that There are currently no other new regulations to adopt any legis- have been submitted. For example, in case of a tax audit, as long as lation to tackle BEPS beyond OECD’s BEPS reports. the tax assessment has not been issued, the taxpayers are allowed to

make amendments to their tax returns and are subject to an administrative sanction of 50% from any tax underpayment. 10.4 Does your jurisdiction support information obtained under Country-by-Country Reporting (CBCR) being made 10 BEPS and Tax Competition available to the public?

10.1 Has your jurisdiction introduced any legislation in Indonesia has only incorporated provisions of CbCR in PMK-213 and PER-29, which are generally in line with BEPS Action 13. response to the OECD’s project targeting BEPS? Under these regulations, CBCR can be considered as taxpayer In general, Indonesia has introduced several local regulations to adopt taxation information. Therefore, it is treated as confidential BEPS Action Plans. For example, Indonesia has adopted a common information and not being made available to the public. approach for BEPS Action 4 by introducing a thin capitalisation rule (“PMK-169”) that is based on equity approach (balance sheet test), as 10.5 Does your jurisdiction maintain any preferential tax opposed to the fixed or group ratio in BEPS Action 4. Please refer to regimes such as a patent box? questions 3.4 and 3.5. Further, in line with BEPS Action 13, Indonesia has introduced PMK-213 and PER-29 on Transfer Pricing No, Indonesia does not maintain any preferential tax regime such as Documentation (MF, LF, and CbCR). Generally, PMK-213 and PER- a patent box. 29 adopt BEPS Action 13. Please refer to question 3.9. Indonesia also signed the MLI on June 7, 2017, which is related to BEPS Action 15. 11 Taxing the Digital Economy

10.2 Has your jurisdiction signed the tax treaty MLI and 11.1 Has your jurisdiction taken any unilateral action to tax deposited its instrument of ratiﬁcation with the OECD? digital activities or to expand the tax base to capture digital presence? On June 2017, Indonesia has signed Multilateral Convention to Implement Tax Treaty Related to Measures to Prevent BEPS. Indonesia has submitted There are currently no new regulations reflecting unilateral action 33 tax treaties in the Covered Tax Agreements, which will be modified from the DGT to tax digital activities or to expand the tax base. through MLI. 22 of the treaty partners have also included the tax treaty with Indonesia in their CTA (Australia; Belgium; Canada; China; 11.2 Does your jurisdiction favour any of the G20/OECD’s Croatia; Finland; France; Hong Kong; India; Italy; Japan; Korea; Luxembourg; Netherlands; New Zealand; Poland; Seychelles; “Pillar One” options (user participation, marketing intangibles Singapore; Slovakia; South Africa; Turkey; and the UK). or signiﬁcant economic presence)?

There is still an ongoing discussion on taxing the digital economy in 10.3 Does your jurisdiction intend to adopt any legislation to Indonesia. However, there is still not even one option that has been tackle BEPS which goes beyond the OECD’s formally adopted by Indonesia to tax the digital economy. recommendations?

In relation to the adoption of BEPS Action Plan 13, as currently set out in PMK-213 and PER-29 (please also refer to question 3.9),

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Mulyono is the managing partner of Mul & Co. He has a triple Master’s in finance, law, and notary, as well as several professional certifications such as Certified Public Accountant, Chartered Accountant, Certified Financial Planner, Certified Management Accountant, and Affiliate Wealth Manager. He is also a licensed legal counsel in the Tax Court, a licensed advocate and member of the Indonesian Advocate Association (“PERADI”), and a registered tax consultant. He is currently pursuing a Doctorate degree in Law. Prior to setting up Mul & Co, he gained extensive experience working in tax and legal environments, such as in Baker McKenzie (Hadiputranto Hadinoto & Partners), PB Taxand (formerly known as PB & Co.), and McKinsey & Company. His experience in the taxation field extends to tax disputes, tax due diligence, tax advisory, tax compliance, as well as company restructuring. In tax dispute areas, he has represented various multi-national clients in tax appeal and lawsuit cases in the Tax Court, as well as assisting taxpayers in the civil review process in the Supreme Court. He has served in a variety of industries, including in manufacturing, trading, real estate, mining and oil & gas, telecommunication, hospitality, and services. His unique combination of technical knowledge in tax, accounting, finance and law, and his expertise in the Indonesian taxation business process system, enable him to be a trusted advisor to his clients.

Mul & Co Tel: +62 21 668 1998 Jl. Pluit Raya 121 Blok A/12 Email: [email protected] Penjaringan, North Jakarta, 14440 URL: www.mul-co.com Indonesia

Mul & Co is one of a very few Law Firms in Indonesia that specialises in taxation fields. Mul & Co is founded by experienced practitioners with multidisciplinary backgrounds in tax, law, accounting, and finance. We mainly assist our clients in tax litigation cases (tax audit, tax objection, tax appeal, tax lawsuit, and tax civil review), as well as tax restructuring projects. We believe that our success depends upon our clients’ satisfaction. We therefore always strive to provide our clients with the best possible solutions to their tax matters. Our firm brings a rich understanding of Indonesia’s unique business and legal culture to provide our tax services to our client. Our firm is also staffed by dedicated professionals with a deep understanding of taxation law regulations and business culture. We are also independent and free from a lengthy conflict checks process which can sometimes be time-consuming. www.mul-co.com

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Ireland Ireland

Andrew Quinn

Maples Group David Burke

1 Tax Treaties and Residence 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced 1.1 How many income tax treaties are currently in force in subsequently)? your jurisdiction? No, Irish double tax treaties prevail over domestic law. As noted As of September 2019, 74 treaties have been signed, 73 of which are under question 1.3, certain domestic exemptions mirror the treaty in force. relief, and indeed may be more favourable, and apply before a treaty comes into force.

1.2 Do they generally follow the OECD Model Convention or 1.6 What is the test in domestic law for determining the another model? residence of a company? Generally speaking, they follow the OECD Model. A company is resident in Ireland if it is incorporated in Ireland or, if not Irish-incorporated, is centrally managed and controlled in 1.3 Do treaties have to be incorporated into domestic law Ireland. This latter test is based on case law and focuses on board before they take effect? control, but is a question of fact based on how decisions of the company are made in practice. Yes, but a number of Irish domestic provisions, including certain If a company incorporated in Ireland is managed and controlled exemptions from withholding tax, take effect immediately when a in a treaty state, it may be regarded as resident in that other state treaty is signed. under the “tie-breaker” clause of Ireland’s double taxation treaty

(“DTT”) with that state. 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on beneﬁts” articles)? 2 Transaction Taxes No, other than in respect of certain treaties, such as the treaty with 2.1 Are there any documentary taxes in your jurisdiction? the US. Additionally, the OECD’s Base Erosion and Project Shifting Generally, a document is chargeable to stamp duty, unless exempt, (“BEPS”) project recommended that members include in their where the document is both: double tax treaties a limitation-on-benefits test and/or a principal ■ listed in Schedule 1 to the Irish Stamp Duties Consolidation Act purpose test (“PPT”) as a condition for granting treaty relief. This 1999 (the principal head of charge is a transfer of any Irish recommendation will be implemented by means of a multilateral property); and instrument (“MLI”). ■ executed in Ireland or, if executed outside Ireland, relates to The effect of the MLI is that countries (including Ireland) will property situated in Ireland or to any matter or thing done or to transpose certain provisions relating to the BEPS project into their be done in Ireland. existing networks of bilateral tax treaties without the requirement to The transferee is liable to pay stamp duty and a return must be filed, re-negotiate each treaty individually. The date from which provisions and stamp duty paid, within 44 days of the execution of the instrument. of the MLI have effect in relation to a treaty depends on several Stamp duty is charged on the higher of the consideration paid for, factors, including the type of tax which the article relates to. or the market value of, the relevant asset at the following rates: The MLI is to be applied alongside existing tax treaties (rather ■ Shares or marketable securities: 1%. than amending them directly), modifying the application of those ■ Non-residential property: 6%. existing treaties in order to implement BEPS measures. The first ■ Residential property: 1% on consideration up to €1 million and high-level signing ceremony for the Multilateral Instrument took 2% on the excess. place on 7 June 2017. The United Kingdom and Ireland signed the There are numerous reliefs and exemptions including: Multilateral Instrument with both countries indicating that the ■ Group relief on transfers between companies where the trans- double tax treaty entered into between the United Kingdom and feror and transferee are 90% associated at the time of execution Ireland is to be designated as a Covered Tax Agreement (“CTA”), and for two years afterwards. being a tax treaty that is to be modified by the Multilateral ■ Reconstruction relief on a share-for-share exchange or share-for- Instrument. undertaking transaction, subject to meeting certain conditions. ■ Exemptions for transfers of intellectual property, non-Irish shares and land, loan capital, aircrafts and ships.

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2.2 Do you have Value Added Tax (or a similar tax)? If so, at apply to certain premises and activities (e.g. betting and licences for retailing of liquor). what rate or rates? There is an insurance levy on the gross amount received by an VAT is a transaction tax based on EU directives as implemented into insurer in respect of certain insurance premiums. The rate is 3% for Irish law. It is chargeable on the supply of goods and services in non-life insurance and 1% for life insurance. There are exceptions Ireland and on goods imported into Ireland from outside the EU. for re-insurance, voluntary health insurance, marine insurance, Persons in business in Ireland generally charge VAT on their aviation and transit insurance, export credit insurance and certain supplies, depending on the nature of the supply. dental insurance contracts. The standard VAT rate is 23% but lower rates apply to certain supplies of goods and services, such as, e.g., 13.5% on supplies of 3 Cross-border Payments land and property and 0% on certain food and drink, books and children’s clothing. 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? Dividend withholding tax at 20% applies to dividends paid to non- resident persons. However, a number of exemptions apply in that The application of VAT to a supply of goods or services depends case, including where payments are made to: on the place of supply of those goods or services. For example, ■ persons resident in an EU Member State (other than Ireland) or business-to-business supplies of services take place where the a country with which Ireland has concluded a double tax treaty recipient is established. (“EU/treaty state”); The supply of the following goods and services is exempt from ■ companies ultimately controlled by persons who are resident in VAT: most banking, insurance and financial services; medical an EU/treaty state; and services; education and training services; and passenger transport. ■ companies whose shares are substantially and regularly traded The transfer of certain assets of a business between accountable on a recognised stock exchange in an EU/treaty state, or where persons is not subject to VAT where the assets constitute an the recipient company is a 75% subsidiary of such a company undertaking capable of being carried on independently. or is wholly owned by two or more of such companies.

2.4 Is it always fully recoverable by all businesses? If not, 3.2 Would there be any withholding tax on royalties paid by what are the relevant restrictions? a local company to a non-resident?

VAT incurred will generally be recoverable as long as it is incurred Royalties are not generally subject to withholding tax unless paid in by a taxable person (a person who is, or is required to be, VAT-regis- respect of an Irish patent. tered) for the purpose of making taxable supplies of goods and No withholding tax will apply to royalties paid in the course of a services. VAT incurred by a person who makes exempt supplies is trade or business to a company resident in an EU/treaty state or paid not recoverable. Where a taxable person makes exempt, non-exempt between “associated companies” in the EU. or non-business supplies, VAT recovery will be allowed in respect of It is Irish Revenue’s administrative practice, since 2010, not to the non-exempt supplies only. However, if the VAT incurred cannot charge withholding tax on royalties payable under a licence agree- be attributed to either (for example, general overheads), the VAT ment executed in a foreign territory, which is subject to the law and must be apportioned between the taxable and exempt supplies. jurisdiction of a foreign territory (subject to the Irish company obtaining advance approval from Revenue). 2.5 Does your jurisdiction permit VAT grouping and, if so, is it “establishment only” VAT grouping, such as that applied 3.3 Would there be any withholding tax on interest paid by by Sweden in the Skandia case? a local company to a non-resident?

Under Ireland’s VAT grouping rules, inclusion within a VAT group Payments of “yearly” interest by an Irish corporation to a non- is on an all-or-nothing basis for a legal entity, and once a branch is resident are normally subject to withholding tax at 20%. There are included within an Irish VAT group registration, the entire legal wide exemptions from this requirement, the most notable of which entity is included. Irish Revenue is still considering the implications include payments: of the Skandia decision. ■ between “associated companies” under the EU Interest and Royalties Directive; ■ by a company in the ordinary course of its trade or business to a 2.6 Are there any other transaction taxes payable by company resident in an EU/treaty state (provided the payments companies? do not relate to an Irish branch or agency of the lender), where that state imposes a tax that generally applies to interest receivable Certain taxes, including interest withholding tax, dividend withholding in that state by companies from sources outside that state; tax, professional services withholding tax and relevant contract tax, ■ on quoted Eurobonds; or may be payable depending on the nature of the transaction and the ■ by an Irish “section 110 company” to a person resident in an type of business carried on by the parties to the transaction. EU/treaty state, other than where it relates to an Irish branch or agency. 2.7 Are there any other indirect taxes of which we should be aware? 3.4 Would relief for interest so paid be restricted by Customs duties are payable on goods imported from outside the EU. reference to “thin capitalisation” rules? Excise duty applies at varying rates to mineral oils, alcohol and There are no “thin capitalisation” rules applicable in Ireland. alcoholic beverages, tobacco products and electricity, and will also

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It is nonetheless possible in certain limited cases that the interest Earlier this year on 18 February 2019, the Irish Government may be reclassified as a distribution, preventing such interest from launched a public consultation concerning the domestic transfer being tax-deductible. pricing regime. The Department of Finance published its Feedback Statement arising from the consultation in late August 2019. The 3.5 If so, is there a “safe harbour” by reference to which tax document outlined potential new provisions alongside some examples as to how legislation could be enacted to achieve certain relief is assured? objectives, which were expressed by the relevant industry Interest that would ordinarily be reclassified as a distribution may stakeholders. In particular, the Feedback Statement sought to nevertheless be deductible for an Irish “section 110 company” if one address the following areas of concern: of four safe harbours apply, including where the recipient is resident ■ the application of transfer pricing rules to pre-1 July 2010 and subject to tax in an EU/treaty state. arrangements; ■ the extension of transfer pricing rules to non-trading income and to capital transactions; 3.6 Would any such rules extend to debt advanced by a ■ the extension of transfer pricing rules to SMEs; and third party but guaranteed by a parent company? ■ enhancing the documentary requirements concerning transfer pricing. This is not applicable. When enacted, the new provisions will apply for chargeable

periods commencing on or after 1 January 2020. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non-resident, for example 4 Tax on Business Operations: General pursuant to BEPS Action 4? 4.1 What is the headline rate of tax on corporate proﬁts? Interest is generally deductible if provided for as an expense in the statutory accounts of the company, and is incurred wholly and Ireland has two rates of corporation tax, a 12.5% rate and a 25% exclusively for the purposes of its trade. rate. Subject to meeting certain conditions, interest incurred in lending The 12.5% rate applies to the trading profits of a company which money to a trading or property rental company or in acquiring shares carries on a trade in Ireland. There is no precise definition of what in a trading or property rental company, or a holding company of constitutes a trade for this purpose. As a general rule, it would such a company, should also be deductible. require people on the ground in Ireland carrying out real economic Tax relief for interest is restricted where it is paid for acquiring activity on a regular or habitual basis, and normally with a view to shares in or lending money to a connected company, or for the realising a profit. purposes of acquiring a trade or business of that or another connected The corporation tax rate of 25% applies in respect of passive company (irrespective of the payee’s country of residence). income, profits arising from a possession outside of Ireland (i.e. The new EU Anti-Tax Avoidance Directive (“EU ATAD”) foreign trade carried on wholly outside of Ireland) and profits of contains certain restrictions on borrowing costs. In April 2019, the certain trades, such as dealing in or developing land and mineral European Commission served a formal notice on Ireland asking it exploration activities. to implement interest limitation rules sooner than the planned date in 2024. 4.2 Is the tax base accounting proﬁt subject to In a tax strategy paper released in July 2019, the Irish Department of Finance has publicly stated that work has commenced to bring adjustments, or something else? forward the transposition process. In the view of many in the A company’s profits for tax purposes will follow its accounts, industry, this could lead to the introduction of the rules in 2020 or provided that they are prepared in accordance with generally 2021. accepted accounting principles, subject to specific adjustments

required by Irish tax legislation. 3.8 Is there any withholding tax on property rental payments made to non-residents? 4.3 If the tax base is accounting proﬁt subject to Withholding tax applies at a rate of 20% on rent paid directly to a adjustments, what are the main adjustments? non-resident landlord in respect of Irish situated property (payable Revenue expenses which are not incurred wholly and exclusively for to Irish Revenue by the tenant). the purposes of the trade are not deductible from the company’s The appointment of an Irish tax-resident agent by the non- taxable profits. resident landlord to collect rental payments on his behalf excludes While accounting-based depreciation of assets is not generally the application of withholding tax on the rent altogether. deductible, tax-based depreciation can be taken into account for

“plant and machinery” and “industrial buildings”, subject to meeting 3.9 Does your jurisdiction have transfer pricing rules? certain conditions. It is possible to carry forward trading profits arising from the same Yes, Ireland has had transfer pricing rules since 2011 and these apply trade and surrender losses from group companies to reduce taxable to arrangements entered into between associated companies where profits. one of them carries on a trade. If an arrangement is not made at arm’s length, an adjustment will be made to the trading profits to reflect an arm’s length amount. The Irish tax legislation refers to the 4.4 Are there any tax grouping rules? Do these allow for OECD Transfer Pricing Guidelines for the interpretation of the relief in your jurisdiction for losses of overseas subsidiaries? arm’s length principle. There is an exemption for small and medium- sized enterprises. Yes. Companies can be grouped for different tax purposes (but are not taxed on the basis of consolidated accounts).

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For loss relief and capital gains tax (“CGT”) purposes, a group exempt from CGT. The subsidiary must carry on a trade, or the consists of a principal company and all its effective 75% subsidiaries. activities of the disposing company and all of its 5% subsidiaries An Irish company may be allowed relief for losses in an Irish taken together must amount to trading activities. subsidiary and for losses in an overseas subsidiary provided that the loss is not available for use by the overseas subsidiary. Capital losses 5.3 Is there any special relief for reinvestment? cannot be surrendered between members of a CGT group. Capital assets may be transferred between group members on a No, there is no such relief. no gain/no loss basis. This has the effect of postponing liability until the asset is transferred outside the group or until the company 5.4 Does your jurisdiction impose withholding tax on the holding the asset is transferred outside the group. proceeds of selling a direct or indirect interest in local Payments between members of a 51% group can be made without withholding. assets/shares? Transfers between associated companies are exempt from stamp Where a company disposes of Irish real estate, or shares deriving more duty where certain conditions are met. than 50% of their value from Irish real estate, for a consideration It is possible to apply for a VAT grouping of companies exceeding €500,000, or in the case of residential property exceeding established in Ireland that are under common control. Transactions €1 million, the purchaser is obliged to withhold 15% of the sales between these companies are disregarded for VAT purposes. proceeds unless the purchaser obtains a CG50 clearance certificate

from Irish Revenue. Such certificate will be issued where the vendor 4.5 Do tax losses survive a change of ownership? is resident in Ireland, the CGT has been paid or no CGT arises.

Tax losses may survive a change in ownership but there are rules denying the use of carry-forward losses in certain circumstances 6 Local Branch or Subsidiary? following such a change. 6.1 What taxes (e.g. capital duty) would be imposed upon 4.6 Is tax imposed at a different rate upon distributed, as the formation of a subsidiary? opposed to retained, profits? No taxes would be imposed. A surcharge of 20% applies in respect of “estate and investment” income retained by “close” companies. In general terms, close 6.2 Is there a difference between the taxation of a local companies are ones which are controlled by five or fewer people. A subsidiary and a local branch of a non-resident company (for surcharge of 15% will also be applicable in respect of retained example, a branch profits tax)? professional income in cases of close “professional” service companies. Yes. An Irish-resident subsidiary would pay corporation tax on its worldwide income and gains, whereas a branch would be liable to 4.7 Are companies subject to any significant taxes not corporation tax only on the items listed in question 6.3. The charge covered elsewhere in this chapter – e.g. tax on the to Irish corporation tax only applies where the non-resident company is carrying on a trade in Ireland through the branch. A occupation of property? branch set up for investment purposes only, and not carrying on a Other than “local” rates which may apply to the occupation of trade, is not subject to Irish corporation tax, though certain Irish commercial property, no they are not. source income (mainly rent and interest) may be subject to income tax either through withholding or by way of income tax charge, subject to any available exemptions. A branch would not be subject 5 Capital Gains to a branch profits tax.

5.1 Is there a special set of rules for taxing capital gains 6.3 How would the taxable proﬁts of a local branch be and losses? determined in its jurisdiction? Yes, there is a separate set of rules for computing capital gains. A non-resident company carrying on a trade through an Irish branch Those rules are broadly as follows: is subject to Irish tax on the following items: ■ costs of acquisition and disposal are deducted from disposal ■ the trading income arising directly or indirectly through or from proceeds; the branch; ■ enhancement expenditure is generally deductible where such ■ income from property or rights used by, held by or for the expenditure is reflected in the value of the asset; branch; and ■ the application of capital losses carried forward may reduce the ■ such gains as, but for the corporation tax rules, would be charge- amount of gain; and able to CGT in the case of a company not resident in Ireland. ■ the purchase price and enhancement expenditure may be The profits subject to tax may arise from within Ireland and from adjusted for inflation (indexation relief). abroad. The rate of tax imposed upon capital gains is currently 33% and therefore differs from the rate imposed on business profits (12.5% for trading income and 25% for investment income). 6.4 Would a branch beneﬁt from double tax relief in its jurisdiction? 5.2 Is there a participation exemption for capital gains? Irish domestic legislation does not give treaty relief against Irish tax Where an Irish company disposes of shares in a company resident unless the person claiming credit is resident in Ireland for the in Ireland or an EU/treaty state, in which it has held at least 5% of accounting period in question. This means that the Irish branch of the ordinary shares for more than 12 months, any gain should be a non-resident company cannot claim treaty relief.

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6.5 Would any withholding tax or other similar tax be CFC retains undistributed income arising from arrangements, the essential purpose of which is not to secure a tax advantage, then no imposed as the result of a remittance of profits by the branch? Irish CFC charge is applicable to that income. No such tax would be imposed. 8 Taxation of Commercial Real Estate 7 Overseas Profits 8.1 Are non-residents taxed on the disposal of commercial 7.1 Does your jurisdiction tax profits earned in overseas real estate in your jurisdiction? branches? CGT arises on the disposal of commercial Irish real estate by non- Profits in overseas branches are, as a general rule, taxed in Ireland residents. because an Irish resident company is subject to corporation tax on its worldwide profits. It is nonetheless generally possible to claim a 8.2 Does your jurisdiction impose tax on the transfer of an tax credit for the foreign tax paid. indirect interest in commercial real estate in your jurisdiction?

7.2 Is tax imposed on the receipt of dividends by a local CGT arises on the disposal of shares or securities (other than shares or securities quoted on a stock exchange) deriving their value, or the company from a non-resident company? greater part of their value, directly or indirectly from Irish commer- Dividends received from a non-resident company are generally taxed cial real estate. at 25% but the lower rate of 12.5% applies in many cases, including where dividends are paid out of the “trading profits” of a company 8.3 Does your jurisdiction have a special tax regime for resident in an EU/treaty state or in a country which is a signatory to Real Estate Investment Trusts (REITs) or their equivalent? the Convention on Mutual Administrative Assistance in Tax Matters. In any event, tax credits can be claimed, up to the Irish corporation Ireland introduced a REIT regime in 2013. A REIT is exempt from tax due, for: tax on income and chargeable gains of its property rental business, ■ withholding tax suffered on the dividend; and provided it meets certain conditions as to Irish residence, listing of ■ underlying tax suffered on the trading profits out of which the shares (on an EU stock exchange), derives 75% of its assets and profits dividend was paid. from its property rental business and distributes 85% of its property It is possible to pool and carry forward excess foreign tax credits income by dividends to shareholders in each accounting period. and offset these against Irish corporation tax on other foreign Income tax can apply where a dividend is paid to a shareholder who dividends. holds at least 10% of the share capital or voting rights in the REIT.

7.3 Does your jurisdiction have “controlled foreign 9 Anti-avoidance and Compliance company” rules and, if so, when do these apply? 9.1 Does your jurisdiction have a general anti-avoidance or Following the formal adoption of the EU ATAD by the Economic anti-abuse rule? and Financial Affairs. Council of the European Union on 12 July 2016, Ireland was Ireland has a general anti-avoidance provision, section 811 of the required to introduce legislation to reflect the Controlled Foreign Irish Taxes Consolidation Act 1997, the applicability of which was Company (“CFC”) Rules contained in Article 7 of the Directive. The considered by the Irish Supreme Court in O’Flynn Construction Limited rules were enacted through the Finance Act 2018, with effect from 1 & Others v The Revenue Commissioners. January 2019. Significantly, an entity will be considered a controlled Section 811 applies where Irish Revenue forms an opinion that a foreign company where it is subject to greater than 25% control by a transaction gives rise to a tax advantage for the taxpayer, was not parent company and its associated enterprises in a group structure, undertaken for any other purpose but obtaining that advantage and and the tax paid on its profits is less than the difference between the would be a misuse or abuse of any relief sought by the taxpayer. corporate tax that would have been charged in Ireland and the actual Article 6 of the EU ATAD also introduces a broad general anti- corporate tax which has been paid. However, there is an exclusion avoidance provision. However, the existing Irish general anti-avoidance for taxpayers who satisfy either of the following conditions, namely: provision in section 811 is regarded as being broader than that ■ having accounting profits of €750,000 or less, and non-trading contained in Article 6 and, accordingly, it is considered that no income of €75,000 or less; or further amendment to section 811 is envisaged at this time. ■ the accounting profits of the taxpayer are less than €75,000 for the applicable tax period. 9.2 Is there a requirement to make special disclosure of There are also two further exemptions concerning transfer pricing and the essential purpose test. avoidance schemes? The CFC Rules tax an Irish group entity on the amount of undis- Yes, Ireland has a mandatory disclosure regime for tax avoidance tributed profits of a CFC, which can reasonably be attributable to transactions, similar to the regime in the UK. Section 817D – certain activities that are carried out by that entity in Ireland. section 817T of the Taxes Consolidation Act (“TCA”) deal with the The rate of Irish tax chargeable will depend on the nature of the mandatory reporting of certain defined transactions. income. In Ireland, trading income is taxed at 12.5% and non- The regime aims to enforce promoters, advisors and, on occasion, trading income is taxed at 25%. A credit is available for any foreign the clients who implement tax avoidance schemes to inform tax paid by the CFC on its undistributed income. Revenue of the details of such schemes. In this regard, to the extent that the CFC retains undistributed The promoter includes persons involved in designing, managing income arising from arrangements which are within the scope of the or marketing the transaction. The promoter is entitled to assert legal Irish transfer pricing regime, or it is reasonable to conclude that such professional privilege when making the disclosure, subject to arrangements conform to the “arm’s length” principle, no Irish CFC informing the taxpayer of its obligation to disclose the transaction charge is applicable to that income. Similarly, to the extent that the directly to Revenue.

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Failure to comply can result in penalties determined by the court ratification with the OECD before 1 October 2019 (including in amounts ranging up to a maximum of €4,000, plus €500 per day Australia, France, the Netherlands, Japan and the United Kingdom), for each day the scheme remains unnotified after the due date for the MLI enters into effect for taxes withheld at source from 1 notification. January 2020 and for all other taxes for taxable periods beginning on Ireland has also introduced DAC 6, as explained in question 9.3 or after 1 November 2019 (subject to any reservations). below. 10.3 Does your jurisdiction intend to adopt any legislation to 9.3 Does your jurisdiction have rules which target not only tackle BEPS which goes beyond the OECD’s taxpayers engaging in tax avoidance but also anyone who recommendations? promotes, enables or facilitates the tax avoidance? Ireland’s objective is to adopt the best international practice. In addition to the Irish mandatory disclosure regime, in May 2018 Preceding BEPS, Ireland already operated certain anti-avoidance the Council of the European Union adopted a directive introducing measures not existing in other OECD countries, such as a legislative new EU mandatory disclosure rules. The rules are aimed at “cross- general anti-avoidance rule (“GAAR”) and rules denying tax border tax arrangements”. They therefore have a slightly different deductibility in Ireland in certain cases to payments, which are not emphasis to the Irish rules. The directive targets intermediaries such correspondingly taxed in an EU/DTT country. as tax advisors, accountants and lawyers that design and/or promote tax planning schemes, and will require them to report schemes that 10.4 Does your jurisdiction support information obtained are potentially aggressive. under Country-by-Country Reporting (CBCR) being made DAC 6 will be transposed into Irish legislation by 31 December 2019, but reporting must include transactions implemented from 25 available to the public? June 2018. Regulations implementing CBCR have applied since 2016 to groups

with an Irish presence and turnover exceeding €750 million. 9.4 Does your jurisdiction encourage “co-operative However, section 851A TCA 1997 provides that all taxpayer informa- compliance” and, if so, does this provide procedural beneﬁts tion is confidential and may only be disclosed in accordance with the only or result in a reduction of tax? law – the information contained in the CBC Reports/equivalent CBC Reports will be treated in the same manner as all other taxpayer Yes, in January 2017 Irish Revenue relaunched its cooperative information provided to/received by Revenue. compliance framework (“CCF”) for large cases division (“LCD”) taxpayers. 10.5 Does your jurisdiction maintain any preferential tax The CCF is designed to promote open communication between regimes such as a patent box? Irish Revenue and larger taxpayers, reflecting the mutual interest in being certain about tax liabilities and ensuring that there are no Ireland has recently introduced a “knowledge development box” surprises in later reviews. It is entirely voluntary and does not result (“KDB”), which provides for an effective 6.25% tax rate on income in a reduction of tax. from IP and software that was improved, created or developed in Ireland. 10 BEPS and Tax Competition Additionally, Ireland amended its legislation in relation to securitisation companies (section 110 TCA) in 2011, in advance of 10.1 Has your jurisdiction introduced any legislation in BEPS, to prevent certain possible cross-border “double non- response to the OECD’s project targeting BEPS? taxation” results arising.

In response to certain themes emerging from the BEPS consultation, 11 Taxing the Digital Economy Ireland amended its corporate tax residence rules in order to phase out the so-called “double Irish” structure used by certain multi- 11.1 Has your jurisdiction taken any unilateral action to tax national groups. digital activities or to expand the tax base to capture digital It has also introduced country-by-country reporting and updated its transfer pricing legislation as recommended in the BEPS reports. presence? Ireland is also in the process of implementing EU ATAD, which No such unilateral action has been taken in Ireland. is itself a response to BEPS. After engaging in a series of consultations on the implementation of ATAD measures, CFC Rules were introduced in 2018, and hybrid measures are to be 11.2 Does your jurisdiction favour any of the G20/OECD’s included in the Finance Bill 2019. Interest limitation may be intro- “Pillar One” options (user participation, marketing intangibles duced in this or, more likely, a subsequent Finance Bill. or signiﬁcant economic presence)?

10.2 Has your jurisdiction signed the tax treaty MLI and The Irish Government has strongly opposed the European Commission’s interim proposal for a digital tax, with the Irish deposited its instrument of ratiﬁcation with the OECD? Minister for Finance emphasising the need for unanimity before any The MLI enters into force for a treaty country three calendar months EU digital tax proposal can be agreed. Reference was made to the after they lodge their instrument of ratification with the OECD. OECD reports on digital taxation, hinting at a need for broader The MLI came into force in Ireland on 1 May 2019. The MLI international consensus on this issue, rather than EU-focused comes into effect for withholding taxes on 1 January of the year after measures. At a speech given by the Minister at the Irish Tax Institute the MLI came into force for both treaty partners (unless one of the Global Tax Policy Conference in May 2019, he reiterated his belief countries has opted to delay by one year). For all other taxes, it that corporate tax should be paid where value is created in accord- comes into effect six months after the MLI came into force. So, for ance with the arm’s length principle and that the widely accepted treaties where Ireland’s treaty partner lodged their instrument of principle should be kept in mind while working towards a mutually acceptable solution.

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In response to the OECD’s public consultation “Addressing the Tax Challenges of the Digitalisation of the Economy” in March 2019, a number of submissions from Irish stakeholders were made. Some of the reoccurring points raised in those submissions were: ■ marketing intangibles must have a credible basis and should not be considered a “catch-all”; ■ the digital economy should not be ring-fenced from the rest of the economy for tax purposes; ■ any solution should focus on the economic link between the user or market jurisdiction and the value created; and ■ any further BEPS rules must have a clear evidence base and respect existing rights.

Andrew Quinn is head of the Tax team 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 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 multi-jurisdictional guide. He was most recently recommended in Who’s Who Legal Corporate Tax 2018. Andrew is also the joint author of the book Taxing Financial Transactions, Irish Taxation Institute.

Maples Group Tel: +353 1 619 2038 75 St. Stephen’s Green Email: [email protected] Dublin 2 URL: www.maples.com Ireland

Maples Group Tel: +353 1 619 2779 75 St. Stephen’s Green Email: [email protected] Dublin 2 URL: www.maples.com Ireland

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Israel Israel

Tali Yaron-Eldar

Yaron-Eldar, Paller, Schwartz & Co. Gilad Ben Ami

1 Tax Treaties and Residence 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? 1.1 How many income tax treaties are currently in force in VAT is charged on almost all transactions in Israel, or with respect to your jurisdiction? an asset in Israel, with exceptions such as 0% VAT being applicable in different situations, including services to a non-Israeli, etc. There are currently 57 income tax treaties in force in Israel.

2.4 Is it always fully recoverable by all businesses? If not, 1.2 Do they generally follow the OECD Model Convention or what are the relevant restrictions? another model? VAT cannot be recovered if it was not used for a taxable transaction They generally follow the OECD model convention. in VAT.

1.3 Do treaties have to be incorporated into domestic law 2.5 Does your jurisdiction permit VAT grouping and, if so, before they take effect? is it “establishment only” VAT grouping, such as that applied Yes, treaties must be incorporated into domestic law before they take by Sweden in the Skandia case? effect. Yes, VAT grouping is permitted in Israel. It is an “establishment only” VAT grouping. 1.4 Do they generally incorporate anti-treaty shopping

rules (or “limitation on beneﬁts” articles)? 2.6 Are there any other transaction taxes payable by Yes, they generally incorporate anti-treaty shopping rules. companies?

Yes, with respect to Real Estate. 1.5 Are treaties overridden by any rules of domestic law

(whether existing when the treaty takes effect or introduced 2.7 Are there any other indirect taxes of which we should subsequently)? be aware? No, treaties cannot be overridden by any rules of domestic law. Yes, excise tax and purchase tax.

1.6 What is the test in domestic law for determining the 3 Cross-border Payments residence of a company?

A company is a resident of Israel if (a) it was incorporated under the 3.1 Is any withholding tax imposed on dividends paid by a law of Israel, or (b) if the “control and management” of the locally resident company to a non-resident? company is exercised from Israel. Yes. Companies at a rate of 25% and individuals at a rate of 25– 2 Transaction Taxes 30%, depending on the individual’s holding percentage. The rate may be reduced under the applicable DTT.

2.1 Are there any documentary taxes in your jurisdiction? 3.2 Would there be any withholding tax on royalties paid by Yes, documentary taxes apply in Israel. a local company to a non-resident?

Yes, withholding taxes can be applied to royalties paid by a local 2.2 Do you have Value Added Tax (or a similar tax)? If so, at company to a non-resident. what rate or rates? Yes, VAT applies at a rate of 17%.

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3.3 Would there be any withholding tax on interest paid by 4.6 Is tax imposed at a different rate upon distributed, as a local company to a non-resident? opposed to retained, proﬁts?

Yes, withholding tax can be applied to interest paid by a local No, tax is not imposed at a different rate upon distributed profits. company to a non-resident. 4.7 Are companies subject to any signiﬁcant taxes not 3.4 Would relief for interest so paid be restricted by covered elsewhere in this chapter – e.g. tax on the reference to “thin capitalisation” rules? occupation of property?

No, it would not. No, they are not.

3.5 If so, is there a “safe harbour” by reference to which tax 5 Capital Gains relief is assured? 5.1 Is there a special set of rules for taxing capital gains This is not applicable in Israel. and losses?

3.6 Would any such rules extend to debt advanced by a Yes, a special set of rules apply for taxing capital gains and losses. third party but guaranteed by a parent company? 5.2 Is there a participation exemption for capital gains? This is not applicable in Israel. Yes, there is a participation exemption for capital gains. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non-resident, for example 5.3 Is there any special relief for reinvestment? pursuant to BEPS Action 4? No, there is no special relief for reinvestment. Yes. Some loans may be re-classified as equity instruments. 5.4 Does your jurisdiction impose withholding tax on the 3.8 Is there any withholding tax on property rental proceeds of selling a direct or indirect interest in local payments made to non-residents? assets/shares?

No, as long as the rental payments are for residential use. Yes. In Israel withholding tax can be imposed on the proceeds of selling a direct or indirect interest in local assets or shares. 3.9 Does your jurisdiction have transfer pricing rules? 6 Local Branch or Subsidiary? Yes, transfer pricing rules are used in Israel. 6.1 What taxes (e.g. capital duty) would be imposed upon 4 Tax on Business Operations: General the formation of a subsidiary?

4.1 What is the headline rate of tax on corporate proﬁts? There are no taxes to be imposed.

The headline rate of tax on corporate profits is 23%. 6.2 Is there a difference between the taxation of a local

subsidiary and a local branch of a non-resident company (for 4.2 Is the tax base accounting proﬁt subject to example, a branch proﬁts tax)? adjustments, or something else? The difference is mainly on distributions, as there is not any Yes, the tax base accounting profit can be subject to adjustments. applicable branch taxation in Israel.

4.3 If the tax base is accounting proﬁt subject to 6.3 How would the taxable proﬁts of a local branch be adjustments, what are the main adjustments? determined in its jurisdiction?

The main adjustments are inflation, depreciation, interest, etc. As the profits of a company in Israel.

4.4 Are there any tax grouping rules? Do these allow for 6.4 Would a branch beneﬁt from double tax relief in its relief in your jurisdiction for losses of overseas subsidiaries? jurisdiction?

Yes, there are tax grouping rules in Israel with respect to industrial Yes, a branch would benefit from double tax relief in its jurisdiction. entities, although no relief is allowed for losses of overseas subsidiaries. 6.5 Would any withholding tax or other similar tax be

imposed as the result of a remittance of proﬁts by the branch? 4.5 Do tax losses survive a change of ownership? No withholding tax or other similar tax applies. Yes, tax losses will survive a change of ownership.

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7 Overseas Proﬁts 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who 7.1 Does your jurisdiction tax proﬁts earned in overseas promotes, enables or facilitates the tax avoidance? branches? Yes, in Israel there exist rules which target persons who enable or Yes. In Israel tax profits earned in overseas branches can be taxed. facilitate tax avoidance.

7.2 Is tax imposed on the receipt of dividends by a local 9.4 Does your jurisdiction encourage “co-operative company from a non-resident company? compliance” and, if so, does this provide procedural beneﬁts only or result in a reduction of tax? Yes, tax can be imposed on the receipt of dividends from a non- resident company. Yes, it does.

7.3 Does your jurisdiction have “controlled foreign 10 BEPS and Tax Competition company” rules and, if so, when do these apply? 10.1 Has your jurisdiction introduced any legislation in Yes, upon meeting the following criteria: response to the OECD’s project targeting BEPS? A. It is held by at least 50% Israeli shareholders (directly or indirectly). Yes, it has. B. It is not registered in a stock exchange. C. Most of its income or profits are passive. 10.2 Has your jurisdiction signed the tax treaty MLI and D. It is subject to an effective tax of less than 15% in the non- deposited its instrument of ratiﬁcation with the OECD? Israeli country. Yes, Israel has signed the tax treaty MLI. 8 Taxation of Commercial Real Estate 10.3 Does your jurisdiction intend to adopt any legislation to 8.1 Are non-residents taxed on the disposal of commercial tackle BEPS which goes beyond the OECD’s real estate in your jurisdiction? recommendations? Yes, non-residents are taxed on the disposal of commercial real No, there are no current plans to adopt any legislation to tackle estate in Israel. BEPS which goes beyond the OECD’s recommendations.

8.2 Does your jurisdiction impose tax on the transfer of an 10.4 Does your jurisdiction support information obtained indirect interest in commercial real estate in your jurisdiction? under Country-by-Country Reporting (CBCR) being made Yes. In Israel, tax can be imposed on the transfer of an indirect available to the public? interest in commercial real estate. No, Israel does not support information obtained under CBCR being made available to the public. 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent? 10.5 Does your jurisdiction maintain any preferential tax Yes, a special tax regime for REITs exist in Israel. regimes such as a patent box?

Yes, such as the Encouragement of Capital Investments Law. 9 Anti-avoidance and Compliance 11 Taxing the Digital Economy 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? 11.1 Has your jurisdiction taken any unilateral action to tax Yes, such rules exist in Israel. digital activities or to expand the tax base to capture digital presence? 9.2 Is there a requirement to make special disclosure of For this period only, under the tax authorities’ decision, no legislation avoidance schemes? has been enacted yet.

Yes. 11.2 Does your jurisdiction favour any of the G20/OECD’s “Pillar One” options (user participation, marketing intangibles or signiﬁcant economic presence)?

This is not applicable in Israel.

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Adv. Tali Yaron-Eldar, a founding partner of YETAX & BUSINESS, is one of Israel's leading lawyers in the field of taxation, as recognised by many Israeli and international legal directories. Tali possesses extensive experience in the fields of family wealth and trust fund management and direct and indirect taxation, both locally and internationally. For over 27 years, Tali has been providing tax advice to a wide range of clients, based on her cumulative experience at the tax authorities, where she served as the Income Tax Commissioner and held the position of Chief Legal Advisor of the Customs and VAT Authority. Tali is regularly consulted by the Israeli tax authorities and other policy makers regarding taxation matters, as well as the country’s budget, due to her experience as the Income Tax Commissioner.

Yaron-Eldar, Paller, Schwartz & Co. Tel: +972 7473 39222 4 Ariel Sharon Road, HaShahar Tower Email: [email protected] Givataim URL: www.yetax.co.il Israel

Adv. Gilad Ben Ami is a founding partner of YETAX & BUSINESS. Gilad brings to the table an extensive experience in tax planning, with special expertise in international tax planning, and consulting on tax matters in multinational transactions. Additionally, Gilad has an extensive experience in representing clients in front of the tax authorities in disputes regarding tax matters, and representing and consulting to clients on M&A transactions on large scales, including investment funds, multinational corporations, start-up companies, employees’ incentive plans and various tax matters.

Yaron-Eldar, Paller, Schwartz & Co. Tel: +972 7473 39222 4 Ariel Sharon Road, HaShahar Tower Email: [email protected] Givataim URL: www.yetax.co.il Israel

Yaron-Eldar, Paller, Schwartz & Co. is among the leading and most professional boutique firms in the Israeli legal market, specialising in a wide array of both local and international tax matters. The firm is comprised of 15 outstanding attorneys – an unprecedented number for an Israeli boutique tax law firm, even when compared to the leading tax departments within the major law firms in Israel, due to the wide scope of work and the need for expertise in the tax field. The firm is one of the few firms in Israel where the partners have enjoyed senior roles and gained wide expertise while serving for the Israeli tax authorities. In contrast to the large firms’ tax departments, where clients receive tax advice regarding specific issues, such as mergers and acquisitions, YETAX & BUSINESS provides its clients with comprehensive tax services. The tax services offered by the firm are essential for the organisations and individuals it advises. www.yetax.co.il

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Italy Italy

Massimo Di Terlizzi

Pirola Pennuto Zei e Associati Andrea Savino

1 Tax Treaties and Residence 2 Transaction Taxes

1.1 How many income tax treaties are currently in force in 2.1 Are there any documentary taxes in your jurisdiction? your jurisdiction? Transfers of assets performed within the Italian territory are Italy currently has bilateral Tax Treaties in place with 96 countries. generally subject to registration tax, as the relevant deed of transfer (even if only voluntary) is subject to registration on the Public Register. Registration Tax is applied at a fixed amount of €200.00, 1.2 Do they generally follow the OECD Model Convention or if the transfer is subject to VAT or in proportional amount, with another model? rates varying – depending on the kind of assets – from 0.5% to 3%, up to a maximum of 15% in case of real estate properties. Italian Tax Treaties generally follow the OECD model. Certain deeds/certificates/documents, expressly indicated by law

are further subject to stamp tax, which is applied at a fixed amount 1.3 Do treaties have to be incorporated into domestic law (from €1.00 to €300.00) or proportionally (rates generally range before they take effect? from 0.01% to 0.12%). The transfers of shares and of participating financial instruments Tax Treaties have to be ratified by both the Italian Parliament and in Italian companies are generally subject to financial transaction tax the relevant foreign country’s Parliament. Such a ratification passes (0.2% or 0.1% in case of quoted companies), due by the purchaser, through domestic law. regardless of the tax residence of the seller and of the purchaser as well as the territory in which the transfer is carried out. Some 1.4 Do they generally incorporate anti-treaty shopping exemptions and exclusions are provided for by the law (transfer of rules (or “limitation on beneﬁts” articles)? limited liability companies’ quotas or intercompany transactions).

Italian Tax Treaties generally do not contain any anti-treaty shopping 2.2 Do you have Value Added Tax (or a similar tax)? If so, at rules; with the exception of treaties signed with the USA, Chile and what rate or rates? Switzerland. VAT is generally applied in Italy on sales of goods and services, at 1.5 Are treaties overridden by any rules of domestic law the following rates: (whether existing when the treaty takes effect or introduced ■ 22% standard rate; ■ 10% reduced rate applied (sales of certain food and pharma subsequently)? products, water/gas/electricity supplies in specific cases, trans- Unless more favourable, domestic laws cannot override treaties. port services, non-luxury real estate properties); ■ 5% further reduced rate applied, social and health services by social co-operatives; and 1.6 What is the test in domestic law for determining the ■ 4% ultra-reduced rate applied for specific food products, books residence of a company? and newspapers.

A company is qualified as an Italian resident, for Tax purposes, for the greater part of the year if, alternatively, it has: 2.3 Is VAT (or any similar tax) charged on all transactions ■ a legal seat; or are there any relevant exclusions? ■ the place of effective management; or ■ the main object/purpose of the business. Certain VAT exclusions are provided, for instance: in case of inter- The Italian Tax Law provides for anti-abuse provisions that national sales of goods/provision of services; sales of agricultural consider a foreign company as Italian resident even if it formally has lands; financial transactions; and real properties. its legal seat abroad. Transfer of sales branch of business in the context of M&A transactions are not subject to VAT, however, they are subject to registration tax depending the type of assets included in the branch of business.

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2.4 Is it always fully recoverable by all businesses? If not, A reduced rate of 1.20% applies, provided that the recipient: ■ is a company or an entity (with no permanent establishment in what are the relevant restrictions? Italy) resident in an EU/EEA country, which allows an adequate Generally, VAT is recoverable for taxable persons in the context of exchange of information with Italy; and B2B transactions (it is not recoverable by the consumers); if the ■ is liable to corporate income tax in its State of residence. purchase of goods/services is pertinent to the business activity, it is According to Directive 2011/96/EU (“EU Parent-Subsidiary subject to VAT. VAT is not recoverable for taxable persons who Directive”), no withholding tax is applied on dividends paid by an carry out VAT-exempt transactions (banks, insurances, hospitals, Italian subsidiary to its foreign parent company, if such a recipient: etc.). In case a taxable person carries out both VAT-taxable activities ■ is tax-resident in an EU Member State; and VAT-exempt activities, VAT paid to suppliers is recoverable ■ meets the requirements provided by the Directive, to be according to the pro rata mechanism. considered as “qualified” for the purposes of the Directive; Limitation to VAT deduction is provided for with respect to the ■ is subject to corporate income tax in its State of residence; and purchase of certain goods and services (cars, telephone devices and ■ has held at least 10% of the capital of the Italian subsidiary for, services, representative expenses, etc.). at least, one year.

2.5 Does your jurisdiction permit VAT grouping and, if so, 3.2 Would there be any withholding tax on royalties paid by is it “establishment only” VAT grouping, such as that applied a local company to a non-resident? Skandia by Sweden in the case? As a general rule, the payment of royalties towards a non-resident recipient is subject to a final 30% withholding tax (or to the lower Italian corporate groups are allowed to opt for the set-off of VAT rates provided for by a double tax treaty, if any). credits and debts emerging from the annual tax return of the According to Directive 2003/49/EU (“EU Interest and Royalties companies belonging to the group. Directive”), no withholding tax is levied on royalties paid to foreign Starting from 2019, it is also possible for taxpayers established in companies (or permanent establishments) if the following the State (including permanent establishments of foreign companies) requirements are met: which qualify as the holding of a group of companies – meeting ■ the recipient is tax-resident in another EU Member State, is specific financial, economic and organisational requirements – to opt considered as “qualified” for the purposes of the Directive and for the establishment of a VAT group. Such VAT groups are is liable to corporate income tax in its State of residence; qualified as a single taxable person for VAT purposes, obtaining ■ the royalties are subject to corporate income tax in the State of several benefits including the exclusion from VAT on intra-group residence of the recipient; and transactions. ■ the recipient and the payer qualify as “associated companies”:

(a) one of them has continuously held, directly, at least 25% of 2.6 Are there any other transaction taxes payable by the voting rights of the other company for at least one year; or companies? (b) a third EU company has continuously held, directly, at least 25% of the voting rights of the two companies for at least one Cadastral and mortgage taxes are due for each deed concerning year. transfers of real estate. The amount of the tax depends on the subject of the document and may be a fixed amount or a proportion of the 3.3 Would there be any withholding tax on interest paid by agreed value. If the transfer is subject to VAT, a lump-sum tax is due. These taxes are normally paid by the buyer or by anyone requiring a local company to a non-resident? annotation in the property registers. Cadastral and mortgage taxes As a general rule, the payment of interest towards a non-resident apply in fixed terms (€50.00 or €200.00) or proportionally (with rates recipient is subject to a final 26% withholding tax (or to the lower ranging from 0.5% to 3%), depending on the kind of transaction. rates provided for by a double tax treaty, if any).

According to Directive 2003/49/EU (“EU Interest and Royalties 2.7 Are there any other indirect taxes of which we should Directive”), no withholding tax is levied on interest paid by an Italian be aware? company to an EU “associated” company, with the same requirements requested for the exemption of royalties (see question 3.2). Goods imported from extra EU countries are subject to custom duties upon their entrance into the Italian territory, according to EU 3.4 Would relief for interest so paid be restricted by Custom Legislation. Furthermore, specific goods (i.e. alcohol, electricity, natural gas, etc.) are subject to excise duties. reference to “thin capitalisation” rules?

No thin capitalisation rules apply in Italy. Different rules are 3 Cross-border Payments provided for interest deductions (see question 4.3).

3.1 Is any withholding tax imposed on dividends paid by a 3.5 If so, is there a “safe harbour” by reference to which tax locally resident company to a non-resident? relief is assured?

The payment of dividends by a company towards its non-resident This is not applicable. shareholders is subject to a final 26% withholding tax (or to the lower rates applicable according to a double tax treaty, if any). A partial refund could be claimed by the foreign recipient (up to 11/26 3.6 Would any such rules extend to debt advanced by a of the withholding tax levied), subject to proof that the same third party but guaranteed by a parent company? dividends are taxed in the State of residence. This is not applicable.

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3.7 Are there any other restrictions on tax relief for interest 4.4 Are there any tax grouping rules? Do these allow for payments by a local company to a non-resident, for example relief in your jurisdiction for losses of overseas subsidiaries? pursuant to BEPS Action 4? Italian rules provide for two different tax consolidation regimes: i) a No, there are not. domestic consolidation regime, applicable only to Italian entities controlled by the holding; and ii) a worldwide consolidation regime, applicable to foreign controlled companies. The option for the 3.8 Is there any withholding tax on property rental domestic tax consolidation allows that not all Italian entities must be payments made to non-residents? consolidated (according to a “cherry picking mechanism”), while the worldwide tax consolidation regime implies that all the subsidiaries As a general rule, no withholding tax is applied to rental payments must be consolidated (“all-in mechanism”). (arising from real estate). In both regimes, a loss compensation mechanism is permitted. The only case in which withholding tax is applied is for rental payments coming from short-term leases (“Airbnb tax”). Such withholding tax is applied by the intermediaries of the transaction and is 4.5 Do tax losses survive a change of ownership? equal to 21% (also in case the recipient is not an Italian resident). As a general rule, changes of ownership do not affect the tax losses carried forward; specific anti-avoidance provisions are provided, as 3.9 Does your jurisdiction have transfer pricing rules? the losses are not recoverable if the business activity of the company is modified in the year in which the change of ownership occurred Transfer pricing rules have been enforced in compliance with Article or in the following two years. 9 of the OECD Model Tax Convention. Penalty protection (in case Similar anti-abuse provisions (to avoid offsetting of taxable of TP challenges raised by the tax authorities) is granted in case the incomes with tax losses) are provided for M&A transactions. taxpayer makes available TP documentation, prepared according to the guidelines provided for by law. 4.6 Is tax imposed at a different rate upon distributed, as 4 Tax on Business Operations: General opposed to retained, profits? Starting from 2019, in case of retained profits set aside to reserve, a 4.1 What is the headline rate of tax on corporate profits? 15% tax rate is applicable for IRES purposes. Such profits need to Corporate profits are subject to a corporate income tax (“Imposta sul be invested to purchase or modernise specific assets to be used reddito delle società” or “IRES”) at the rate of 24%. This rate is within the Italian territory. increased by 3.5% for banks and financial institutions. In case a company is qualified as “non-operating” (“società di 4.7 Are companies subject to any significant taxes not comodo”), the ordinary rate is increased from 24% to 34.5%. covered elsewhere in this chapter – e.g. tax on the occupation of property? 4.2 Is the tax base accounting profit subject to adjustments, or something else? Other than IRES, companies’ profits are also subject to Regional Tax on Business Activity (“Imposta Regionale sulle Attività Produttive” or The aggregate income of companies is determined by making the “IRAP”) at the standard rate of 3.9%; each region can vary the rate. required tax adjustments, increasing or decreasing the statutory profit Furthermore, different rates are provided for specific types of business or loss shown in the profit and loss account for the year, plus or (agriculture: 1.9%, banks: 4.65% and insurance companies: 5.9%). minus the items that are directly recorded in the Financial The IRAP taxable base is different from the IRES taxable base and Statements. Income is determined separately for each tax year, with it is determined on the basis of the EBIT, resulting from the official reference to the business year ended in the same period. financial statement of the company, being adjusted, taking into consideration a few specific tax adjustments provided for by IRAP law with the purpose of excluding or limiting the deduction of labour 4.3 If the tax base is accounting profit subject to costs, depreciations and provisions/accruals. A different taxable basis adjustments, what are the main adjustments? is determined for banks, insurances or other financial subjects.

Adjustments may be divided into two categories, “permanent adjustments” and “timing differences”. 5 Capital Gains The main permanent adjustments are: i) Participation Exemption Regime for dividends; ii) Participation Exemption Regime (with 5.1 Is there a special set of rules for taxing capital gains some exclusions) for gains and losses arising from the disposal of and losses? participation; and iii) total or partial avoidance of deduction for certain costs, vehicle expenses, telephone costs, entertainment costs, Capital gains/losses are included in the IRES taxable basis, upon hotel services, supply of food and beverages, etc. realisation with the exemption of disposal of participation eligible The main timing differences are: i) depreciation (goodwill, real for the Participation Exemption Regime (see question 5.2). estate properties and other immovable assets); ii) bad debts provisions and other provisions for risks; iii) interest costs 5.2 Is there a participation exemption for capital gains? (deductible by up to 30% of the EBITDA, with a carry back/carry forward mechanism); and iv) maintenance costs. Under the Participation Exemption Regime provided by Italian rules, capital gains from the sale of equity interests held by companies (subject to IRES) in resident or non-resident joint-stock companies or partnerships are partially (95%) exempt, on condition that:

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a) the equity interest has been held without interruption from the first According to the Tax Treaty, if any, the non-resident company day of the twelfth month prior to the month of sale (the equity should be granted, in its country, a tax credit for the income tax paid interests purchased more recently are considered to be sold first); in Italy by its relevant branch. b) the equity interest is classified among financial fixed assets in the first financial statements prepared during the period of ownership; 6.4 Would a branch benefit from double tax relief in its c) the subsidiary is situated in a white-listed country or territory (or jurisdiction? alternatively, the taxpayer must be able to demonstrate, pursuant to a ruling request, that it did not seek to locate income in a See question 6.3. black-listed jurisdiction – see CFC regime); and d) the subsidiary carries out a commercial activity. 6.5 Would any withholding tax or other similar tax be The conditions under letters c) and d) must be met, without interruption, from the beginning of the third accounting period prior to imposed as the result of a remittance of profits by the the date of disposal of the shares. branch? Where shares are held through holding companies, exclusively or mainly engaged in the ownership of equity interests, the conditions There is no withholding tax on the remittance of branch profits. under c) and d) above refer to indirect subsidiaries and are considered to be satisfied if met in respect of the subsidiaries which 7 Overseas Profits account for the largest share of the holding company’s net equity. Without the possibility to provide contrary proof, the condition under 7.1 Does your jurisdiction tax profits earned in overseas letter d) is assumed not to be met for equity interests in companies branches? whose assets mainly consist of property, other than the production or exchange of property which constitutes the company’s corporate object, According to the worldwide taxation principles, Italian resident plant and buildings directly used in the conduct of business. companies are subject to IRES on their worldwide income, including Any capital losses incurred will be non-deductible if the sharehold- profits realised abroad (also through local branches). ings transferred qualify for the Participation Exemption Regime. A derogation (so-called “branch exemption”) is provided for permanent establishments when the relevant option is exercised. In 5.3 Is there any special relief for reinvestment? this case, taxation will take place only in the State where the permanent establishment is located. The option is irrevocable and See question 4.6. must involve all foreign branches.

5.4 Does your jurisdiction impose withholding tax on the 7.2 Is tax imposed on the receipt of dividends by a local proceeds of selling a direct or indirect interest in local company from a non-resident company? assets/shares? Dividends received by Italian companies from a foreign subsidiary A 26% withholding tax is applied on gains arising from the disposal are taxed for IRES purposes (no IRAP taxation) on 5% of their of financial assets, only where financial intermediaries take part in amount; unless the dividends are distributed by a company resident the transaction. in a “privileged tax regime” country, in such case dividends are taxed on their whole amount. 6 Local Branch or Subsidiary? Under the Italian Tax Law, States that apply a normal corporate income tax lower than 50% of the Italian one (determined with consideration to both IRES and IRAP) qualify as “privileged tax 6.1 What taxes (e.g. capital duty) would be imposed upon regime” countries. the formation of a subsidiary? The establishment of a subsidiary is not subject to taxes in Italy, with 7.3 Does your jurisdiction have “controlled foreign the exception of registration duty of €200.00 upon the Notary Deed company” rules and, if so, when do these apply? of incorporation. CFC rules (Article 167 of the Italian Income Tax Code) provide that income realised by controlled foreign companies situated in black 6.2 Is there a difference between the taxation of a local listed countries flows through to the resident taxpayer (individual or subsidiary and a local branch of a non-resident company (for company), directly or indirectly, controlling the foreign company, in example, a branch proﬁts tax)? proportion to his/its equity interest therein. The income of the non-resident entity attributed on a flow-through basis is subject to There is no difference between a branch and a local subsidiary, given separate taxation at the average rate applied to the aggregate income that both are subject to IRES and IRAP and the relevant taxable of the resident taxpayer, not below 24%. Income is determined in basis is to be calculated according to the same mechanism. accordance with the Italian tax rules governing the calculation of business income. The CFC rules apply if: 6.3 How would the taxable proﬁts of a local branch be ■ foreign entities are subject to an effective taxation lower than determined in its jurisdiction? 50% of that which is applicable in Italy; and ■ more than ⅓ of the proceeds consist of passive income or derives The taxable basis of a local branch is calculated according to a proper from a banking, insurance or financial business, or from the sale statutory account, based on net profit/loss of the year adjusted, and purchase of low-value-added goods or providing of low-value- taking into consideration the same IRES/IRAP adjustments added services carried out among intercompany transactions. applicable to Italian resident companies (see questions 4.3 and 4.7). The regulations on CFC will not apply if the foreign entities are able to demonstrate that they carry out an effective business using an appropriate organisation.

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Through a tax ruling accepted by the Italian tax authorities, the revenues exceeding €10 billion (and for the taxpayers with a turnover “controlled foreign company” regime may be avoided. exceeding €1 billion, in case they accepted to enter into such a pilot programme). The main benefits deriving from such a co-operative 8 Taxation of Commercial Real Estate compliance programme include: ■ a reduction of time for obtaining the response to tax rulings (45 8.1 Are non-residents taxed on the disposal of commercial days from the request, instead of 90); ■ a reduction of the minimum administrative tax penalties real estate in your jurisdiction? applicable in case of tax assessments; and The gain arising from the disposal, by a non-resident, of commercial ■ a dispensation from the presentation of guarantees in case of real estate owned in Italy is subject to IRES taxation in the State. tax refunds.

10 BEPS and Tax Competition 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your 10.1 Has your jurisdiction introduced any legislation in jurisdiction? response to the OECD’s project targeting BEPS? Disposal of participation held by a non-resident shareholder in an Italy has recently introduced rules implementing BEPS Actions, such Italian real estate company is subject to the same tax rules applicable as i) Country-by-Country Reporting, ii) some amendments to the to the disposal of participation. transfer pricing legislation in compliance with the 2017 OECD

Guidelines, iii) the introduction of the so-called “web tax”, iv) some 8.3 Does your jurisdiction have a special tax regime for amendments to the definition of permanent establishment, and v) the Real Estate Investment Trusts (REITs) or their equivalent? Anti-Tax Avoidance Directives, or “ATADs”, reshaped the Italian CFC legislation and changed the tax regime applicable to foreign dividends. A special regime applicable to listed real estate investment companies (“SIIQS”) is provided by the Italian rules, according to which 10.2 Has your jurisdiction signed the tax treaty MLI and income from real estate properties leased to third parties are not subject to IRES and IRAP. deposited its instrument of ratiﬁcation with the OECD?

Italy has signed the OECD Multilateral Convention on 7 June 2017, 9 Anti-avoidance and Compliance but has not ratified it yet. As specified in the press release published on the website of the Ministry of Foreign Affairs, “the Convention 9.1 Does your jurisdiction have a general anti-avoidance or enables the introduction of the measures developed within the anti-abuse rule? OECD/G20 project named BEPS and in the bilateral treaties thus enabling Governments to strengthen their network of treaties in an A general anti-abuse discipline is provided for by the Italian tax effective and consistent manner without adopting burdensome system, according to which the tax authorities can disregard tax bilateral negotiations”. At the time of the subscription, Italy had consequences of transactions that do not have an economic provided a provisional list of the reservations and notifications substance and, on the other side, are exclusively tax driven. This prescribed pursuant to the Multilateral Convention. occurs when a transaction (as well as a set or sequences of transactions, facts, actions and agreements) is not aimed at generating 10.3 Does your jurisdiction intend to adopt any legislation to significant economic substance, even if compliant with the Tax Law tackle BEPS which goes beyond the OECD’s recommendations? and requirements, but at reaching undue tax benefits. No, there are no similar provisions or programmes aiming to tackle 9.2 Is there a requirement to make special disclosure of BEPS. avoidance schemes? 10.4 Does your jurisdiction support information obtained Taxpayers can ask the tax authorities’ opinion on the possibility, in under Country-by-Country Reporting (CBCR) being made given conditions, not to apply anti-abuse rules which limit deductions, tax credits or other tax attributes. available to the public?

In compliance with BEPS Action 13, in 2017 Italy introduced the 9.3 Does your jurisdiction have rules which target not only Country-by-Country Reporting discipline, based on which Italian taxpayers engaging in tax avoidance but also anyone who parent companies of multinational groups having a consolidated promotes, enables or facilitates the tax avoidance? turnover exceeding €750 million must communicate to the tax authorities, on a yearly basis, a wide range of information concerning the As a general principle, taxpayers are not the only ones involved in group (i.e. tax residence of all the companies belonging to the group, tax avoidance rules, but also all persons who promote, enable or revenues, profits, taxes paid, intangibles, employees, etc.). facilitate tax abuse or other similar behaviours. Italian parent companies are subject to the CBCR discipline if alternatively: 9.4 Does your jurisdiction encourage “co-operative ■ they are mandatorily required to prepare the group consolidated compliance” and, if so, does this provide procedural beneﬁts financial statement; or ■ regardless of the existence of a (higher level) group holding only or result in a reduction of tax? company, such a (higher level) holding company is not requested Italy introduced, by pilot programme, a co-operative compliance to prepare a CBCR in its State of residence; or regardless of the programme available only for resident companies and Italian fact that such a (higher level) holding company prepares the branches of foreign companies having a total turnover or operating CBCR, its State of residence does not guarantee an adequate exchange of information with Italian tax authorities.

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Currently, only multinational banks and institutions have to 1. The company has to have an annual global revenue of at least disclose their CBCR, making them available to the public. €750 million. 2. At least €5.5 million have to arise from digital services provided 10.5 Does your jurisdiction maintain any preferential tax in Italy. The tax base is constituted from the transaction value realised regimes such as a patent box? through some enumerated digital services (online targeted advertising Yes, a patent box regime has been introduced in Italy starting from of sales of goods and provision of services through a digital inter- the fiscal year 2015, providing for a 50% exclusion from the IRES active platform by the transfer of users’ data generated and collected and IRAP taxable basis on the incomes deriving from the through digital platforms), and then a 3% fixed tax rate is applied. exploitation of intangibles and intellectual properties. 11.2 Does your jurisdiction favour any of the G20/OECD’s 11 Taxing the Digital Economy “Pillar One” options (user participation, marketing intangibles or signiﬁcant economic presence)? 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture digital The Italian legislator has included in the definition of material permanent establishment the non-physical taxable presence, presence? meaning a significant and ongoing economic presence in the State In Italy, a specific digital tax has been introduced with the 2018 territory. However, it is doubtful if it only has anti-avoidance nature Budget Law. However, the decrees implementing the Law have yet or it constitutes a new type of permanent establishment. to come into force, therefore, the digital tax is not actually effective. This tax applies only if some requirements are satisfied, in particular:

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Massimo Di Terlizzi Admitted to the roll of Lawyers (Avvocato) of the Italian Court and to the roll of Solicitors of the Senior Courts of England and Wales. Registered with the Italian Register of Certified Tax Advisors (Dottore Commercialista) and the Italian Register of Certified Public Statutory Auditors (Registro dei Revisori Legali). Equity Partner, Member of the Executive Committee and of the Board at Pirola Pennuto Zei & Associati (Milan). Equity Partner and Managing Partner at Pirola Pennuto Zei & Associati Ltd (London). Chairman at Pirola Consulting China Co. Ltd (Beijing and Shanghai). Chairman at Pirola Corporate Finance SpA (Milan). Knowledge of, and experience with, corporate, commercial and tax law, M&A, private equity and restructuring. Member of Boards of Directors and Statutory Auditor of Italian companies and Italian subsidiaries of foreign multinational groups. Areas of Activity:

■ Commercial Law. ■ Corporate – M&A – Private Equity. ■ Corporate Law. ■ Corporate Tax. ■ Insolvency and Restructuring. ■ Tax Litigation.

Pirola Pennuto Zei e Associati Tel: +39 02 669 951 Via Vittor Pisani n. 20 Email: [email protected] 20124 Milan URL: www.pirolapennutozei.it Italy

Andrea Savino Registered with the Italian Register of Certified Tax Advisors (Dottore Commercialista) and the Italian Register of Certified Public Statutory Auditors (Registro dei Revisori Legali). Partner at Pirola Pennuto Zei & Associati (Milan). Knowledge of, and experience with, corporate tax law and insolvency and restructuring. Member of Statutory Auditor of Italian companies and Italian subsidiaries of foreign multinational groups.

Pirola Pennuto Zei e Associati Tel: +39 02 669 951 Via Vittor Pisani n. 20 Email: [email protected] 20124 Milan URL: www.pirolapennutozei.it Italy

Pirola Pennuto Zei & Associati was established as an association of Leveraging the wealth of knowledge and know-how gained over the years, professionals in the early 1980s by its founders who, in the 1970s, had been Pirola Pennuto Zei & Associati is recognised as an authoritative partner in engaged in providing tax and statutory consulting services to companies and business, academic and professional circles, providing synergy, support and multinational groups. It is currently one of the leading independent ﬁrms in mutual enrichment. Italy. www.pirolapennutozei.it Our organisation has made service quality its distinctive feature through the experience and high professionalism of over 600 professionals who, by combining their technical skills and expertise, provide a wide range of tax, corporate and statutory consulting services, both nationally and internationally, using advanced methodologies and an extensive network of correspondents.

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Japan Japan

Nagashima Ohno & Tsunematsu Shigeki Minami

1 Tax Treaties and Residence LOB clauses of general application are included, and have been followed, with certain variations, in the most recent modernised tax treaties. As the US has not signed the MLI, the current Japan/US 1.1 How many income tax treaties are currently in force in Treaty will remain effective without change. your jurisdiction? Other treaties that have similar LOB clauses include those with Australia, France, New Zealand, Sweden, Switzerland and the United There are 75 income tax treaties (including an agreement between Kingdom. The amended Japan/Germany Treaty, signed on private associations of Japan and Taiwan) applicable to 132 December 17, 2015, introduced a principal purpose test (“PPT”) in jurisdictions currently in force in Japan as of October 1, 2019. Japan its Article 21, Paragraph 8, for anti-avoidance in line with BEPS has entered into 11 tax information exchange agreements, and the Action 6, “Preventing the Granting of Treaty Benefits in Convention on Mutual Administrative Assistance in Tax Matters Inappropriate Circumstances”, which entered into force on October which was executed by 99 countries. 28, 2016. Some treaties or agreements (other than the abovementioned modernised tax treaties) also include a simple anti-treaty shopping 1.2 Do they generally follow the OECD Model Convention or clause (examples of which are Article 22, Paragraph 2 of the tax another model? agreement between Japan and Singapore and Article 26 of the tax agreement between Japan and Hong Kong). However, these agree- Yes. Most of the income tax treaties currently in force in Japan ments will be modified by the MLI if a relevant country signs the generally follow the OECD Model Convention with certain MLI and the MLI takes effect between Japan and such country, deviations. Japan signed the Multilateral Convention to Implement depending upon the timing of the deposit (with the OECD) of the Tax Treaty Related Measures to Prevent Base Erosion and Profit ratification instruments by both relevant countries. Shifting (“MLI”) on June 7, 2017. Japan ratified the MLI on May The BEPS Action 6 Final Report recommended, (1) the inclusion 18, 2018, and deposited its instrument of ratification with the of a clear statement that the States that enter into a tax treaty intend OECD on September 26, 2018. Based on such ratification, with to avoid creating opportunities for non-taxation through tax evasion respect to certain countries, including the United Kingdom, or avoidance in tax treaties, and (2) that countries include in their Australia, France, Israel, Sweden, New Zealand, Poland, and treaties either (i) the combined approach of an LOB and PPT rule, Slovakia, the MLI became effective as of January 1, 2019. With the (ii) the PPT rule alone, or (iii) the LOB rule supplemented by a important exception of the US, which has not signed (and currently mechanism that would deal with conduit financing arrangements not does not intend to sign), the MLI covers 39 existing tax treaties that already dealt with in tax treaties. Japan has entered into. For the preamble, Japan chose to adopt that in accordance with Article 6(1) of the MLI, i.e., “Intending to eliminate double taxation 1.3 Do treaties have to be incorporated into domestic law with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax before they take effect? evasion or avoidance”. No. Once treaties are ratified by the Diet (the Japanese Parliament) and For anti-tax treaty shopping measures, Japan chose to adopt the promulgated, such treaties take effect domestically in Japan in accord- PPT clause in accordance with Article 7(1) of the MLI, i.e., “a benefit ance with those treaties, without being incorporated into domestic law. under the Covered Tax Agreement shall not be granted in respect of However, the “Act on Special Provisions of the Income Tax Act, the an item of income or capital if it is reasonable to conclude...that Corporation Tax Act and the Local Tax Act Incidental to Enforcement obtaining that benefit was one of the principal purposes of any of Tax Treaties” provides certain procedures for obtaining treaty bene- arrangement or transaction that resulted directly or indirectly in that fits, including the filing of various application forms and tax residence benefit”. Therefore, a significant number of treaties that Japan has certificates (if applicable) with the competent tax offices. entered into will be modified to include the foregoing PPT clauses once the MLI is effective between Japan and a relevant country.

1.4 Do they generally incorporate anti-treaty shopping 1.5 Are treaties overridden by any rules of domestic law rules (or “limitation on beneﬁts” articles)? (whether existing when the treaty takes effect or introduced No, although the new modernised tax treaty with the United States subsequently)? which entered into force on March 30, 2004 (the “Japan/US Treaty”), and some other recent treaties do incorporate certain No. It is a well-established constitutional principle in Japan that no limitations on benefits (“LOB”) clauses. The Japan/US Treaty is the treaty is overridden by any rule of domestic law (whether existing at first income tax treaty executed by Japan in which fairly comprehensive the time the treaty takes effect or enacted subsequently).

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1.6 What is the test in domestic law for determining the For recovery of the Consumption Tax incurred from taxable purchases, taxpayers are obliged to keep books and records, but not residence of a company? invoices, of purchased goods and services as the Japanese The applicable test is the “location of head or principal office” test. Consumption Tax has yet to adopt an invoice system, though it will Under Japanese domestic tax law, a corporation is treated as a be introduced on October 1, 2023. Japanese corporation (having a corporate residence in Japan) if such corporation has its head office or principal office in Japan, regardless 2.5 Does your jurisdiction permit VAT grouping and, if so, of the place of effective management. is it “establishment only” VAT grouping, such as that applied by Sweden in the Skandia case? 2 Transaction Taxes No, VAT grouping is not permitted. 2.1 Are there any documentary taxes in your jurisdiction? 2.6 Are there any other transaction taxes payable by companies? Yes. Japan has a Stamp Tax, which is imposed on certain categories of documents that are exhaustively listed in the Stamp Tax Act, including, Yes. There are some transaction taxes in Japan, including, but not for example, real estate sales agreements, land leasehold agreements, limited to, Registration and Licence Tax, Real Property Acquisition loan agreements, transportation agreements, merger agreements, Tax and Automobile Acquisition Tax. promissory notes, articles of incorporation and bills of lading. 2.7 Are there any other indirect taxes of which we should 2.2 Do you have Value Added Tax (or a similar tax)? If so, at be aware? what rate or rates? Yes. There are various indirect taxes in Japan such as Tonnage Tax, Yes. Japan has Consumption Tax, which is a Japanese version of Special Tonnage Tax, Liquor Tax, Tobacco Tax and Gasoline Tax. Value Added Tax, consisting of a national consumption tax and a local consumption tax. The current aggregate tax rate is 10% 3 Cross-border Payments (national 7.8% and local 2.2%), which became effective as of October 1, 2019. 3.1 Is any withholding tax imposed on dividends paid by a

locally resident company to a non-resident? 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? Generally, yes. Under Japanese domestic tax law, generally, a non- resident shareholder (either a non-resident company or a non-resident Consumption Tax is generally charged on all transactions, subject to individual) of a Japanese company is subject to Japanese withholding certain exclusions. Specifically, taxable transactions, for the purposes tax with respect to dividends it receives from such Japanese company of Consumption Tax, are broadly defined to mean those transactions at the rate of 20.42%; however, if the Japanese company paying the conducted by a business enterprise (including any resident and non- dividends to a non-resident shareholder is a listed company, this with- resident companies and individuals, regardless of whether they have holding tax rate is reduced to 15.315%, excluding the dividends any permanent establishment in Japan) to transfer or lease goods or received by a non-resident individual shareholder holding 3% or more other assets or to provide services, for consideration, within Japan. of the total issued shares of such listed Japanese company, to whom However, certain specified categories of transactions, such as, for the rate of 20.42% is applicable. example, transfers and leases (other than for certain temporary However, most of the income tax treaties currently in force in Japan purposes) of land, housing leases (other than for certain temporary generally provide that the reduced treaty rate in the source country shall purposes), transfers of securities, extension of interest-bearing loans, be 15% or 10% for portfolio investors and 10% or 5% for parent and provision of insurance, deposit-taking and other certain specified other certain major shareholders. Furthermore, under the Japan/US categories of financial services, and provision of certain specified Treaty and a certain limited number of other modernised tax treaties medical, social welfare or educational services, are excluded from recently executed by Japan (including those with Australia, France, the taxable transactions for the purposes of Consumption Tax. With Netherlands, Sweden, Switzerland and the United Kingdom), the with- respect to imported goods, they are, when released from a bonded holding tax rate is reduced to 10% for portfolio investors and 5% or area, subject to Consumption Tax, except for certain specified 0% for parent and other certain major shareholders. categories of imported goods. The tax rate was increased to 10% on October 1, 2019 although an 8% preferential rate applies to food 3.2 Would there be any withholding tax on royalties paid by items (excluding alcoholic beverages and dining-out) and certain newspapers. a local company to a non-resident?

Generally, yes. Under Japanese domestic tax law, royalties relating to 2.4 Is it always fully recoverable by all businesses? If not, patents, trademarks, design, technology know-how, and copyrights what are the relevant restrictions? used for any Japanese company’s business carried on in Japan and paid by the Japanese company to a non-resident licensor (either a non- Generally, yes. At present, Consumption Tax charged on taxable resident company or a non-resident individual) are subject to Japanese purchases and incurred by a business enterprise is generally recover- withholding tax at the rate of 20.42%, with certain exemptions. able in full, by way of a tax credit or refund. By way of exception: Most of the income tax treaties currently in force in Japan provide (i) if the ratio of a taxpayer’s revenue from taxable transactions to that the withholding tax rate for royalties be reduced to 10%. the taxpayer’s total revenue from transactions within Japan is less Furthermore, under the Japan/US Treaty and a certain limited than 95%; or (ii) if a taxpayer’s revenue from taxable transactions in number of other modernised tax treaties recently executed by Japan the relevant fiscal year exceeds 500 million yen, such taxpayer would (including those with France, the Netherlands, Sweden, Switzerland recover only the Consumption Tax incurred from the taxable and the United Kingdom), an exemption from source country purchases that correspond to its taxable sales. taxation with respect to royalties may be available.

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3.3 Would there be any withholding tax on interest paid by under Japanese domestic tax law. Such rules deny deductibility of interest expenses paid to the payor company’s foreign affiliates when a local company to a non-resident? such company’s annual average ratio of debt to equity exceeds 3:1, (1) Generally, yes. subject to an exemption available based on separate criteria. (a) Interest on corporate bonds issued by a Japanese company However, even when the deductibility is denied under the thin that is paid to a non-resident bondholder (either a non- capitalisation rules, the relief under a treaty (i.e., the reduced with- resident company or a non-resident individual) was generally holding tax rate) available to the non-resident recipient of such subject to Japanese withholding tax at the rate of 15.315%. interest, would nevertheless not be restricted. (b) Also, under Japanese domestic tax law, with respect to a certain specified scope of discount corporate bonds issued 3.5 If so, is there a “safe harbour” by reference to which tax by a Japanese company (except for certain qualified short- relief is assured? term discount bonds), such Japanese company was required to withhold, at the time of the issuance of the discount No, this is not applicable. Please see question 3.4. corporate bonds, 18.378% (or 16.336% for certain bonds), of the amount equivalent to the difference between the face 3.6 Would any such rules extend to debt advanced by a value and the issue price thereof (original issue discount). third party but guaranteed by a parent company? There were important exceptions to the foregoing (a) and (b): (i) corporate bonds issued outside Japan by Japanese corpor- Yes. Under the thin capitalisation rules in Japan, debt advanced by a ations; and (ii) book-entry corporate bonds. third party and guaranteed by a parent company would generally be The 2013 Tax Reform, which came into force on January 1, treated as related party debt, subject to the thin capitalisation rules. 2016, introduced, among others, a new rule for withholding tax to be applied to discount corporate bonds. Under such new 3.7 Are there any other restrictions on tax relief for interest rule, a withholding tax imposed at the time of the issuance of discount corporate bonds was lifted, and a withholding tax payments by a local company to a non-resident, for example imposed at the time of the redemption was introduced. An pursuant to BEPS Action 4? issuer company of discount corporate bonds is generally required to withhold, at the time of the redemption of such Yes. Japan has earnings stripping rules, under which deduction for “net discount corporate bonds, 15.315%, of the amount equivalent interest payments” (as defined in such rules) to certain “related to (i) 0.2% of the amount of the redemption (if the term of the persons” (as defined in such rules) in excess of 20% (or 50% until April bond in question is one year or less), and (ii) 25% of the amount 1, 2020) of an “adjusted taxable income” (as defined in such rules) will of the redemption (if the term of the bond in question is more be disallowed, and the disallowed amounts may be carried forward for than one year). seven ensuing business years. If the disallowed interest amount under (2) Interest on bank deposits and other similar deposits made by a the earnings stripping rules is smaller than the amount disallowed for non-resident depositor (either a non-resident company or a non- deduction under the thin capitalisation rules, then deduction is resident individual) with any office of a bank or other institution disallowed to the extent of the larger of the two disallowed amounts. in Japan is generally subject to Japanese withholding tax, under The current 50% (of an adjusted taxable income) threshold was Japanese domestic tax law, at the rate of 15.315%. less rigorous than the standard recommended by BEPS Action 4 (3) Interest on loans extended by a non-resident lender (either a Report, “Limiting Base Erosion Involving Interest Deductions and non-resident company or a non-resident individual) to a Other Financial Payments” (i.e., 10% to 30%). In 2019, accordingly, Japanese company in relation to such company’s business carried the Japanese government tightened its earnings stripping rules, (a) on in Japan is generally subject to Japanese withholding tax, by lowering the threshold from 50% to 20% and (b) by widening the under Japanese domestic tax law, at the rate of 20.42%, with scope of the rules (subjecting interest on third-party loans to the certain exemptions. rules, and excluding dividends from an adjusted taxable income), in (4) As an exception to the foregoing, if a certified non-resident line with the OECD recommendations and suggestions. company makes a deposit or extends a loan to certain qualified Even if deductibility is denied under the earnings stripping rules, financial institutions through a special Japan Offshore Market the relief under a treaty (i.e., the reduced withholding tax rate) available account, such non-resident company would be exempt from to the non-resident recipient of such interest, would nevertheless not Japanese withholding tax with respect to interest to be paid on be restricted. such deposit or loan. (5) Most of the income tax treaties currently in force in Japan 3.8 Is there any withholding tax on property rental provide that the withholding tax rate for interest (regardless of payments made to non-residents? whether it is interest on bonds, deposits or loans) is reduced generally to 10%. It is worth noting that under the modernised Generally, yes. Rental fees for leasing real property, or rights to real tax treaties, beginning with the Japan/US Treaty, certain property located within Japan and paid by a Japanese company to a specified categories of financial or other qualified institutions non-resident (either a non-resident company or a non-resident (the scope of which may slightly vary from treaty to treaty) individual) are subject to Japanese withholding tax at the rate of which are residents of the contracting states, may be exempt 20.42%, subject to certain exemptions. from source country taxation with respect to interest, subject to certain requirements. 3.9 Does your jurisdiction have transfer pricing rules?

3.4 Would relief for interest so paid be restricted by Yes. Japanese transfer pricing rules are applicable to both a Japanese reference to “thin capitalisation” rules? company and a Japanese branch of a non-resident company if either of them engage in transactions with any of their “foreign-related No. The payor company of interest may be denied a deduction of persons” (measured by, in principle, a direct or indirect 50%-or-more the interest paid to a non-resident recipient for its own corporation share ownership). tax purposes, due to the application of the “thin capitalisation” rules

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4 Tax on Business Operations: General company or an individual (to which certain family members’ ownership is attributed). The Group Taxation Rules include the following rules, among others: (i) deferral of capital gains/losses 4.1 What is the headline rate of tax on corporate proﬁts? from transfer of certain assets between Japanese companies in a 100% group; and (ii) denial of deduction and exclusion of income The nominal rate of Corporation Tax (national tax) is 23.2%, and on donations between Japanese companies in a 100% group. the effective corporation tax rate – national and local combined – is: Under the Group Taxation Rules, the losses of one company are (a) approximately 31% for large companies (i.e., companies with a not allowed to be used to offset income of other group companies. stated capital of more than 100 million yen); and (b) approximately In Japan, neither the consolidation rules nor Group Taxation 35% with a certain favourable rate for up to the first eight million Rules allow for relief for losses of overseas subsidiaries. yen for small and medium-sized companies (i.e., companies with a stated capital of 100 million yen or less), operating in Tokyo for the fiscal year beginning on or after April 1, 2018. 4.5 Do tax losses survive a change of ownership?

Generally, yes. 4.2 Is the tax base accounting profit subject to (a) A change of ownership does not restrict a corporation from adjustments, or something else? utilising its accumulated tax losses that the corporation incurred in prior years, in general. However, for a company under certain Yes. The tax base for corporation tax is the net taxable income; such specified events which shall take place within five years from the net taxable income is calculated based on the results reflected in the date of the ownership change (measured, in principle, by more- taxpayer company’s profit and loss statements, prepared in accord- than-50% of the issued and outstanding shares), utilisation of ance with Japanese generally accepted accounting principles. the tax losses of the company may be restricted. The restriction If a taxpayer company’s stated capital is more than 100 million applies, for example: (i) when a company was dormant before yen, the tax base for the local Enterprise Tax is determined by the ownership change and begins its business after the owner- certain factors; specifically, by a combination of (a) the net taxable ship change; or (ii) when a company ceases its original business income, (b) the amount of value added (as determined by the after the ownership change and receives loans or capital compensation paid to employees), the net interest paid, the net rental contributions, the amount of which exceeds five times the fees paid and the net profit or loss in each fiscal year, and (c) the previous business scale. stated capital of such taxpayer company, with certain exceptions for (b) In respect of a merger, a surviving company is able to utilise the electricity, gas and insurance businesses. carried-forward losses of a merging company, if: (i) the merger falls under a “qualified merger”; and 4.3 If the tax base is accounting profit subject to (ii) (a) the merger takes place five years after there is a relevant adjustments, what are the main adjustments? more-than-50% change in issued and outstanding shares or, (b) the merger satisfies “joint-business” requirements. The main differences include, but are not limited to, the treatment of (c) In general, the tax losses of the past fiscal years can be carried donations and entertainment expenses. Donations, including any kind forward to offset (by deduction) the taxable income of the of economic benefit granted for no or unreasonably low consideration, current fiscal year, while such deduction is limited to a maximum are generally deductible only up to a certain limited amount. The of 50% (for a fiscal year beginning after April 1, 2018) of the deductibility of entertainment expenses is subject to certain qualifications taxable income (before the deduction). Losses survive for 10 and a certain ceiling. Please also see questions 5.2 and 5.3. years (or nine years for losses accrued in a fiscal year beginning before April 1, 2017). Please note that these limitations are not 4.4 Are there any tax grouping rules? Do these allow for applicable (thus, a deduction of losses of up to 100% of the income is available) to a small and medium-sized company relief in your jurisdiction for losses of overseas subsidiaries? taxable stipulated under Japanese tax law, which is a company Yes. There are two categories of tax grouping rules under Japanese with a stated capital of 100 million yen or less that is not a tax law: (a) the consolidated tax return rules; and (b) the group wholly-owned subsidiary of a company (Japanese or non- taxation rules. Japanese) with a stated capital of 500 million yen or more. (a) A group of Japanese companies, where a Japanese parent company directly, or indirectly through other Japanese 4.6 Is tax imposed at a different rate upon distributed, as companies, owns no less than 100% of other Japanese opposed to retained, profits? subsidiaries, can elect to file, subject to the approval of the Commissioner of the National Tax Agency, a consolidated tax Japanese corporation tax is generally imposed at the same rate upon return. The consolidated tax is calculated on the basis of the all corporate taxable profits regardless of whether such profits are aggregate net taxable income of the parent company and all distributed or retained. As an exception, a certain additional surtax consolidated subsidiaries. With certain exceptions, when a (at the rate of 10%, 15% or 20%) may be imposed on certain company participates in the consolidated tax return group from portions of retained earnings of certain types of so-called family outside, the participating company’s carry-forward losses will be companies, unless such family company is a small and medium-sized lost and cannot be used to offset the income of the existing company as stipulated under Japanese tax law, which is a company companies in the consolidated tax return group. with a stated capital of 100 million yen or less that is not a wholly- (b) Separate from the abovementioned consolidated tax return rules, owned subsidiary of a company (Japanese or non-Japanese) with a there are special rules for intra-group transactions (the “Group stated capital of 500 million yen or more. Taxation Rules”), which apply to group companies in a “100% There are certain special qualified corporate entities used for group” (i.e., companies that have a direct or indirect 100% investment purposes, including Investment Corporations and Tokutei shareholding relationship), even if they do not elect to file a Mokuteki Kaisha (“TMK”), which can deduct as expenses dividends consolidated tax return. The Group Taxation Rules apply to paid to their shareholders if they distribute more than 90% of their Japanese companies wholly owned by a foreign or Japanese distributable profits.

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4.7 Are companies subject to any signiﬁcant taxes not 6 Local Branch or Subsidiary? covered elsewhere in this chapter – e.g. tax on the occupation of property? 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? Yes. Among local taxes, other than those already mentioned above, Prefectural Inhabitant Tax per capita levy, Municipal Inhabitant Tax In order to form a Japanese subsidiary, the articles of incorporation per capita levy, Fixed Assets Tax and Automobile Tax may be of of such subsidiary must be submitted, which is subject to Stamp Tax general application to the business operations of a company in in the amount of 40,000 yen. Further, such subsidiary must be regis- Japan. tered in the commercial register kept at the competent office of the legal affairs bureau of the Ministry of Justice, subject to Registration 5 Capital Gains and Licence Tax at the rate of seven-thousandths (7/1,000) of its stated capital amount, but no less than 150,000 yen in the case of a 5.1 Is there a special set of rules for taxing capital gains joint-stock company (Kabushiki Kaisha). and losses? If a non-resident company forms a subsidiary in Japan (i.e., establishing a company incorporated under the laws of Japan) by Generally, no. For purposes of income taxes imposed on a company making a capital contribution in cash, the formation of the (not an individual) in Japan, generally all of the taxable income of a subsidiary is not a taxable event for corporation tax purposes. company is aggregated, regardless of whether such income is classified as capital gains or ordinary/business profits. 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident company (for 5.2 Is there a participation exemption for capital gains? example, a branch proﬁts tax)?

There is no participation exemption for taxation on capital gains. Yes. If a foreign parent forms a Japanese subsidiary that is a corpor- However, with respect to dividends paid to a Japanese company by ation, such Japanese subsidiary will be treated as a Japanese taxpayer its foreign subsidiary, a participation exemption from Japanese and will be subject to Japanese corporation tax on its worldwide income taxation is granted for a 95% portion of such dividends if income in the same manner as any other domestic Japanese corpor- the Japanese company owns at least 25% of such foreign subsidiary’s ation, subject to the exclusion of 95% of dividends from certain issued and outstanding shares or voting shares for at least six foreign subsidiaries (see question 5.2 above). A branch of a non- months. The 25% threshold requirement may be altered if a tax resident corporation, by contrast, is generally only subject to treaty explicitly so provides or if a particular taxpayer is eligible for Japanese corporation tax on the profits attributable to its permanent treaty benefits under an applicable tax treaty in which a lower establishment in Japan under an applicable tax treaty or under threshold is required for a treaty-based indirect foreign tax credit Japanese domestic tax law. There is no branch profits tax or other eligibility (for example, a 10% shareholding threshold is provided similar tax that is applicable to a branch of a non-resident company, under Article 23(1)(b) of the Japan/US Treaty). but not a subsidiary.

5.3 Is there any special relief for reinvestment? 6.3 How would the taxable proﬁts of a local branch be Generally, yes. Dividends received by a Japanese company from determined in its jurisdiction? another Japanese company may be either 100%, 50% or 20% (subject Under the Corporation Tax Act, if a non-resident company that has to certain adjustments) excluded from the recipient company’s taxable its branch in Japan earns profits attributable to its permanent income, depending on whether or not the recipient Japanese establishment in Japan, such business profits constitute Japanese company owns more than a third, more than 5%, or 5% or less of source income that is taxable in Japan in line with the Authorised the total issued and outstanding shares of the dividend-paying OECD Approach. Rules similar to the transfer pricing regulations Japanese company. Such dividend-received exclusion is also available for foreign-related persons are applicable to the Japan branch. With to a Japanese branch of a foreign corporation with respect to respect to the question of how the amount of such business profits dividends received by such branch from any Japanese company. should be determined, certain specific rules are provided in the

relevant regulations. With respect to the detailed method of 5.4 Does your jurisdiction impose withholding tax on the calculating taxable income, rules that are applicable to a Japanese proceeds of selling a direct or indirect interest in local company are, in principle, also applicable to a Japan branch of a non- assets/shares? resident company, mutatis mutandis. In calculating the taxable income of a Japan branch, only the expenses that are related to the business Generally, no. However, Japan imposes withholding tax on the carried on through the Japan branch (permanent establishment), are proceeds of selling a direct interest in real property located within treated as deductible expenses. Specifically, the expenses of the Japan. See questions 8.1 and 8.2 below. With respect to capital gains relevant foreign corporation must be allocated to (a) the business from shares of a company, when a non-resident shareholder (either carried on through the Japan branch, and (b) other business in a non-resident company or a non-resident individual) having no accordance with reasonable criteria, such as revenue, value of assets, permanent establishment in Japan alienates its shares in a Japanese number of employees, etc. company, such shareholder is not subject to any Japanese taxation, with certain exceptions, including the case where such shareholder 6.4 Would a branch beneﬁt from double tax relief in its owns 25% or more of the issued shares of a Japanese company in a jurisdiction? three-year window period and sells 5% or more of the issued shares in aggregate in a single fiscal year, in which case such non-resident A Japan branch of a company that is a resident in a treaty country can alienator is required to file a tax return in Japan and is subject to benefit from the treaty provisions to some extent. However, with Japanese personal income tax or corporation tax (but not with- respect to the treaty relief given to passive income such as dividends, holding tax), as the case may be, on a net income basis. interest and royalties, a Japan branch of a non-resident company

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would not be allowed to enjoy such treaty relief, since most of the the effective tax rate for the relevant subsidiaries is “20%” or income tax treaties currently in force in Japan include provisions higher; and similar to Articles 10(4), 11(4) and 12(3) of the OECD Model (3) even if the foreign subsidiaries satisfy the “Economic Activity Convention, which deny treaty benefits to the beneficial owner of Test”, its “passive income” will be included in the taxable dividends, interest, or royalties who carries on business through a income of the Japanese parent, unless the effective tax rate for permanent establishment situated in the source country (i.e., Japan) if the relevant subsidiaries is “20%” or higher. its relevant shares, debt-claims, or intellectual properties are effectively As a notable development in 2019, the scope of a “paper connected with such permanent establishment (i.e., the Japan branch). company” in (1)(a) above, which is subject to Japanese parent’s inclusion under the Japanese CFC rules, was significantly narrowed 6.5 Would any withholding tax or other similar tax be in response to the concern that a number of Japanese companies’ U.S. subsidiaries would be subject to the Japanese CFC rules due to imposed as the result of a remittance of proﬁts by the branch? the decrease of the U.S. corporation tax rate to 21%. For example, Generally, no. For a remittance, banks are obligated to file a report a U.S. holding company which is owned by a Japanese parent is not with the competent tax office regarding any remittance to a foreign viewed as a company from the “paper company”, if it performs country in the amount of more than one million yen. functions such as (a) shielding one business’ risk of another for financing purposes, (b) facilitating a joint venture with local 7 Overseas Proﬁts companies, (c) facilitating management or disposal of assets, or (d) shielding litigation risks.

7.1 Does your jurisdiction tax proﬁts earned in overseas 8 Taxation of Commercial Real Estate branches?

Yes. A Japanese company is generally subject to Japanese corpor- 8.1 Are non-residents taxed on the disposal of commercial ation tax with respect to its worldwide income, subject to the real estate in your jurisdiction? exclusion of 95% of dividends from certain overseas subsidiaries. Please see question 7.2 below. Generally, yes. If real property (land or any right on land or any building or auxiliary facility or structure), commercial or otherwise, which is located within Japan is alienated by a non-resident (either a 7.2 Is tax imposed on the receipt of dividends by a local non-resident individual or a non-resident company), the gross company from a non-resident company? amount of the consideration received by such non-resident for such alienation is subject to Japanese withholding tax at the rate of Ninety-five per cent of the dividends paid to a Japanese company 10.21% if it is paid, or deemed paid, within Japan, with certain by its overseas subsidiaries is excluded from Japanese corporation exceptions (including no withholding tax for an alienation to an tax, subject to a certain shareholding threshold and holding period individual for use as a personal or family residence for consideration requirements. Please see question 5.2 above. of 100 million yen or less) and exemptions.

Regardless of the imposition of the aforementioned withholding 7.3 Does your jurisdiction have “controlled foreign tax, if a non-resident (either a non-resident individual or a non- company” rules and, if so, when do these apply? resident company) alienates real property located within Japan, such non-resident alienator is required to file a tax return in Japan and is Yes. Japan has its own CFC rules and if such CFC rules are applied subject to Japanese personal income tax or corporation tax, as the to any particular overseas subsidiary, such CFC subsidiary’s net case may be, on a net income basis with respect to any capital gains profits (but not its net losses) shall be deemed to constitute the (after cost basis and expenses deducted) derived from such Japanese parent company’s taxable income in proportion to its alienation. If such non-resident alienator is subject to the afore- shareholding percentage, regardless of whether or not such profits mentioned withholding tax, the amount of such withholding tax may are distributed to the parent. These rules apply to Japanese be credited against such income tax or corporation tax, subject to companies that own 10% or more of the shares in a certain overseas certain procedural requirements. subsidiary more-than-50% owned, in aggregate, by Japanese resident individuals or companies directly or indirectly, and that is located in 8.2 Does your jurisdiction impose tax on the transfer of an a jurisdiction where its effective tax rate is less than 20%. The Japanese CFC rules were overhauled in 2017 in line with indirect interest in commercial real estate in your BEPS Action 3, “Designing Effective Controlled Foreign Company jurisdiction? Rules”, and the new rules will be applicable for the relevant subsidiaries’ fiscal years beginning on or after April 1, 2018. Under Yes. When a non-resident individual or a non-resident company and the new rules: his/her/its special related parties, in aggregate, hold: (1) profits of foreign subsidiaries that are either a (a) “paper (i) more than 5% of the shares issued by a company with 50% or company”, (b) “cash box company”, or (c) “company located in more of its assets’ value attributable directly or indirectly to real black-list jurisdictions” will be included in the taxable income of property (land or any right on land or any building or auxiliary the Japanese parent unless the effective tax rate for the relevant facility or structure), commercial or otherwise, that is located subsidiaries is “30%” or higher; within Japan (“Real Property Related Company”) and such (2) profits of foreign subsidiaries that do not fall under the fore- shares are either listed on a stock exchange or traded over-the- going categories (1)(a)–(c), but do not satisfy the “Economic counter; or Activity Test” (i.e., the test to see whether the subsidiary is (ii) more than 2% of the shares issued by a Real Property Related engaged in active business by examining the subsidiary’s (a) Company that is not so listed, category of business, (b) fixed facility, (c) management, and (d) the special rules apply. volume of unrelated sales/purchases or manufacturing) will be If the special rules are applicable and the non-resident individual included in the taxable income of the Japanese parent, unless or the non-resident company transfers the Real Property Related

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Company shares, such non-resident company or the non-resident No. The Japanese tax authorities are studying the potential adoption individual is required to file a tax return in Japan and is subject to of mandatory disclosure rules applicable to promoters, enablers or Japanese income tax or corporation tax, as the case may be, on a net facilitators of tax avoidance in line with BEPS Action 12. However, income basis with respect to any capital gains (after cost basis and the tax authorities are apparently being cautious in introducing new expenses deducted) derived from such transfer. rules, and a specific proposal has yet to be seen as of October 1, 2019.

8.3 Does your jurisdiction have a special tax regime for 9.4 Does your jurisdiction encourage “co-operative Real Estate Investment Trusts (REITs) or their equivalent? compliance” and, if so, does this provide procedural beneﬁts only or result in a reduction of tax? REITs structured in Japan (“J-REITs”) are generally structured in the form of a company, although it is legally possible to structure J-REITs Yes. The Japanese tax authorities encourage corporations to in the form of a trust under Japanese law. Thus, dividends from J- cooperate with them and to voluntarily disclose certain information REITs are, practically, subject to the same taxation as dividends paid by for compliance purposes. As an incentive, if the authorities a local resident company to a non-resident (please see question 3.1 acknowledge that a certain taxpayer is well in compliance with tax above), and transfers of investment equity to J-REITs are subject to the laws, the authorities may refrain from auditing that taxpayer for one same taxation as transfers of Real Property Related Company shares year in addition to the period that the authorities customarily took (please see question 8.2), in general. J-REITs are often structured in the to audit that taxpayer in the past. However, it is up to the discretion form of certain special qualified corporate entities established under of the authorities and a voluntary disclosure will not necessarily Japanese law, such as Investment Corporations and TMK, which can entail exemption or relaxation of any tax audit or other procedural deduct as expenses dividends paid to their shareholders if they distribute requirements. It will not reduce any tax either. more than 90% of their distributable profits. As another alternative, real estate investments are sometimes made in the form of a Godo Kaisha 10 BEPS and Tax Competition (“GK”) corporation contributed to by silent partners through a Tokumei Kumiai (“TK”), under which dividends to investors are fully deductible by the GK but subject to withholding tax at the rate of 20.42% under 10.1 Has your jurisdiction introduced any legislation in Japanese domestic tax law. Some tax treaties in Japan (including those response to the OECD’s project targeting BEPS? with France, the Netherlands and the U.S.) allow the said Japanese withholding tax, while other tax treaties (including that with Ireland) do not Yes. Japan introduced legislation in response to BEPS Action 2 allow it under a provision equivalent to Article 21 (Other Income) of Report, “Neutralising the Effects of Hybrid Mismatch the OECD Model Convention. Arrangements”, which denies exclusion for dividends received from 25%-owned non-Japanese companies (see question 5.2) as long as they are deductible in the payer country, including dividends on 9 Anti-avoidance and Compliance Mandatory Redeemable Preference Shares (“MRPS”) issued in Australia and dividends from a Brazilian company. 9.1 Does your jurisdiction have a general anti-avoidance or In addition, in response to BEPS Action 13, “Guidance on anti-abuse rule? Transfer Pricing Documentation and Country-by-Country Reporting”, the Japanese government introduced new transfer No. Japanese tax law does not have a general anti-avoidance rule. pricing legislation to adopt the three-tiered documentation approach However, Japanese tax law includes a so-called “specific” anti- consisting of a country-by-country report, a master file and a local avoidance rule for a family company (i.e., a company where more than file. Please see question 10.3. 50% of its shares are held by three or fewer shareholders and certain related persons). Japanese tax law also has specific anti-avoidance rules 10.2 Has your jurisdiction signed the tax treaty MLI and that involve corporate reorganisation transactions and consolidated tax return filing. In addition, an anti-avoidance rule was introduced deposited its instrument of ratiﬁcation with the OECD? for transactions regarding income attributable to a permanent Yes. Japan signed the MLI on June 7, 2017, and after its ratification establishment of overseas corporations, which is applicable to internal by the Diet, deposited its instrument of ratification with the OECD and other dealings between a non-Japanese company and its Japanese on September 26, 2018. Accordingly, the MLI entered into force branch. Under these specific anti-avoidance rules, if transactions are with respect to Japan on January 1, 2019 with the countries that viewed as “unjust”, the transactions can be recharacterised and recon- deposited their instruments of ratification with the OECD. As of structed to a “normal” or “natural” form of transactions with October 1, 2019, the MLI was effective entirely or partially between different tax implications (presumably higher tax burdens). Japan and a number of countries including the U.K., France,

Australia, the Netherlands, Singapore, India, Israel and so on. The 9.2 Is there a requirement to make special disclosure of MLI applies to the existing tax agreements between Japan and the avoidance schemes? parties to the MLI with which Japan and the relevant treaty party mutually provided notification as to each specific agreement to be No. Japanese tax law does not have a disclosure rule that imposes a covered by the MLI. requirement to disclose avoidance schemes. The Japanese tax authorities are studying the potential adoption of mandatory disclosure 10.3 Does your jurisdiction intend to adopt any legislation to rules in line with BEPS Action 12. However, given the ambiguity of the scope of the “avoidance schemes”, the tax authorities are appar- tackle BEPS which goes beyond the OECD’s ently being cautious in introducing new rules and a specific proposal recommendations? has yet to be seen as of October 1, 2019. No. The Japanese tax authorities appear to intend to adopt legislation to tackle BEPS in line with, but not beyond, the OECD’s BEPS 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax avoidance?

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reports. In addition to the new rules in line with Actions 2 and 13 set (b) In the master file, a taxpayer is required to report the items as forth in question 10.1 above, the Japanese government introduced the described in Annex I to Chapter 5 of the revised OECD new CFC rules in line with BEPS Action 3, “Designing Effective Guidelines, which includes a description of the businesses of Controlled Foreign Company Rules”. Further, the government the MNE, the MNE’s intangibles, the MNE’s intercompany revised the transfer pricing regulations in line with the revised OECD financial activities, and the MNE’s financial and tax positions. Transfer Pricing Guidelines under BEPS Actions 8–10, “Aligning (c) In the country-by-country report, a taxpayer is required to report Transfer Pricing Outcomes with Value Creation”. Specifically, in 2019, the items as described in Annex III to Chapter 5 of the revised Japan introduced new transfer pricing rules for transfers of hard-to- OECD Guidelines, which includes an overview of allocation of value intangibles (“HTVI”), such as (a) discount cash flow method as income, taxes and business activities by tax jurisdiction, and a list another transfer pricing method, and (b) ex post price adjustment of all the constituent entities of the MNE group included in measures, aimed at preventing base erosion and profit shifting by each aggregation per tax jurisdiction. moving intangibles among group members, in line with the “Guidance for Tax Administrations on the Application of the Approach to Hard- 10.5 Does your jurisdiction maintain any preferential tax to-Value Intangibles” published by the OECD on June 21, 2018. regimes such as a patent box?

10.4 Does your jurisdiction support information obtained No. Japan does not maintain any preferential tax regimes such as a under Country-by-Country Reporting (CBCR) being made patent box. available to the public? Japanese tax law does, however, provide for special tax credits and deductions on certain research and development costs. No. While Japan adopted CBCR as stated below, the Japanese government is reluctant to make information available to the public or to the 11 Taxing the Digital Economy countries that may make information public. According to the Japanese tax authority, it provided CBCR information filed by Japanese 11.1 Has your jurisdiction taken any unilateral action to tax taxpayers only to the jurisdictions that satisfied the standards set by digital activities or to expand the tax base to capture digital the OECD, including those for confidentiality and appropriate use of CBCR information. Under such policy, Japan provided CBCR presence? information to 39 jurisdictions for 609 multinational enterprise groups No. No specific legislation has been created to capture digital and received CBCR information from 29 jurisdictions for 558 multi- presence so far. However, in enforcement, the Japanese tax authority national enterprise groups as of October 31, 2018. appears to be eager to capture digital presence. For example, in For the CBCR generally, the Japanese government adopted the 2009, it was reported that the Japanese tax authority made adjust- three-tiered documentation approach, under which a separate ments on a certain Japanese affiliate of Amazon.com for the reason “master file” and a “local file” as well as a “country-by-country that such affiliate was a permanent establishment of Amazon based report” are required. Any Japanese corporations and foreign corpor- on the finding that Amazon U.S.’s computers were used in Japan, ations with permanent establishments in Japan that are a constituent Japanese employees were instructed by Amazon U.S. and the entity of a multinational enterprise (“MNE”) group with total Japanese affiliate functioned in more than just a logistical capacity. consolidated revenues of 100 billion yen or more in the previous Amazon sought relief from a mutual agreement procedure with fiscal year (“Specified MNE Group”) are subject to the new competent authorities and the U.S. and Japanese tax authorities documentation rules. Such corporations must file (i) a notification reached an agreement in 2010 with a result of no significant tax as to the ultimate parent entity, (ii) a country-by-country report, and expense to Amazon. If the OECD makes specific (iii) a master file with the tax authority online (“e-Tax”). recommendations for taxing digital activities, the Japanese govern- (a) The local file (reporting material transactions of the local taxpayer) ment may move to enforce or take legislative actions in line with is mandated to be prepared simultaneously with the filing of the them. relevant corporation tax return (and to be presented to the local tax authority upon instruction within a maximum of 45 days of receiving such instruction) for transactions with a certain foreign- 11.2 Does your jurisdiction favour any of the G20/OECD’s affiliated person, with whom either (1) the sum of payments and “Pillar One” options (user participation, marketing intangibles receipts is five billion yen or more, or (2) the sum of payments and or signiﬁcant economic presence)? receipts for intangible transactions is 0.3 billion yen or more, in the previous fiscal year. In addition, presentation of the local file for Generally, yes. Although the Japanese government has not officially any transaction, the value of which is below the foregoing announced its position, it appears to favour a unified form of the threshold amounts, is also to be made with the local tax authority, “Pillar One” options. Mr. Akira Amari, the Chair of the Tax upon instruction by the auditor, within a certain period designated Research Commission of the controlling Liberal Democratic Party by the auditor, which is no more than 60 days. told news outlets that the Japanese government is wary of suppor- In the local file, a taxpayer is required to report the items as ting a revenue-based tax (such as that adopted by France) and described in Annex II to Chapter 5 of the revised OECD instead, is eager to make a proposal that is balanced and will ensure Guidelines, which includes a description of the local entity, a support from developing countries (Nihon Keizai Shimbun, description of controlled transactions, and financial information. September 30, 2019).

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Shigeki Minami is a lawyer licensed in Japan (admitted in 1997) and a partner at the Tokyo office of Nagashima Ohno & Tsunematsu. He is an expert in tax law matters, including transfer pricing, cross-border mergers and acquisitions, international reorganisations, anti-tax-haven (CFC) rules, withholding tax issues, tax treatment on various financial instruments, corporate tax issues and other general tax issues. With respect to such matters, he has acted as counsel in various tax disputes on behalf of major Japanese and foreign companies and his recent achievements include the following:

■ successfully represented a Japanese multinational company in a transfer pricing dispute before the National Tax Tribunal of Japan, which resulted in the cancellation of an assessment of more than USD 200 million; ■ successfully represented a US based multinational company in a tax dispute involving an international reorganisation before a Japanese court, which resulted in the cancellation of an assessment of more than USD 1 billion; and ■ successfully represented an international air carrier against its trading partners in commercial disputes that originated from VAT related matters.

Mr. Minami served as the Chair of the Asia-Pacific Region Committee of the International Fiscal Association (“IFA”) from 2016 to 2018, and as a member of the Practice Council of the International Tax Program at New York University School of Law.

Nagashima Ohno & Tsunematsu Tel: +81 3 6889 7177 JP Tower Email: [email protected] 2-7-2 Marunouchi, Chiyoda-ku URL: www.noandt.com Tokyo 100-7036 Japan

Nagashima Ohno & Tsunematsu is the first integrated full-service law firm in management/corporate governance cases and large-scale corporate reorgan- Japan and one of the foremost providers of international and commercial isations. The 400+ lawyers of the firm, including over 20 experienced foreign legal services based in Tokyo. The firm’s overseas network includes offices attorneys from various jurisdictions, work together in customised teams to in New York, Singapore, Bangkok, Ho Chi Minh City, Hanoi and Shanghai, provide clients with the expertise and experience specifically required for each associated local law firms in Jakarta and Beijing where our lawyers are on- client matter. site, and collaborative relationships with prominent local law firms throughout www.noandt.com Asia and other regions. In representing our leading domestic and international clients, we have successfully structured and negotiated many of the largest and most significant corporate, finance and real estate transactions related to Japan. The firm has extensive corporate and litigation capabilities span- ning key commercial areas such as antitrust, intellectual property, labour and taxation, and is known for path-breaking domestic and cross-border risk

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Kosovo Kosovo

Andi Pacani

Boga & Associates Fitore Mekaj

The test of residence of a company is related to its place of 1 Tax Treaties and Residence establishment. Any entity, company or partnership established in Kosovo is considered resident. 1.1 How many income tax treaties are currently in force in your jurisdiction? 2 Transaction Taxes Kosovo, as an independent country, has concluded several new tax 2.1 Are there any documentary taxes in your jurisdiction? treaties, such as those with: (i) the Republic of Albania (2016); (ii) the Republic of Macedonia (2014); (iii) the Republic of Turkey No, there are no documentary taxes in Kosovo. (2016); (iv) Slovenia (2015); (v) the Czech Republic (published in the Official Gazette on 27 March 2015); (vi) the United Kingdom (2016); (vii) Hungary (2015); (viii) Republic of Croatia (2018); (ix) 2.2 Do you have Value Added Tax (or a similar tax)? If so, at Switzerland (published in the Official Gazette on 17 August 2017, what rate or rates? applicable from 1 January 2019); (x) United Arab Emirates (2017); (xi) Republic of Austria (published in the Official Gazette on 1 Kosovo introduced VAT in 2001. A new Law “On VAT” entered August 2018); and (xii) Grand Duchy of Luxembourg (published in into force on 1 September 2015. The standard rate of VAT is 18%, the Official Gazette on 18 January 2018, applicable from 1 January the reduced rate of VAT is 8% and exports are zero-rated. The turn- 2020). Kosovo has also acceded to other tax treaties on the over threshold for registration purposes is set to EUR 30,000. avoidance of double taxation with respect to taxes on income and capital from the former Yugoslavia (with Germany, Belgium, the 2.3 Is VAT (or any similar tax) charged on all transactions Netherlands and Finland, as well as with the Czech Republic for the or are there any relevant exclusions? avoidance of double taxation on inheritance tax). The following activities are VAT-exempt: 1.2 Do they generally follow the OECD Model Convention or ■ insurance and reinsurance transactions; another model? ■ financial services; ■ the supply of postage stamps; Kosovo tax treaties generally follow the OECD model. ■ the supply at face value of fiscal stamps and other similar stamps; ■ betting, lotteries and other forms of gambling; 1.3 Do treaties have to be incorporated into domestic law before they take effect? ■ the supply of land; ■ the supply of houses, apartments or other accommodation used The new tax treaties must be ratified by Parliament. A treaty ratified for residential purposes; and by Parliament becomes part of the Kosovo legal system after ■ the leasing or letting of immovable property. publication in the Official Gazette and prevails over any law which differs from the treaty’s provisions. 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on beneﬁts” articles)? Generally, taxpayers registered for VAT are entitled to recover the input VAT, provided that the VAT is charged in relation to their The treaties do not incorporate anti-treaty shopping rules. taxable activity. When taxpayers perform both taxable and exempt

1.5 Are treaties overridden by any rules of domestic law supplies, VAT may be partially reclaimed. VAT cannot be reclaimed (whether existing when the treaty takes effect or introduced on certain recreation expenses and representation costs, and it is subsequently)? limited on expenses for passenger vehicles which are not used solely for business purposes. A treaty prevails over domestic law regardless of whether the domestic legislation existed previously or is introduced subsequently to it. 2.5 Does your jurisdiction permit VAT grouping and, if so,

is it “establishment only” VAT grouping, such as that applied 1.6 What is the test in domestic law for determining the by Sweden in the Skandia case? residence of a company? No, Kosovo does not permit VAT grouping.

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2.6 Are there any other transaction taxes payable by 3.9 Does your jurisdiction have transfer pricing rules? companies? The Corporate Income Tax Law provides that the prices between There is an excise tax which applies to a limited number of goods related parties should be set at open market value. Such value should such as coffee, tobacco, alcoholic drinks, derivatives of petroleum, be determined using one of the traditional methods: (i) the uncon- and motor vehicles used mainly for the transport of passengers. trolled price method; (ii) the resale price; (iii) cost plus method, and, under specific circumstances; (iv) transaction net margin; and (v) profit split method. Additional rules are provided in an adminis- 2.7 Are there any other indirect taxes of which we should trative instruction. be aware? Except for VAT and excise, there are no other indirect taxes. 4 Tax on Business Operations: General

3 Cross-border Payments 4.1 What is the headline rate of tax on corporate profits? The Kosovo Corporate Income Tax Law provides for a rate of 10%. 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 4.2 Is the tax base accounting profit subject to No, there is no withholding tax on dividends distributed from a adjustments, or something else? Kosovo-resident company. The taxable base is calculated starting from the profit shown in the financial statements and is adjusted in accordance with the 3.2 Would there be any withholding tax on royalties paid by limitations provided in the Corporate Income Tax Law. a local company to a non-resident? 4.3 If the tax base is accounting profit subject to Yes. There is withholding tax at a rate of 10% on royalties paid by a Kosovo company to a non-resident. adjustments, what are the main adjustments?

The Corporate Income Tax Law provides a list of expenses that are 3.3 Would there be any withholding tax on interest paid by non-deductible for tax purposes, consisting of: a local company to a non-resident? ■ fines, penalties and interest imposed by any public authority and expenses related to them; Yes. There is withholding tax at a rate of 10% on interest paid by a ■ income tax paid or accrued for the current or previous tax Kosovo company to a non-resident. period and any interest or late penalty incurred for its late payment; 3.4 Would relief for interest so paid be restricted by ■ any loss from the sale or exchange of property between related reference to “thin capitalisation” rules? persons; ■ pension contributions above the maximum amount allowed by No, there are no “thin capitalisation” rules or any similar rules. the Kosovo Pension Law; ■ bad debts that do not meet the specified conditions; 3.5 If so, is there a “safe harbour” by reference to which tax ■ contributions made for humanitarian, health, education, religious, scientific, cultural, environmental protection and sports relief is assured? purposes, which exceed 10% of taxable income (before the No, there is no such provision. deduction of such expenses); ■ representation costs (these include publicity, advertising, entertainment and representation) which exceed 1% of the total 3.6 Would any such rules extend to debt advanced by a gross income; third party but guaranteed by a parent company? ■ accrued expense for which the withholding tax should be paid, unless such expense is paid on or before 31 March of the There are no such rules in place. subsequent tax period; and

■ provisions for expected losses are not allowed as deductible 3.7 Are there any other restrictions on tax relief for interest expenses, except provisions for expected losses on loans, tech- payments by a local company to a non-resident, for example nical and mathematical provisions for banks, microfinance pursuant to BEPS Action 4? institutions and non-bank financial institutions, financial insurance and reinsurance institutions (up to 80% of the No, there are no other restrictions on tax relief for interest payments provision approved by the regulatory authority). by a local company to a non-resident. 4.4 Are there any tax grouping rules? Do these allow for 3.8 Is there any withholding tax on property rental relief in your jurisdiction for losses of overseas subsidiaries? payments made to non-residents? No, there are no tax grouping rules. Yes. There is a 9% withholding tax on property rental payments made to non-residents. 4.5 Do tax losses survive a change of ownership?

As a general rule, the losses may be carried forward for four years, but they do not survive a change of more than 50% in ownership or a change in the legal form of the entity.

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4.6 Is tax imposed at a different rate upon distributed, as 6.3 How would the taxable proﬁts of a local branch be opposed to retained, proﬁts? determined in its jurisdiction?

No, there is no difference in this regard. Branches are taxed only on the taxable income from a Kosovo source of income. The taxable income is determined in the same 4.7 Are companies subject to any signiﬁcant taxes not manner as for resident companies. Taxable income of branches is subject to Corporate Income Tax at the rate of 10%. covered elsewhere in this chapter – e.g. tax on the

occupation of property? 6.4 Would a branch beneﬁt from double tax relief in its Yes, there is a property tax in Kosovo. All persons who own, use or jurisdiction? occupy immovable property are subject to tax on real estate. The Municipal Assembly of each Municipality shall set property tax rates Branches have the same treatment under the local legislation. for all property categories except for the public property category, at the rate of 0.15% to 1% of the market property value. 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of proﬁts by the 5 Capital Gains branch?

5.1 Is there a special set of rules for taxing capital gains No, there is no withholding tax or other tax with regard to the and losses? remittance of profits by the branch.

The Corporate Income Tax Law indicates the rules applicable to 7 Overseas Proﬁts capital gains. As a general rule, capital gains and losses are treated as ordinary income/losses from economic activity. 7.1 Does your jurisdiction tax proﬁts earned in overseas

branches? 5.2 Is there a participation exemption for capital gains? Foreign-sourced income is taxable in Kosovo. However, tax credit No, there is no participation exemption for capital gains. is allowable for the amount of income tax paid overseas for the income derived abroad. 5.3 Is there any special relief for reinvestment? 7.2 Is tax imposed on the receipt of dividends by a local No, there is no general relief for reinvestment. The only relief is granted to taxpayers in case of involuntary conversion of property company from a non-resident company? if the consideration received from the conversion consists of either No, dividends distributed by a non-resident to a local company are property of the same character or nature, or money that is invested considered as exempt income. in property of the same character or nature within a replacement period of two years. 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local There are no “controlled foreign company” rules. assets/shares? 8 Taxation of Commercial Real Estate There is no withholding tax on the proceeds of selling a direct or indirect interest in local assets/shares. 8.1 Are non-residents taxed on the disposal of commercial 6 Local Branch or Subsidiary? real estate in your jurisdiction? Non-residents are taxed on the disposal of commercial real estate in 6.1 What taxes (e.g. capital duty) would be imposed upon Kosovo, at a rate of 10% of the realised profit. the formation of a subsidiary? 8.2 Does your jurisdiction impose tax on the transfer of an There are no taxes payable upon the formation of a subsidiary. indirect interest in commercial real estate in your jurisdiction? 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident company (for There is no tax on the transfer of an indirect interest in commercial example, a branch proﬁts tax)? real estate located in Kosovo.

There is no difference between the taxation of a locally formed 8.3 Does your jurisdiction have a special tax regime for subsidiary and the branch of a non-resident company. Real Estate Investment Trusts (REITs) or their equivalent? Kosovo does not have any special regime for REITs or their equivalent.

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9 Anti-avoidance and Compliance 10.2 Has your jurisdiction signed the tax treaty MLI and deposited its instrument of ratiﬁcation with the OECD? 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? Kosovo has not signed the MLI or made any step in regard to deposition of ratification with the OECD. The Tax Procedure Law provides for the right of tax authorities to disregard and re-characterise a transaction or element of the trans- 10.3 Does your jurisdiction intend to adopt any legislation to action that does not have a substantial economic effect, where the tackle BEPS which goes beyond the OECD’s form of the transaction does not reflect its economic substance and where it was entered into as part of a scheme to avoid a tax liability. recommendations? Kosovo has expressed no intention to adopt any legislation to tackle 9.2 Is there a requirement to make special disclosure of BEPS. avoidance schemes? 10.4 Does your jurisdiction support information obtained There are no requirements to disclose avoidance schemes. under Country-by-Country Reporting (CBCR) being made available to the public? 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who Kosovo does not support public CBCR information. promotes, enables or facilitates the tax avoidance? 10.5 Does your jurisdiction maintain any preferential tax There are no such rules. regimes such as a patent box? 9.4 Does your jurisdiction encourage “co-operative Kosovo does not maintain any preferential tax regimes. compliance” and, if so, does this provide procedural beneﬁts only or result in a reduction of tax? 11 Taxing the Digital Economy

There are no provisions encouraging “co-operative compliance”. 11.1 Has your jurisdiction taken any unilateral action to tax

digital activities or to expand the tax base to capture digital 10 BEPS and Tax Competition presence?

10.1 Has your jurisdiction introduced any legislation in Kosovo has not taken any action with regard to taxing digital response to the OECD’s project targeting BEPS? activities.

Kosovo has not introduced any legislation in response to the 11.2 Does your jurisdiction favour any of the G20/OECD’s OECD’s project targeting BEPS. “Pillar One” options (user participation, marketing intangibles or signiﬁcant economic presence)?

Kosovo has not expressed any position on of the G20/OECD’s “Pillar One” options.

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Andi Pacani is a Senior Manager at Boga & Associates, which he joined in 2006. His practice is focused on accounting, tax and regulatory matters. Over several years, Andi has earned ample experience in the application of accounting regulations (national and international standards), corporate tax law and other fiscal laws. These assignments involve regular assistance to local and international clients in both Albania and Kosovo jurisdictions. Since 2005, Andi has been a member of the Approved Accountants Association. Andi obtained a degree from the Business Administration, University of Tirana, Albania, 1999, and speaks Albanian, English and Italian.

Boga & Associates Tel: +383 38 223 152 27/5 Nene Tereza Str. Email: [email protected] 10000 Pristina URL: www.bogalaw.com Kosovo

Fitore Mekaj is a Senior Associate at Boga & Associates, which she joined in 2010. Her practice covers accounting and tax services. Fitore has developed a particular expertise in accounting services as part of the accounting and tax team in Kosovo. She graduated in Finance from the South-East European University of Tetovo, Macedonia in 2008. Fitore is a Certified Accountant in Kosovo.

Boga & Associates Tel: +383 38 223 152 27/5 Nene Tereza Str. Email: [email protected] 10000 Pristina URL: www.bogalaw.com Kosovo

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Liechtenstein Liechtenstein

Sele Frommelt & Partner Attorneys at Law Ltd. Heinz Frommelt

1.2 Do they generally follow the OECD Model Convention or 2 Transaction Taxes another model? 2.1 Are there any documentary taxes in your jurisdiction? All DTAs concluded by Liechtenstein follow the OECD Model Convention. Liechtenstein is part of the Swiss customs area, for which reason the Swiss federal legislation on stamp duties (including formation duty, 1.3 Do treaties have to be incorporated into domestic law duty on insurance premiums and securities transfer stamp tax) is directly applicable in Liechtenstein. before they take effect? Swiss formation (or issuance) duty is levied upon a company DTAs are concluded and signed by the Government. In order to limited by shares, a limited liability company or a cooperative at a come into effect and become law, they must be approved by the rate of 1% with an allowance of CHF 1 million upon formation or Liechtenstein Parliament and be published in the Official Gazette. increase of the statutory capital of the entity or in the case of a non- repayable equity contribution by the shareholder. Certain transactions (e.g. restructuring within a corporate group) are tax- 1.4 Do they generally incorporate anti-treaty shopping exempt. rules (or “limitation on beneﬁts” articles)? The Swiss duty on insurance premiums applies upon insurance contracts concluded by a Liechtenstein-based insurance company or Yes. In general, the DTAs concluded so far contain anti-treaty shop- between a Liechtenstein-resident policyholder and a non- ping rules, and all future DTAs shall contain such rules in light of Liechtenstein-based insurance company. The standard rate amounts Liechtenstein’s commitment to implement BEPS Action Point 6 (see to 5% of the premium; the rate for life insurance is 2.5%. Several question 10.1 below). Currently, the DTAs with Hong Kong SAR types of insurance are exempt. PRC, Luxembourg, Malta and Singapore do not contain limitation- Swiss securities transfer stamp tax applies upon the sale of certain on-benefits (LOB) clauses. However, with respect to Luxembourg, securities, viz. mainly bonds, shares (in companies or funds) or other the two Governments have agreed that LOB shall nevertheless apply participating rights, provided one of the directly or (as an intermediary) in respect of privileged taxed entities (i.e. subject to merely the indirectly involved parties is a Swiss- or Liechtenstein-resident stock- minimum income tax; see question 4.1 below). broker. In particular, Swiss or Liechtenstein banks or securities

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dealers are deemed as stockbrokers, as are any corporate entity with entrepreneurial and non-entrepreneurial purposes, the VAT is more than CHF 10 million worth of taxable securities in its books. recoverable only to a certain extent. Analogous provisions apply in The applicable rates vary between 0.15% and 0.30%, depending on the case of privately used goods or services. the residency of the entity having issued the taxable security. In all those cases where the Swiss federal legislation on stamp 2.5 Does your jurisdiction permit VAT grouping and, if so, duties is not applicable, a special Liechtenstein formation duty or a is it “establishment only” VAT grouping, such as that applied duty on insurance premiums is levied (Art. 66 and 67 Tax Act). Skandia The Liechtenstein formation duty is levied upon the formation of by Sweden in the case? a legal entity, transfer of its registered seat into Liechtenstein or Entities having their registered seat or permanent establishment in increase of the statutory capital, unless the Swiss legislation on stamp Liechtenstein, which are connected under a uniform direction of a duties is already applicable. Thus, such duty applies, e.g., in the case single entity, may apply to be treated as a single VAT-taxable entity of the setting up of a Liechtenstein foundation or a Liechtenstein (VAT group). The group can also comprise entities, which do not establishment (Anstalt). The standard rate is 1% with an allowance pursue a commercial activity, as well as individuals. The pooling to of CHF one million, which decreases to 0.5% for capital above CHF a VAT group can be activated as of the beginning of each taxable five million and to 0.3% for capital above CHF 10 million. year and be terminated as of the end of the respective taxable year Foundations are subject to a formation duty at a rate of 0.2% on (Art. 13 VAT Act). their statutory capital; at least CHF200. The same charge applies A VAT group can be formed by any legal entity, partnerships or upon the setting up of a trust. individuals as long as they have their registered seat or a permanent The Liechtenstein duty on insurance premiums is charged on establishment in Liechtenstein. Entities having their registered seat insurance contracts, provided the insured risk is located in abroad can be part of a VAT group provided they have a permanent Liechtenstein and unless the Swiss legislation on stamp duties is establishment in Liechtenstein. Liechtenstein permanent establish- already applicable. The provision is very much coined after the Swiss ments of Swiss-incorporated companies are attributed to the Swiss equivalent, thus the same rates apply (standard rate 5%, life insurance headquarters and can therefore form part of a Swiss VAT group. 2.5%). Several types of insurance are exempt. Conversely, Swiss permanent establishments of Liechtenstein- Moreover, Liechtenstein has a capital gains tax which is levied incorporated companies are attributed to the Liechtenstein upon the transfer of real estate (see question 8.1 below). headquarters and can thus not be part of a Swiss VAT group, but

only of a Liechtenstein VAT group. 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? 2.6 Are there any other transaction taxes payable by Because of the customs area with Switzerland, Liechtenstein is part companies? of the Swiss VAT area and applies the substantive Swiss VAT regime. No, there are no other transaction taxes apart from the stamp duties Liechtenstein has thus enacted its own VAT Act (2009) and a VAT (see question 2.1 above) and real estate capital gains tax (see question Ordinance (2009), which are modelled upon the Swiss legal basis. 8.1 below). The standard VAT rate has been 7.7% since 1.1.2018. A reduced rate of 2.5% applies for certain goods like food, medicaments, books and newspapers, inter alia. A special rate of 3.7% applies for bed and 2.7 Are there any other indirect taxes of which we should breakfast facilities (see Art. 25 VAT Act). be aware?

No, there are not. 2.3 Is VAT (or any similar tax) charged on all transactions

or are there any relevant exclusions? 3 Cross-border Payments The general principle is that all services within the meaning of the VAT Act (i.e. supply of goods and provision of services), which are 3.1 Is any withholding tax imposed on dividends paid by a rendered within Switzerland or Liechtenstein by an entrepreneur locally resident company to a non-resident? resident in Liechtenstein, are subject to VAT. In addition, VAT is levied by a reverse charge procedure upon services imported from As a rule, Liechtenstein does not levy any withholding tax on an entrepreneur based outside the VAT area (i.e. Switzerland and dividends. However, under the terms of a Tax Cooperation Liechtenstein), provided the annual aggregate amount exceeds CHF Agreement with Austria concluded in 2013, Liechtenstein paying 10,000. The import of goods from outside Switzerland is subject to agents, e.g. banks, are obliged to withhold a tax in the amount of import duty VAT. The VAT Act lists several transactions which are 27.5% on dividends (as well as on capital gains) paid to a trust, not taxable. The most important are services by medical doctors, foundation or establishment deemed transparent for tax purposes dentists and other medical practitioners, children and youth care, with a beneficial owner resident in Austria, unless the bank’s client services in the area of education and training, artistic performances, and beneficial owner has waived the banking secrecy and has insurance and reinsurance transactions, dealing with securities and instructed the bank to notify the income payment directly to the fund shares, transfer of real estate, letting of real estate and sale of Austrian Tax Authority. agricultural products. An entrepreneur with an annual turnover below CHF 100,000 is 3.2 Would there be any withholding tax on royalties paid by out-of-scope of VAT. a local company to a non-resident?

2.4 Is it always fully recoverable by all businesses? If not, Liechtenstein does not levy any withholding tax on royalties. what are the relevant restrictions? 3.3 Would there be any withholding tax on interest paid by VAT is, in principle, recoverable for all entrepreneurs in relation to a local company to a non-resident? the VAT paid on all goods and services (including the import service VAT). In case the taxpayer uses the goods or services both for

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As a rule, Liechtenstein does not levy any withholding tax on and may choose between the comparable uncontrolled price method, interest. However, under the terms of a Tax Cooperation the resale price method, the cost plus method, the transactional net Agreement with Austria concluded in 2013, Liechtenstein paying margin method, the transactional profit split method or another agents, e.g. banks, are obliged to withhold a tax in the amount of method in case the other available methods are not suitable for 25% on interest paid to a trust, foundation or Establishment deemed reflecting the transfer price objectively. Taxpayers which are part of transparent for tax purposes with a beneficial owner resident in a group with a consolidated turnover in excess of CHF 900 million Austria, unless the bank’s client and beneficial owner has waived the are obliged to document the appropriateness of the transfer price banking secrecy and has instructed the bank to notify the income by way of a Master File and a Local File pursuant to the OECD- payment directly to the Austrian Tax Authority. Guidelines. It is possible, and also general practice, to obtain an Advance Pricing Agreement (APA) from the Tax Authority in 3.4 Would relief for interest so paid be restricted by relation to the applicable transfer price.

reference to “thin capitalisation” rules? 4 Tax on Business Operations: General Liechtenstein does not have thin capitalisation rules. However, with respect to interest-bearing liabilities between related parties booked 4.1 What is the headline rate of tax on corporate proﬁts? in Swiss francs, the Liechtenstein Tax Authority currently allows a maximum interest rate of 1.5%. For liabilities in other currencies, Corporate profits are taxed at a flat rate of 12.5% p.a., whereby a other rates apply (e.g. 1.75% for EUR, 2.75% for GBP). minimum annual tax of CHF 1,800 is payable irrespective of gains made by the legal entity. 3.5 If so, is there a “safe harbour” by reference to which tax A special tax regime applies for legal entities qualifying as so-called Private Asset Structures (basically a holding or investment vehicle – relief is assured? very often a private foundation – used for the management of an See question 3.4 above. individual’s private wealth without pursuing an economic activity). Those entities pay merely the minimum annual tax irrespective of their effective income and are not required to file a tax return. 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company? 4.2 Is the tax base accounting proﬁt subject to Generally, no, as the administrative practice illustrated in question adjustments, or something else? 3.4 above applies only between related entities. However, each case must be looked at individually as further utilisation of the loaned Yes, that may be the case. The relevant tax base is the annual profit amount may have an influence on the assessment by the Tax pursuant to the financial statements drawn up under the applicable Authority. commercial and accounting rules.

3.7 Are there any other restrictions on tax relief for interest 4.3 If the tax base is accounting proﬁt subject to payments by a local company to a non-resident, for example adjustments, what are the main adjustments? pursuant to BEPS Action 4? The main adjustments leading to an increase in the net profit are: depreciations, value adjustments and reserves which are not No, there are not. BEPS Action 4 is not implemented in commercially justified; profit distributions and hidden profit Liechtenstein’s legislation. distributions to shareholders or related persons; disallowance of tax

expenses; as well as income generated from capital made available to 3.8 Is there any withholding tax on property rental shareholders or related persons which does not correspond to the payments made to non-residents? “arm’s length” principle.

There is no withholding tax on property rental payments made to 4.4 Are there any tax grouping rules? Do these allow for non-residents. However, real estate located in Liechtenstein which is owned by a non-resident individual is subject to limited wealth tax. relief in your jurisdiction for losses of overseas subsidiaries?

The Tax Act provides for group taxation upon request (Art. 58 Tax 3.9 Does your jurisdiction have transfer pricing rules? Act). A tax group is possible with a parent subject to unlimited tax liability in Liechtenstein, and affiliated group members subject to tax The Liechtenstein Tax Act contains a general “arm’s length” in Liechtenstein or abroad. Group taxation allows the proportionate principle in its Art. 49, which states that commercial transactions offset of losses from the subsidiaries to the group parent, or from between related persons must correspond to the terms generally the group parent to any group member subject to unlimited tax applied between unrelated parties. The term “related person” has liability in Liechtenstein. been defined as relatively far-reaching, including not only participating entities, entities of which the taxpayer is a beneficiary, and members of the board of the taxpayer, but even persons to 4.5 Do tax losses survive a change of ownership? whom the taxpayer is connected by personal bonds of family Yes. Losses may be carried forward for an indefinite period of time, relationship or friendship (Art. 31a Tax Ordinance). Taxpayers are but the carryover is limited to 70% of the taxable net gain. Special further obliged to keep appropriate transfer pricing documentation rules apply in relation to losses from a foreign permanent establish- and to apply the OECD Transfer Pricing Guidelines for ment. Multinational Enterprises (Art. 31b Tax Ordinance). In determining

the appropriate transfer pricing method, taxpayers have to consider the effective facts and circumstances of the respective transaction, 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, proﬁts?

No; Liechtenstein taxes profits on an annual arising basis.

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4.7 Are companies subject to any signiﬁcant taxes not 6 Local Branch or Subsidiary? covered elsewhere in this chapter – e.g. tax on the 6.1 What taxes (e.g. capital duty) would be imposed upon occupation of property? the formation of a subsidiary? No; there is no such tax on the occupation of property. Foundations and trusts with settlors and/or beneficiaries resident in Liechtenstein Any Liechtenstein company formed as a subsidiary of a resident or may be subject to endowment tax if assets are transferred to a non-resident parent company will be subject to the same formation foundation or trust which is deemed opaque for wealth tax purposes. duties applied for all resident legal entities, i.e. depending on the legal Endowment tax is not applied to companies limited by shares and form, either the Swiss formation (issuance) duty or the Liechtenstein other types of corporate entities. formation duty (see question 2.1 above).

5 Capital Gains 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident company (for 5.1 Is there a special set of rules for taxing capital gains example, a branch profits tax)? and losses? A subsidiary locally formed or having its seat transferred into Capital gains on the sale of participations in Liechtenstein or abroad, Liechtenstein is subject to taxation on its worldwide income. The as well as the sale of real estate located outside of Liechtenstein, are branch of a non-resident company is taxed as a permanent establish- tax-exempt. ment only on its Liechtenstein-sourced income, which is deemed as the However, as from 1.1.2019, the gain on participations is taxable income from agricultural and silvicultural land in Liechtenstein, rental if the owned foreign company generates more than 50% of its income from real estate located in Liechtenstein and the taxable net income from passive income and is taxed at a low rate (i.e. less than income from a permanent establishment located in Liechtenstein. The half of the Liechtenstein corporate tax rate (i.e. 6.25%) in case of definition of “permanent establishment” contained in the Tax Act is ownership below 25% or in case of ownership above 25% if the akin to the definition used in the OECD Model Tax Convention. effective tax charge of the foreign company is less than half of the effective tax charge of the local company (switch-over principle). 6.3 How would the taxable profits of a local branch be With regard to existing participations as of 31.12.2018, this second determined in its jurisdiction? rule will apply from 2022 only. Gains realised upon the sale of any other assets are subject to A local branch is subject to limited tax liability in relation to its ordinary corporate income tax. Gains from the sale of real estate Liechtenstein-sourced income. The branch is obliged to follow the located in Liechtenstein are subject to special rules (see question 5.4 same accounting rules which exist for other entities, and its taxable below). profits are thus determined in accordance with the applicable Capital losses were tax-deductible until the end of 2018. Since accounting provisions. 1.1.2019, such provision is abolished. 6.4 Would a branch benefit from double tax relief in its 5.2 Is there a participation exemption for capital gains? jurisdiction?

Capital gains on the sale of shares in participations are tax-exempt, A branch is not deemed as a separate legal entity under domestic law. irrespective of the quota held and the duration of time for which The branch can therefore not benefit directly from double tax relief, the shares are held. However, the exemption will not apply in case but only its head office or entrepreneur, depending on the terms of of a foreign company which generates more than 50% of its income the applicable DTA. from passive income and whose net gain is taxed at a rate which is less than half of the Liechtenstein corporate tax rate (i.e. 6.25%) (see 6.5 Would any withholding tax or other similar tax be question 5.1 above). imposed as the result of a remittance of profits by the branch? 5.3 Is there any special relief for reinvestment? Liechtenstein does not impose any withholding tax or similar tax with respect to the remittance of profits by the branch. No, there is not. 7 Overseas Profits 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local 7.1 Does your jurisdiction tax profits earned in overseas assets/shares? branches?

The sale of real estate located in Liechtenstein is subject to real estate The earnings of the foreign branch of a Liechtenstein company are capital gains tax, payable by both resident and non-resident owners. exempt from tax in Liechtenstein. The applicable rate is equal to the income tax bracket applicable for unmarried individuals plus a municipality surcharge of 200%. The 7.2 Is tax imposed on the receipt of dividends by a local sale of shares of a real estate holding company owning real estate in Liechtenstein is treated for tax purposes as if the real estate was sold company from a non-resident company? directly. The tax is owed by the seller. Generally, dividend income is exempt from income tax. The sale of shares of local companies is not subject to any with- However, as from 1.1.2019, dividends are taxed upon the local holding tax. company if and insofar as (i) the receiving company holds at least

25% of the dividend-paying company and the dividend payment has

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been treated as a tax allowance at the level of the dividend-paying arguments for such arrangement and the same does not show any company (correspondence principle), or (ii) in case the dividend- own economic consequences. All mentioned requirements must be paying company generates more than 50% of its income from met in order to affirm the application of the anti-avoidance provision. passive income and its net gain is taxed at a low rate (i.e. less than If the anti-avoidance rule is applied, the Tax Authority is empowered half of the Liechtenstein corporate tax rate (i.e. 6.25%) in case of to disregard the tax planning and to assess the taxes as they would be ownership below 25% or in case of ownership above 25% if the levied in the case of an appropriate legal arrangement in compliance effective tax charge of the dividend-paying company is less than half with the respective business transactions, facts and circumstances. In of the effective tax charge of the local company (switch-over practice, this rule has so far been used in just a small number of cases. principle)). With regard to existing participations as of 31.12.2018, Moreover, with effect from 1.1.2019, a new anti-abuse provision this second rule will apply from 2022 only. in relation to the notional equity interest deduction came into force: Among other things, in the case of the following transactions, the 7.3 Does your jurisdiction have “controlled foreign notional equity interest deduction shall not be granted, unless the taxpayer proves that the transactions were not carried out from tax, company” rules and, if so, when do these apply? but from economic or other significant reasons, such as: cash and No; Liechtenstein does not have “controlled foreign company” legis- non-cash contributions from related parties (provided these have not lation. However, for individuals resident in Liechtenstein, a already been eliminated as non-operating assets); the acquisition of comparable provision is applied in respect of foundations or trusts companies or parts of companies held by affiliated companies; and used as wealth-holding vehicles. These are generally deemed as tax the transfer of shareholdings to resp. from related parties. transparent by the Tax Authority and their assets are consequently subject to wealth taxation in respect of the settlors or the bene- 9.2 Is there a requirement to make special disclosure of ficiaries resident in Liechtenstein. This provision does not apply to avoidance schemes? foundations or trusts with settlors and/or beneficiaries resident outside of Liechtenstein. No, there is not.

8 Taxation of Commercial Real Estate 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who 8.1 Are non-residents taxed on the disposal of commercial promotes, enables or facilitates the tax avoidance? real estate in your jurisdiction? No; tax avoidance (as opposed to tax evasion) is not a crime under Yes. Capital gains realised by a non-resident on the disposal of real Liechtenstein law. estate located in Liechtenstein are subject to capital gains tax. The applicable rate is equal to the income tax bracket applicable for 9.4 Does your jurisdiction encourage “co-operative unmarried individuals plus a municipality surcharge of 200%. The compliance” and, if so, does this provide procedural beneﬁts tax is owed by the seller. only or result in a reduction of tax? 8.2 Does your jurisdiction impose tax on the transfer of an The Tax Act provides for the possibility of a voluntary disclosure indirect interest in commercial real estate in your which allows the regularisation of undeclared income or assets jurisdiction? without incurring penalties.

The Tax Act lists certain transactions concerning real estate, which 10 BEPS and Tax Competition are deemed as transfer of real estate for capital gains tax purposes. These are: the transfer of real estate by way of forced execution or 10.1 Has your jurisdiction introduced any legislation in expropriation; the change of ownership by means of transactions having the same effect as a disposal; the encumbrance of a piece of response to the OECD’s project targeting BEPS? real estate if this influences considerably the saleability or the sale Liechtenstein applies all the Minimum Standards of the BEPS value of the real estate and consideration is charged for; and the proposal and has therefore implemented – at this stage – four of the transfer of shares in a real estate holding company (Art. 35 para. 3 15 BEPS Action Points. The following amendments came into force Tax Act). on 1 January 2017:

■ Hybrid arrangements: The so-called “correspondence principle” 8.3 Does your jurisdiction have a special tax regime for was introduced with regard to the taxation of dividends. Under Real Estate Investment Trusts (REITs) or their equivalent? the new regime, dividend income from participations above 25% are no longer tax-free, if the dividend paid has been treated as a No, it does not. tax allowance at the level of the dividend-paying company. The idea is to combat hybrid arrangements which can lead to a 9 Anti-avoidance and Compliance double non-taxation. ■ Exchange of Tax Rulings: Liechtenstein has introduced a duty 9.1 Does your jurisdiction have a general anti-avoidance or to exchange tax rulings with foreign jurisdictions in accordance anti-abuse rule? with BEPS Action Point 5. The exchange is carried out based on the principles of spontaneous exchange of tax information. Yes. Art. 3 Tax Act stipulates when a tax arrangement can be Rulings are exchanged in relation to: preferential tax situations; deemed abusive. A legal or factual arrangement, which can be transfer-pricing issues; cross-border decrease of taxable gains deemed inadequate in relation to its economic reality and whose only not evidenced in the financial accounts, existence of a aim is to obtain a tax advantage, is deemed abusive if the granting permanent establishment or attribution of gains to a permanent of tax advantages could collide with the rationale of the Tax Act and establishment, income or money-flow to associated companies if the taxpayer cannot indicate any economic or otherwise significant routed via other legal entities.

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Only Tax Rulings concluded after 31.12.2016 or those concluded 10.3 Does your jurisdiction intend to adopt any legislation to before such date and still in force as of 1.1.2017 are subject to the tackle BEPS which goes beyond the OECD’s exchange. The jurisdiction(s) with whom an exchange occurs will depend recommendations? upon the type of Tax Ruling concluded. No. From today’s standpoint, Liechtenstein’s plan is to implement ■ Intellectual Property box (IP-box) regime: Liechtenstein has had the Minimum Standards requested by the BEPS Action Points. an IP-box regime since 2011. The current regime was deemed not

to comply with BEPS Action Point 5 insofar as the list of IP rights eligible for preferred taxation was rather wide (including, e.g., 10.4 Does your jurisdiction support information obtained trademarks) and the provisions did not reflect the “nexus under Country-by-Country Reporting (CBCR) being made approach” required by the OECD. The tax regime has therefore available to the public? been abolished with effect as of 1.1.2017. Grandfathering provisions until the calendar year 2020 apply for companies, which No. The applicable law does not provide that information collected were already making use of this tax regime up to the end of 2016. as part of Country-by-Country Reporting (CBCR) should be made ■ Transfer pricing documentation: Following BEPS Action Point available to the public. 13, a duty to establish transfer pricing documentation on significant transactions with related persons has been intro- 10.5 Does your jurisdiction maintain any preferential tax duced. The assessment of the transfer prices is to be made in regimes such as a patent box? accordance with the internationally recognised Transfer Pricing Rule, e.g. the OECD Transfer Price Guidelines for Multinational Liechtenstein has had a preferential tax regime for income from IP Enterprises and Tax Administrations. rights since 2011, which taxed income from the exploitation or sale ■ Country-by-Country Reporting (CBCR): Liechtenstein has of patents, trademarks and designs, as well as software and scientific implemented this BEPS recommendation as per Action Point databases at a preferred rate of 2.5%. Because the IP-box regime 13. The duty to file the relevant report applies to a parent was deemed not to comply with the OECD’s nexus approach, the company of a multinational group of companies with an annual tax regime was abolished with effect from 1.1.2017. Grandfathering turnover exceeding CHF 900 million. The report will be provisions until the calendar year 2020 apply for companies, which exchanged with those countries that have ratified the Multilateral were already making use of this tax regime up to the end of 2016. Competent Authority Agreement on the Exchange of CBC Reports, in which any of the members of the multinational 11 Taxing the Digital Economy group is subject to tax either by virtue of residency or on the grounds of a permanent establishment. ■ Anti-treaty abuse: In accordance with BEPS Action Point 6, 11.1 Has your jurisdiction taken any unilateral action to tax Liechtenstein has committed to include LOB clauses and anti- digital activities or to expand the tax base to capture digital abuse clauses in all its DTAs. presence? With effect from 1.1.2019, further anti-abuse provisions came into force in order to prevent the asymmetric treatment of gains and No, it has not. losses on participations (see questions 7.2 and 9.1). 11.2 Does your jurisdiction favour any of the G20/OECD’s 10.2 Has your jurisdiction signed the tax treaty MLI and “Pillar One” options (user participation, marketing intangibles deposited its instrument of ratiﬁcation with the OECD? or signiﬁcant economic presence)?

Liechtenstein signed the MLI on 7.6.2017 and agreed to implement No. As of today, it is not known if Liechtenstein will implement the the minimum standards (BEPS action points 7 and 14) with the G20/OECD’s “Pillar One” options. MLI. The ratification process has not yet been completed.

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Heinz Frommelt is a partner with Sele Frommelt & Partner Attorneys at Law Ltd. and of NSF Services Trust reg. Heinz studied law at the University of Zurich, graduating in 1988 (Dr. iur.) and was admitted to the Bar in 1992. He acted as Minister of Justice in the Government of the Principality of Liechtenstein from 1997 to 2001. His practice focuses on tax planning and asset structuring, but also on banking, investment fund and insurance law. Heinz publishes on a range of tax issues and is active in various think tanks. He is Secretary of the International Fiscal Association (IFA), Liechtenstein branch, a member of Liechtenstein Chamber of Lawyers, AIJA (International Association of Young Lawyers) and DACH Europäische Anwaltsvereinigung (European Lawyers’ Association).

Sele Frommelt & Partner Attorneys at Law Ltd. Tel: +423 237 11 55 P.O. Box 1617, Meierhofstrasse 5 Email: [email protected] Vaduz, FL-9490 URL: www.sfpartner.li Liechtenstein

Sele Frommelt & Partner Attorneys at Law is one of the largest law firms in Liechtenstein. We have particular expertise in commercial, corporate and tax law. Many national and international players, both companies and individuals, put their trust in our competent and independent experts with years of experience. In our centres of excellence in tax law, corporate law, civil, administrative and constitutional law, real estate, financial markets, M&A and litigation, we provide extensive legal advice and represent our clients at all courts and authorities in Liechtenstein. Our actions are characterised by straightness, drive and efficiency. We think in generations – to the benefit of our clients. www.sfpartner.li

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Luxembourg Luxembourg

Mathilde Ostertag

GSK Stockmann Katharina Schiffmann

1 Tax Treaties and Residence (“LOB”) clause is used in the treaties signed with i.a. Hong Kong, Poland, Senegal, Singapore, Trinidad and Tobago, and the USA. Interestingly, the new treaty signed with France contains a specific 1.1 How many income tax treaties are currently in force in anti-treaty shopping rule in its new Article 28 (“Denial of benefits your jurisdiction? under the Convention”). In addition, the MLI signed by Luxembourg contains a general As of August 2019, Luxembourg has 83 tax treaties currently in anti-abuse provision in the preamble to all of its tax treaties, which force and an additional 20 under negotiation. includes the express statement to eliminate double taxation without creating opportunities for reduced taxation or non-taxation. Such 1.2 Do they generally follow the OECD Model Convention or provision is a minimum standard and cannot be opted out by any of another model? the signatories to the MLI. In the context of Article 7 (prevention of treaty abuse), countries may choose to apply either the Principle Tax treaties concluded by Luxembourg are usually based on the Purpose Test (“PPT”) or the detailed LOB provisions. Like most OECD Model Tax Convention (the “OECD MC”). Luxembourg of the signatories to the MLI, Luxembourg chose to apply the PPT. has agreed with most of the treaty countries to implement a provision on the exchange of information in line with Article 26 of 1.5 Are treaties overridden by any rules of domestic law the OECD MC. The new tax treaty, signed with France on 20 (whether existing when the treaty takes effect or introduced March 2018 and entering into force as of 1 January 2020, reflects all the post-BEPS changes and the 2017 version of the OECD MC; subsequently)? inter alia, the treaty changes the definition of a permanent establish- Luxembourg applies the hierarchy of norms. The constitution is the ment to include commissionaire arrangements, and restricts the scope highest source of law, followed by laws and regulations. It is worth of the “preparatory and auxiliary” activities. It further changes the noting that the relationship between international law and domestic distributive rules for payments of dividends, interest and royalties in law is governed entirely by case law. Such established case law states line with the 2017 OECD MC. that tax treaties incorporated into internal legislation by a ratification A few treaties signed by Luxembourg deviate from the OECD law should constitute a superior law. Therefore, if a conflict between MC. A notable example is the treaty concluded with the USA which the provisions of an international treaty and those of a national law follows the US Model Income Tax Convention. A more recent occurs, international law should take precedence over the national law. example is the treaty signed with Senegal, which more closely Further to the above and under the general principles of resembles the UN model. Luxembourg public law, treaties are considered a “lex specialis” and

therefore take precedence over the national provisions. 1.3 Do treaties have to be incorporated into domestic law before they take effect? 1.6 What is the test in domestic law for determining the All tax treaties are incorporated into domestic law pursuant to the residence of a company? following procedure: the legislator adopts a consenting law (loi According to Article 159 of the Luxembourg income tax law d’adaptation) that authorises the Grand Duke to ratify the tax treaty. (“LITL”), an entity is treated as a resident of Luxembourg for direct Before the treaty takes effect, it is submitted for approval by the tax purposes if it has: (i) its registered office (siège statutaire) in parliament (Chambre des députés). The parliament’s approval takes the Luxembourg; or (ii) its central administration (administration centrale, form of a law (loi d’approbation). After the aforementioned procedure i.e. the place of effective management) in Luxembourg. is completed, the treaty will take effect once it is ratified by the

Grand Duke. The treaty must then be published in the Mémorial in order to be in force in Luxembourg. 2 Transaction Taxes Tax treaties signed by Luxembourg generally specify an exact date on which the treaty enters into force. 2.1 Are there any documentary taxes in your jurisdiction?

Under Luxembourg law, certain acts such as official acts, acts of 1.4 Do they generally incorporate anti-treaty shopping estate agents and transfer of ownership of certain goods, are rules (or “limitation on beneﬁts” articles)? required to be registered with the Luxembourg Administration de l’Enregistrement, des Domaines et de la TVA. Registration duties are fixed As a general rule, tax treaties concluded by Luxembourg do not or proportional, depending on the nature of the acts and transfers include anti-treaty shopping rules. However, a limitation on benefits that are subject to them. A fixed fee of €12 is levied on all acts

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which do not contain a movement of securities, while a proportional The new VAT group regime treats all of the transactions between duty (ranging from 0.01% to 14.4%, depending on the transaction its members as “out of the scope” of the VAT. One of the major and the nature of the underlying asset) is levied on acts and differences between the new and the former regime is that the VAT conventions involving a movement of securities. group regime is restricted to persons established in Luxembourg and For instance, payment obligations are subject to a proportional Luxembourg branches of foreign companies, whereas the former 0.24% registration duty (which tax is calculated on the principal or regime allowed for grouping with other Member States of the EU. highest amount stated in the document), if stated in a loan agree- Companies wishing to benefit from the VAT group regime must ment physically attached to a deed subject to mandatory registration generally meet three requirements proving their bound. There must (such as a notarial deed). be an: (i) economic; (ii) financial; and (iii) organisational link with the other company(-ies). 2.2 Do you have Value Added Tax (or a similar tax)? If so, at 2.6 Are there any other transaction taxes payable by what rate or rates? companies?

Luxembourg applies Value-Added Tax (“VAT”) pursuant to the law A fixed registration fee of €75 is due in some specific cases deter- of 12 February 1979 as amended (the “VAT Law”). Currently, four mined by law such as, but not limited to: upon incorporation or rates are applicable: 17% standard rate; an intermediary rate of 14%; subsequent capital increase; and migration of a company to a reduced rate of 8%; and a super-reduced rate of 3%. Annexes A, B Luxembourg. and C provide for a detailed list of services and goods that are subject to the reduced rates. Such Annexes are to be interpreted strictly. 2.7 Are there any other indirect taxes of which we should be aware? 2.3 Is VAT (or any similar tax) charged on all transactions There are custom and excise duties applicable for certain goods. or are there any relevant exclusions? Luxembourg as a Member State of the EU follows the partially 3 Cross-border Payments harmonised VAT system and applies exemptions as prescribed for 3.1 Is any withholding tax imposed on dividends paid by a by the Council Directive 2006/112/EC, as amended (the “VAT locally resident company to a non-resident? Directive”). Such exemptions are granted i.a. in the context of financial services, fund management or medical services. An impor- Dividends paid to residents as well as non-residents are subject in tant point to highlight is that Luxembourg does not allow for an “opt principle to a 15% withholding tax (“WHT”) in Luxembourg. It is in/opt out” mechanism for activities that are exempt – with the possible, however, to benefit from either a reduced rate, an exemp- exception of rent, in which case the taxable person can choose tion under a double tax treaty, or the domestic participation whether to apply VAT or not. exemption regime. Domestic participation exemption is granted if, at the time of the 2.4 Is it always fully recoverable by all businesses? If not, dividend distribution: what are the relevant restrictions? ■ the parent company is a fully taxable Luxembourg company, or a resident company of a Member State of the EU as defined in In accordance with EU VAT rules, companies registered for VAT Article 2 of the EU Parent-Subsidiary Directive 2011/96, as can deduct input VAT to the extent it is linked with their output amended (the “PSD”), or a Swiss-resident capital company that VATable economic activity. In the past, a pro rata deduction was used is subject to income tax in Switzerland without being exempt based on the percentage of VATable and non-VATable activities. from tax, or a foreign joint-stock company which is subject in However, after the judgment of the Court of Justice of the its country of residence to an income tax regime corresponding European Union (the “CJEU”) in BLC Baumarkt GmbH & Co. KG to the Luxembourg corporate income tax (“CIT”); (C-511/10), the VAT directive must be interpreted as allowing ■ said company holds or commits to hold a participation of at Member States to use a more accurate method than the one of the least 10% (or with an acquisition price of at least €1.2 million) general pro rata. In Circular n° 765 of 15 May 2013, the Luxembourg in the nominal share capital of the distributing company; and VAT authorities referred to a direct allocation or another key ■ such qualifying participation has been held for an uninterrupted allocation method. The general pro rata deduction should not be period of at least 12 months. used if a more precise allocation method can be applied. If the shareholder is an EU company within the scope of the As per Circular n° 765-1 of 11 June 2018, the VAT tax adminis- PSD, the exemption applies subject to the additional general anti- tration extended the regime applicable in Circular n° 765 to persons abuse rule (“GAAR”) below: carrying out both economic and non-economic activities for VAT ■ the EU parent company is not used for the main purpose or as purposes. The former Circular referred only to persons carrying out one of the main purposes of obtaining a tax advantage that an economic activity partially exempt for VAT purposes. defeats the object of the PSD. Liquidation proceeds are not subject to dividend WHT. If properly structured, a partial liquidation may additionally not be 2.5 Does your jurisdiction permit VAT grouping and, if so, subject to the WHT. is it “establishment only” VAT grouping, such as that applied In addition, dividend payments made by a certain type of vehicle, by Sweden in the Skandia case? e.g. SPFs, SICAV, SICAR and securitisation vehicles, are not subject to WHT. In its judgment of 4 May 2017, the CJEU ruled that the Luxembourg implementation of the VAT group regime was not 3.2 Would there be any withholding tax on royalties paid by compatible with the VAT Directive, as it extended the benefits of a local company to a non-resident? the exemption to taxable activities that were not directly necessary for the exempt or out-of-scope activities of the VAT group. In light There has been no WHT on royalties in Luxembourg since 1 January of the above decision, Luxembourg has repealed its old regime and 2004. implemented a new VAT group regime as per the law of 6 August 2018 (in line with the Skandia case (C-7/13)).

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3.3 Would there be any withholding tax on interest paid by Stand-alone entity: stand-alone entities are exempt from the scope of application of the interest deduction limitation rule. A stand- a local company to a non-resident? alone entity is defined as a taxpayer that is not part of a consolidated There is no WHT on arm’s length interest payments in Luxembourg. group for financial accounting purposes and had no associated Interest paid under certain hybrid instruments, or not at arm’s length, enterprise. The definition of “associated enterprise” encompasses may be subject to a 15% WHT if reclassified as dividend payments any entity – and not company – which holds, directly or indirectly, by the tax authorities. more than 25% of the taxpayer. As a result, an orphan Luxembourg company held by a trust, a foundation or a stichting should not be considered as a stand-alone entity under the interest deduction 3.4 Would relief for interest so paid be restricted by limitation rule. reference to “thin capitalisation” rules? Financial undertaking: outside of the scope of the interest deduction limitation rule is any entity which falls within the There is currently no legislation concerning the thin capitalisation ratio definition of a financial undertaking (under article 168bis LITL). specifically but, in practice, the tax administration uses a debt-to-equity Included in this definition are, inter alia: (i) alternative investment ratio of 85:15 for the intra-group financing of participations. In case funds in the meaning of AIFM Directive 2011/61/EU; and (ii) EU a taxpayer fails to comply with this ratio, the surplus of interest may securitisation vehicles that fall within the scope of Article 2(2) of be requalified as a hidden dividend distribution. Such requalification EU Regulation 2017/2402. With regard to the latter exemption, its would result in a lack of deductibility for those payments and possible current wording only covers STS securitisations. application of a 15% WHT (subject to applicable tax treaty or participation exemption, if applicable). Back-to-back financing is not subject to the abovementioned ratio. 3.5 If so, is there a “safe harbour” by reference to which tax As of 1 January 2019, however, due to the transposition into relief is assured? Luxembourg tax law of the interest deduction limitation rule (article 168bis of the Luxembourg Income Tax Law (“LITL”)), deduction The only safe harbour rule is set out in the Circular n° 56/1-56bis/1 of interest qualifying as “exceeding borrowing costs” is limited up in relation to transfer pricing rules. The rule stipulates that for to the higher of: entities providing financial services to group companies and acting (i) 30% of the company’s EBITDA (defined as the total net income as a simple intermediary, a minimum return of 2% after tax is increased by the exceeding borrowing costs, depreciation and considered as a transaction performed at arm’s length. It should be amortisation), or noted that the safe harbour rule applies only at the level of the (ii) €3 million. Luxembourg tax administration, and other tax administrations may The €3 million threshold should also be calculated on the consider the transaction not to be at arm’s length. company level, not only on its compartment level. Also in the framework of the ATAD Law, the abovementioned Exceeding borrowing costs is defined as the amount by which the limitation to deduct exceeding borrowing costs up to €3 million is deductible borrowing costs of a taxpayer exceed taxable interest considered as a de minimis rule. revenues and other economically equivalent taxable income of the taxpayer. 3.6 Would any such rules extend to debt advanced by a Interestingly, although borrowing costs are defined, there is no third party but guaranteed by a parent company? definition of “interest revenues and other equivalent taxable income”. Based on the recommendation of the Luxembourg Debts guaranteed by a parent company (other than pledging the Chamber of Commerce, practitioners take the view that such term shares of the Luxembourg debtor to the creditor) are treated as a should be interpreted by analogy with the definition of borrowing shareholder loan and as a result, in the absence of a transfer pricing costs and should encompass by symmetry the items listed under the report, the 85:15 debt-to-equity ratio will most likely be used. latter definition (e.g., but not limited to: payments under profit participating loans; imputed interest on instruments such as 3.7 Are there any other restrictions on tax relief for interest convertible bonds and zero-coupon bonds; amounts paid under payments by a local company to a non-resident, for example alternative financing arrangements, such as Islamic finance; the finance cost element of finance lease payments; capitalised interest pursuant to BEPS Action 4? included in the balance sheet value of a related asset, or the If the interest payments are not made at arm’s length or are paid amortisation of capitalised interest; amounts measured by reference under a profit-participating debt instrument, there is a risk of re-clas- to a funding return under transfer pricing rules; notional interest sification of the interest payments as dividend payments, with the under derivative instruments or hedging arrangements related to an tax consequences set out above under question 3.4. entity’s borrowings; certain foreign exchange gains and losses on See also question 3.4 for further developments with regard to the borrowings and instruments connected with the raising of finance; interest deduction limitation rule as introduced under Luxembourg guarantee fees for financing arrangements; and arrangement fees and law since 1 January 2019. similar costs related to the borrowing of funds).

Exceeding borrowing costs not deductible in a tax period can be carried forward indefinitely. The same applies to the excess interest 3.8 Is there any withholding tax on property rental capacity which cannot be used in a given tax period (however, for a payments made to non-residents? maximum period of five years). Exemptions to the interest deduction limitation rule have been Luxembourg does not levy any WHT on property rental payments, introduced, as follows: whether they are made to non-residents or residents. Grandfathering: debt instruments concluded before 17 June 2016 will not fall within the scope of the interest limitation rule to the extent that they have not been amended. The amount of exceeding borrowing costs shall be computed as if no amendments have taken place.

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3.9 Does your jurisdiction have transfer pricing rules? ■ discrepancies between the application of different valuation rules in accounting and tax (e.g. amortisation, rollover relief). Luxembourg transfer pricing rules are embedded in the revised Under certain conditions, a tax balance sheet may be prepared in Article 56 and Article 56bis LITL, which incorporate the concept of a way which deviates from the statutory accounts. the arm’s length principle based on Article 9 OECD MC. The amended provision, however, goes further and reflects the spirit set 4.4 Are there any tax grouping rules? Do these allow for out in BEPS actions 8–10, such as the concept of comparability relief in your jurisdiction for losses of overseas subsidiaries? analysis, and a GAAR that allows a transaction that has been made without any valid commercial or business justification to be Luxembourg allows a group of companies to apply a fiscal unity (or disregarded. tax consolidation). Under such regime, the respective taxable profits On 27 December 2016, the Luxembourg tax authorities issued the of each company in the consolidated group are pooled or offset to Circular n° 56/1-56bis/1, which has reshaped the transfer pricing be taxed on the aggregate amount, which means that the group is framework for companies carrying out intra-group financing effectively treated as a single taxpayer. activities in Luxembourg. The Circular provided additional guidance Generally, the conditions to qualify for a fiscal unity are as follows: in terms of substance and transfer pricing requirements, in line with ■ each company that is part of the tax unity is a Luxembourg- the OECD Guidelines. In particular, it provided substantial details resident, fully taxable company (the top entity may be a on how to conduct the comparability and functional analyses in a Luxembourg permanent establishment of a fully taxable non- way consistent with the OECD principles. Furthermore, the resident company) (the “Eligible Company”); Circular requires the performance of a comprehensive risk analysis ■ at least 95% of each subsidiary’s capital is directly or indirectly in order to determine the adequate level of equity capital. held by an Eligible Company; ■ each company’s fiscal year starts and ends on the same date; and 4 Tax on Business Operations: General ■ the fiscal unity is applied for at least five financial years. The taxable income/loss of the fiscal unity is calculated as the 4.1 What is the headline rate of tax on corporate profits? sum of the taxable income/loss of each constitutive entity. The vertical fiscal unity regime has been extended since 1 January 2016 As from the tax year 2019, income exceeding €200,000 is taxed at a in accordance with the CJEU case law, in particular, to allow rate of 17%. In addition, a 7% solidarity surcharge for the horizontal integrations. Eligible Companies (at least two Luxembourg employment fund, and a 6.75% municipal business tax (“MBT”) for companies) that are held by a common parent established in any companies registered in Luxembourg City, are levied. For companies EEA country and subject to tax comparable to Luxembourg’s CIT located outside of Luxembourg City, a different rate of MBT may in its country of residence are now also permitted to form a fiscal apply. unity. Companies consolidated for CIT are also automatically The above amounts to an aggregate tax rate for Luxembourg-City consolidated for MBT. However, there is no tax consolidation for domiciled companies of 24.94%. net wealth tax (“NWT”) purposes. Since 1 January 2019, two intermediary CIT rates have been intro- Securitisation entities and venture capital companies are excluded duced: from the possibility to form a fiscal unity in order to prevent tax ■ 15% for taxable income up to €175,000, and evasion schemes. ■ €26,250 plus 31% of the tax base above €175,000, for taxable income between €175,000 and €200,000. 4.5 Do tax losses survive a change of ownership? It is worth noting that in the past (from 1 January 2011 up until 31 December 2015) companies were subject to a minimum CIT in Companies resident in Luxembourg can carry forward their losses the amount of €3,210. However, since that provision was rendered for 17 years if they are realised from the financial year closing after as incompatible with the EU PSD, Luxembourg abolished minimum 31 December 2016 (before that, tax losses could be carried forward CIT and introduced a minimum net wealth tax as of 1 January 2016 indefinitely; losses incurred between 1 January 1991 and 31 which amounts to €4,815. December 2016 are, however, grandfathered in) and offset them against any future profits if the following conditions are met 4.2 Is the tax base accounting profit subject to cumulatively: adjustments, or something else? ■ the losses have not already been offset; ■ the company has maintained proper accounting in the loss- As a general rule, companies in Luxembourg follow Luxembourg making period; and general accounting principles (“LuxGAAP”) under which both ■ the losses are offset by the company that incurred them. upward and downward adjustments are allowed. Based on Luxembourg case law, companies should have a right to carry forward tax losses in case of change of ownership, unless an abuse of law has been established. Such condition should be inter- 4.3 If the tax base is accounting profit subject to preted in the meaning of corporate law and not solely on economic adjustments, what are the main adjustments? rationale. The right to offset the losses based on the hereinabove conditions should only be interpreted in light of the definition of a Profits in commercial accounts differ from taxable profits mainly for company based on corporate law. As a consequence, amendments the following reasons: to articles of association relating to sale of shares of the company ■ tax-exempt profits (e.g. as per the participation exemption do not lead to the creation of a new legal entity and hence do not regime applicable for dividends and capital gains); prohibit that entity from the carrying-forward of losses. ■ add-back expenses (e.g. interest expenses on assets generating However, application of the tax carry-forward may be denied if tax-exempt income); the transaction occurred purely for tax reasons; the so-called ■ adjustment to the tax results from transactions that were not at “Mantelkauf” theory. arm’s length (e.g. the interest rate set was not at market It should be noted that the tax losses may be offset against CIT conditions, or interest payments were reclassified as hidden and MBT but not against NWT. dividend distribution and hence no longer tax-deductible); and

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4.6 Is tax imposed at a different rate upon distributed, as met. The purpose of this article is that the profit on the disposal of assets should not be taxed if the funds released are retained in the opposed to retained, proﬁts? business and will be used to invest in other capital assets. Luxembourg taxes retain and distribute profits in the same manner. However, distributed profits may be subject to withholding tax 5.4 Does your jurisdiction impose withholding tax on the unless a domestic or treaty exemption applies. It should also be proceeds of selling a direct or indirect interest in local noted that undistributed profits may also be subject to NWT. assets/shares?

4.7 Are companies subject to any signiﬁcant taxes not Luxembourg does not impose WHT on the sale of a direct or covered elsewhere in this chapter – e.g. tax on the indirect interest in local assets/shares, as such profits are taxed as capital gains. occupation of property?

Yes, Luxembourg levies NWT on Luxembourg corporate tax 6 Local Branch or Subsidiary? residents. NWT is assessed on 1 January of each year on the basis of the estimated realisable value of the company’s net operating 6.1 What taxes (e.g. capital duty) would be imposed upon assets (total assets minus total liabilities, the so-called unitary value). the formation of a subsidiary? There is a possibility of reduction of the NWT up to the CIT paid for the previous fiscal year. NWT of 0.5% is levied on the unitary A €75 registration duty is due upon formation of a subsidiary; the value of up to €500 million (inclusive) and 0.05% for the unitary same duty is paid in case its articles of association are amended. value exceeding this threshold. A minimum NWT of €4,815 is due by Luxembourg corporate 6.2 Is there a difference between the taxation of a local taxpayers holding financial assets representing at least 90% of their total assets and having a balance sheet exceeding €350,000. subsidiary and a local branch of a non-resident company (for Exemptions are available for securitisation vehicles, SICARs, example, a branch proﬁts tax)? SEPCAVs, ASSEPs, and RAIFs that invest exclusively into risk capital-related securities – which only pay the minimum flat NWT Branch is a corporate law term; therefore the classification of an of €4,815. A Luxembourg resident company can also benefit from entity/activities as a branch is not imperative for the determination a NWT exemption on qualifying participations under the same of its tax treatment. Instead tax law uses the term permanent establish- conditions applicable for the participation exemption on dividend ment to determine whether an entity is taxable in Luxembourg. income, except that no minimum holding period is required. Branches and subsidiaries fall under the same tax regime. In addition, all transactions between the head office and the branch are disregarded for tax purposes, e.g. there is no WHT on any payments. 5 Capital Gains 6.3 How would the taxable proﬁts of a local branch be 5.1 Is there a special set of rules for taxing capital gains determined in its jurisdiction? and losses? In principle, Luxembourg branches of foreign companies should be In principle, capital gains arising from the sale of assets are treated taxed the same way as resident companies (subject to the provisions as ordinary income and taxed as such, unless the participation of a relevant tax treaty), with the exception that transactions between exemption (as specified in question 5.2 below) applies. a branch and a head office are disregarded.

5.2 Is there a participation exemption for capital gains? 6.4 Would a branch benefit from double tax relief in its Capital gains exemption is available under the following conditions. jurisdiction? At the time the capital gains are realised: ■ the Luxembourg company has held a direct participation It depends on the domestic law of the jurisdiction where the head representing at least 10% of the nominal paid-up share capital office is located and the applicable double tax treaty. However, as a of its subsidiary (or if below 10%, a direct participation having general rule, a permanent establishment is not considered as a an acquisition price of at least €6 million); resident under a tax treaty and cannot claim the benefits of such ■ it has held such qualifying participation for an uninterrupted treaty on its own. period of at least 12 months; and ■ the subsidiary entity is: (i) a Luxembourg-resident entity fully 6.5 Would any withholding tax or other similar tax be subject to Luxembourg income taxes; (ii) a non-resident capital imposed as the result of a remittance of profits by the company liable for an income tax in its country of residence branch? comparable to the Luxembourg CIT; or (iii) an entity resident in a Member State of the European Union (as defined in Article 2 No, transactions between the branch and the head office are not of the PSD). subject to WHT or any similar tax. It is important to note that the GAAR does not apply to capital gains deriving from qualifying subsidiaries benefiting from the 7 Overseas Profits Luxembourg participation exemption, regardless of their location.

7.1 Does your jurisdiction tax proﬁts earned in overseas 5.3 Is there any special relief for reinvestment? branches? Yes, Article 54 LITL provides for a reinvestment relief if fixed assets As a general rule, in the absence of a double tax treaty, profits consisting of a building or non-depreciable assets are disposed of realised by an overseas branch would be included in the taxable basis during the course of operations, provided that certain conditions are of the Luxembourg head office (as it is taxed on its worldwide

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income). However, within the framework of double tax treaties, 8.2 Does your jurisdiction impose tax on the transfer of an Luxembourg generally exempts profits of a permanent establish- indirect interest in commercial real estate in your ment which are taxed in the other Contracting State. It should be noted that profits of an overseas branch would not jurisdiction? be subject to MBT, as this tax is applicable only to commercial Luxembourg does not impose such tax unless the sale is done by a activities carried on in Luxembourg. tax-transparent entity from a Luxembourg point of view; then the

non-resident company directly above the tax-transparent entity is 7.2 Is tax imposed on the receipt of dividends by a local taxable on capital gains realised on the sale of the real estate in ques- company from a non-resident company? tion.

Yes, all dividends received from abroad are calculated in the taxable 8.3 Does your jurisdiction have a special tax regime for profits of a company. Such income might be exempt under the applicable tax treaty or Real Estate Investment Trusts (REITs) or their equivalent? the domestic participation exemption. No, Luxembourg does not have any special tax regime for REITs. Under the domestic participation exemption, dividend income

(and liquidation proceeds) is exempt if, at the time the income is put at the disposal of the taxpayer: 9 Anti-avoidance and Compliance ■ the subsidiary entity is (i) a Luxembourg-resident entity fully subject to Luxembourg income taxes, (ii) an entity resident in a 9.1 Does your jurisdiction have a general anti-avoidance or Member State of the European Union (as defined in Article 2 anti-abuse rule? of the PSD), or (iii) a non-resident capital company liable to an income tax in its country of residence comparable to the Luxembourg has GAAR embedded in its legislative framework Luxembourg CIT; (Article 6 Steueranpassungsgesetz, “StAnpG”), which applies to any ■ the Luxembourg company holds a direct participation Luxembourg taxpayer (capital companies, individuals and partner- representing at least 10% of the nominal paid-up share capital ships). of its subsidiary (or if below 10%, a direct participation having Specific GAAR were also introduced to implement the provisions an acquisition price of at least €1.2 million); and of the Directive 2014/86/EC of 8 July 2014 amending the Parent- ■ it has held (or commits itself to hold) such qualifying Subsidiary Directive introducing a GAAR on the participation participation for an uninterrupted period of at least 12 months. exemption regime. If the dividends are distributed by an EU subsidiary which is listed More recently, Luxembourg modified its existing GAAR under in Article 2 of the PSD, the exemption applies subject to the two Article 6 StAnpG to align it with the GAAR provided for by the additional conditions below: ATAD 1. According to the amended rule, a misuse of forms and ■ the EU subsidiary is not used for the main purpose or as one of institutions of law (i.e., an “arrangement”) which has been effected the main purposes of obtaining a tax advantage that defeats the for the main purpose, or one of the main purposes, of achieving a object of the PSD (GAAR); and tax advantage, and which is not commercially genuine, should be ■ the dividend/profit distribution from the EU subsidiary have ignored. An arrangement is considered not to be genuine if it has not been deducted from its taxable base (anti-hybrid rule). not been put into place for valid commercial reasons which reflect economic reality. 7.3 Does your jurisdiction have “controlled foreign However, one should remember that the GAAR are still subject to EU law and its interpretation by the CJEU. In this context, the company” rules and, if so, when do these apply? CJEU Cadbury Schweppes case-law and the notion of wholly artificial CFC rules have been introduced into Luxembourg law as of January arrangements should be taken into account when applying the 2019 upon the implementation of the ATAD 1 with the above- GAAR. mentioned ATAD law. The ATAD 1 CFC rules are the mere implementation of BEPS Action 3. In short, the CFC rule 9.2 Is there a requirement to make special disclosure of distributes to Luxembourg (i.e. under the jurisdiction of the control- avoidance schemes? ling company) the income of a foreign subsidiary or permanent establishment 50% owned directly or indirectly by a foreign In accordance with DAC 6 (the fifth amendment to the Directive subsidiary or permanent establishment, if the effective corporation 2011/16/EU as regards mandatory automatic exchange of informa- tax on the profits of that subsidiary or permanent establishment are tion in the field of taxation in relation to reportable cross-border less than half the CIT that would have been paid in Luxembourg. arrangements), cross-border arrangements indicating a potential risk However, the rule excludes Luxembourg MBT from the scope of of tax avoidance should be disclosed to the tax authorities. The the CFC provisions. directive entered into force on 25 June 2018, and must be introduced into national law by 31 December 2019. It is expected that this 8 Taxation of Commercial Real Estate directive will be soon transposed by the Luxembourg legislator, as a draft bill was introduced on 8 August 2019 to the Parliament.

8.1 Are non-residents taxed on the disposal of commercial 9.3 Does your jurisdiction have rules which target not only real estate in your jurisdiction? taxpayers engaging in tax avoidance but also anyone who Yes, non-residents are subject to capital gains tax upon disposal of promotes, enables or facilitates the tax avoidance? a real estate located in Luxembourg, as per domestic law. Such position might be overruled under double tax treaties signed with According to DAC 6, intermediaries, i.e. persons who design, Luxembourg. market, organise or make the arrangement available for implementation, are responsible for filing the information on report-

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able cross-border arrangements to the tax authorities. National law 10.3 Does your jurisdiction intend to adopt any legislation to may give the intermediary the right to a waiver from filing informa- tackle BEPS which goes beyond the OECD’s tion if the reporting obligation would breach the legal professional privilege. For example, lawyers have a legal obligation to maintain recommendations? professional secrecy under the Luxembourg Criminal Code. As per No, Luxembourg is implementing all the mandatory measures which the draft bill, Luxembourg lawyers would be covered by the derive from the EU Parliament initiative. However, as a competitive professional secrecy. However, in that event, they have to inform jurisdiction, it does not plan to impose measures that would go the other intermediaries adequately and concurrently therewith to beyond other recommendations of the BEPS report. The inter- provide the Luxembourg tax administration with certain information esting exception to that is the introduction of the mandatory binding relating to the transaction to be disclosed, on an anonymous basis. arbitration, which is not required under the MLI instrument. Also,

it is worth noting that the Luxembourg law on transfer pricing 9.4 Does your jurisdiction encourage “co-operative expressly makes reference to the OECD transfer pricing guidelines compliance” and, if so, does this provide procedural beneﬁts when interpreting the national law. only or result in a reduction of tax? 10.4 Does your jurisdiction support information obtained A corporate entity may approach the tax administration and request under Country-by-Country Reporting (CBCR) being made an advance tax ruling, which constitutes a binding agreement with the tax authorities and a confirmation of the tax treatment. available to the public?

Yes, Luxembourg has transposed the EU Directive 2016/881 10 BEPS and Tax Competition concerning automatic and mandatory exchange of tax information by the law of 23 December 2016 concerning the CbCR. The law 10.1 Has your jurisdiction introduced any legislation in requires the annual filing of a CbCR declaration by every ultimate response to the OECD’s project targeting BEPS? parent company residing in Luxembourg for tax purposes (or a designated reporting entity). The CbCR must be filed within 12 Luxembourg has implemented many changes to align its law with months from the last day of the fiscal year in question. There is also the BEPS Action Plan: an obligation to submit a notification stating whether the entity is ■ Action 1: Implementation of the EU VAT directive addressing either the ultimate parent of the group, a substitute parent or the VAT on business to customers’ digital services. designated reporting entity, and if it performs none of these ■ Actions 2–4: Implementation of ATAD 1, which deals with functions, the notification shall clearly state the identity and fiscal CFCs and interest-limitation rules, which have been residence of the reporting group entity no later than on the last day implemented into Luxembourg law as of 1 January 2019 (hybrid of the fiscal year of the group. The notification is submitted elec- rules under ATAD 2 are to be transposed into Luxembourg tronically. national law by the end of 2019, aiming to neutralise the effects Information obtained under CbCR is not public. In this respect, of hybrid mismatch arrangements). Luxembourg implemented measures to ensure the appropriate use ■ Action 5: Luxembourg introduced a BEPS-compliant new IP of information. box regime as of the fiscal year starting 2018. ■ Action 6: On preventing the granting of treaty benefits in 10.5 Does your jurisdiction maintain any preferential tax inappropriate circumstances. Action 6 will include minimum regimes such as a patent box? standards to combat contractual abuse. ■ Action 7: Prevention of the artificial avoidance of permanent Yes, the law dated 22 March 2018 replaced the IP box regime that establishment status. was abolished in 2016. In addition, the Luxembourg tax authorities ■ Actions 8–10: Introduction of the new Article 56bis to the LITL published a circular on 28 June 2019, L.I.R. n° 50ter/1, clarifying the (please refer to question 3.9 above). IP box. The Law introduced a new Article 50ter LITL that provides ■ Action 12: As per the introduction into domestic law of DAC 6 for an 80% exemption on income derived from the commer- (please refer to question 9.2 above). cialisation of certain intellectual property (“IP”) rights, as well as a ■ Action 13: Transfer pricing documentation as requested by the full exemption from NWT. The new rules are applicable as from the new transfer pricing rules (please refer to question 3.9 above); fiscal year 2018. Qualifying assets include the following IP rights: country-by-country reporting (“CbCR”) which is applicable in ■ patents (broadly defined) and functionally equivalent rights that Luxembourg for financial years starting on or after 1 January are legally protected by utility models, extensions of patent 2016. protection for certain drugs and phyto-pharmaceutical products, ■ Action 14: Luxembourg chose to opt for mandatory arbitration plant breeders’ rights, and orphan drug designations; and under the MLI, which will be improved due to the new BEPS- ■ copyrighted software. MLI. In line with the BEPS – Action 5 recommendations, marketing- ■ Action 15: Luxembourg signed the MLI. related IPs can no longer benefit from the IP box regime. Qualifying income includes the following: 10.2 Has your jurisdiction signed the tax treaty MLI and ■ income derived from the use of, or a concession to use, deposited its instrument of ratiﬁcation with the OECD? qualifying IP rights (i.e. royalty income); ■ IP income embedded in the sales price of products or services Luxembourg has signed and ratified MLI. For Luxembourg directly related to the eligible IP asset. The principles of Article purposes, the MLI entered into force on 1 August 2019. Hence and 56bis ITL must be used to separate income unrelated to the IP as of now, each tax treaty signed with Luxembourg will have to be (e.g. marketing and manufacturing returns); interpreted in line with the MLI, and the application of the MLI will ■ capital gains derived from the sale of the qualifying IP rights; have to be checked on a case-by-case basis. and ■ indemnities based on an arbitration ruling or a court decision directly linked to a breach of a qualifying IP right.

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The regime applies on a net income basis, meaning that expenses applicable to financial transactions to virtual currencies (which relating to the qualifying IP assets need to be deducted from the follows the CJEU’s position in the Hedqvist case (C-264/14)). gross qualifying income. The proportion of qualifying net income Concurrently therewith, the Luxembourg direct tax administration entitled to the benefits will be determined based on the ratio of issued Circular n° 14/5-99/3-99bis/3 of 26 July 2018 which classifies qualifying expenditures and overall expenditures (nexus ratio). The virtual currencies as intangible assets for CIT, MBT and NTW rather previously-qualifying IP assets can continue to benefit from the old than a currency. It is an interesting point to note that the French and regime during the grandfathering period, running until 30 June 2021. Luxembourg tax administrations have a diverging interpretation on the assessment of cryptocurrencies. 11 Taxing the Digital Economy 11.2 Does your jurisdiction favour any of the G20/OECD’s 11.1 Has your jurisdiction taken any unilateral action to tax “Pillar One” options (user participation, marketing intangibles digital activities or to expand the tax base to capture digital or signiﬁcant economic presence)? presence? Given the short period of time that has elapsed since the proposal No, as any digital service tax would be detrimental to the fiscal in June 2019, Luxembourg has not particularly commented on any politics of Luxembourg. of the options. In general, Luxembourg was in favour of the Although France has now introduced a digital tax, such actions taxation of digital giants. However, Luxembourg finance minister are not to be expected in Luxembourg. Pierre Gramegna said that the initiatives should be taken with the It is worth noting that the Luxembourg VAT Authorities issued consensus of the OECD countries (or G20), so it is to be expected Circular n° 787 of 11 June 2018 to extend the VAT exemption that Luxembourg might be in favour of the “Pillar One” options.

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Mathilde Ostertag heads the tax practice at GSK Stockmann in Luxembourg. She practised within a Benelux and an international law firm in Luxembourg for the past nine years prior to joining GSK Stockmann (Luxembourg bar, 2008). Her areas of expertise include domestic and international tax law, in particular tax planning, private equity, real estate, start-ups and other foreign investment structures. She also has in-depth knowledge on capital market transactions, cross-border restructurings, i.a. inbound and outbound migrations, mergers and acquisitions and debt restructuring. Mathilde holds a Master’s degree from the Université Robert Schuman, Strasbourg and a postgraduate degree in Corporate and Tax Law (DJCE). Mathilde has been appointed recently as President of the Ladies in Law Luxembourg Association (“LILLA”) which aims at actively promoting gender diversity and women in senior positions in the legal sector. She is also a member of the International Fiscal Association (“IFA”) and the International Bar Association (“IBA”); she publishes regularly. Mathilde is fluent in French, English, German and Portuguese. Website: https://www.gsk.de/en/person/en.mathilde.ostertag.

GSK Stockmann Tel: +352 2718 0200 44, Avenue John F. Kennedy Email: [email protected] L-1855 URL: www.gsk-lux.com Luxembourg

Katharina Schiffmann is a Senior Associate at GSK Stockmann in Luxembourg. She graduated from the Saarland University majoring in tax law. Prior to joining GSK Stockmann, Katharina worked in a leading independent law firm in Luxembourg for several years focusing on tax law. Katharina’s practice areas include international and European tax law, domestic Luxembourg taxation, tax planning and restructuring. Katharina is a member of the International Fiscal Association (“IFA”). She is fluent in German, English and French. Website: https://www.gsk.de/en/person/en.katharina.schiffmann.

GSK Stockmann Tel: +352 2718 0200 44, Avenue John F. Kennedy Email: [email protected] L-1855 URL: www.gsk-lux.com Luxembourg

GSK Stockmann is a leading, independent business law firm with international Solution-driven, we tailor our services to the exact business needs of our reach and offices in Berlin, Frankfurt am Main, Hamburg, Heidelberg, Munich clients. Teamwork is one of our core values, as are respect, solidarity and and Luxembourg. integrity. This combination ensures that we work efficiently for the benefit of We advise international and domestic clients across a wide range of areas in our clients. relation to Corporate/M&A, Private Equity, Investment Funds, Tax, Capital www.gsk-lux.com Markets and Banking and Finance. GSK Stockmann is the trusted advisor of leading financial institutions, asset managers, private equity houses, insurance companies, corporates and innovative FinTech and start-up companies, having both a local and global reach. GSK Stockmann strives to provide the highest-quality legal advice and responsiveness, combined with a pragmatic approach to transactions.

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Malaysia Malaysia

Wong & Partners Yvonne Beh

1 Tax Treaties and Residence 2 Transaction Taxes

1.1 How many income tax treaties are currently in force in 2.1 Are there any documentary taxes in your jurisdiction? your jurisdiction? Yes, stamp duty is imposed on instruments identified in the Stamp As of 21 June 2019, Malaysia has treaties in effect with Act. The rate of stamp duty will depend on the type of instrument, approximately 77 countries. However, the treaties with Argentina and may be a fixed rate or an ad valorem rate. and the United States of America are of limited application, and Stamp duty relief may be available in limited circumstances, e.g., only apply to profits from shipping and air transport undertakings. for the transfer of shares between associated companies. Malaysia has also concluded Tax Information Exchange Agreements with a number of countries, such as the United Kingdom, Qatar and 2.2 Do you have Value Added Tax (or a similar tax)? If so, at South Africa. what rate or rates?

1.2 Do they generally follow the OECD Model Convention or Effective from 1 September 2018, the goods and services tax another model? (“GST”) regime was repealed and replaced with a new sales tax and service tax framework. Yes. Malaysia’s income tax treaties generally follow the OECD Sales tax is chargeable on the manufacture of taxable goods in Model Convention. Malaysia and the importation of taxable goods into Malaysia, at the rate of either 5% or 10% or a specified rate depending on the category of taxable goods. 1.3 Do treaties have to be incorporated into domestic law Service tax is imposed at 6% on (i) the provision of taxable before they take effect? services by a registered person in the course or furtherance of a business in Malaysia, and (ii) imported taxable services. The scope of Yes. A treaty will take effect domestically once it has been ratified taxable services include, among others, the provision of accom- and the effective date has been declared by way of a statutory order. modation services, food and beverage preparation services,

consultancy and management services, courier services, information 1.4 Do they generally incorporate anti-treaty shopping technology (“IT”) services and advertising services. rules (or “limitation on beneﬁts” articles)? With effect from 1 January 2020, registered foreign service providers who provide any digital services to a consumer in Malaysia would be No, there are generally no specific anti-treaty shopping provisions in required to charge 6% service tax on the digital services provided. the treaties.

2.3 Is VAT (or any similar tax) charged on all transactions 1.5 Are treaties overridden by any rules of domestic law or are there any relevant exclusions? (whether existing when the treaty takes effect or introduced subsequently)? Malaysian sales tax is generally imposed on all goods manufactured in or imported into Malaysia, unless specifically exempted. No. Domestic legislation and case law stipulate that where there is Exemptions may be granted by way of a statutory order to exempt conflict between the provisions of a treaty and the provisions in (i) any goods or class of goods from sales tax, or (ii) any persons or domestic tax legislation, the treaty provision will take precedence and class of persons from the payment of sales tax. Separately, any prevail over domestic law. person may also apply to the Minister of Finance for a specific exemption from sales tax. 1.6 What is the test in domestic law for determining the Malaysian service tax is only imposed on specific services identified as taxable services. Further, certain services provided residence of a company? between companies in the same group of companies are not treated Under Malaysian law, the test to determine the tax residence of a as taxable services, subject to the fulfilment of certain conditions. company is based on the “control and management” test. A Service tax will be applicable on digital services (as defined in legis- company carrying on a business is resident in Malaysia for a year of lation) provided by a foreign service provider to consumers in assessment if, at any time during that year, the management and Malaysia, with effect from 1 January 2020. A person would be control of its business is exercised in Malaysia. deemed as a “consumer” if certain criteria are fulfilled.

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2.4 Is it always fully recoverable by all businesses? If not, 3.3 Would there be any withholding tax on interest paid by what are the relevant restrictions? a local company to a non-resident?

No. There is no input tax credit mechanism under the sales tax and Yes, withholding tax is applicable on interest paid by a Malaysian service tax regime. company to non-residents at the domestic rate of 15%, subject to Sales tax and service tax is therefore generally not recoverable, reduction under an applicable double tax treaty. save for sales tax drawback mechanisms which allow a person to There are certain circumstances in which interest income, derived by claim a drawback for sales tax paid on taxable goods which are non-residents, is exempt from withholding tax. For example, interest subsequently exported out of Malaysia or for goods which are paid or credited to a non-resident in respect of securities issued by the imported to be used in the manufacturing process. Malaysian Government is exempted from withholding tax.

2.5 Does your jurisdiction permit VAT grouping and, if so, 3.4 Would relief for interest so paid be restricted by is it “establishment only” VAT grouping, such as that applied reference to “thin capitalisation” rules? by Sweden in the Skandia case? Initial proposals to introduce thin capitalisation rules in Malaysia No. Group registration is not permitted under the sales tax and have been scrapped, and Earning Stripping Rules (“ESR”) have been service tax regime. introduced instead. The ESR, which came into operation on 1 July 2019, restrict the interest deductible from the gross income of a person for any financial assistance in a controlled transaction. The 2.6 Are there any other transaction taxes payable by ESR generally apply to a person whose total interest expense for any companies? financial assistance granted in a controlled transaction exceeds MYR 500,000. Real property transactions may potentially be subject to real property Where the ESR apply, an entity’s deduction for interest expenses gains tax (“RPGT”). Malaysia imposes RPGT on chargeable gains will be limited to 20% of its earnings before interest, taxes, realised from the disposal of real properties or shares in real depreciation and amortisation based on a fixed ratio rule. property companies (“RPC”). An RPC is a controlled company which owns land with a defined value of not less than 75% of its total tangible assets. Capital gains on the disposal of shares in RPCs 3.5 If so, is there a “safe harbour” by reference to which tax will be subject to tax in the same way as capital gains on the disposal relief is assured? of land. The applicable RPGT rates are set out in questions 8.1 and 8.2 This is not applicable to Malaysia as there are no thin capitalisation below. rules in Malaysia.

2.7 Are there any other indirect taxes of which we should 3.6 Would any such rules extend to debt advanced by a be aware? third party but guaranteed by a parent company?

Import and excise duties may be imposed on the movement of Yes. The ESR restrict the interest deductible from the gross income goods into or out of Malaysia. of a person for any financial assistance in a controlled transaction, Import duties are levied on a wide variety of goods imported into and “financial assistance” is defined to include the provision of any Malaysia, whereas export duties are levied on a very limited category guarantee. Guidelines on the ESR, issued by the Inland Revenue of products (e.g., crude petroleum, palm oil, etc.). Excise duties are Board (“IRB”), also clarify that the ESR is applicable to a person imposed on certain goods which are imported into Malaysia or having interest expenses which are paid or payable to a third party manufactured in Malaysia (e.g., cars, alcoholic beverages, cigarettes outside Malaysia, where the financial assistance is guaranteed by its and certain articles such as casino accessories and billiards). holding company or any other enterprises under the same multinational enterprise group (regardless of the tax residence country of 3 Cross-border Payments the guarantor).

3.1 Is any withholding tax imposed on dividends paid by a 3.7 Are there any other restrictions on tax relief for interest locally resident company to a non-resident? payments by a local company to a non-resident, for example pursuant to BEPS Action 4? No, dividends distributed by a Malaysian resident company to a non- resident shareholder are not subject to Malaysian withholding tax. It is not mandatory for Malaysia to implement the recommendations in the BEPS Action 4 Final Report as a BEPS Associate. However, the 3.2 Would there be any withholding tax on royalties paid by ESR (as discussed in question 3.4) are similar to the recommendations proposed under the Final Report. a local company to a non-resident? Other than that, Malaysian companies will generally be entitled to Yes, withholding tax is applicable on royalties paid by a Malaysian take a deduction on interest payments made to a non-resident, with company to a non-resident at the domestic rate of 10%, subject to respect to borrowing, employed in the production of gross income reduction under an applicable double tax treaty. or laid out on assets used or held for the production of gross The term “royalty” is broadly defined in domestic tax legislation income. However, the Malaysian company will not be entitled to and includes any sums paid in consideration for or derived from the take a tax deduction on the interest payments if the withholding tax use of, or the right to use in respect of, any copyrights, software, (where applicable) chargeable on the interest payments has not been designs or models or other like property or rights. paid.

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3.8 Is there any withholding tax on property rental 4.5 Do tax losses survive a change of ownership? payments made to non-residents? From the year of assessment 2006 onwards, the accumulated tax No, there is no such tax. losses of a company will not be allowed to be carried forward if there has been a substantial change in the shareholders of the company, i.e., a change of more than 50% of the shareholders of 3.9 Does your jurisdiction have transfer pricing rules? the company. However, the Ministry of Finance subsequently issued Yes. The domestic tax legislation contains specific transfer pricing an exemption from the “substantial shareholder” requirements, provisions which govern transactions between associated companies which allowed tax losses to be carried forward even if there has been and require such transactions to be conducted on an arm’s length a substantial change in shareholders, except for dormant companies. basis. The Director-General of Inland Revenue may make adjust- The exemption will continue to be in force until otherwise revoked. ments or disregard certain transactions, as necessary, if he has reason Separately, tax losses could previously be carried forward to believe that any property or services provided between associated indefinitely. However, with effect from the year of assessment 2019 persons have not been supplied at an arm’s length price. onwards, tax losses may only be carried forward for a maximum There are also specific rules which require the preparation of period of seven consecutive years of assessment, to be utilised contemporaneous transfer pricing documentation for controlled against income from the same business source. transactions between associated persons. To complement these rules, the IRB also issued transfer pricing guidelines to provide 4.6 Is tax imposed at a different rate upon distributed, as taxpayers with further guidance on the (i) administrative opposed to retained, proﬁts? requirements in preparing transfer pricing documentation, and (ii) application of transfer pricing methodologies to related party trans- No. Malaysian income tax is imposed on profits, regardless of actions. whether they are retained or distributed.

The income tax rate for resident and non-resident companies in Other taxes which may be imposed include quit rent and assessment Malaysia is 24% from the year of assessment 2016 onwards. For tax relating to real property. Assessment tax is payable on a half- resident small- and medium-sized companies (i.e., companies yearly basis based on the value of the property. Quit rent is payable incorporated in Malaysia with a paid-up capital of not more than to the local state government on an annual basis with respect to MYR 2.5 million), the applicable tax rate is 17%, with effect from alienated land in Malaysia. the year of assessment 2019, on the first MYR 500,000, with the subsequent balance being taxed at 24%. 5 Capital Gains

4.2 Is the tax base accounting proﬁt subject to 5.1 Is there a special set of rules for taxing capital gains adjustments, or something else? and losses?

The chargeable income that is subject to tax comprises of the gross Malaysia does not impose tax on capital gains, except for RPGT with income, less permitted deductions. respect to gains arising from the disposal of real property or shares in RPCs. Please refer to section 8 below regarding the imposition 4.3 If the tax base is accounting proﬁt subject to of RPGT. adjustments, what are the main adjustments? 5.2 Is there a participation exemption for capital gains? A company is permitted to take deductions for expenses incurred wholly and exclusively in the production of income. Other adjust- This is not applicable in Malaysia. ments which would be made in arriving at the chargeable income subject to tax include: 5.3 Is there any special relief for reinvestment? (i) capital allowances; (ii) reinvestment allowances; This is not applicable in Malaysia. (iii) approved donations; and (iv) losses carried forward from prior years. 5.4 Does your jurisdiction impose withholding tax on the

proceeds of selling a direct or indirect interest in local 4.4 Are there any tax grouping rules? Do these allow for assets/shares? relief in your jurisdiction for losses of overseas subsidiaries? Generally, no. However, RPGT may be imposed on gains arising Yes. A Malaysian company may transfer up to 70% of its current from the sale of shares in an RPC, i.e., a company whereby 75% or year losses to one or more related companies, subject to certain more of its total tangible assets consist of real property. Where qualifying conditions set out in the domestic tax legislation. The tax RPGT is applicable, the purchaser of the RPC shares is required to grouping rules only apply if the transferor and transferee companies withhold 3% of the cash consideration payable to the seller, and are related companies (as defined), resident in Malaysia and incorpor- remit the sum to the IRB within 60 days from the date of acquisition. ated in Malaysia for the relevant year of assessment.

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6 Local Branch or Subsidiary? Profits earned in overseas branches are only taxed in Malaysia to the extent that the profits are derived from or accrued in Malaysia. The income received in Malaysia from outside Malaysia is 6.1 What taxes (e.g. capital duty) would be imposed upon exempted from Malaysian income tax, save for the income of a the formation of a subsidiary? resident person carrying on the business of banking, insurance, sea transport or air transport. Malaysia does not impose taxes on the formation of a subsidiary incorporated in Malaysia. The execution of some statutory documents 7.2 Is tax imposed on the receipt of dividends by a local relating to the incorporation process may be subject to stamp duty, such as the memorandum of association of the company. There are also company from a non-resident company? some administrative charges imposed by the Companies Commission No, dividends distributed by a non-resident company to a local of Malaysia for the incorporation of a company in Malaysia. Malaysian company would generally be regarded as foreign-sourced

income, which is not taxable in Malaysia. 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident company (for 7.3 Does your jurisdiction have “controlled foreign example, a branch proﬁts tax)? company” rules and, if so, when do these apply?

In Malaysia, a local branch of a non-resident company and a local No, Malaysia does not have any such rules. subsidiary would be subject to corporate tax at the same rate of 24% (for years of assessment 2016 onwards) with respect to Malaysian- sourced income. 8 Taxation of Commercial Real Estate However, there are some distinctions in the tax treatment of a branch and a subsidiary. For example, a local subsidiary may poten- 8.1 Are non-residents taxed on the disposal of commercial tially avail itself of tax incentives under the Promotion of Investments real estate in your jurisdiction? Act 1986 and Income Tax Act 1967, but a local branch of a non- resident company generally would not qualify for such benefits. Yes. RPGT is chargeable on gains derived by non-residents from Further, a local branch of a non-resident company is generally the disposal of real property in Malaysia. regarded as a non-resident for Malaysian tax purposes, since manage- RPGT is imposed at the rate of 30% for disposals made by a non- ment and control are exercised outside Malaysia and, accordingly, resident individual within five years from the date of acquisition, and certain payments (e.g., interest, royalties, service fees, etc.) paid by a at the rate of 10% for disposals made in the sixth year onwards from Malaysian payer to the local branch would be subject to Malaysian the date of acquisition. Based on the Budget 2020 speech, it has withholding tax. been proposed that with effect from 1 January 2020, non-resident Malaysia does not impose branch profits tax on the branch remittances companies are also subject to the same RPGT rates as that of non- by the local branch in Malaysia to its non-resident head office. resident individuals (i.e. 30% for disposals within five years from the date of acquisition and 10% for disposals made within the sixth year onwards from date of acquisition). 6.3 How would the taxable proﬁts of a local branch be

determined in its jurisdiction? 8.2 Does your jurisdiction impose tax on the transfer of an The local branch of the non-resident company will be taxed on indirect interest in commercial real estate in your income accrued in or derived from Malaysia. The calculation of the jurisdiction? chargeable income, which will be subject to income tax, is similar to the calculation applied for local subsidiaries. Yes. RPGT is also chargeable on gains derived from the disposal of shares in an RPC. A company is regarded as an RPC if it is a 6.4 Would a branch beneﬁt from double tax relief in its controlled company and 75% or more of the value of its total tangible assets comprises of real property or shares in other RPCs. jurisdiction?

The local branch of a foreign company generally would not be treated 8.3 Does your jurisdiction have a special tax regime for as a Malaysian tax resident, since management and control are Real Estate Investment Trusts (REITs) or their equivalent? exercised outside Malaysia and, accordingly, it would not be able to benefit from the relief afforded under Malaysia’s tax treaties with a Yes. If an REIT distributes 90% or more of its total income in a third country. year of assessment to its unit holders, the total income of the REIT for that year of assessment will be exempted from corporate income 6.5 Would any withholding tax or other similar tax be tax. Further, the rental income earned by an REIT from the letting of imposed as the result of a remittance of proﬁts by the branch? properties will be treated as business income of the REIT, and the No. Malaysian withholding tax would not be imposed on the amount of deductible expenses that can be claimed by an REIT in remittance of profits by the local branch in Malaysia to the non- a year of assessment is restricted to the gross income from the resident company. letting of properties in that year of assessment.

7 Overseas Proﬁts 9 Anti-avoidance and Compliance

7.1 Does your jurisdiction tax proﬁts earned in overseas 9.1 Does your jurisdiction have a general anti-avoidance or branches? anti-abuse rule?

Generally, only Malaysian-sourced income (i.e., income derived from Yes, Malaysia has a general anti-avoidance rule in Section 140 of the or accrued in Malaysia) will be subject to Malaysian income tax. Malaysian Income Tax Act 1967. The anti-avoidance rule applies to

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any transaction which has the direct or indirect effect of: (i) altering Malaysia has also introduced the ESR to adopt the BEPS Action the incidence of tax which would otherwise have been payable; (ii) 4 recommendations relating to the limitation of an entity’s deduction relieving any person from any liability which would have arisen to for interest expenses to a percentage of its income before interest, pay tax or to make a tax return; (iii) evading or avoiding any duty or taxes, depreciation and amortisation. liability imposed under the Income Tax Act 1967; or (iv) hindering or preventing the operation of the Income Tax Act 1967 in any 10.2 Has your jurisdiction signed the tax treaty MLI and respect. If the Director-General of Inland Revenue has reason to deposited its instrument of ratiﬁcation with the OECD? believe that any of the above-mentioned transactions have occurred, he may disregard or vary the transaction and make such adjustments Yes, Malaysia is a signatory to the Multilateral Convention to as he deems fit, with a view to counteracting the whole or any part Implement Tax Treaty Related Measures to Prevent Base Erosion of the effect of the transaction. and Profit Shifting (“MLI”). Malaysia has yet to complete its domestic ratification process, and it is anticipated that the MLI for 9.2 Is there a requirement to make special disclosure of Malaysia will enter into force in the later part of 2019. avoidance schemes? 10.3 Does your jurisdiction intend to adopt any legislation to No. Malaysian tax law currently does not impose any requirements tackle BEPS which goes beyond the OECD’s to make disclosures of avoidance schemes. recommendations? 9.3 Does your jurisdiction have rules which target not only There is no proposed legislation at this current time to tackle BEPS, taxpayers engaging in tax avoidance but also anyone who which goes beyond the recommendations in the BEPS reports. promotes, enables or facilitates the tax avoidance? 10.4 Does your jurisdiction support information obtained No, there are no specific rules targeting persons who promote, under Country-by-Country Reporting (CBCR) being made enable or facilitate tax avoidance. However, in tax evasion cases, any person who assists in or advises on the preparation of tax returns, available to the public? where the return results in an understatement of tax liability, may be Malaysia signed the Multilateral Competent Authority Agreement on guilty of an offence unless he satisfies the court that the assistance the Exchange of Country-by-Country Reports in January 2016. The or advice was given with reasonable care. CBCR rules came into force in Malaysia on 1 January 2017.

However, there is currently no legislation or rules that support 9.4 Does your jurisdiction encourage “co-operative CBCR information being made available to the public. compliance” and, if so, does this provide procedural beneﬁts only or result in a reduction of tax? 10.5 Does your jurisdiction maintain any preferential tax regimes such as a patent box? Yes, the Malaysian tax authority encourages voluntary disclosures by taxpayers. No, Malaysia’s tax incentive regime does not include a preferential A special voluntary disclosure programme (“SVDP”) was announced regime such as a patent box. However, there are certain incentives during the Malaysian Budget 2019 speech to encourage taxpayers to in Malaysia which are available for, amongst others, research and voluntarily disclose previously undeclared income accurately and to settle development activities. tax arrears. Generally, the SVDP allows any resident or non-resident to voluntarily disclose, amongst others, income not previously declared, 11 Taxing the Digital Economy expenses over-claimed and gains on disposals of assets, as well as to stamp instruments not previously stamped. Special penalty rates apply as follows: 11.1 Has your jurisdiction taken any unilateral action to tax (i) 10% on the actual amount of tax payable if disclosure and digital activities or to expand the tax base to capture digital payment is made to the tax authorities by 30 June 2019; and presence? (ii) 15% on the actual amount of tax payable if disclosure and payment is made to the tax authorities within the period from 1 Malaysia does not intend to implement any unilateral direct tax July 2019 to 30 September 2019. measures to specifically target the digital economy. The OECD aims According to the IRB, a minimum penalty rate of 45% will apply to reach a consensus-based solution by 2020, and it is likely that for disclosures made after 30 September 2019. Malaysia will adopt the OECD’s consensus-based solution in the future. From 1 January 2020 onwards, Malaysian service tax will be 10 BEPS and Tax Competition imposed on digital services provided by foreign service providers to Malaysian recipients. This is a form of indirect tax on digital services, as opposed to a unilateral direct tax measure. 10.1 Has your jurisdiction introduced any legislation in

response to the OECD’s project targeting BEPS? 11.2 Does your jurisdiction favour any of the G20/OECD’s Yes. Malaysia has introduced legislation for the implementation of “Pillar One” options (user participation, marketing intangibles the country-by-country reporting requirements recommended under or signiﬁcant economic presence)? BEPS Action 13. The three-tiered approach, comprising the filing of the master file, local file and country-by-country report, has been The Malaysian authorities have not made any formal statements as incorporated into the Malaysian tax legislation. to which of the “Pillar One” options are favoured.

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Yvonne Beh is a key partner in the Tax, Trade and Wealth Management practice of Wong & Partners. With 15 years of experience, she advises on Malaysian tax laws and legal issues related to corporate and commercial matters in Malaysia, including issues relating to income tax, double tax treaties, withholding tax, real property gains tax and taxation of stock options. She has also assisted in negotiating for tax incentives and obtaining stamp duty exemptions for domestic and multinational corporations. She established and is currently leading the indirect tax sub-practice of Wong & Partners, and is often called upon by clients to advise on sophisticated and complex issues relating to Malaysian tax and the sales and service tax (“SST”) regime. This is particularly so for clients in the e-commerce, technology and digital economy industries, which have products and service offerings which are new, innovative and unconventional.

Wong & Partners Tel: +603 2298 7808 Level 21, The Gardens South Tower Email: [email protected] Mid Valley City, Lingkaran Syed Putra URL: www.wongpartners.com 59200 Kuala Lumpur Malaysia

Wong & Partners is a Malaysian law firm dedicated to providing solution- oriented legal services to its clients. As a member firm of Baker McKenzie International, we bring a unique combination of local knowledge and global experience to every matter. Since its establishment in 1998, Wong & Partners has grown steadily and now consists of 19 partners and more than 60 associates. The Firm’s lawyers are able to deliver comprehensive and integrated advice to clients, and is trusted by respected domestic and multinational corporations for their needs in Malaysia and throughout Asia. The Firm’s lawyers are committed to helping clients apply industry-specific, innovative and practical solutions. www.wongpartners.com

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Mexico Mexico

Ana Paula Pardo Lelo de Larrea

SMPS Legal Alexis Michel

1 Tax Treaties and Residence when the parties entitled to decide its business strategies, policies, distribution of profits or dividends, or other core subjects are located within the national territory. 1.1 How many income tax treaties are currently in force in your jurisdiction? 2 Transaction Taxes Mexico currently has over 61 income Double Tax Treaties in force. Mexico has also entered into Exchange of Information Agreements with certain 2.1 Are there any documentary taxes in your jurisdiction? countries where an income Double Tax Treaty has not been agreed. There are no documentary or stamp taxes imposed in Mexico.

1.2 Do they generally follow the OECD Model Convention or 2.2 Do you have Value Added Tax (or a similar tax)? If so, at another model? what rate or rates? Mexico generally adheres to the OECD Model, even to the extent that in Mexico has a Value-Added Tax (VAT), which is imposed on the some cases the content of local legislation follows the OECD guidelines. following activities:

a) Alienation of goods. 1.3 Do treaties have to be incorporated into domestic law b) Rendering of independent services. before they take effect? c) Granting of temporary use or enjoyment of goods. d) Importation of goods and services. In order for Double Tax Treaties to take effect and have the force of The general VAT rate is 16%. In some cases, the tax rate can be federal law under the Mexican Constitution, they are negotiated and 0% and other activities are tax-exempt. signed by the President and then sent to the Senate for ratification and, if approved, must be published in the Mexican Official Gazette. 2.3 Is VAT (or any similar tax) charged on all transactions

or are there any relevant exclusions? 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on beneﬁts” articles)? In accordance with the Mexican VAT Law, there are some activities exempt from tax, such as: Most Double Tax Treaties incorporate anti-treaty shopping rules and a) Exempt transfers: limitations on benefits provisions. i. Land. Additionally, it should be noted that the Mexico tax system ii. Residential real property constructions. includes general anti-avoidance rules and has been actively iii. Books, newspapers, magazines and copyright. participating in the G20 for the BEPS Action Plan. iv. Used personal property. v. Lotteries, raffles, drawing, etc. 1.5 Are treaties overridden by any rules of domestic law vi. Currency and troy ounces. (whether existing when the treaty takes effect or introduced vii. Partnership interest, negotiable instruments. viii. Non-participating real estate trust certificates. subsequently)? ix. Gold ingots. Pursuant to Mexican law, a treaty may only be overridden if it is x. Between foreign residents or to toll manufacturers or enterprises contradictory with a provision found in the Constitution. In terms of the automotive industry. of hierarchy, the Supreme Court of Justice has stated that inter- b) Exempt services: national treaties are positioned above federal and local laws, but i. Consideration for mortgage loan. immediately below the Constitution. ii. Commissions for management of funds from the retirement savings system. iii. Free services. 1.6 What is the test in domestic law for determining the iv. Education. residence of a company? v. Land passenger transportation. vi. International maritime transportation of goods. Entities should be deemed as Mexican residents for tax purposes if vii. Agribusiness, housing loan, financial guaranty and they established the main administration of their business or the life insurance. place of their effective management within Mexican territory. In this viii. Interest paid or charged by financial institutions in certain cases. regard, a legal entity could be considered a Mexican tax resident ix. Financial derivative transactions. ICLG.com Corporate Tax 2020 © Published and reproduced with kind permission by Global Legal Group Ltd, London SMPS LegalXX 173

x. Services rendered by associations and unions to their members. xi. Public events. 3.2 Would there be any withholding tax on royalties paid by xii. Professional medical services. a local company to a non-resident? xiii. Medical and hospital services by the government agencies. xiv. On royalties paid to authors. Yes. There is a withholding tax on royalties paid by a Mexican entity c) Exempt use or enjoyment of goods: to a non-resident recipient; different withholding tax rates apply to i. Real property intended or used for residence. different types of royalties: ii. Farms. a) a 5% rate applies in the case of royalties paid for temporary use or iii. Tangible property the use or enjoyment of which is granted enjoyment of railroads; by residents abroad without a permanent base in Mexico. b) a 35% rate applies to royalties for the use of patents, inventions, iv. Books, newspapers and magazines. trademarks, trade names and commercial names; and d) Exempt imports: c) a 25% rate applies to technical assistance and any other type of royalty. i. Not finalised, temporary or in transit goods. Under most Double Tax Treaties executed by Mexico, the with- ii. Baggage and household goods. holding tax rate is reduced to 10% or 15%. iii. Goods donated to the Federal Government. iv. Works of art intended for permanent public exhibition. 3.3 Would there be any withholding tax on interest paid by v. Works of art with a cultural value. a local company to a non-resident? vi. Goods consisting of at least 80% gold. vii. Vehicles in some specific cases. Yes. There is a withholding tax on interest paid by Mexican entities Finally, a 0% rate applies to certain acts or activities, sale of patented to a non-resident lender. The withholding tax rate on interests is medicine and products destined as food. different in each case depending on the type of credit or the nature of the parties; the rate goes from 4.9% to 35% withholding tax. 2.4 Is it always fully recoverable by all businesses? If not, Finally, under some Double Tax Treaties, different withholding what are the relevant restrictions? tax rates may apply, but are normally reduced taxes.

To recover VAT, individuals or corporations must be registered as 3.4 Would relief for interest so paid be restricted by taxpayers for income tax and VAT purposes. In the event a taxpayer reference to “thin capitalisation” rules? is exempt for part of the transactions carried out, the VAT Law establishes an apportionment method to consider only the taxable The Law provides that debts with foreign related parties must not portion of such transactions. exceed the 3:1 ratio with respect to the debtor’s capital. Otherwise, interest associated to the excess will not be deductible. 2.5 Does your jurisdiction permit VAT grouping and, if so, Nonetheless, entities engaged in specific industries such as the is it “establishment only” VAT grouping, such as that applied financial system or the country’s strategic sectors could be allowed to have a higher debt-to-net equity ratio, and the thin capitalisation by Sweden in the Skandia case? rules do not apply, similarly to taxpayers which might have a special No, it is not applicable in Mexico. ruling on transfer pricing.

2.6 Are there any other transaction taxes payable by companies? 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? Even though it is not a federal tax, the States of the Federation have a tax on the acquisition of real estate and the applicable tax rates Transfer pricing safe harbour rules apply to maquila operations. range between 3% and 5% of the value of the real estate. The maquila tax regime has two main benefits: Likewise, in certain states, payroll taxes are imposed and paid by a) Exemption from having a permanent establishment in Mexico. employers, and the rates range from 1% to 3% on the payroll value. b) Reduced income tax liability (the safe harbour).

2.7 Are there any other indirect taxes of which we should 3.6 Would any such rules extend to debt advanced by a be aware? third party but guaranteed by a parent company?

In Mexico, there is also the special tax on products and services that Interest derived from back-to-back loans shall be treated for tax is a federal tax applicable to certain alienations and/or import of purposes as dividends, and, as such, a non-deductible expense. goods such as alcoholic and some non-alcoholic beverages, tobacco, Back-to-back loans are transactions where one person provides gasoline and diesel. This also applies to certain services. cash, goods or services to another person, who in turn provides, In addition, there are also customs duties on the import and directly or indirectly, cash, goods or services to the former person export of goods in Mexico. Free Trade Agreements in force grant or to a related party thereof. tax benefits and represent the possibility of reducing or receiving an Back-to-back loans are also transactions in which one person extends exemption from tariffs. financing and the credit is guaranteed by cash, cash deposits, shares or debt instruments of any kind from a related party or from the same 3 Cross-border Payments borrower, to the extent that the credit is guaranteed in this same manner.

country or territory where the foreign entity is located, if the foreign a) It must be a Mexican resident company. entity does not consider the payment as taxable income in accordance b) More than 80% of the shares with voting rights of the with the applicable tax provisions, or if the foreign entity receiving companies that will be integrated must be directly or indirectly the payment is considered tax transparent under Mexican law. held by the integrating company. c) The written consent of the legal representative of each of the 3.8 Is there any withholding tax on property rental companies that will be integrated must be obtained. d) A request to operate under the optional regime for groups of payments made to non-residents? companies (accompanying thereto, supporting information and In accordance with the Mexican Income Tax Law, there is a 25% documentation such as the companies’ shareholders and their withholding tax on property rental payments made to non-residents participation therein) must be filed before the tax authorities. on the gross income. The USA-Mexico Double Tax Treaty provides It should be noted that several restrictions apply both to the a reduced rate if some requirements are met. integrating company and to the integrated companies. For instance, entities that form part of the financial system, foreign residents, and legal entities with non-profit purposes may not be subject to this tax regime. 3.9 Does your jurisdiction have transfer pricing rules?

The Mexican transfer pricing rules have been adapted to the OECD 4.5 Do tax losses survive a change of ownership? guidelines. Accordingly, transactions between related parties must be at fair market value and are required to comply with the arm’s length principle. As a general rule, the right to apply tax losses corresponds exclusively The extent of the relationship between parties required to apply the to the taxpayer that incurred such losses and may not be transferred transfer pricing rules to transactions is direct or indirect participation even as a consequence of a merger. in management, supervision, control, or capital/ownership. The parent entity of a permanent establishment and all other permanent 4.6 Is tax imposed at a different rate upon distributed, as establishments of that entity are also considered related parties. opposed to retained, proﬁts? The interpretation of the transfer pricing rules is based on Transfer Pricing Guidelines for Multinational Enterprises and Tax There is no additional corporate tax on the distribution of profits if Administrations approved by the OECD. The “Best Method Rule” the same are paid from the Net Tax Profit Account “CUFIN”, shall apply in the terms of the Income Tax Law. which is composed of profits that have already been subject to corporate income tax. However, income tax is imposed at a second 4 Tax on Business Operations: General level, i.e., at the shareholder/partner level, when earnings are distributed to resident individuals or to non-resident entities and 4.1 What is the headline rate of tax on corporate proﬁts? individuals. This additional tax is charged at a 10% rate.

The Income Tax Law provides a flat rate of 30% over all taxable 4.7 Are companies subject to any signiﬁcant taxes not covered income of Mexican corporate entities. elsewhere in this chapter – e.g. tax on the occupation of property?

4.2 Is the tax base accounting proﬁt subject to In Mexico, the main federal taxes for entities are income tax, VAT adjustments, or something else? and special tax on products and services (the excise tax). However, there are some state taxes mainly regarding real estate, including Corporate Mexican entities shall accrue all income earned in cash, ownership or acquisition, and payroll taxes, among others. in kind, in services, in credit or in any other form during the fiscal year, including income from their establishments abroad. 5 Capital Gains The tax profit shall be determined by subtracting from the taxable income the authorised deductions and the employee’s profit-sharing 5.1 Is there a special set of rules for taxing capital gains paid in the fiscal year. and losses? The tax profit for the fiscal year shall be reduced, as applicable, by the loss carry-forward from previous years. In Mexico, entities may deduct capital losses but only to the extent of capital gains, whenever the amount of deductions is higher than 4.3 If the tax base is accounting proﬁt subject to gross income. Excess capital losses may be carried forward 10 years adjustments, what are the main adjustments? to offset capital gains from such years.

Mexican entities may offset the income tax which has been effec- 5.2 Is there a participation exemption for capital gains? tively paid abroad against the tax payable in Mexico under the Income Tax Law (see question 4.7). There is no participation exemption in Mexico for capital gains of Mexican entities. 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas subsidiaries? 5.3 Is there any special relief for reinvestment?

Under the Income Tax Law, corporate members of an affiliated group Currently, there is no special relief for profit reinvestment in Mexico. may elect tax grouping rules (special regime) that allow the tax results obtained by entities to be combined in a group, providing the benefit 5.4 Does your jurisdiction impose withholding tax on the of a tax deferral (a portion of the tax) for up to three years, taking into proceeds of selling a direct or indirect interest in local account only the profits and losses of the entities in the group. assets/shares? For an entity to obtain the authorisation to operate under the optional regime for groups of companies, certain requirements must In general, Income Tax Law provides that gains from the transfer be met; for example: of shares or interests held in a company will be considered to have their source in Mexico if the company is resident in Mexico for tax

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purposes, or if regardless of the tax residency of the company, the to accrue taxable income and pay the corresponding tax (amount value of the shares or interests derives directly or indirectly from real registered on the Net Tax Profit Account), profits distributed or property located in the country. reimbursed (in cash or in kind) by it to its parent company or main In principle, the transfer of shares by a foreign resident is subject office would receive a similar tax treatment as that applicable to to a 25% withholding tax on the gross amount without deductions. dividend payments in favour of foreign residents and the 10% with- However, the transferor may elect to apply a 35% rate on the net holding tax would apply. gain if some requirements are met. Additionally, the Income Tax Law provides for a 10% rate on the 7 Overseas Proﬁts net gain obtained from the transfer of shares in the stock exchange. 7.1 Does your jurisdiction tax proﬁts earned in overseas 6 Local Branch or Subsidiary? branches?

6.1 What taxes (e.g. capital duty) would be imposed upon Mexican Income Tax Law provides that Mexican tax residents will the formation of a subsidiary? be taxed on their worldwide income including income from their establishments abroad. In Mexico, there are no taxes on the incorporation of any kind of entity. 7.2 Is tax imposed on the receipt of dividends by a local 6.2 Is there a difference between the taxation of a local company from a non-resident company? subsidiary and a local branch of a non-resident company (for example, a branch proﬁts tax)? Yes, dividends received by a local company from a non-resident company will be subject to taxation. The law allows a tax credit for taxes In accordance with Mexican Income Tax Law, a subsidiary resident paid abroad with respect to such dividends, if requirements are met. in Mexico is subject to tax on its worldwide income as with any other Mexican corporation. On the other hand, branches of a non- 7.3 Does your jurisdiction have “controlled foreign resident, which are considered to be permanent establishments company” rules and, if so, when do these apply? under Mexican legislation, are generally subject to tax in Mexico only on income obtained from activities carried out within the country; Concerning “controlled foreign company” (CFC) rules, the Income Tax special deduction rules apply. Law establishes that Mexican tax residents and residents with a permanent In addition, foreign tax residents are subject to income taxation in establishment in Mexico shall be deemed to receive income from Mexico regarding Mexican-sourced income that is not attributed to jurisdictions considered as preferential tax regimens if: (i) income deriving a permanent establishment. therefrom is not subject to taxation; or (ii) the income tax to which said income is subject to in the relevant jurisdiction is 75% lower than the 6.3 How would the taxable proﬁts of a local branch be income tax that would have been levied in Mexico for such operation. determined in its jurisdiction? 8 Taxation of Commercial Real Estate Permanent establishments in Mexico are taxed on all income attributable thereto. For such purposes, income obtained from the 8.1 Are non-residents taxed on the disposal of commercial performance of business activities carried out by the permanent real estate in your jurisdiction? establishment within the country would be deemed as “attributable income”. Additionally, income obtained by the central office or by Yes. The Mexican Income Tax Law provides that the disposition of another permanent establishment set up abroad will be attributed to Mexican real estate by non-residents is subject to Mexican income the Mexican permanent establishment in the proportion of the taxation at a tax rate of 25% on the total revenue obtained, with no expenses incurred by the latter regarding the mentioned income. deductions allowed. However, under the USA-Mexico Double Tax Permanent establishments in Mexico may deduct the expenses Treaty, the rate could be 30% on the profit if certain conditions are met. incurred in the performance of its taxable activity insofar as the applicable requirements for deductibility are met. 8.2 Does your jurisdiction impose tax on the transfer of an

indirect interest in commercial real estate in your jurisdiction? 6.4 Would a branch beneﬁt from double tax relief in its jurisdiction? Yes. In Mexico, the transfer of an indirect interest in real estate located in Mexico is also the subject of taxation. An indirect interest As under the OECD Model, a Mexican Branch (Permanent refers to the alienation of property through the disposition of shares Establishment) may benefit from the Double Tax Conventions by: or interests in any entity if more than 50% of the value of the shares “… applying the rate of tax provided in the convention with respect to taxes on or interests proceeds from real property. income and capital between the State of which the enterprise is a resident and the third State. However, the amount of the credit shall not exceed the amount 8.3 Does your jurisdiction have a special tax regime for that an enterprise that is a resident of the first mentioned State can claim under that State’s convention on income and capital with the third State.” Real Estate Investment Trusts (REITs) or their equivalent?

Yes. Mexico provides a special tax regime regulation regarding real 6.5 Would any withholding tax or other similar tax be estate investment trusts (FIBRA) whose purpose is the acquisition imposed as the result of a remittance of proﬁts by the branch? and development of real estate for lease, or the acquisition of the right to receive income from the lease of real property, or to grant In case the profits remitted by the permanent establishment are financing for such purposes. This tax regime gives benefits to distributed from the Net Tax Profit Account or from the Capital taxpayers that contribute real property to the trust, consisting of tax Remittances Account, the remittance of such profits will be tax-free deferrals, and eliminates the obligation of the FIBRA to make at the corporate level. advance payments for income tax purposes. Certain requirements Notwithstanding the foregoing, and regardless of the obligation must be met to be subject to this tax regime.

9 Anti-avoidance and Compliance Mexico signed the tax treaty MLI on July 7, 2017, and on January 8, 2018 the Mexican Government submitted it to the Mexican Senate for ratification, as required under the Mexican Constitution. After 9.1 Does your jurisdiction have a general anti-avoidance or the domestic ratification procedure is complete, Mexico must anti-abuse rule? deposit its ratification instrument to bring the MLI into force.

The Mexican tax system considers transfer-pricing, thin 10.3 Does your jurisdiction intend to adopt any legislation to capitalisation, CFC, back-to-back and tax re-characterisations as general anti-avoidance rules. tackle BEPS which goes beyond the OECD’s recommendations?

Since the tax reform of 2014, the local set of laws have been 9.2 Is there a requirement to make special disclosure of amended to abide by the standards set forth in the BEPS Action avoidance schemes? Plan, before the OECD’s recommendations. In this regard, more stringent conditions and requirements have In Mexican tax law, there is no legal requirement to make special disclosure been established relating to hybrid mismatches (Action 2), CFC rules of avoidance schemes. In some cases, the taxpayers are required to file a (Action 3), treaty abuse (Action 8), transfer pricing rules (Action 8, notice to inform the tax authorities if they have an offshore investment 9 and 10), and reporting obligations (Action 13). that might be subject to controlled foreign corporation regulations. Likewise, whenever the tax audit report is prepared by an 10.4 Does your jurisdiction support information obtained independent certified public accountant, they are required to disclose any transaction that might be in violation of the Mexican tax law. under Country-by-Country Reporting (CBCR) being made available to the public? 9.3 Does your jurisdiction have rules which target not only The Country-by-Country Reporting filing obligations regarding taxpayers engaging in tax avoidance but also anyone who transactions with related parties abroad have been included in the promotes, enables or facilitates the tax avoidance? Income Tax Law. Taxpayers could now be required to file (no later than on Under the Mexican Fiscal Code, it is a violation if any individual December 31 of the following tax year to which the filing obligation gives advice or provides consultancy or other services in order for a corresponds) the following information: (a) master file, information taxpayer to totally or partially omit the payment of any taxes in viol- concerning the structure and activities of multinational corporate ation of the tax provisions. groups; (b) local file, describing the structure and activities conducted with related parties at a local level; and (c) country-by- 9.4 Does your jurisdiction encourage “co-operative country reporting, with respect to the activities, distribution of compliance” and, if so, does this provide procedural beneﬁts income and taxes paid in each jurisdiction. only or result in a reduction of tax? However, the information provided to the tax authorities is considered confidential and is therefore not available to the general public. In Mexico, there is no co-operative compliance programme as such. Regardless of the foregoing, it is worth noting that those being 10.5 Does your jurisdiction maintain any preferential tax audited are entitled to seek remedy before the Mexican tax regimes such as a patent box? ombudsman (PRODECON). This alternative allows taxpayers to negotiate solutions with the tax No. In Mexico there is no special tax regime concerning intellectual authorities to avoid escalating into litigation; under this procedure, property. fines could be reduced or even repealed. However, some incentives are granted for national cinematographic and theatrical production, as well as for innovation 10 BEPS and Tax Competition (CONACYT). Additionally, there are some incentives on the FIBRA (real estate investment trust) and on investments in risk capital and 10.1 Has your jurisdiction introduced any legislation in on the maquila industry.

response to the OECD’s project targeting BEPS? 11 Taxing the Digital Economy The BEPS Action Plan has had a major impact on the design and implementation of tax laws in Mexico. Furthermore, said document 11.1 Has your jurisdiction taken any unilateral action to tax digital has made the Mexican tax authorities aware of the everchanging nature activities or to expand the tax base to capture digital presence? of cross-border structures and transactions conducted by taxpayers. As a consequence thereof, provisions normally reserved to To date, there have not been any substantial tax law reforms to tax international instruments have gradually been incorporated into digital activities or to expand the tax base to capture digital presence. local laws and regulations. Likewise, there is no mechanism to collect tax on digital services. In addition, it should be noted that more stringent requirements However, following the OECD trends, there is a proposal to include concerning the deductibility of certain income/expense items have a special tax (on the Excise Tax Law) on the sale of publicity online been incorporated into Mexican laws in view of recent BEPS and digital intermediary activities that facilitate the sale of goods and advances. For instance, for taxpayers to be able to claim treaty bene- services. Also, it is highly probable that in the near future there will fits, tax authorities could request a sworn affidavit from the foreign be changes following the International VAT/GST Guidelines. party stating the existence of a double taxation and identifying the statutes or provisions under foreign law in terms of which said 11.2 Does your jurisdiction favour any of the G20/OECD’s double taxation exists. “Pillar One” options (user participation, marketing intangibles

or signiﬁcant economic presence)? 10.2 Has your jurisdiction signed the tax treaty MLI and deposited its instrument of ratiﬁcation with the OECD? Mexico has not taken any express position on the “Pillar One” options provided by the OECD.

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Nevertheless, Mexico, as an OECD member and a part of the Acknowledgment BEPS Actions, follows the approach of the OECD on its work The authors would like to thank Luis Roberto Moreno Tinoco, towards a consensus-based solution by 2020, and will most likely Associate, for his invaluable assistance in the preparation of this chapter. adopt the recommendations issued by the OECD. Tel: +52 55 5282 9063 / Email: [email protected]

Ana Paula Pardo Lelo de Larrea joined SMPS Legal in 2015 as a Tax partner. Her main practice is taxation concerning domestic and international aspects and involves representing corporations and individuals. She regularly advises clients on matters involving commercial transactions, tax planning, start-up business, joint ventures, investments, acquisitions, mergers, spin-offs, dispositions, tax-free reorganisations and transfer pricing consulting. Ana Paula has extensive experience and negotiation skills in international transactions in corporate law, including representation of multinational groups and domestic groups, specific controversy and litigation, and representing domestic and international clients in tax audits. Before joining SMPS Legal, Ana Paula was an associate at Hogan Lovells BSTL from 2010 and before that she was an associate at Basham Ringe y Correa. She also clerked at the tax boutique, Ortiz, Sainz y Erreguerena for two-and-a-half years. Ana Paula obtained her Law Degree from Universidad Panamericana in 2002 and her Postgraduate Degree from the Universidad de Salamanca. She holds a LL.M. from the University of Florida – Fredric G. Levin College of Law, 2007, obtaining the Certificate of Academic Excellence. Ana Paula is fluent in Spanish and English and she is a member of the IFA Study Committee.

SMPS Legal Tel: +52 55 5282 9063 Paseo de la Reforma No.509 Piso 18 Email: [email protected] Col. Cuahutemoc URL: www.smpslegal.com C.P 06500, CDMX Mexico

Alexis Michel has focused his practice not only on compliance with obligations in matters of customs and foreign trade, but in aiding, through the enforcement of administrative instruments that Mexican authorities have implemented, identifying and developing areas with opportunities of expansion for his clients. Alexis is specialised in tariff classification, customs valuation, implementation of free-trade agreements, origin verifications, criteria confirmation and certifications before different authorities, as well as development of foreign trade development programmes such as Maquila, Sector Promotion and Drawback. Likewise, he has extensive experience in the performance of internal audits to verify compliance with the obligations arising from foreign trade transactions. He has represented clients before the different tax and customs authorities in audits, administrative proceedings and contesting of resolutions derived therefrom. Furthermore, he has developed a successful practice in matters of international commerce unfair trade practices such as anti-dumping and subventions. Before joining SMPS, Alexis worked at Jauregui, Navarrete, Nader y Rojas, S.C., White & Case LLP, Trón y Natera, S.C. and Natera y Espinoza, S.C., accruing more than 19 years of experience. Alexis obtained his J.D. from the División de Estudios Superiores of Centro Universitario México, with honours, in 1998 and his degree in the Specialty in Tax Law from Universidad Panamericana, with honours, in 2006.

SMPS Legal Tel: +52 55 5282 9063 Paseo de la Reforma No.509 Piso 18 Email: [email protected] Col. Cuahutemoc URL: www.smpslegal.com C.P 06500, CDMX Mexico

SMPS Legal is a law firm with regional expertise created by San Martín y Pizarro strategic alliances with prominent firms in Brazil, Argentina, Costa Rica, Panama, Suarez, S.C., O&G Energy and Natural Resources Attorneys S.A.S. and Solorzano Peru, Cuba and other Latin American countries to best serve its clients. Corporation to form a team of experienced and specialised lawyers committed From knowledge of the local commercial and corporate customs and prac- to offering integrated multidisciplinary legal counsel in Latin America from tices, to evaluating the relevant sectors of the economy and obtaining strategically located offices. specialised legal advice, SMPS Legal assists its clients in maximising the For over 20 years, the partners and lawyers of SMPS Legal have successfully opportunities offered by the Region, providing timely and cost effective advice. counselled domestic and foreign investors in their activities in Latin America. In addition to the fact that the members of SMPS Legal share a joint vision to Specifically, SMPS Legal provides legal services and support in transactions and apply a commercial approach and provide focused legal and business advice, projects in Latin America in important industry sectors of the economy, such as the Firm provides tangible added value to its clients by taking the time to infrastructure, private equity, tax, banking and finance, hospitality, insurance, understand their business and legal service needs. capital markets, aeronautic, automotive, cultural, food, pharmaceutical, real www.smpslegal.com estate, manufacturing and information technology. Responding to the growth of emerging markets in Latin America, SMPS Legal specialises in cross-border transactions, acquisitions, spin-offs, joint ventures, strategic alliances and foreign investments in the Region. SMPS Legal currently has offices in Mexico City and Bogota, where we provide advice on local law, and rep offices in Calgary and Dallas. SMPS Legal has

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Netherlands Netherlands

Peter van Dijk

Buren N.V. IJsbrand Uljée

1 Tax Treaties and Residence though in principle any Dutch company is deemed to be a Dutch tax resident insofar as it is incorporated under Dutch law, for some Dutch tax provisions and under (most) tax treaties the actual tax 1.1 How many income tax treaties are currently in force in residency is decisive. your jurisdiction? A company incorporated under non-Dutch law may be considered a Dutch tax resident if, based on an examination of all There are 94 income tax treaties in force in the Netherlands. In relevant facts and circumstances, it is determined that the company addition, the Netherlands has signed several income tax treaties is a resident of the Netherlands. The place of effective management which are expected to enter into force in the future. Furthermore, is one of the most important factors to decide on actual tax the Netherlands is currently negotiating new income tax treaties and residency. The place of effective management is the place where key renegotiating a number of income tax treaties with existing tax treaty management and commercial decisions that are necessary for the partners. conduct of the entity’s business as a whole are in substance made (the company’s ‘mind and management’). The residency of the 1.2 Do they generally follow the OECD Model Convention or directors is considered an important factor by the Dutch tax auth- another model? orities. Another important factor to decide on actual tax residency of the company is the place where board decisions are (formally and Dutch income tax treaties generally follow the OECD Model materially) taken. Also, for instance, the address where bank Convention. accounts of the company are kept, the country where the bookkeeping is done and the books are located, the office address, office 1.3 Do treaties have to be incorporated into domestic law space and the employment of personnel are all relevant.

before they take effect? 2 Transaction Taxes Before entering into force, tax treaties have to be approved by both chambers of the Dutch parliament. In addition, an announcement 2.1 Are there any documentary taxes in your jurisdiction? of the ratification should be made in the Dutch Treaty Series (Tractatenblad van het Koninkrijk der Nederlanden) before the treaty enters The Netherlands levies a real estate transfer tax on the transfer of into force. Dutch real estate assets at a rate of 2% (for residential properties) and 6% (for other properties). 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on beneﬁts” articles)? 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? The current tax treaty policy of the Netherlands is the incorporation of a ‘Principle Purpose Test’ in its tax treaties. The Netherlands levies Value-Added Tax (VAT) on the supply of goods and services as part of the domestic implementation of the 1.5 Are treaties overridden by any rules of domestic law EU VAT Directive (Directive 2006/112/EC). The current Dutch VAT system, therefore, is comparable to VAT systems of other EU (whether existing when the treaty takes effect or introduced Member States, though the Netherlands uses certain optional subsequently)? measures to facilitate trading. In the Netherlands, the following VAT rates apply to the supplies of goods and services: general rate: 21%; The application of tax treaties overrides domestic Dutch law reduced rate: 9%; and zero rate: 0%. (irrespective of when the domestic law or tax treaty takes effect).

2.3 Is VAT (or any similar tax) charged on all transactions 1.6 What is the test in domestic law for determining the or are there any relevant exclusions? residence of a company? Certain transactions are treated as VAT exempt. Examples of such For Dutch corporate income tax purposes, a Dutch company (e.g. a transactions are healthcare, education, financial services, insurance limited liability company, B.V.) is deemed to be a tax resident of the services, child day care, transfer or lease of certain real estate assets, Netherlands by virtue of the fact that it is incorporated under Dutch funeral services and deposit and management of portfolio invest- law. Dutch tax law does not therefore require Dutch companies to ments. meet any tests for determining the residence of a company. Even

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2.4 Is it always fully recoverable by all businesses? If not, 3.2 Would there be any withholding tax on royalties paid by what are the relevant restrictions? a local company to a non-resident?

A VAT entrepreneur may generally recover input VAT charged on Currently, the Netherlands does not levy withholding tax on interest goods provided and services rendered to him based on a proper and royalty payments. However, the Dutch government has invoice. There are certain exceptions, such as VAT charged on food announced that a withholding tax on interest and royalty payments and beverages and VAT charged in connection with exempt trans- will apply from 1 January 2021 onwards. The applicable rate will be actions. 21.7%. The withholding tax would apply to intra-group interest and royalty payments by Dutch resident companies to related entities 2.5 Does your jurisdiction permit VAT grouping and, if so, either residing in jurisdictions with no or low statutory tax rates (most likely less than 9%), in jurisdictions that are on the EU black- is it “establishment only” VAT grouping, such as that applied list of non-cooperative jurisdictions or in abusive situations. Skandia by Sweden in the case? A Dutch VAT group can be created by two or more persons 3.3 Would there be any withholding tax on interest paid by established within an EU Member State, who, while legally a local company to a non-resident? independent, are closely bound to each other by (i) financial ties (i.e. more than 50% shareholding), (ii) organisational ties (i.e. central Reference is made to our answer to question 3.2. management), and (iii) economic ties (i.e. same or related activities or suppliers). In that case they can opt to be treated as one VAT 3.4 Would relief for interest so paid be restricted by entrepreneur. Transactions between the members of a VAT group reference to “thin capitalisation” rules? are not subject to VAT. The right to deduct input VAT is based on the activities of the VAT group as a whole. The VAT group regime As part of the implementation of the Anti-Tax Avoidance Directive applies only if each member of the VAT group qualifies as an entre- 1, as of 1 January 2019, the Dutch earning stripping rules limit the preneur for VAT purposes. deduction of excessive interest expenses related to intra-group and According to the Dutch Ministry of Finance, the Dutch VAT third-party payables for Dutch corporate income tax purposes. group regime should not be considered “establishment only”, such as that applied by Sweden in the Skandia case. 3.5 If so, is there a “safe harbour” by reference to which tax

relief is assured? 2.6 Are there any other transaction taxes payable by companies? Under the Dutch earning stripping rules, the starting point is to determine the Dutch taxpayers’ so-called interest expense excess, The Netherlands does not levy any other transaction taxes except which is the amount by which the Dutch taxpayers’ tax-deductible for VAT and real estate transfer tax. interest expenses exceed their taxable interest income. The deductibility of the interest expense excess is limited to 30% of the 2.7 Are there any other indirect taxes of which we should taxpayers’ EBITDA (carving out tax exempt income) or a safe be aware? harbour threshold of EUR one million, whichever is higher. Interest disallowed under the earning stripping rules can be carried forward Besides VAT, the other main indirect taxes levied by the Netherlands to later years without any time limitations. are excise duties on certain categories of products (e.g. alcoholic beverages, tobacco and mineral oils), consumption taxes (e.g. on soft 3.6 Would any such rules extend to debt advanced by a drinks, fruit juices and water) and import duties on various products third party but guaranteed by a parent company? imported from outside the EU. The Dutch earning stripping rules apply to interest payments to both 3 Cross-border Payments intra-group companies and third parties.

3.1 Is any withholding tax imposed on dividends paid by a 3.7 Are there any other restrictions on tax relief for interest locally resident company to a non-resident? payments by a local company to a non-resident, for example pursuant to BEPS Action 4? The Netherlands levies generally 15% Dutch dividend withholding tax in respect of dividend distributions (and other payments treated Besides the earning stripping rules, Dutch corporate income tax law as dividend for Dutch tax purposes) paid by Dutch tax-resident includes several rules based on which the deduction of interest can companies (or companies deemed to be tax residents). be denied. An exemption applies to dividends distributed to corporate Under the Dutch anti-tax base erosion rules, the deduction of shareholders who own a share interest of at least 5% in the relevant interest expenses (including currency results and other costs) is Dutch tax-resident company if, in short, the corporate shareholder limited to related party loans that have been used to finance: profit is a tax resident of the EU or a jurisdiction with which the distribution or repayment of capital to related parties; capital Netherlands has concluded a tax treaty, is the beneficial owner of contributions to related parties; or the acquisition or increase of the dividend or if it is not a hybrid transaction and the subjective share interests in entities that are, or become, related parties. There and objective tests are both met. The subjective test is met if – in are, however, exceptions under which the interest deduction short – a corporate structure was set up to avoid an individual’s limitation rule does not apply (e.g., if the loan and the transaction liability to pay dividend tax. The objective test is met if the are based primarily on business reasons). corporate structure is deemed part of an artificial arrangement or In addition, there is a rule limiting the deduction of interest and transaction. value fluctuations of low or no interest-bearing loans. Under these Application of the extensive tax treaty network or EU directives rules, interest expenses and fluctuations in the value of loans are not may result in a reduction or refund of Dutch dividend withholding deductible if (i) a loan is a related party loan, (ii) it does not have a tax.

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fixed repayment date of over 10 years after contracting the loan, and 4.2 Is the tax base accounting proﬁt subject to (iii) while legally or actually no interest has been charged or the adjustments, or something else? interest is, to a considerable extent, lower than the economic value of what independent parties would have agreed upon. The profit for accounting purposes may differ from the profit for Finally, Dutch tax law limits the deduction of interest and value Dutch tax purposes. The profit for Dutch tax purposes is based on fluctuations of loans if the loan would have the characteristics of the principle of ‘sound business practice’, which originates from equity for Dutch tax purposes. This can either be a sham loan, a Dutch case law. After the profit for Dutch tax purposes is deter- profit-dependent loan or a participation loan (i.e. the payment of mined, there may be certain other adjustments that determine the interest depends on whether the creditor is in a profit-making actual taxable amount based on the provisions of the Dutch CIT. position, the loan is subordinated to all other creditors and the loan has no maturity date or a maturity period of 50 years or more, and 4.3 If the tax base is accounting proﬁt subject to is therefore only collectable in case of bankruptcy). adjustments, what are the main adjustments? 3.8 Is there any withholding tax on property rental The main adjustments between the profit for Dutch tax purposes payments made to non-residents? and the actual taxable amount based on the Dutch CIT includes the treatment of income from subsidiaries, deductibility of interest, The Netherlands does not currently levy a withholding tax on depreciation, transactions within a tax group (fiscal unity), deduction property rental payments. However, non-Dutch tax-resident of certain costs and hybrid payments. companies are subject to corporate income tax from certain Dutch sources, including rental payments derived from Dutch real estate. 4.4 Are there any tax grouping rules? Do these allow for

relief in your jurisdiction for losses of overseas subsidiaries? 3.9 Does your jurisdiction have transfer pricing rules? Companies can file a request to form a ‘fiscal unity’ for Dutch For Dutch tax purposes, transactions between affiliated entities must corporate income tax purposes if certain conditions are met. A fiscal be performed under the same terms and conditions as would be unity may file a consolidated corporate income tax return, and the agreed between non-affiliated entities under similar circumstances companies included in the fiscal unity are taxed on a consolidated basis (the so-called ‘arm’s length principle’). If the terms and conditions as if they were just one company. As a result, transactions between of an affiliated party transaction are not at arm’s length, the trans- companies belonging to the fiscal unity are, in principle, ignored and action is taxed as if they had been. not subject to taxation on profits or gains. However, under the For Dutch transfer pricing purposes, companies are considered to application of certain anti-abuse rules (e.g., the anti-base erosion rules), be affiliated if one entity participates – directly or indirectly – in the transactions between entities within a fiscal unity are taken into account. management, control or capital of another entity, or if the same There are certain other anti-abuse rules which, for example, can be person participates – directly or indirectly – in the management, triggered by the formation or dissolution of a fiscal unity. Companies control or capital of two entities. belonging to a fiscal unity are jointly and severally liable for payments All Dutch taxpayers must have documentation available showing of corporate income tax over the period of the fiscal unity. that the terms and conditions applied to affiliated party transactions

are at arm’s length. In addition, multinationals with a consolidated group turnover of at least EUR 750 million in the preceding year are 4.5 Do tax losses survive a change of ownership? required to file country-by-country (CbC) reports containing detailed There are certain anti-abuse rules based on which the deduction of information on the transfer pricing policy and allocation of assets tax losses can be denied if the (ultimate) shareholders of a Dutch and personnel within the group. CbC reports are then exchanged company have been changed by at least 30% compared with the automatically with the tax authorities of all countries in which the oldest loss year. Certain exceptions apply. For instance, if the multinational group operates. activities during the loss year did not primarily consist of passive Furthermore, Dutch taxpayers that are part of a multinational portfolio activities and it is not anticipated to reduce such activities group with a consolidated turnover of at least EUR 50 million in the of the taxpayer considerably in the next three years. preceding year must prepare both so-called ‘master files’ and ‘local

files’. The master file provides an overview of the multinational’s core business, the allocation of income and the global transfer 4.6 Is tax imposed at a different rate upon distributed, as pricing policy, while the local file is necessary for the transfer pricing opposed to retained, proﬁts? analysis and includes information on intra-group transactions involving the Dutch taxpayer. This is not applicable.

Dutch tax-resident companies are subject to Dutch CIT at a tax rate Currently, the Netherlands does not levy a withholding tax on of 20% over the first EUR 200,000 of profit. The profits exceeding interest and royalty payments. However, the government has EUR 200,000 are taxed at 25%. Please note that there have been announced that a withholding tax on interest and royalty payments amendments to the envisaged changes of the Dutch CIT rate in the will apply from 1 January 2021 onwards. The applicable rate will be coming years. Now, it is envisaged that the standard CIT rates will 21.7%. The withholding tax would apply to intra-group interest and be reduced in steps: 16.5% over profits up until EUR 200,000 in royalty payments by Dutch resident companies to related entities 2020 (the 25% rate remains unchanged); and 21.7% over profits residing in jurisdictions with no or low statutory tax rates (i.e. less exceeding EUR 200,000 in 2021 (the 16.5% rate remains than 9%), in jurisdictions that are on the EU blacklist of non- unchanged). cooperative jurisdictions or in abusive situations.

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5 Capital Gains 6.4 Would a branch beneﬁt from double tax relief in its jurisdiction? 5.1 Is there a special set of rules for taxing capital gains A Dutch branch is generally entitled to relief from double taxation and losses? under the application of the domestic rules but is, in most cases, not entitled to apply to Dutch double tax treaties. This is not applicable.

6.5 Would any withholding tax or other similar tax be 5.2 Is there a participation exemption for capital gains? imposed as the result of a remittance of profits by the The Netherlands has one of the best holding company regimes in branch? the world. The Dutch participation exemption provides for a full exemption of income (e.g. dividends, capital gains, liquidation Distributions by a local Dutch branch of a non-resident company proceeds, etc.) derived from share interests in qualifying are not subject to a branch profit tax. participations. The conditions for the application of the Dutch participation exemption are relatively easy to meet compared to 7 Overseas Profits similar regimes in other jurisdictions (e.g. no minimum holding period, low minimum share interest of 5% or more, etc.). 7.1 Does your jurisdiction tax profits earned in overseas

branches? 5.3 Is there any special relief for reinvestment? Profits received by a Dutch company from a non-Dutch branch A taxpayer can roll over capital gains realised in connection with the should be exempt for Dutch tax purposes insofar the Dutch object sale of a business asset under the application of the reinvestment exemption applies. reserve. Certain conditions apply such as the condition that the taxpayer should reinvest in an asset with the same function if the assets 7.2 Is tax imposed on the receipt of dividends by a local are not depreciated or has a depreciation term of more than 10 years, a reinvestment term of three years and the condition that the book company from a non-resident company? value of the new asset should not be lower than the disposed asset. Reference is made to our answer to question 5.2.

5.4 Does your jurisdiction impose withholding tax on the 7.3 Does your jurisdiction have “controlled foreign proceeds of selling a direct or indirect interest in local assets/shares? company” rules and, if so, when do these apply? Non-Dutch tax-resident companies are subject to corporate income tax from certain Dutch sources, which may include income derived Based on the implementation of the Anti-Tax Avoidance Directive from shareholdings of at least 5% in Dutch companies, if they 1, controlled foreign company (CFC) rules apply as from 1 January cannot pass either the subjective or objective test. The subjective 2019. Under the CFC rules, the participation exemption does not test decides whether non-resident corporate shareholders hold apply to profits from passive portfolio investment activities of direct shares in Dutch companies with the main purpose, or one of the or indirect subsidiaries or permanent establishments established in main purposes, of avoiding Dutch personal income tax by another. jurisdictions with no or low statutory tax rates (i.e. less than 9%), or The objective test decides whether the situation qualifies as an in jurisdictions that are on the EU blacklist of non-cooperative artificial arrangement. The rules are only applicable to income jurisdictions included in a blacklist issued by the Dutch Ministry of directly received from Dutch shareholdings. Finance. Only interests of 50% of Dutch taxpayers, together with related companies, are targeted. The CFC rules do not generally apply if the subsidiaries or permanent establishments have a certain 6 Local Branch or Subsidiary? level of substance (including office space and payroll expenses of generally at least EUR 100,000). 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? 8 Taxation of Commercial Real Estate This is not applicable. 8.1 Are non-residents taxed on the disposal of commercial

real estate in your jurisdiction? 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident company (for Non-Dutch tax-resident companies are subject to corporate income example, a branch proﬁts tax)? tax from certain Dutch sources, including Dutch real estate assets. In addition, the Netherlands levies a real estate transfer tax on the Distributions by local Dutch subsidiaries are, in principle, subject to transfer of Dutch real estate assets at a rate of 2% (for residential Dutch dividend withholding tax. Distributions by a local branch of properties) and 6% (for other properties). a non-resident company are not subject to a branch profit tax. 8.2 Does your jurisdiction impose tax on the transfer of an 6.3 How would the taxable proﬁts of a local branch be indirect interest in commercial real estate in your determined in its jurisdiction? jurisdiction?

For Dutch corporate income tax purposes, the allocation of the The transfer of indirect interests in Dutch companies should not be taxable profits of a local Dutch branch should be based on an subject to Dutch corporate income tax. However, the transfer of a allocation of risks and functions between the head office and the company may be subject to real estate transfer tax if the assets have branch. consisted of 50% or more of real property and, at the same time, at

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least 30% of the real estate are located in the Netherlands, provided which the earning stripping rules and controlled foreign company that its objects are or of which the actual activities consist of (CFC) legislation were introduced and the rules regarding exit acquiring, alienating or developing of real estate. taxation were amended. Furthermore, the MLI was ratified (reference is made to our answer to question 10.2). Besides these 8.3 Does your jurisdiction have a special tax regime for measures, the Ministry of Finance envisages to implement the Anti- Tax Avoidance Directive 2, introduce a conditional withholding tax Real Estate Investment Trusts (REITs) or their equivalent? on interest and royalty payments, and amend the conditions of the The Netherlands has a special tax regime for so-called Financial Dutch corporate income tax rules for non-resident corporate Investment Institutions (in Dutch: Fiscale beleggingsinstellingen), based shareholders in Dutch companies and the conditions of the Dutch on which qualifying entities investing directly or indirectly in Dutch dividend withholding tax exemption. real estate are subject to Dutch corporate income tax at a rate of 0%. 10.2 Has your jurisdiction signed the tax treaty MLI and 9 Anti-avoidance and Compliance deposited its instrument of ratiﬁcation with the OECD?

9.1 Does your jurisdiction have a general anti-avoidance or The Netherlands has signed the tax treaty MLI, ratified it and deposited its instrument of ratification. The MLI will enter into anti-abuse rule? force on 1 January 2020 in the Netherlands. Dutch tax law includes the uncodified anti-avoidance rule called fraus legis. Under the application of fraus legis, transactions can be 10.3 Does your jurisdiction intend to adopt any legislation to eliminated for Dutch tax purposes or replaced by other transactions tackle BEPS which goes beyond the OECD’s recommendations? that fall within the scope of relevant legal provisions. Fraus legis can be applied if the Dutch tax authorities can prove that (i) the sole or As mentioned in our answer to question 10.1, the Netherlands aims predominant motive for a transaction is tax avoidance, and (ii) the to introduce a conditional withholding tax on interest and royalty envisaged tax consequences of a transaction would conflict with the payments. purposes and rationale of the relevant law. 10.4 Does your jurisdiction support information obtained 9.2 Is there a requirement to make special disclosure of under Country-by-Country Reporting (CBCR) being made avoidance schemes? available to the public?

Currently, a Dutch legislative proposal implementing the EU Based on Dutch law, information obtained under Country-by- Directive, regarding Mandatory Disclosure 2 (commonly known as Country Reporting (CBCR) is not made available to the public. the DAC6), is being discussed in the Dutch parliament. Based on However, the Dutch government supports this concept and is in the legislative proposal, service providers, or in absence thereof, tax discussions with the other EU Member States on the matter. payers, should disclose certain reportable tax arrangements. The proposed legislation should be implemented no later than 31 10.5 Does your jurisdiction maintain any preferential tax December 2019 and will apply retroactively from 25 June 2018 regimes such as a patent box? onwards. In their annual corporate income tax returns, Dutch taxpayers can 9.3 Does your jurisdiction have rules which target not only apply an ‘innovation box regime’ to qualifying profits derived from taxpayers engaging in tax avoidance but also anyone who benefits from certain self-developed intangible fixed assets. Under promotes, enables or facilitates the tax avoidance? the innovation box regime, profits are included only in the tax base of a taxpayer for 7/25 part, resulting in an effective tax rate of 7%. The Netherlands has no rules targeting promoters, enablers or It is envisaged that the effective tax rate under the innovation box facilitators of tax avoidance, besides the proposed DAC6 rules regime will increase to 9% on 1 January 2020. described in question 9.2 above. However, there are rules based on which persons cooperating with tax evasion can be fined. 11 Taxing the Digital Economy

9.4 Does your jurisdiction encourage “co-operative 11.1 Has your jurisdiction taken any unilateral action to tax compliance” and, if so, does this provide procedural beneﬁts digital activities or to expand the tax base to capture digital only or result in a reduction of tax? presence?

Yes. The Netherlands has a mechanism based on which taxpayers No. The Dutch government is currently investigating the possibility and the tax authorities can cooperate together on the basis of mutual of amending the taxation of digital activities. The outcome of this trust (so-called horizontal monitoring). The mechanism only investigation will be published in the beginning of the year 2020. provides procedural benefits for the taxpayer. 11.2 Does your jurisdiction favour any of the G20/OECD’s 10 BEPS and Tax Competition “Pillar One” options (user participation, marketing intangibles or signiﬁcant economic presence)? 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting BEPS? The Dutch government supports the international discussions of the G20/OECD to develop a consensus on the taxation of the In response to the OECD’s project targeting BEPS, the Netherlands digital economy. The Dutch government is, however, not yet has implemented the Anti-Tax Avoidance Directive 1, based on convinced which approach should be preferred and awaits a more detailed impact analysis of the proposals.

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Peter van Dijk co-heads the Tax practice of Buren and is a corporate lawyer and tax lawyer. He specialises in setting up corporate structures for foreign investors or Dutch-based groups operating internationally. He has a special focus on Russia/CIS, CEE and Japan. Furthermore, his expertise is assisting groups operating internationally, with various M&A transactions and starting and developing (cross-border) activities.

Buren N.V. Tel: +31 020 333 83 90 / +31 070 318 42 00 WTC – Toren C level 14 Email: [email protected] Strawinskylaan 1441 URL: www.burenlegal.com/en 1077 XX – Amsterdam Netherlands

Johan de Wittlaan 15 2517 JR – The Hague Netherlands

IJsbrand Uljée graduated in tax law from the University of Groningen in 2011. Since 2012, he has been working as a tax adviser in the international tax practice, having previously been at one of the big four law firms and at an international tax boutique firm. IJsbrand advises his clients on Dutch tax aspects of (domestic and international) transactions, such as mergers, acquisitions and (re)structuring of investments and debt. He is a member of the Dutch Association of Tax Advisors.

Buren N.V. Tel: +31 020 333 83 90 / +31 070 318 42 00 WTC – Toren C level 14 Email: [email protected] Strawinskylaan 1441 URL: www.burenlegal.com/en 1077 XX – Amsterdam Netherlands

Johan de Wittlaan 15 2517 JR – The Hague Netherlands

■ Buren is an internationally oriented corporate and tax ﬁrm with ofﬁces in Internationally:

Amsterdam, Beijing, the Hague, Luxembourg and Shanghai. ■ We arguably have the strongest Asia practice of any Dutch law firm. ■ Buren has an integrated domestic and international corporate, notarial and ■ Our Asia-capability is complemented by our offices in Beijing and tax practice. As a result, we can offer our clients assistance on all relevant Shanghai. Dutch corporate, tax and notarial aspects, from the setting up of a transaction structure up through the post completion integration of a target group. ■ We act for many leading Asian corporates. ■ The firm’s heritage dates back to 1898, although we have experienced our ■ Buren has been active in China since 1995, and was the first Dutch firm to most rapid growth over the past 10 years. We now have 70 lawyers, notaries be granted a licence from the Chinese Ministry of Justice to operate a and international tax lawyers providing a full range of services to domestic foreign law firm branch in China in 2004. and international clients who conduct business nationally and globally. ■ We have a number of other foreign desks, including the Russia/CIS desk ■ The tax department of the firm is not only ancillary to the corporate and Latin America desk, with native speakers and qualified lawyers. practice of the firm, but rather has always been a major driver to develop ■ Many of our international clients operate from or through Luxembourg. the international corporate practice of the firm. Our presence in Luxembourg allows us to optimise our services to them. ■ Size of team: relatively large tax department compared to the tax It will also enhance our possibility to further strengthen our position in the departments in other full service law firms. international corporate and tax markets.

■ Our tax team can be considered ‘a boutique in a full service firm’. www.burenlegal.com/en ■ Expertise of team: other than tax professionals at the big four, the partners of the tax department are admitted to the bar and are also extremely active in the corporate practice of the firm. ■ The tax department is exceptionally strong in building relationships with reputable foreign law firms. ■ We effectively act as the virtual Netherlands in-house tax department of several reputable international law firms and actively participate in their tax practice groups. We also enjoy referrals from a number of leading international law firms.

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Nigeria Nigeria

Blackwood and Stone LP Kelechi Ugbeva

1 Tax Treaties and Residence 1.6 What is the test in domestic law for determining the residence of a company? 1.1 How many income tax treaties are currently in force in In Nigeria, the test for determining the residence of a company is the your jurisdiction? place of its incorporation. A company is said to be incorporated in Nigeria if it is registered by the Corporate Affairs Commission (CAC). Nigeria is party to 24 Double Tax Treaties (DTTs). However,

Nigeria currently has only 14 Double Tax Treaties in force for taxes on income, corporation, petroleum revenue and capital gains, 2 Transaction Taxes amongst others of a similar character, with the following countries: Belgium; Canada; China; Czech Republic; France; Italy; the 2.1 Are there any documentary taxes in your jurisdiction? Netherlands; Pakistan; Philippines; Romania; Singapore; Slovakia; South Africa; and the United Kingdom. It is also noteworthy that Yes. Stamp duty tax is a documentary tax in Nigeria. Stamp duty is Nigeria’s Double Tax Treaty with Italy only covers capital gains tax a type of tax imposed on documents and certain transactions. The arising out of shipping and air transportation in the international stamp duty rate is dependent on the type of documents. space, unlike its Double Tax Treaties with other countries. 2.2 Do you have Value Added Tax (or a similar tax)? If so, at 1.2 Do they generally follow the OECD Model Convention or what rate or rates? another model? Yes. VAT is charged at the rate of 5% on the value of goods and Generally, Nigeria follows the OECD and United Nations (UN) services in Nigeria. However, the Federal Executive Council of the Models. The OECD Model serves as the foundation upon which Federal Government of Nigeria has approved the increase of VAT most of the current Double Tax Treaties Nigeria has with other to 7.5%, but this is yet to be applied as a decision is yet to be taken countries are formed. However, the Transfer Pricing Regulations are on the effective date of the new rate. based on both the OECD & UN Models. 2.3 Is VAT (or any similar tax) charged on all transactions 1.3 Do treaties have to be incorporated into domestic law or are there any relevant exclusions? before they take effect? The Fifth Schedule to the VAT Act exempts certain goods and Yes. Pursuant to Section 12(1) of the 1999 Constitution of the services from VAT charges. These include but are not limited to: all Federal Republic of Nigeria, treaties must be ratified by the National medical and pharmaceutical products; basic food items; books and Assembly to take effect as domestic law. educational materials; baby products; and equipment purchased for the utilisation of gas in downstream petroleum operations. However, on the 6th of June 2018, the Federal Executive Council of 1.4 Do they generally incorporate anti-treaty shopping Nigeria approved two Executive Orders and Five Amendment Bills. rules (or “limitation on beneﬁts” articles)? Amongst the Executive Orders include the Value-Added Tax Modification Order. This order expands the list of exempt items to include: rent/lease Nigeria does not currently have provisions for anti-treaty shopping of residential properties; public transport services; non-oil exports; life rules (or “limitation on benefits”). insurance policies; services rendered by unit microfinance banks and

mortgage institutions; and education and training conducted by public or 1.5 Are treaties overridden by any rules of domestic law non-profit educational institutions. The Amendment Bills have been (whether existing when the treaty takes effect or introduced submitted to the National Assembly for ratification. subsequently)? 2.4 Is it always fully recoverable by all businesses? If not, The Nigerian Constitution takes precedence over all other laws in what are the relevant restrictions? subsistence within the country. In practice, any law inconsistent with the Constitution is null and void. Consequently, where a treaty is VAT is recoverable; however, it is restricted to goods purchased or deemed inconsistent with the Constitution, or there is conflict imported directly for resale and goods which form the stock-in trade between a treaty and the Constitution, the Constitution will prevail. used for the direct production of any new product on which the No other rule or law can override any treaty that has been ratified output VAT is charged. by the National Assembly other than the Constitution. VAT on fixed assets/capital items, overheads, services and general administration are not recoverable. ICLG.com Corporate Tax 2020 © Published and reproduced with kind permission by Global Legal Group Ltd, London Blackwood and Stone LPXX 185

Furthermore, excess input VAT may be carried forward as credit There are no statutory safe harbour rules. against future VAT payable. In addition, the Federal Inland Revenue Service (FIRS) Establishment Act provides for a cash refund on 3.6 Would any such rules extend to debt advanced by a application, within 90 days of the FIRS’ decision (subject to an third party but guaranteed by a parent company? appropriate tax audit). No, this is not applicable in Nigeria. 2.5 Does your jurisdiction permit VAT grouping and, if so, is it “establishment only” VAT grouping, such as that applied 3.7 Are there any other restrictions on tax relief for interest by Sweden in the Skandia case? payments by a local company to a non-resident, for example pursuant to BEPS Action 4? No. Nigeria does not permit VAT grouping. No, there are no other restrictions. 2.6 Are there any other transaction taxes payable by companies? 3.8 Is there any withholding tax on property rental payments made to non-residents? Yes. Capital gains tax, charged on qualifying transactions at the rate of 10%, VAT, withholding tax & stamp duties. Generally, non-residents are subject to tax on profits accrued in or derived from Nigeria. Withholding tax of 10% is deducted from the 2.7 Are there any other indirect taxes of which we should rental payments paid to non-residents. be aware? 3.9 Does your jurisdiction have transfer pricing rules? Other indirect taxes include import duties and excise duties. Yes, Nigeria has the Income Tax Transfer Pricing Regulations 2018. 3 Cross-border Payments 4 Tax on Business Operations: General 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 4.1 What is the headline rate of tax on corporate proﬁts?

A withholding tax of 10% is deducted from the dividend paid by a Generally, the headline rate of tax on corporate profits is 30% of Nigerian company to a non-resident company. However, the rate is the total profits of the company. However, for small companies in 7.5% for a non-resident company located in a country that has the manufacturing industry and companies that deal wholly in entered into a Double Tax Treaty with Nigeria. exports, both of which have a turnover of not more than one million naira (N1,000,000) respectively, their tax headline rate is 20% 3.2 Would there be any withholding tax on royalties paid by of the total profits in the first five calendar years of operation.

a local company to a non-resident? 4.2 Is the tax base accounting proﬁt subject to Yes, withholding tax of 10% (and 7.5% for companies in DTT adjustments, or something else? countries) is deducted from the royalties paid by a Nigerian company to a non-resident company. Yes, the tax base is subject to adjustments. This is because, in determining taxable profits, the tax authorities take the profit before tax from 3.3 Would there be any withholding tax on interest paid by an entity’s financial statement and then make adjustments thereto.

a local company to a non-resident? 4.3 If the tax base is accounting proﬁt subject to Yes, withholding tax of 10% is deducted from the interest paid by a adjustments, what are the main adjustments? Nigerian company to a non-resident company. However, note that interest payable on the following loans are exempt from tax: Section 24 of CITA allows only deduction of expenses which are i. foreign loans with a two-year moratorium period and repayment revenue in nature and must be incurred wholly, exclusively, necess- periods of above seven years; and arily and reasonably for earning the income reported. Also, capital ii. any loans granted by a bank to a company engaged in allowances are granted to companies against taxable income in lieu agricultural trade, fabrication of any local plant & machinery and of the wear and tear of business assets. providing working capital for any cottage industry established in Nigeria, provided the moratorium period is not less than 18 4.4 Are there any tax grouping rules? Do these allow for months and the rate of interest on the loan is not more than the relief in your jurisdiction for losses of overseas subsidiaries? base lending rate at the time the loan was granted. No, Nigeria has no tax grouping rules. Each legal entity is treated 3.4 Would relief for interest so paid be restricted by as separate for tax purposes. reference to “thin capitalisation” rules? 4.5 Do tax losses survive a change of ownership? Nigeria currently has no specific thin capitalisation rules. However, the arm’s-length test is applied in determining interest charged Normal business losses can be carried forward indefinitely, except between related parties. The relevant tax authority has the power to for insurance companies who can only carry forward losses for a disallow any related-party interest that fails the arm’s-length test. maximum period of four years. The losses incurred by a Nigerian company can be utilised domestically, irrespective of the jurisdiction 3.5 If so, is there a “safe harbour” by reference to which tax in which the loss arose. However, this is not applicable to losses of foreign legal entities in which a Nigerian entity has an interest. relief is assured?

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4.6 Is tax imposed at a different rate upon distributed, as The local branch is taxed on the profits accrued in, derived from, brought into and received in Nigeria. opposed to retained, proﬁts?

No. Tax rate is calculated on the total profit of the company made 6.4 Would a branch beneﬁt from double tax relief in its for that year of assessment. However, retained earnings are jurisdiction? generally not taxable. A Nigerian branch of a non-resident company would be deemed to be 4.7 Are companies subject to any signiﬁcant taxes not resident in Nigeria and, as such, cannot claim treaty relief. However, non- resident entities (with Nigerian branches) in treaty countries may benefit covered elsewhere in this chapter – e.g. tax on the from double tax relief in instances where such non-resident entities derive occupation of property? profits attributable to a permanent establishment in Nigeria.

Yes, they include education tax, Petroleum Profit Tax (PPT) and some levies such as the Nigerian Trust Fund, National Information 6.5 Would any withholding tax or other similar tax be Technology Development Levy (NITDL) and the newly established imposed as the result of a remittance of profits by the branch? Nigerian Police Trust Fund (NPTF). Dividends repatriated are subject to withholding tax. 5 Capital Gains 7 Overseas Profits 5.1 Is there a special set of rules for taxing capital gains 7.1 Does your jurisdiction tax profits earned in overseas and losses? branches? Section 5 of the Capital Gains Tax Act provides that in the computation of chargeable gains under the Act, the amount of any loss accruable to Profits earned in branches overseas are only taxable to the extent a person on the disposal of any asset shall not be deductible from gains that such income accrued is derived from or brought into Nigeria. accruing to any person on the disposal of such asset. 7.2 Is tax imposed on the receipt of dividends by a local 5.2 Is there a participation exemption for capital gains? company from a non-resident company?

Yes, this is provided for by Section 32 of the Capital Gains Tax Act, Yes, tax is imposed on dividends received by a local company from a which exempts corporate securities from capital gains tax. non-resident company, except if brought into Nigeria through Government approved channels (any financial institution authorised by 5.3 Is there any special relief for reinvestment? the Central Bank of Nigeria to deal in foreign currency transactions).

Yes, there is. Subject to the provisions of Section 32 of the Capital 7.3 Does your jurisdiction have “controlled foreign Gains Tax Act, gains accruing to unit holders of unit trusts, in company” rules and, if so, when do these apply? respect of disposal of securities, shall not be taxed provided the proceeds are re-invested. Nigeria has no controlled foreign company rules.

5.4 Does your jurisdiction impose withholding tax on the 8 Taxation of Commercial Real Estate proceeds of selling a direct or indirect interest in local assets/shares? 8.1 Are non-residents taxed on the disposal of commercial Capital gains on the disposal of shares and stocks are tax exempt. real estate in your jurisdiction? However, withholding tax will be charged on the proceeds from the sale of assets, unless such gains meet the exemption requirements. Yes, capital gains tax of 10% is payable on the gain from the disposal of real estate by residents and non-residents in Nigeria, except where such 6 Local Branch or Subsidiary? gains are derived from the main or only private residence of the individual, and provided that the real estate does not exceed one acre in size. 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your jurisdiction? Upon the incorporation of a subsidiary, stamp duty charges will be imposed. Note however that stamp duties apply generally upon the No, it does not. incorporation of any company in Nigeria.

8.3 Does your jurisdiction have a special tax regime for 6.2 Is there a difference between the taxation of a local Real Estate Investment Trusts (REITs) or their equivalent? subsidiary and a local branch of a non-resident company (for example, a branch proﬁts tax)? Yes. The dividends of publicly traded REIT securities are exempt from withholding tax. Also, VAT and capital gains tax are not No. There is no difference between the taxation of a local subsidiary applicable on the sales of REIT securities. and a local branch of a non-resident company. 9 Anti-avoidance and Compliance 6.3 How would the taxable proﬁts of a local branch be determined in its jurisdiction? 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule?

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Yes, general anti-avoidance rules (GAAR) in tax legislations in 10.2 Has your jurisdiction signed the tax treaty MLI and Nigeria are contained specifically in Section 17 of the Personal deposited its instrument of ratiﬁcation with the OECD? Income Tax Act (2004), Section 22 of the Companies Income Tax Act (2004) and Section 15 of the Petroleum Profits Tax Act (2004). Nigeria has signed the tax treaty MLI and deposited its instrument The foregoing Sections provide for the adjustment of any trans- of ratification with OECD. action which is deemed to produce a result artificially reducing taxable income in Nigeria. 10.3 Does your jurisdiction intend to adopt any legislation to

tackle BEPS which goes beyond the OECD’s 9.2 Is there a requirement to make special disclosure of recommendations? avoidance schemes? Nigeria does not intend to adopt any legislation to tackle BEPS. Yes, for instance, TP disclosures of related party transactions, under the Transfer Pricing Regulations. 10.4 Does your jurisdiction support information obtained 9.3 Does your jurisdiction have rules which target not only under Country-by-Country Reporting (CBCR) being made taxpayers engaging in tax avoidance but also anyone who available to the public? promotes, enables or facilitates the tax avoidance? The FIRS does not make public information of taxpayers, except under certain conditions. Yes, Sections 94 & 95 of CITA and Sections 95 & 96 of Personal

Income Tax Act (PITA) set out provisions and penalties for anyone who engages, promotes or facilitates tax avoidance. 10.5 Does your jurisdiction maintain any preferential tax regimes such as a patent box? 9.4 Does your jurisdiction encourage “co-operative Subject to the approval of the National Office for Technology compliance” and, if so, does this provide procedural beneﬁts Acquisition and Promotion (NOTAP), Nigerian companies are only or result in a reduction of tax? allowed to remit royalties, management & technical fees and payments under Technology Transfer Agreements to their non- Nigeria encourages co-operative compliance. However, this does resident technical partners. not result in reduction of taxes. 11 Taxing the Digital Economy 10 BEPS and Tax Competition 11.1 Has your jurisdiction taken any unilateral action to tax digital 10.1 Has your jurisdiction introduced any legislation in activities or to expand the tax base to capture digital presence? response to the OECD’s project targeting BEPS? Nigeria is yet to implement the taxation of digital activities. Nigeria is yet to introduce any legislation in response to the OECD’s However, the Nigerian tax authorities recently disclosed that the BEPS Action Plan. The BEPS recommendations for changes to the FIRS would soon begin collection of VAT on online transactions. TP Regulations immediately became effective in Nigeria, as the Nigerian TP Regulations incorporated the OECD TP Guidelines. 11.2 Does your jurisdiction favour any of the G20/OECD’s The FIRS, in this regard, has already begun to adopt some of the regulations while carrying out the audits. However, the BEPS “Pillar One” options (user participation, marketing intangibles recommendations will require ratification of the regulations into or signiﬁcant economic presence)? Nigerian law before they can be fully implemented. Nigeria is yet to take a stand on this.

Kelechi Ugbeva is a Partner at Blackwood & Stone LP. Kelechi provides specialist tax and corporate/commercial legal services to resident and non-resident entities and individuals doing business in Nigeria. Blackwood and Stone LP Tel: +234 90 3350 1613 22A Rasheed Alaba Williams Street, Lekki 1 Email: [email protected] Lagos URL: www.blackwoodstone.com Nigeria

Blackwood and Stone LP is a globally-minded tax law ﬁrm located in Lagos, Nigeria, dedicated to the practice of specialised Tax and International Business Law. Blackwood and Stone was created with the goal of providing sophisticated yet practical services, advice and solutions to the unique challenges faced by our clients. We go the extra mile to ensure that we work closely with our clients to understand their business objectives and then deliver cost effective and creative solutions that are tailored to those objectives. www.blackwoodstone.com

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Norway Norway

Toralv Follestad

Braekhus Advokatﬁrma DA Charlotte Holmedal Gjelstad

1 Tax Treaties and Residence 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced 1.1 How many income tax treaties are currently in force in subsequently)? your jurisdiction? At the outset, the answer is no. It should be noted that according to Norway currently has 88 income tax treaties in force covering 94 the Double Tax Treaty Act, a tax treaty can only limit the taxation jurisdictions. following Norwegian Tax Regulations. This means that the tax treaty cannot be the legal basis for taxation, i.e. taxation has to be in accordance with Norwegian tax regulations irrespective of regulation 1.2 Do they generally follow the OECD Model Convention or in tax treaty. another model? The income tax treaties do generally follow the OECD Model 1.6 What is the test in domestic law for determining the Convention. The most important exception is the tax treaty between residence of a company? Norway and the USA. In addition, some of the tax treaties between Norway and some Currently, the test for determining company tax residency is from developing countries are based on the United Nations Model Double where a company is lead at the level of Board of Directors. If this Taxation Convention between Developed and Developing Countries. takes place in Norway, the company is considered to be tax resident in Norway. Per 2019 all companies incorporated in Norway are considered as 1.3 Do treaties have to be incorporated into domestic law tax residents in Norway unless they are considered to be a tax before they take effect? resident in another country according to the tax treaty. Companies incorporated in a foreign country will be considered as a tax resident At the outset, treaties in general have to be incorporated in in Norway if the place of effective management takes place in Norwegian law according to the regulations on legislative decisions Norway. by Parliament. However, according to the Double Tax Treaty Act,

tax treaties enter into force by Parliament’s consent in plenary session. 2 Transaction Taxes 1.4 Do they generally incorporate anti-treaty shopping 2.1 Are there any documentary taxes in your jurisdiction? rules (or “limitation on beneﬁts” articles)? Yes, there are. Several of the tax treaties in force contain regulations which can be characterised as anti-treaty shopping or Limitation of Benefit. The type of regulation varies but, in general, it is three out of the four 2.2 Do you have Value Added Tax (or a similar tax)? If so, at methods described by OECD: “The subject-to-tax approach” (e.g. what rate or rates? Nordic Tax Treaty and UK); “The exclusion approach” (e.g. USA, Canada, Argentina and Luxembourg); and “The look through A general Value-Added Tax (“VAT”) was introduced in Norway in approach” (e.g. Barbados and the Netherlands Antilles). The 1970. VAT is applicable on all supplies unless explicitly exempt exclusion approach is not included in any tax treaties in force. under the Norwegian VAT legislation. The standard VAT rate is It should also be noted that in 2017 Norway signed the OECD 25%. A reduced rate of 15% applies to foodstuff and a low rate of Multilateral Convention to Implement Tax Treaty Related Measures 10% applies to certain services such as hotels, taxis and tickets to the to Prevent Base Erosion and Profit Shifting (“MLI”), which contains opera/cinema. Norway also have a zero rate that applies to exports regulations to prevent treaty abuse, most importantly Article 7 with and to some specifically mentioned goods and services supplied the Principle Purpose Test, Limitation of Benefit regulations or a within the Norwegian VAT territory. combination of both. Please see more details in section 10 below. 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions?

VAT is generally applied unless the supplies are specifically exempt under the VAT legislation. Examples of such exemptions are

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services relating to the sale and lease of immovable property, 3.4 Would relief for interest so paid be restricted by educational services, healthcare services and financial services. reference to “thin capitalisation” rules? For the lease of immovable property an option to tax is possible on certain criteria. Relief is currently restricted by the Norwegian Tax Act Section 13- 1, according to which transactions between affiliated parties must be 2.4 Is it always fully recoverable by all businesses? If not, on arm’s length. This regulation is also applied to “thin what are the relevant restrictions? capitalisation”. However, interests on related party debt may generally be deducted to the extent the interests do not exceed 25% Taxable persons supplying VAT-able goods and/or services are of EBITDA. For group companies, external debt is generally entitled to deduct input VAT. Some exceptions do, however, apply treated as related party debt when applying the threshold, see answer independent of use such as VAT on catering, art, representation and to question 3.7. passenger cars, where VAT deduction is disallowed. For mixed busi- Relief may also be restricted by the General Anti-Avoidance nesses (businesses making both taxable and exempt supplies) input Regulation (doctrine developed by case law). VAT is deductible based on a pro rata key. 3.5 If so, is there a “safe harbour” by reference to which tax 2.5 Does your jurisdiction permit VAT grouping and, if so, relief is assured? is it “establishment only” VAT grouping, such as that applied by Sweden in the Skandia case? See answer to question 3.4.

VAT grouping is allowed between companies and establishments in 3.6 Would any such rules extend to debt advanced by a Norway on certain conditions. Norway has one of the most favour- third party but guaranteed by a parent company? able VAT grouping rules in Europe. The principle of the Skandia case, that a branch part of a foreign VAT group is a separate taxable See answer to question 3.7. person, does so far not apply in Norway. 3.7 Are there any other restrictions on tax relief for interest 2.6 Are there any other transaction taxes payable by payments by a local company to a non-resident, for example companies? pursuant to BEPS Action 4?

Transfer of title to real estate is subject to a 2.5% transfer tax (stamp Regulations providing limitation on the deductibility of interest costs duty), calculated on the gross value of the property. When transfer- are currently in place, irrespective of interest costs being paid to a ring ownership to a company holding title to real estate, no transfer resident or non-resident, see comments under question 3.4. tax is levied. According to these regulations, deduction for interest costs paid to a related party shall not exceed 25% of “taxable EBITDA”. This 2.7 Are there any other indirect taxes of which we should limitation is only applied if net interest costs exceed NOK 5 million be aware? (approx. EUR 500,000) per annum. The same rule applies for group companies, and external debt is generally treated as related party debt Special duties apply on certain goods and services in Norway such when applying the threshold. as sugar, tobacco, candy, alcohol, NOx and electric power. There are, however, important exemptions. First of all, the restriction will only apply to group companies with interest costs 3 Cross-border Payments exceeding NOK 25 million (approx. EUR 2,500,000) per annum. Second, if the equity according to accounts at company level is not 3.1 Is any withholding tax imposed on dividends paid by a lower than the equity level in the consolidated accounts at a global level, deduction of interest costs is not restricted. Third, deduction locally resident company to a non-resident? of interest costs is not restricted if the company claiming deduction for interest costs is part of a Norwegian group and the equity ratio Twenty-five per cent withholding tax is, at the outset, imposed on for the Norwegian group as a whole is not lower than the equity ratio dividends paid by a company that is a tax resident in Norway of the group globally. Although the mentioned equity ratio test is according to the Norwegian tax law. However, companies that are passed for a group company, deduction will be restricted if the tax resident in an EU/EEA country will be exempt providing that company has interest costs paid to a related individual and thereby the company is in fact (i) established, and (ii) conducting real having total interest costs exceeding 25% of taxable EBITDA. economic activity in such a country. This test was developed in order to comply with the “wholly artificial arrangements” test by the ECJ in the Cadbury Schweppes ruling (C-196/04). Reduced-rate or no 3.8 Is there any withholding tax on property rental withholding tax may follow from tax treaty, and the normal with- payments made to non-residents? holding tax rate is 15%. No there is not. 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? 3.9 Does your jurisdiction have transfer pricing rules?

Norway does not levy withholding tax on royalty payments. Transactions between related parties must be in accordance with the arm’s length principle. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations are incorporated 3.3 Would there be any withholding tax on interest paid by in Norwegian tax law. a local company to a non-resident? In addition, an entity being involved in group-controlled transactions exceeding NOK 10,000,000 (approx. EUR 1,000,000) or Norway does not levy withholding tax on interests payments. internal balances exceeding NOK 25,000,000 (approx. EUR

2,500,000) must report this to. If subject to the reporting obligation such tax has increased in the last few years. The maximum rate is as mentioned, transactions must in addition be documented in 0.5% applicable from 1 January 2019. This is calculated on the gross accordance with specific reporting obligations, as the tax authorities value of the property and the property is valuated according to may require such documentation within a 45-day notice. However, specific regulations aimed at setting the “objective” value of the entities which are part of a group with less than 250 total employees property, irrespective of the actual use of said property. that either has a turnover below NOK 400 million (approx. EUR 40 million) or gross balance (equity + debt) below NOK 350 million 5 Capital Gains (approx. EUR 35 million) are exempt. 5.1 Is there a special set of rules for taxing capital gains 4 Tax on Business Operations: General and losses?

4.1 What is the headline rate of tax on corporate proﬁts? Taxation of capital gains and losses are subject to a special set of rules in the Norwegian Tax Act. Capital gains/losses are, at the outset, Headline tax rate in general is 22% effective from 1 January 2019. taxable when realised and the tax base will be the difference between Headline tax rate on income subject to the Norwegian Petroleum cost price (less eventual depreciation) and sales price/market value. Tax Act is 78%. Most importantly, Norway has exit tax regulations according to Taxation of income from hydro-power is currently subject to a which capital gains are taxable if taken out of the Norwegian tax tax of 37% effective from 1 January 2019 according to specific jurisdiction or if the Norwegian tax residency ceases to exist. regulations, in addition to the base rate of 23%.

5.2 Is there a participation exemption for capital gains? 4.2 Is the tax base accounting proﬁt subject to adjustments, or something else? Norway has participation exemption regulations, according to which capital gains and losses on shareholding, ownership in partnership Yes, the tax base accounting profit is subject to adjustments. and similar are tax free, provided the shareholding is in a Norwegian company or a company tax resident and conducting real economic 4.3 If the tax base is accounting proﬁt subject to activity in an EU/EEA Member State. Three per cent of dividend income is taxable at the general rate. adjustments, what are the main adjustments? For shareholding in companies tax resident outside the EU/EEA, The tax law has its own regulations on when income/capital gains capital gains and losses will be tax free and only 3% of dividends will and costs/capital losses are taxable. The most important adjustments be taxed, provided shareholding has exceeded 10% of the total share relate to depreciation, capital gains/losses (taxable when realised) and capital for at least two years. manufacturing contracts (income taxable when completed). Shareholding in a low tax jurisdiction will, however, not be subject to participation exemption in any case. In addition, dividends are not covered by the participation exemption regulations if the 4.4 Are there any tax grouping rules? Do these allow for distribution is deductible in the jurisdiction of the distributing entity. relief in your jurisdiction for losses of overseas subsidiaries? Norway has tax grouping rules, according to which group 5.3 Is there any special relief for reinvestment? contributions are deductible for the paying company and taxable for There is relief for reinvestment capital gain from assets which have the receiving company, irrespective of whether the receiving been realised involuntarily (e.g. as a result of an accident or expropri- company has a profit or loss. These regulations, at the outset, allow ation), provided certain conditions are met. Most importantly, the deduction for group contributions paid to a group company taxable proceeds must be reinvested in a similar asset. in another EU/EEA State. However, eventual loss in such company

must be “final” (ref. the Marks & Spencer ruling of ECJ, case C- 446/03) and it must not be a “wholly artificial arrangement”. 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local 4.5 Do tax losses survive a change of ownership? assets/shares?

Losses do, at the outset, survive change of ownership. However, No, it does not. losses will not survive change of ownership or other kinds of transactions if the exploitation of the loss is deemed as the principle 6 Local Branch or Subsidiary? purpose of the transaction, cf. Norwegian Tax Act Section 14-90. These are anti-avoidance regulations developed by case law which 6.1 What taxes (e.g. capital duty) would be imposed upon are stricter that the General Anti-Avoidance Regulations. the formation of a subsidiary?

4.6 Is tax imposed at a different rate upon distributed, as No tax will be levied upon the mere formation of a subsidiary. The opposed to retained, profits? income of the subsidiary will be taxed in accordance with the tax regulations as described. Please see the answers to questions 3.1 and 4.1 above. 6.2 Is there a difference between the taxation of a local 4.7 Are companies subject to any significant taxes not subsidiary and a local branch of a non-resident company (for covered elsewhere in this chapter – e.g. tax on the example, a branch profits tax)? occupation of property? There is, at the outset, no difference between taxation of a local Companies may be subject to tax on occupation of property. This subsidiary and a local branch of a non-resident company. A branch is levied by local municipals and the number of municipals imposing may, however, be exempted from taxation based on tax treaties

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(permanent establishment) whereas a subsidiary will be taxable from 8.2 Does your jurisdiction impose tax on the transfer of an day one of having taxable income. indirect interest in commercial real estate in your

jurisdiction? 6.3 How would the taxable proﬁts of a local branch be determined in its jurisdiction? No, it does not.

Taxable profit will be determined by applying the regular tax 8.3 Does your jurisdiction have a special tax regime for regulations applicable according to the Norwegian Tax Act, i.e. no special regulations in Norwegian internal tax law. Real Estate Investment Trusts (REITs) or their equivalent? Most of the Norwegian tax treaties provide that it is only the No, it does not. profit attributable to a permanent establishment of the branch in

Norway which can be taxed in Norway. In attributing the profit to the branch, the starting point will be the profits it might be expected 9 Anti-avoidance and Compliance to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions, i.e. 9.1 Does your jurisdiction have a general anti-avoidance or the arm’s length principle. The taxable profits will further be anti-abuse rule? considered in accordance with the OECD Model Tax Treaty and relevant OECD Guidelines. Norway has General Anti Avoidance Regulations which are developed by case law. 6.4 Would a branch benefit from double tax relief in its jurisdiction? 9.2 Is there a requirement to make special disclosure of avoidance schemes? A branch will not benefit from any double tax relief other than that provided for in a tax treaty. No such requirement is applicable at date, but such disclosure of avoidance schemes is under consideration by the Government. 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the 9.3 Does your jurisdiction have rules which target not only branch? taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax avoidance? There is no withholding tax on remittance of profit from the branch. Anyone who is aiding and abetting illegal tax avoidance may be 7 Overseas Profits subject to claim for damages and/or criminal proceedings.

7.1 Does your jurisdiction tax proﬁts earned in overseas 9.4 Does your jurisdiction encourage “co-operative branches? compliance” and, if so, does this provide procedural beneﬁts only or result in a reduction of tax? Norwegian tax law is based on the global tax income principle. The only exception is if the method for avoiding double taxation is an Norwegian tax regulations have no rules on “co-operative applicable tax treaty, i.e. the exemption method. compliance”.

7.2 Is tax imposed on the receipt of dividends by a local 10 BEPS and Tax Competition company from a non-resident company? 10.1 Has your jurisdiction introduced any legislation in Unless covered by participation exemption regulations, receipt of response to the OECD’s project targeting BEPS? dividends will be taxable for a local company. The Norwegian Government is working actively on implementing 7.3 Does your jurisdiction have “controlled foreign BEPS in Norwegian tax legislation. Reference is made in our answer company” rules and, if so, when do these apply? to question 1.4 above, regarding the Norwegian position on MLI (BEPS Action 15). Legislation in order to incorporate the following Norway has CFS regulations, which are applicable on Norwegian BEPS Actions is, or will be, incorporated in Norwegian tax law: Action entities holding at least 50% ownership in a company tax resident in 2 (Hybrid Investments), Action 4 (Interest Deductions), Action 6 a low-tax jurisdiction both at the beginning and end of a tax year. If (Treaty Abuse), Action 7 (Permanent Establishment), Actions 8–10 the ownership share is more than 60% at the end of the tax year, (Change in the OECD Transfer Pricing Guidelines), Action 13 CFS regulations will apply in any case. Countries with a general tax (Country-by-Country Reporting), and Action 14 (Dispute Resolution). rate of less than ⅔ of the tax rate for a similar company in Norway, are classified as low-tax jurisdictions. 10.2 Has your jurisdiction signed the tax treaty MLI and deposited its instrument of ratiﬁcation with the OECD? 8 Taxation of Commercial Real Estate Yes, Norway ratified the MLI in February 2019 and can be 8.1 Are non-residents taxed on the disposal of commercial implemented in Norway from 1 November 2019. In 2020, parts of the MLI concerning withholding tax will take effect whereas the real estate in your jurisdiction? regulation concerning permanent establishment and tax avoidance Yes, they are. will be applicable from 2021. Norway has reserved itself against

Article 9 as Norway does not currently have the right to tax profits 11 Taxing the Digital Economy from the sale of shares in property companies. This may, however, be introduced in Norway, and Parliament has announced that Article 9 may then be accepted by Norway. 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture digital 10.3 Does your jurisdiction intend to adopt any legislation to presence? tackle BEPS which goes beyond the OECD’s The Norwegian Government is taking an active role in the OECD recommendations? Task Force on the Digital Economy and is also following its development in the EU closely. The notified legislation of withholding This must be analysed for each relevant piece of legislation. tax on royalty (see our answer to question 3.2 above), is partly

considered to be a part of this work. Development should be 10.4 Does your jurisdiction support information obtained monitored closely. Norway introduced VAT on the supply of elec- under Country-by-Country Reporting (CBCR) being made tronic services by foreign established businesses to Norwegian available to the public? private individuals in 2011. The rules are modelled on the OECD Guidelines. Norway has introduced CBCR regulations effective from the financial year 2016. The reports may be exchanged with other 11.2 Does your jurisdiction favour any of the G20/OECD’s competent tax administrations across national borders, but the “Pillar One” options (user participation, marketing intangibles reports are not made available to the public. or signiﬁcant economic presence)? 10.5 Does your jurisdiction maintain any preferential tax The Norwegian Government is generally positive to Pillar One, but regimes such as a patent box? the Government has not made any public statement as to which of the options is the preferred choice. Norway is actively contributing Norway has a special tax regime available for shipping; a tonnage tax to the preparatory works on how the digital economy could system. This is considered to be competitive with similar systems be/should be, i.e. Norway is amongst others participating in the available in Europe. work group Inclusive Framework under Pillar One and Pillar Two.

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Toralv Follestad gives clients strategic tax and corporate law advice, especially Norwegian clients engaged in real estate and non-Norwegian entities doing business in Norway. This may be related to tax-optimal structuring, business transfers, mergers and acquisitions, etc. He is also regularly engaged in tax disputes on behalf of our clients. Our firm has a long tradition in advising non-Norwegian entities doing business in Norway, e.g. in the oil service industry and various construction projects both onshore and offshore, and Toralv plays an important part of the team, giving the required advice. His work experience includes the Norwegian tax administration and the Ministry of Foreign Affairs.

Braekhus Advokatfirma DA Tel: +47 99 56 85 65 Roald Amundsensgate 6 Email: [email protected] 0161 Oslo URL: www.braekhus.no Norway

Charlotte Holmedal Gjelstad works with tax, VAT, duties and company law. She provides companies with Norwegian and international tax and VAT assessments, restructuring and structuring of transactions. She is also experienced in mergers and acquisitions. Charlotte has extensive experience with Norwegian VAT liability on cross-border projects and VAT on immovable property. Her practice includes real estate and property development, infrastructure, corporate law and transactions in addition to oil & gas. Charlotte is also experienced in litigation and conflict resolution.

Braekhus Advokatfirma DA Tel: +47 48 04 00 32 Roald Amundsensgate 6 Email: [email protected] 0161 Oslo URL: www.braekhus.no Norway

Braekhus Advokatﬁrma DA has a long tradition in advising clients on cross- border and international business activities. We advise clients on strategic tax and VAT issues and can also provide required tax and VAT compliance services for non-Norwegian entities doing business in Norway. www.braekhus.no

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Russia Russia

Alexandra Shenderyuk

Pepeliaev Group Andrey Tereschenko

1 Tax Treaties and Residence 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? 1.1 How many income tax treaties are currently in force in The law provides exceptions for VAT taxation on the following your jurisdiction? transactions, among others: supply of fixed assets, intangibles and other properties to a non-profit organisation for non-commercial As of 2019, 83 treaties signed by Russia are currently in force. activities; sale of shares; sale of land plots and shares in it; transfer

of properties under concession agreements; and disposal of assets 1.2 Do they generally follow the OECD Model Convention or belonging to persons declared insolvent or bankrupt. another model? 2.4 Is it always fully recoverable by all businesses? If not, Yes, treaties generally follow the OECD Model Convention. what are the relevant restrictions? 1.3 Do treaties have to be incorporated into domestic law Under the Russian Tax Code, input VAT is generally deductible if before they take effect? the following conditions are met: ■ Amounts of VAT must be presented to the taxpayer when it Yes, the treaties and the additional protocols have to be ratified in purchases goods (works, services, property rights, etc.), under a Russia in order for them to be in force. VAT invoice, or paid by the taxpayer when it imports goods into Russia’s customs territory (in connection with an amount of 1.4 Do they generally incorporate anti-treaty shopping VAT due when goods are imported). rules (or “limitation on beneﬁts” articles)? ■ The goods (works, services, property rights, etc.) must be purchased to carry out VAT taxable operations. Yes, anti-treaty shopping rules are incorporated. ■ The purchaser must have booked the purchase properly and must have supporting documents. 1.5 Are treaties overridden by any rules of domestic law ■ The purchaser is a taxpayer for VAT purposes.

(whether existing when the treaty takes effect or introduced 2.5 Does your jurisdiction permit VAT grouping and, if so, subsequently)? is it “establishment only” VAT grouping, such as that applied International agreements (treaties, conventions, etc.) ratified and by Sweden in the Skandia case? incorporated into Russian legislation prevail over the domestic rules. No tax grouping for VAT purposes is established by law. 1.6 What is the test in domestic law for determining the residence of a company? 2.6 Are there any other transaction taxes payable by companies? Legal incorporation of the entity. There are no transaction taxes established by law. But in several 2 Transaction Taxes cases, some amounts are charged for particular procedures: stamp duties for some registration procedures or registration amendments 2.1 Are there any documentary taxes in your jurisdiction? made by the state registry, but generally they are nominal; and notary fees for operations subject to mandatory notary approval (e.g. such No documentary taxes are specified in tax law. corporate transactions as sale of shares, option contracts, etc.).

2.2 Do you have Value Added Tax (or a similar tax)? If so, at 2.7 Are there any other indirect taxes of which we should what rate or rates? be aware?

Yes, the general VAT rate is 20%. A reduced tax rate of 10% applies Yes, there is an excise tax, which is imposed on manufacturers of to certain social products, such as foodstuffs, children’s clothes, alcohol, gasoline and diesel fuel and tobacco products. books and periodicals, medicines, etc. A 0% rate applies mostly for export and re-export operations.

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3 Cross-border Payments Yes, income from the rental or sublease of assets which are used in the territory of Russia, including income from the leasing transactions, rent and sublease of ships and aircrafts, are subject to WHT in Russia. 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 3.9 Does your jurisdiction have transfer pricing rules?

Yes, a 15% withholding tax (“WHT”) rate is imposed, unless relief Yes. Russian transfer pricing (“TP”) rules follow the OECD TP is applied under the relevant double tax treaty (“DTT”). Guidelines and the main principles established by the OECD.

3.3 Would there be any withholding tax on interest paid by 4.2 Is the tax base accounting proﬁt subject to a local company to a non-resident? adjustments, or something else?

Yes, a 20% WHT rate is imposed, unless relief is applied under the Yes, there are differences in statutory and tax accounting. relevant DTT.

4.3 If the tax base is accounting proﬁt subject to 3.4 Would relief for interest so paid be restricted by adjustments, what are the main adjustments? reference to “thin capitalisation” rules? The statutory accounting rules are focused on reporting every trans- No, but the “excess” amount of interest is deemed as dividends, action of the entity in order to assess more accurately the financial which are not deductible from the tax base and are subject to WHT position of the firm, while the aim of tax accounting is the fairest at the rate of 15% (lower rates could be applied under the relevant taxation of income. DTT). In this case at hand, relief for the amount of interest under Tax accounting implies more strict rules of cost recording based the relevant treaty would also be applied. on the analysis of economic and business reasons. As a result, many expenses reflected in statutory accounting in a full amount can be 3.5 If so, is there a “safe harbour” by reference to which tax restricted in the tax accounting (e.g. costs on payment of interest relief is assured? under controlled transactions, economically unjustified costs or expenses which were not aimed at gaining profit for the company). This is not applicable in Russia. Also, there could be different rules of recording established by law in statutory and tax accounting, with regard to the same 3.6 Would any such rules extend to debt advanced by a processes (e.g. different methods of amortisation/depreciation, methods of revenue recognition, etc.). third party but guaranteed by a parent company?

Yes, “thin capitalisation” rules are applied if the related party acts as 4.4 Are there any tax grouping rules? Do these allow for a guarantor for the loan. relief in your jurisdiction for losses of overseas subsidiaries?

3.7 Are there any other restrictions on tax relief for interest Yes, in Russia the legislation provides the opportunity to create a tax group (consolidated taxpayer group (“CTG”)). CTG is a formation payments by a local company to a non-resident, for example based on a consolidation agreement for at least two years. Tax pursuant to BEPS Action 4? grouping can be used only for corporate income tax with the consolidated tax rate of 20% (other taxes are paid independently by Deductibility of interest expense is limited by thin capitalisation rules each of the group members). Non-Russian companies may not be in Russia. Thin capitalisation rules are applied to interest on loans a member of the group, thus relief for the losses of overseas received from foreign shareholders (legal entities or individuals) subsidiaries are not allowed. holding directly/indirectly more than 25% of the debtor’s capital or more than 50% in each next company in the chain. Interest expenses are deductible provided that the amount of debt does not exceed the 4.5 Do tax losses survive a change of ownership? debt/equity 3:1 ratio (12.5:1 for banks and leasing companies). Also, in recent times the court practice has been developed on this Tax losses of one company cannot be transferred to another matter. Despite the fact that, under the law, only the fixed-ratio company. Tax losses could survive a change of ownership only approach is established, the tax authorities have started challenging during the process of reorganisation. The successor has a right to the deductibility of interests even if the formal criteria are not met. reduce the tax base by the amount of losses suffered by former The courts support such approach and treat the debt as capital companies prior to the reorganisation. investments or equity financing if the real intention of the parties was to avoid taxes by disguising the distribution of profit with the 4.6 Is tax imposed at a different rate upon distributed, as appliance of artificial debt transactions. opposed to retained, proﬁts?

3.8 Is there any withholding tax on property rental Yes, the tax rates for distribution of profit differ from the general tax rates. Under the Russian tax legislation, dividends are taxed at the payments made to non-residents? rate of 13% for Russian tax residents (legal entities or individuals) and 15% for non-Russian tax residents (legal entities or individuals).

4.7 Are companies subject to any signiﬁcant taxes not The activity of a local branch is taxable in Russia, if such branch constitutes a permanent establishment (“PE”) in Russia. The main covered elsewhere in this chapter – e.g. tax on the difference in taxation of profit is that the costs of the head office, occupation of property? which are referred to the local branch in Russia, can reduce the tax base of the PE located in Russia. The transfer of costs from the Yes, the owner of a property has to pay property tax, which is parent company to its subsidiary is not allowed. imposed on fixed assets and paid at the maximum rate of 2.2% (the Also, there are differences in the statutory and tax accounting for exact rates are established by the regional authorities) of the average the activity carried out by a local subsidiary and a local branch. net book value of the taxpayer’s fixed assets or of its cadastral value Different tax returns are established for local branches and local (established by the local governments). subsidiaries.

5 Capital Gains 6.3 How would the taxable proﬁts of a local branch be determined in its jurisdiction? 5.1 Is there a special set of rules for taxing capital gains and losses? According to Russian tax rules, the tax base is determined as a difference between the income received by the local branch and the Capital gains are subject to Russian CIT at the rate of 20%. Sales costs incurred by this branch in Russia. of shares or assets are taxed as capital gains. The taxable base from The performance of preparatory or auxiliary activities through a sales of shares is calculated as the difference between the sale price permanent base in Russia on a regular basis could be regarded as a under the transaction and the acquisition historical costs incurred PE when such activities are carried out in the interests of third (acquisition price plus additional expenses on legal/finance parties, even if such activities do not imply any remuneration. In consulting services). For asset deals, the tax base is equal to the such circumstances, the tax base is determined as 20% of the difference between the sale price and the asset’s net book value (after amount of the expenses of such permanent establishment amortisation costs). associated with the activities in question.

5.2 Is there a participation exemption for capital gains? 6.4 Would a branch beneﬁt from double tax relief in its Nowadays the exemption from taxation is applicable for the sale of jurisdiction? shares in Russian entities. It is available if the taxpayer held the shares for five years prior to the date of the sale and the shares were Double tax treaties can establish special regulation of the activities acquired after 1 January 2011. This exemption is also applicable for of the PE in Russia, thus any benefits or limitations could be shares in Russian joint stock companies if the shares are non-listed, provided to the PE based on relevant DTT provisions. if the shares are referred to the high-tech/innovation sector of the economy or if less than 50% of the assets of the company directly 6.5 Would any withholding tax or other similar tax be or indirectly consist of real estate. imposed as the result of a remittance of proﬁts by the branch? 5.3 Is there any special relief for reinvestment? No, since this transfer would be regarded as a transaction within one No relief for reinvestment is provided. company.

5.4 Does your jurisdiction impose withholding tax on the 7 Overseas Proﬁts proceeds of selling a direct or indirect interest in local assets/shares? 7.1 Does your jurisdiction tax proﬁts earned in overseas branches? Sales of shares are WHT exempt, unless it is a sale of shares in a property-rich company (more than 50% of the assets directly or Yes, profits earned overseas are included in the tax base for indirectly consist of real estate located in Russia). corporate income tax. At the same time, the tax paid abroad on such The sale of an immovable property in Russia is subject to WHT profits can be credited in Russia. at the rate of 20%. 7.2 Is tax imposed on the receipt of dividends by a local 6 Local Branch or Subsidiary? company from a non-resident company?

6.1 What taxes (e.g. capital duty) would be imposed upon Yes, dividends received from a non-resident company are subject to the formation of a subsidiary? tax in Russia at the rate of 13%. The taxpayer can credit the amount of tax withheld in the country of source against its tax base in One-off payment (stamp duty) should be paid for the registration Russia. procedure in the amount of RUB 4,000. Also, there is a participation exemption in law: it applies to dividends from a non-resident company received by a Russian company which holds, on the date on which entitlement to the 6.2 Is there a difference between the taxation of a local dividends is determined, at least 50% shares in the equity capital of subsidiary and a local branch of a non-resident company (for the company paying the dividends (foreign company) within a period example, a branch proﬁts tax)? of 365 days. The foreign company should not be incorporated in an offshore zone. A local subsidiary is regarded as a legal entity incorporated in Russia and the tax regime for the subsidiary would be the same as for Russian companies.

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7.3 Does your jurisdiction have “controlled foreign 9.3 Does your jurisdiction have rules which target not only company” rules and, if so, when do these apply? taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax avoidance? Yes, controlled foreign company (“CFC”) rules state that a foreign company may constitute a CFC if an individual or a legal entity owns There is a general criminal liability on individuals for fraud (docu- (directly and/or indirectly) more than 25% of the foreign organ- ment forgery for receiving a tax benefit) and tax avoidance as a result isation and/or an individual or a legal entity owns (directly and/or of the failure to submit a tax declaration or other obligatory docu- indirectly) more than 10% of the foreign organisation and if the ments prescribed by tax law, and as a result of including misleading combined participation of all Russian tax residents in the organ- information into the tax, committed in an excessively large scale. isation is greater than 50%. If the Russian owner does not receive Persons who are responsible for signing the tax declarations dividends from the controlled foreign company, they should (CEO, chief accountant or other person empowered) are subject to recognise the portion of the profit of such legal entity as a taxable the criminal liabilities. income in Russia. Since 2019 the following companies are not regarded as control- 9.4 Does your jurisdiction encourage “co-operative ling companies: if the participation in a foreign company is made through direct or indirect participation in one or several Russian compliance” and, if so, does this provide procedural beneﬁts public companies; and if the participation in a foreign company is only or result in a reduction of tax? made through direct or indirect participation in one or several foreign public companies, whose shares are traded on stock Yes, since 2012 the tax monitoring procedure, and the information exchanges in OECD countries. exchanged during the tax monitoring, has been introduced. This procedure established a new, more transparent format of interaction 8 Taxation of Commercial Real Estate between the tax authorities and the taxpayer. The tax monitoring procedure allows taxpayers to mitigate the procedural risks and prevent tax violation by cooperating with the tax authorities. 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? 10 BEPS and Tax Competition Yes, the sale of an immobile property located in Russia is subject to WHT in Russia at the rate of 20%. 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting BEPS? 8.2 Does your jurisdiction impose tax on the transfer of an Yes, the following rules have been introduced in response to the indirect interest in commercial real estate in your jurisdiction? BEPS project: CFC rules; TP rules; CBCR; the concept of the beneficial owner; and thin capitalisation rules. Yes, since 2015 the “indirect” sale of a Russian immovable property without taxation has been restricted. According to the amendment, capital gains arise for the foreign company from the sale of shares 10.2 Has your jurisdiction signed the tax treaty MLI and if more than 50% of the assets of the target company directly or deposited its instrument of ratiﬁcation with the OECD? indirectly consist of immovable properties located in Russia. Nowadays this amendment is applicable only if the buyer of the Yes, Russia has signed and ratified the tax treaty MLI. Nowadays “property-rich” company is a Russian resident. The sale of shares in a some of the treaties are in the process of drafting amendments company (even with significant real estate assets) between two foreign based on the MLI provisions. companies is still tax-exempt. But, we cannot exclude the possibility that in the near future the legislation on this matter will develop. 10.3 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond the OECD’s 8.3 Does your jurisdiction have a special tax regime for recommendations? Real Estate Investment Trusts (REITs) or their equivalent? At this moment all of the actions are in the frames of the OECD According to Russian rules, money payment as a result of the BEPS actions. redemption of shares in the Real Estate Investment Trusts (REITs) is regarded and taxed as an income received from the sale of an 10.4 Does your jurisdiction support information obtained immobile property located in Russia (WHT at the rate of 20%). under Country-by-Country Reporting (CBCR) being made

available to the public? 9 Anti-avoidance and Compliance No, CBCR information could not be regarded as public information 9.1 Does your jurisdiction have a general anti-avoidance or and is subject to tax secret protection. anti-abuse rule? 10.5 Does your jurisdiction maintain any preferential tax Yes, in Russia there exists an anti-avoidance/anti-abuse rule. regimes such as a patent box?

9.2 Is there a requirement to make special disclosure of There are no special regimes, such as a patent box, but there are avoidance schemes? other special regimes such as a simplified tax system, a special tax regime for agricultural companies, when VAT is not applicable by No, there is not a requirement to make a special disclosure of companies. avoidance schemes.

11 Taxing the Digital Economy Starting from 2019, foreign companies providing electronically supplied services to Russian companies and individual entrepreneurs (“B2B suppliers”) will be required to register for tax purposes in 11.1 Has your jurisdiction taken any unilateral action to tax Russia, and to collect, report and pay VAT on sales to such Russian digital activities or to expand the tax base to capture digital B2B customers. presence? According to the official position of the Ministry of Finance, the new rules will also be applicable for intercompany transactions Yes, several amendments have been introduced with regard to the between related parties. VAT taxation of electronic service providers. As of 1 January 2017, special registration rules apply to certain 11.2 Does your jurisdiction favour any of the G20/OECD’s foreign providers of electronically supplied services. Under new “Pillar One” options (user participation, marketing intangibles place of supply rules relating to these services, foreign operators and their foreign intermediaries, who provide such supplies to individual or signiﬁcant economic presence)? customers in Russia (“B2C supplies”), must register for Russian VAT Nowadays no rules have been introduced in Russia with regard to within 30 days from the date of their first supply to Russian this issue. individuals.

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Alexandra Shenderyuk specialises in tax law and international taxation. Alexandra has participated in projects associated with providing advice to clients on international taxation matters, applying double tax treaties, and in projects that involved providing advice to and representing clients on matters associated with splitting up a business. She graduated from the Faculty for International Relations of St Petersburg State University, and obtained her Master’s degree in International and European Law at the Immanuel Kant Baltic Federal University. She is now studying for her second degree, in Financial Management, at the National Research University ‘Higher School of Economics’. She is fluent in English, and also speaks French (B2 level) and Spanish (basic level).

Pepeliaev Group Tel: +7 495 767 0007 Building 1, 39 3rd Tverskaya-Yamskaya Street Email: [email protected] Moscow URL: www.pgplaw.ru Russia

Andrey Tereschenko specialises in tax law. His professional interests include conducting consulting and judicial projects on taxation of the activities of foreign companies in Russia, application of the norms of international agreements on avoidance of double taxation, including taxation of interest, dividends, royalties, establishment of a permanent establishment, distribution of income and expenses between head office and permanent establishment, payment of intragroup financial and service expenses. Andrey represented taxpayers in litigations about determining the actual recipient of income, applying the provisions of international double taxation treaties, and accounting for intragroup expenses in international companies. According to leading legal international ratings of law firms The Legal 500, EMEA, Tax Directors Handbook, Andrey is one of the leading experts in the field of tax law. “Andrey Tereshchenko is an energetic lawyer who is highly valued for being focused on the needs of the client (Chambers Global).”

Pepeliaev Group Tel: +7 495 767 0007 Building 1, 39 3rd Tverskaya-Yamskaya Street Email: [email protected] Moscow URL: www.pgplaw.ru Russia

Pepeliaev Group is a leading Russian law firm offering the full range of legal estate and construction, corporate, M&A, employment and migration law, services in all regions of Russia, in most former Soviet countries and abroad. dispute resolution and mediation, intellectual property and trademarks, anti- Over 160 lawyers in Moscow, St Petersburg, Krasnoyarsk, Yuzhno-Sakhalinsk, monopoly regulation and bankruptcy practices for doing business in Russia. Vladivostok, Beijing and Shanghai provide legal assistance to over 1,500 www.pgplaw.ru companies operating in various industries. Fifty per cent of these are international corporations implementing long-term investment projects in Russia. Pepeliaev Group is a leader in providing comprehensive legal services in Russia. Every year The Legal 500 and Chambers and Partners name the firm as the best in the category of taxation. International ratings agencies, including Chambers and Partners, The Legal 500, PLC Which Lawyer, IFLR1000, World Tax, Pravo – 300, Expert Ranking Agency and others, recommend the firm’s real

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South Africa South Africa

Brian Dennehy

Webber Wentzel Lumen Moolman

1 Tax Treaties and Residence outside South Africa will be a South African tax resident if its place of effective management is in South Africa. A place of effective management is generally interpreted to mean the place where the 1.1 How many income tax treaties are currently in force in day-to-day activities of the relevant business take place, and where your jurisdiction? key managerial and commercial decisions, which are necessary for the conduct of the relevant business, are on an on-going basis and South Africa has approximately 79 income tax treaties that are in substance taken. currently in force. The definition of residence, however, expressly excludes any company deemed to be a resident of another country under an 1.2 Do they generally follow the OECD Model Convention or applicable tax treaty in place between South Africa and that country. another model? 2 Transaction Taxes South Africa’s tax treaties are largely based on the OECD Model Convention. South Africa is not a Member State of the OECD, but 2.1 Are there any documentary taxes in your jurisdiction? obtained observer status in 1998 and is greatly influenced by its policies. South Africa does not impose stamp duty. Securities transfer tax (“STT”) is imposed on the transfer of 1.3 Do treaties have to be incorporated into domestic law securities. “Securities” include shares or depository receipts in a before they take effect? company, which company is incorporated in South Africa, or is a company listed on an exchange in South Africa (regardless of the Once a tax treaty has been concluded by the South African National place of incorporation). STT is generally levied at 0.25% on the Executive it must be approved by both houses of the South African higher of the market value (or closing price in the case of a listed Parliament. Following approval, the treaty must be published in the security) or the consideration for the security transferred. Government Gazette (a public notice) to acquire force of law and will have the same legal status as other South African domestic tax 2.2 Do you have Value Added Tax (or a similar tax)? If so, at legislation. what rate or rates?

1.4 Do they generally incorporate anti-treaty shopping Value-Added Tax (“VAT”) is levied at a rate of 15% on the supply rules (or “limitation on beneﬁts” articles)? of goods and services by a VAT vendor who is carrying on an enterprise. A taxpayer is required to register as a VAT vendor if its South African treaties generally incorporate anti-treaty shopping taxable supplies made in a 12-month period exceeds or is likely to rules through the use of the principal purpose test. exceed R1 million.

1.5 Are treaties overridden by any rules of domestic law 2.3 Is VAT (or any similar tax) charged on all transactions (whether existing when the treaty takes effect or introduced or are there any relevant exclusions? subsequently)? VAT is generally levied at 15%. However, there are certain supplies on No. When conflicts do arise between South African domestic legis- which VAT is levied at a rate of 0%, or which are exempt from VAT. lation and treaties, the normal rules of interpretation should be VAT is levied at a rate of 0% on certain taxable supplies, including followed to resolve these conflicts. on basic food stuffs, fuel levy goods, the supply of an enterprise as a going concern and the supply of certain goods and services to non-residents. Input tax may still be deducted on the VAT incurred 1.6 What is the test in domestic law for determining the to make zero-rated supplies. residence of a company? Examples of exempt supplies include financial services, passenger transport in South Africa by taxi, bus or train, educational services Broadly speaking, there are two tests for determining corporate provided by recognised educational institutions and childcare residence in South Africa. services provided at crèches or after-school care centres. Input tax Firstly, a company incorporated in South Africa will be a resident on the VAT incurred to make exempt supplies may not be claimed. for South African tax purposes. Secondly, a company incorporated

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2.4 Is it always fully recoverable by all businesses? If not, Africa, subject to reduction in terms of relevant exemptions or applicable tax treaties. A reduced rate or exemption will only apply what are the relevant restrictions? to the extent the relevant declaration is submitted by the foreign Input tax may generally be claimed by a VAT vendor carrying on an person to the local borrower, prior to the payment thereof. enterprise. Input tax is attributed according to the nature of the supplies 3.4 Would relief for interest so paid be restricted by made by the VAT vendor. For instance, input tax is fully deductible reference to “thin capitalisation” rules? if it is incurred wholly to make taxable supplies. Input tax is not deductible if it is incurred to make non-taxable supplies. Where Yes. South African thin capitalisation and transfer pricing legislation input tax is incurred to make both taxable and non-taxable supplies, broadly encompasses that interest paid on loans owing by South an apportionment ratio must be applied. African residents (including a permanent establishment in South Input tax is generally recovered by being deducted from output Africa) to foreign connected persons (including a permanent tax (which is VAT charged on taxable supplies made). establishment outside South Africa) must adhere to the arm’s length principle, both in respect of the quantum of the debt on which the 2.5 Does your jurisdiction permit VAT grouping and, if so, interest is paid, as well as the interest rate applied.

is it “establishment only” VAT grouping, such as that applied 3.5 If so, is there a “safe harbour” by reference to which tax by Sweden in the Skandia case? relief is assured? No, South Africa does not permit VAT grouping. No prescribed “safe harbour” exists in South Africa. A practical approach would need to be applied taking into account guidance 2.6 Are there any other transaction taxes payable by from the South African Revenue Service and the OECD. companies? Although these are not “safe harbours”, a debt to EBITDA ratio of the borrower not exceeding 3:1 and an interest rate of no higher Transfer duty is a tax levied on the value of property in South Africa than JIBAR +2% (the Johannesburg Interbank Average Rate) may (i.e. immovable property or an interest therein) acquired by any be less likely to be subjected to audit. person by way of a transaction or otherwise.

Transfer duties payable are determined on a sliding scale (from 0%–13%) based on the value of the property transferred. 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company? 2.7 Are there any other indirect taxes of which we should Yes, such rules can extend to debt advanced by a third party. be aware? Another primary indirect tax in South Africa is customs and excise 3.7 Are there any other restrictions on tax relief for interest duties, which is levied on goods that are imported into South Africa. payments by a local company to a non-resident, for example Customs and excise duties are payable at different rates, depending pursuant to BEPS Action 4? on the applicable tariff code of the goods imported into South Africa. The deduction of interest incurred by a borrower every year on 3 Cross-border Payments certain connected party loans is limited to the sum of: any interest received by or accrued to the borrower, plus a percentage (currently 3.1 Is any withholding tax imposed on dividends paid by a 43%) of the borrower’s “adjusted taxable income” (which can roughly be likened to EBITDA). These provisions apply to interest locally resident company to a non-resident? incurred on debt provided directly or indirectly by a lender that is in Dividends tax is levied at a rate of 20%, subject to reduction in a “controlling relationship” (i.e. holding more than 50% of the terms of relevant exemptions or applicable tax treaties. A reduced equity shares or voting rights) with the borrower and where the rate or exemption will only apply to the extent the relevant lender is not subject to tax on the interest income in South Africa in declaration and undertaking is submitted by the shareholder to the that year. Any disallowed interest is carried forward to the following local company declaring the dividend, prior to the payment of the year and treated as an amount incurred by the borrower in such year. dividend. Certain hybrid debt provisions also state that where a debt has certain equity-like characteristics, interest incurred on that debt may be reclassified as a dividend in specie in both the borrower and lender’s 3.2 Would there be any withholding tax on royalties paid by hands. The notable impact of such a reclassification is that the a local company to a non-resident? interest would not be deductible in the hands of the borrower.

Withholding tax on royalties is levied at a rate of 15% on the amount of any royalty payments to foreign persons from a source within 3.8 Is there any withholding tax on property rental South Africa, subject to reduction in terms of a relevant exemption payments made to non-residents? or an applicable tax treaty. A reduced rate or exemption will only apply to the extent the relevant declaration is submitted by the foreign No, there is no withholding tax on property rental payments made person to the party paying the royalty, prior to the payment thereof. to non-residents.

3.9 Does your jurisdiction have transfer pricing rules? 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? South Africa does have transfer pricing legislation which includes, inter alia, that parties must transact at arm’s length. Depending on Withholding tax on interest is levied at a rate of 15% on the amount the facts, there may be various documentation requirements. of interest paid to foreign persons from a source within South

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4 Tax on Business Operations: General ■ at least 10% of the equity shares and voting rights in the foreign company are held by the taxpayer before the disposal; ■ at the time of the disposal, the taxpayer must have held the 4.1 What is the headline rate of tax on corporate proﬁts? shares in the foreign company for a period of at least 18 months; and The South African corporate income tax rate is 28%. ■ the taxpayer disposes of the shares in the foreign company to

another foreign company (other than a connected person in 4.2 Is the tax base accounting proﬁt subject to relation to the seller or a “controlled foreign company”). adjustments, or something else? It is important to note that this exemption does not apply if the shares being disposed of are shares in a so-called “land-rich” The tax base is determined as gross income, less exempt income, less company. The test to determine whether shares held in a company qualifying allowances and deductions, plus net taxable capital gains. are “land-rich” is as follows: ■ the taxpayer directly or indirectly (together with any connected 4.3 If the tax base is accounting proﬁt subject to person) owns at least 20% of the equity shares in the company adjustments, what are the main adjustments? whose shares are being disposed of; and ■ 80% or more of the market value of the equity shares in that The main adjustments to gross income are as follows: company at the time of disposal thereof is attributable directly ■ Deduct: exempt income and qualifying allowances and deductions or indirectly to immovable property in South Africa. (for example, wear and tear allowances on fixed assets). ■ Plus: net taxable capital gains (in the instance of companies, 80% 5.3 Is there any special relief for reinvestment? of the net capital gains are included in this calculation). There is no special relief for reinvestment in South Africa. The only 4.4 Are there any tax grouping rules? Do these allow for instances where capital gains may be “rolled-over” is where assets are disposed of in a group context and certain requirements are met relief in your jurisdiction for losses of overseas subsidiaries? (see question 4.4 above). Group taxation is not recognised in South Africa. However, relief is granted for transactions between group companies to allow for 5.4 Does your jurisdiction impose withholding tax on the reorganisations, provided certain requirements are met. proceeds of selling a direct or indirect interest in local Losses incurred by one entity within an economic group cannot be assets/shares? transferred to another entity within the same economic group, nor can such losses be offset against the profits of another group entity. Purchasers of immovable property in South Africa (which includes shares in a “land-rich” company) must withhold 10% of the purchase 4.5 Do tax losses survive a change of ownership? price for the benefit of the revenue authority, if the seller is a non- resident company. Different rates apply if the non-resident seller is Where the shares in a company are disposed of, the existing tax a trust or a natural person. These provisions only apply if the losses in that company will generally remain intact. There is, purchase price for the immovable property exceeds R2 million. however, anti-avoidance legislation in terms of which tax losses may be disallowed by the revenue authority if the sole or main purpose 6 Local Branch or Subsidiary? of the change in ownership was the avoidance or reduction of tax.

6.1 What taxes (e.g. capital duty) would be imposed upon 4.6 Is tax imposed at a different rate upon distributed, as the formation of a subsidiary? opposed to retained, proﬁts? There should be no taxes imposed upon the formation of a No, tax is not imposed at a different rate for distributed profits. subsidiary.

No, companies are not subject to any other significant taxes. From an income tax perspective, the taxation of a local subsidiary and a local branch is largely the same in that their taxable income 5 Capital Gains will be subject to income tax at 28%. The local subsidiary will be taxed on its worldwide income, whereas the local branch (which has 5.1 Is there a special set of rules for taxing capital gains a permanent establishment in South Africa) will only be taxed on its and losses? income (less expenses) that is attributable to that permanent establishment. Yes, the Eighth Schedule to the Income Tax Act 58 of 1962 governs A local subsidiary will withhold dividends tax on profits the taxation of capital gains and losses. For companies, 80% of any distributed to a non-resident parent company. In contrast, dividends capital gains are included in the taxable income calculation (see ques- tax is not levied on the distribution of branch profits. tion 4.3 above). 6.3 How would the taxable proﬁts of a local branch be 5.2 Is there a participation exemption for capital gains? determined in its jurisdiction?

Yes. Capital gains and losses realised in respect of shares in a foreign A local branch of a non-resident company that has a permanent company disposed of are disregarded if: establishment in South Africa will be taxed on its income (less

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expenses) that is attributable to that permanent establishment. The more than 50% of the participation rights in that foreign company taxable income will then be determined in accordance with the are held by persons who are connected persons in relation to each general South African income tax principles (see question 4.3 above). other). Furthermore, voting rights in any foreign company which is a listed company will not be taken into account to determine 6.4 Would a branch beneﬁt from double tax relief in its whether a company is a CFC.

jurisdiction? 8 Taxation of Commercial Real Estate It may, depending on the relevant tax treaties and the legislation applicable in the jurisdiction of the non-resident company which the 8.1 Are non-residents taxed on the disposal of commercial branch forms a part of. real estate in your jurisdiction?

6.5 Would any withholding tax or other similar tax be Non-residents will be subject to capital gains tax on the disposal of imposed as the result of a remittance of proﬁts by the branch? certain South African assets, which includes immovable property situated in South Africa or an interest in immovable property No. No other tax would be imposed as the result of a remittance situated in South Africa (i.e. shares in a “land-rich” company). of profits by the branch. Immovable property will include commercial real estate.

7 Overseas Proﬁts 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your 7.1 Does your jurisdiction tax proﬁts earned in overseas jurisdiction? branches? A non-resident will be subject to capital gains tax on the disposal of South Africa works on a residence-based system, which means that shares in a “land-rich” company. Please refer to question 5.2 above residents of the country are taxed on their worldwide (local and for the test to determine whether shares held in a company are foreign) income, while non-residents are taxed only on their South “land-rich”. African sourced income. The income of a foreign branch of a South African tax resident 8.3 Does your jurisdiction have a special tax regime for will form part of that South African tax resident’s worldwide Real Estate Investment Trusts (REITs) or their equivalent? income. Relief may be applicable to the extent the income earned by the foreign branch is attributable to a permanent establishment Yes, in South Africa there is a special tax regime for Real Estate outside South Africa, and that income is taxed in a foreign country. Investment Trusts.

7.2 Is tax imposed on the receipt of dividends by a local 9 Anti-avoidance and Compliance company from a non-resident company? 9.1 Does your jurisdiction have a general anti-avoidance or A foreign dividend received by a resident company is generally anti-abuse rule? subject to income tax at 20% unless an exemption exists. There are various income tax exemptions on the receipt of foreign dividends, South African tax legislation does contain general anti-avoidance rules. most notably including where: ■ it is received by a person who holds at least 10% of the total equity shares and voting rights in the company declaring the 9.2 Is there a requirement to make special disclosure of foreign dividend; or avoidance schemes? ■ the foreign dividend is received in respect of locally listed shares (i.e. where the foreign company’s shares are listed on a local There is an obligation to report an arrangement to the South African exchange). Revenue Service if the arrangement has certain prescribed characteristics or if it is specifically listed in a public notice (which was published in 2016). 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? 9.3 Does your jurisdiction have rules which target not only South Africa has complex controlled foreign company (“CFC”) taxpayers engaging in tax avoidance but also anyone who legislation. The CFC rules apply where: promotes, enables or facilitates the tax avoidance? ■ South African tax residents hold more than 50% of the total participation rights and/or voting rights in a foreign company Yes, the reportable arrangement legislation specifies that the repor- (directly or indirectly); or ting obligation falls equally on the person who promotes the ■ the financial results of a foreign company are reflected in the arrangement, any person who may, directly or indirectly, derive a tax consolidated financial statements, as contemplated in IFRS 10, benefit from the arrangement, or any person who is a party to a of any company that is a South African tax resident. This will listed arrangement (as listed in the 2016 public notice). include any foreign company held through a trust or foundation that is not resident in South Africa and the financial results of 9.4 Does your jurisdiction encourage “co-operative which form part of the consolidated financial statements of a compliance” and, if so, does this provide procedural beneﬁts South African tax resident company. only or result in a reduction of tax? If a foreign company is a listed company and a South African resident holds less than 5% of the participation rights in that foreign “Co-operative compliance” is encouraged to an extent, as taxpayers company then that resident’s participation rights are ignored/excluded may apply to the South African Revenue Service for Advanced Tax when determining whether the foreign company is a CFC (unless Rulings confirming the South African tax implications of transactions.

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10 BEPS and Tax Competition 10.5 Does your jurisdiction maintain any preferential tax regimes such as a patent box? 10.1 Has your jurisdiction introduced any legislation in There are no general preferential tax regimes applicable to response to the OECD’s project targeting BEPS? intellectual property. Subject to pre-approval being obtained, costs which relate to certain research and development activities may be Prior to the OECD’s BEPS Action Plan initiative being introduced 150% deductible. Capital assets which are used in research and in 2013, South Africa already had a comprehensive set of provisions development may be subject to accelerated depreciation. set out in the Income Tax Act 58 of 1962 to target base erosion and

profit shifting. As such, any legislative changes that are introduced to bring South 11 Taxing the Digital Economy Africa in line with the OECD’s BEPS Action Plan should rather be described as refinements or ad hoc additions, as opposed to a blanket 11.1 Has your jurisdiction taken any unilateral action to tax adoption of any particular action items. digital activities or to expand the tax base to capture digital presence? 10.2 Has your jurisdiction signed the tax treaty MLI and deposited its instrument of ratiﬁcation with the OECD? The rendering of cross-border electronic services to South African residents have been subject to Value-Added Tax since 2014. The South Africa has signed the MLI but has not yet ratified and definition of “electronic services” under the Value Added Tax Act deposited its instrument with the OECD. 89 of 1991 was limited in its scope as it identified specific services which would qualify. Effective from 1 April 2019, the definition of 10.3 Does your jurisdiction intend to adopt any legislation to “electronic services” has been significantly expanded to include any services which are supplied by means of any electronic agent, elec- tackle BEPS which goes beyond the OECD’s recommendations? tronic communication or the internet for consideration, subject to a No. The proposed changes to the Income Tax Act 58 of 1962, limited number of exclusions. contained in the 2019 draft Taxation Laws Amendment Bill, does Furthermore, from 1 April 2019 the definition of an “enterprise” not reflect the adoption of any legislation which goes beyond the for VAT purposes has been broadened to include the activities of OECD recommendations. an intermediary. Where foreign suppliers provide electronic services using the electronic platform of an intermediary, the intermediary will be deemed to be the supplier where it facilitates the supply of 10.4 Does your jurisdiction support information obtained the services. under Country-by-Country Reporting (CBCR) being made available to the public? 11.2 Does your jurisdiction favour any of the G20/OECD’s “Pillar One” options (user participation, marketing intangibles Under the regulations published in South Africa, the South African Revenue Service must preserve the confidentiality of the informa- or signiﬁcant economic presence)? tion contained in the CBCR at least to the same extent that would apply if the information were provided to it under the provisions of No, South Africa does not favour any of the G20/OECD’s “Pillar the Multilateral Convention on Mutual Administrative Assistance in One” options. Tax Matters. Any information obtained through the CBCR will not be made available to the public.

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Brian Dennehy, a qualified chartered accountant CA(SA), has extensive experience in a number of areas, including private equity fund formations, leveraged buyouts, management buyouts, merger & acquisition tax advisory, corporate restructurings, the structuring of derivatives, empowerment transactions, the design and implementation of management incentive schemes and general corporate tax advisory. He has also advised prominent South African and foreign corporate entities on numerous corporate transactions.

Webber Wentzel Tel: +27 11 530 5998 90 Rivonia Road Email: [email protected] Sandton URL: www.webberwentzel.com Johannesburg South Africa

Lumen Moolman , a qualified chartered accountant CA(SA), is a tax specialist who has experience in a number of areas, including mergers and acquisition tax advisory, corporate restructurings, group reorganisations and rationalisations, general corporate tax advisory and tax due diligence reviews.

Webber Wentzel Tel: +27 11 530 5481 90 Rivonia Road Email: [email protected] Sandton URL: www.webberwentzel.com Johannesburg South Africa

With over 150 years of experience and industry knowledge, Webber Wentzel transfer pricing) and exchange control, as well as tax dispute resolution. We is the leading full-service law ﬁrm on the African continent. We combine the track actual and anticipated changes to tax laws to ensure that our clients are collective knowledge and experience of our ﬁrm to provide clients with aware of these changes and are well placed to manage them. We also seamless, tailored and commercially-minded business solutions within record regularly lobby and submit input on tax-related legislative changes to the times. South African National Treasury. We offer a market-leading tax advisory service with an integrated and multi- www.webberwentzel.com skilled team of experts (comprising of both lawyers and accountants). With more than 40 lawyers and accountants in our tax advisory team, we can assist clients with all pan-African and international tax-related matters. We are best known for our expertise in the areas of corporate tax (including mergers and acquisitions, initial public offerings, and private equity related work), employees’ tax, indirect tax, international tax (including Africa tax and

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Sri Lanka Sri Lanka

Naomal Goonewardena

Nithya Partners, Attorneys-at-Law Savini Tissera

1 Tax Treaties and Residence subsequent legislation which is not an amendment to the IRA and which specifically seeks to amend the treaty would have an overriding effect. 1.1 How many income tax treaties are currently in force in your jurisdiction? 1.6 What is the test in domestic law for determining the Sri Lanka has entered into treaties relating to the avoidance of residence of a company? double taxation with 44 states. These include both comprehensive In terms of the IRA, a corporate entity is deemed to be resident in and limited treaties. There are 42 comprehensive treaties and there Sri Lanka when it is incorporated or formed under the laws of Sri are limited treaties with Hong Kong, Oman, Jordan and Saudi Arabia Lanka or where it has its registered or principal office in Sri Lanka, to cover limited areas such as shipping and air transport. or where the control and management of its affairs is exercised in

Sri Lanka. 1.2 Do they generally follow the OECD Model Convention or another model? 2 Transaction Taxes The United Nations Model Convention has been broadly followed, subject to certain variations influenced by the OECD Model. 2.1 Are there any documentary taxes in your jurisdiction?

Stamp duty is the documentary tax applicable in Sri Lanka and is 1.3 Do treaties have to be incorporated into domestic law payable on a number of instruments including promissory notes, as before they take effect? well as on conveyance documents such as leases, mortgages, deeds of transfer and deeds of gifts. Yes. The income tax legislation (i.e. the Inland Revenue Act No. 24 The rates of stamp duty vary depending on the type of of 2017 (“IRA”)) specifically provides that such treaties need to be instrument and are generally ad valorem taxes. Stamp duty on approved by a resolution of Parliament and published in the Gazette transfers of land is charged on the value of the land at 3% for the in order for the same to have the force of law in Sri Lanka. first Rs. 100,000 and 4% for the remaining value. Gifts of land attract a stamp duty of 3% for the first Rs. 50,000 and 2% thereafter. 1.4 Do they generally incorporate anti-treaty shopping Mortgages attract a stamp duty of 0.1% of the secured amount and rules (or “limitation on beneﬁts” articles)? leases are charged at 1% of the lease payments for the entire term, including premiums, up to a maximum term of 20 years. There are no general anti-treaty shopping rules or “limitation on benefit” articles in any of the treaties. The IRA, however, provides 2.2 Do you have Value Added Tax (or a similar tax)? If so, at that where the benefit of an exemption, exclusion or reduction is what rate or rates? being claimed by a resident of the other contracting state, such benefit shall not be available to a body when 50% or more of the VAT legislation has been operative in Sri Lanka since 2002 (which underlying ownership of that body is held by individuals who are replaced the previous GST regime) and is payable (in general) in Sri not residents of that other contracting state. This limitation shall Lanka for the supply of goods and services and for the importation not apply, however, if the body which is claiming the benefit is a of goods into Sri Lanka. Currently, the applicable rate is 15% and company listed on a Stock Exchange in the other contacting state. exports are generally zero-rated. Furthermore, most of the treaties have specific provisions that limit There is also a special type of VAT, known as “Financial Services the application of benefits provided therein to income to which a VAT”, which is also chargeable at a rate of 15% on persons supp- resident of the other contracting state has a beneficial entitlement. lying financial services. Unlike conventional VAT, however, Financial Services VAT is not payable on the basis of turnover, but 1.5 Are treaties overridden by any rules of domestic law on a value addition basis. (whether existing when the treaty takes effect or introduced Sri Lanka also has Nation Building Tax (“NBT”), which came into operation in 2009. It is a tax payable by any person who imports any subsequently)? article (other than personal baggage) into Sri Lanka, carries on the The IRA provides that where there is a conflict between the terms business of manufacturing any article, carries on the business of of a double taxation agreement and the provisions of the IRA, the providing a service of any description or carries on the business of double taxation agreement prevails. However, it is likely that any wholesale or retail sale of any article. NBT is currently payable at a rate of 2% of the liable turnover of such person. In the case of

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distributors, only 25% of their liable turnover is subject to NBT, 2.7 Are there any other indirect taxes of which we should whereas for wholesale/retail business, only 50% of liable turnover be aware? from such retail/wholesale sale is subject to NBT. Economic Service Charge (“ESC”), which is in the nature of a 2.3 Is VAT (or any similar tax) charged on all transactions minimum alternative tax, is payable by businesses whose aggregate or are there any relevant exclusions? turnover exceeds Rs. 12.5 million per quarter. ESC is charged at varying rates from 0.1% to 1.0% of liable turnover. Both VAT and NBT are subject to a vast number of exemptions The ESC can be set off against the income tax liability of the which are frequently modified. business in that year of assessment, and where such liability is less VAT, for example, is not chargeable on the supply or import of than the ESC, it can be brought forward for the next four years. certain basic commodities and agricultural products. Essential services such as the supply of healthcare, public transport and 3 Cross-border Payments residential accommodation (other than any condominium housing unit of a value in excess of Rs. 25 million) are also exempt. NBT is 3.1 Is any withholding tax imposed on dividends paid by a also not chargeable on certain basic commodities and services such locally resident company to a non-resident? as the supply of water and books, and services such as medical services and transport services. The IRA provides that a company resident in Sri Lanka must with- There is also a Simplified VAT (“SVAT”) system whereby hold 14% of the gross dividends distributed to its shareholders. An suppliers to businesses which are zero-rated are entitled to refrain important exemption to this general rule is dividends declared out from charging VAT on transactions with such zero-rated persons, so of dividends received from other Sri Lankan resident companies. long as certain formalities are complied with. This withholding tax applies to all shareholders, not just non- As an incentive to small and medium enterprises, the threshold residents. for the payment of VAT and NBT is an annual turnover of not less than Rs. 12 million, from all businesses carried on by such person. The quarterly threshold for VAT and NBT liability would therefore 3.2 Would there be any withholding tax on royalties paid by be Rs. 3 million. However, this minimum threshold for persons a local company to a non-resident? involved in the business of wholesale or retail sale of articles is Rs. 50 million per annum. Royalties paid to a non-resident are subject to a final withholding tax of 14%.

2.4 Is it always fully recoverable by all businesses? If not, 3.3 Would there be any withholding tax on interest paid by what are the relevant restrictions? a local company to a non-resident? The excess of input VAT over output VAT can be claimed by persons who are liable to VAT and as long as they are registered In terms of the IRA, there would be a 5% withholding tax on under the VAT legislation. Accordingly, persons who are exempt interest paid by a local company to a non-resident which is not a from VAT on their turnover would not be entitled to reclaim any of financial institution on ordinary loans provided by it. However, as their input VAT. the law presently stands, unlike in the case of dividends and royalties, It is important to note that it is only the VAT that has been paid on interest earned by a non-resident will be considered to have a the goods or services used for the purposes of the taxable supply of payment source in Sri Lanka and, accordingly, the non-resident such person on which output VAT is paid that can be recovered as would be liable to income tax in Sri Lanka on such interest income input VAT. As such, input VAT is not claimable on private expenses. with a credit for any withholding tax deducted at source. This Input VAT can only be recovered up to a value equivalent to the income tax liability would need to be satisfied by submitting an output VAT of such person. Any excess input VAT can be brought income tax return and making self-assessment payments. forward to future periods but, again, is subject to the same restriction that recoverability cannot exceed 100% of output VAT. 3.4 Would relief for interest so paid be restricted by Like VAT, manufacturers (although not service providers) are reference to “thin capitalisation” rules? entitled to NBT tax credits against input NBT paid by the manufac- turer on any goods which were used by it in manufacturing Interest paid by a company other than a financial institution is only NBT-liable goods. Once again, no refunds are permitted, but any tax deductible to the extent that such interest does not relate to excesses can be brought forward to future periods. borrowing which exceeds three times the aggregate of its share capital and reserves where it is a manufacturing company and four 2.5 Does your jurisdiction permit VAT grouping and, if so, times in the case of any other company. Any deduction which is denied as a result of this limitation will be carried forward and is it “establishment only” VAT grouping, such as that applied deducted during the immediately succeeding six years, subject to the Skandia by Sweden in the case? same limitations set out above. In terms of most double taxation treaties, the tax payable by the No, in general, Sri Lanka does not have any tax which is levied on a resident of the other contracting state in Sri Lanka shall not exceed group basis. 10% of the gross amount of the interest.

2.6 Are there any other transaction taxes payable by 3.5 If so, is there a “safe harbour” by reference to which tax companies? relief is assured? There is a multiplicity of taxes which are levied at import point on There are no “safe harbour” rules. the importation of goods into Sri Lanka. This includes customs duty, surcharge, ports and airports levy, cess levy, excise duty, VAT and NBT.

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3.6 Would any such rules extend to debt advanced by a In terms of income, the adjustments made would be that there are certain limited categories of income which are exempt from third party but guaranteed by a parent company? income tax; for example, gains arising from the sale of shares on a Since the current “thin capitalisation” rules are not confined to stock exchange in Sri Lanka. In terms of deductibles, a significant related party debt, it would be irrelevant that the debt has been difference would be depreciation charges in the commercial accounts guaranteed by a parent company. and the tax deductible capital allowances charged to ascertain taxable income. Only certain types of assets have the benefit of capital allowances and only at specified rates which would differ from the 3.7 Are there any other restrictions on tax relief for interest depreciation calculations in the commercial accounts. payments by a local company to a non-resident, for example pursuant to BEPS Action 4? 4.4 Are there any tax grouping rules? Do these allow for There are no further restrictions. relief in your jurisdiction for losses of overseas subsidiaries?

There are no provisions for group relief in Sri Lanka. 3.8 Is there any withholding tax on property rental payments made to non-residents? 4.5 Do tax losses survive a change of ownership?

There would be a final withholding tax of 14% on rent payments Where the underlying ownership of a company changes by more made to non-residents. than 50%, as compared with ownership at any time during the previous three years, the company shall not be entitled to deduct 3.9 Does your jurisdiction have transfer pricing rules? losses that were incurred by the company prior to the change.

Yes, the IRA specifically provides that transactions entered into 4.6 Is tax imposed at a different rate upon distributed, as between two associated undertakings must be ascertained having regard to the arm’s length price. opposed to retained, proﬁts? The Minister of Finance has, under the repealed Inland Revenue No, there is no distinction made between distributed and retained Act No. 10 of 2006, published detailed Transfer Pricing Regulations profits. which provides for methods of ascertaining the arm’s length price,

assessing comparability and specifying the necessary records to be kept. Whilst the new Inland Revenue Act No. 24 of 2017 has not 4.7 Are companies subject to any significant taxes not yet published similar Regulations, it has in place a provision which covered elsewhere in this chapter – e.g. tax on the ensures that documents used in relation to the repealed Act would occupation of property? continue to be used under the present Act of 2017. The said Regulation recognises methods outlined in the OECD Guidelines. We have dealt with the more significant taxes in the preceding The IRA has provisions which allows the “Transfer Pricing sections. However, the following may also be noted: Officer” (being any officer of the Inland Revenue Department ■ Liquor Licences: There are annual licence fees imposed on designated by the Commissioner General as such officer) to initiate persons who are involved in the sale of liquor. a transfer pricing audit for the ascertainment of arm’s length pricing ■ Port and Airport Development Levy (“PAL”): This is charged in international transactions, where the computations put forward at 5% on the Cost, Insurance and Freight (“CIF”) value of by the transacting parties are unsatisfactory. imports, other than on specified exempt articles. ■ Betting and Gaming Levy: In addition to fixed annual levies, 4 Tax on Business Operations: General applicable to different types of betting and gaming activities carried out in Sri Lanka, a further 5% of the gross collections 4.1 What is the headline rate of tax on corporate profits? from bookmaking/gaming business is payable on a monthly basis in lieu of other indirect taxes. Generally, the highest tax bracket is 28%. However, the import and ■ Tourism Development Levy: This is charged from institutions sale or the manufacture and sale of liquor and tobacco products and licensed under the Tourism Development Act at a rate of either gaming is taxed at 40%. 0.5% or 1.0% of turnover. ■ Share Transactions Levy: This is levied on every sale and purchase of shares transacted through the Colombo Stock 4.2 Is the tax base accounting profit subject to Exchange at the rate of 0.3% on the turnover. adjustments, or something else? ■ Debt Repayment Levy: This is charged at the rate of 7% on the value addition attributable to the supply of financial services by The tax base for calculating corporate income tax would be the every financial institution. The base of the payment of 7% is commercial accounts of a company, with adjustments made to identified to that which is applied for Financial Services VAT. comply with the provisions of the IRA.

5 Capital Gains 4.3 If the tax base is accounting proﬁt subject to adjustments, what are the main adjustments? 5.1 Is there a special set of rules for taxing capital gains The main differences would be that certain types of income may be and losses? exempt from tax, whereas certain types of expenses would not be tax deductible. Furthermore, there may be certain items which are Investment gains on the realisation of assets and liabilities is liable st considered as income for tax purposes, though not shown in the to income tax after 1 April 2018. Investment gains would only arise commercial accounts, and certain expenses not shown in the from the realisation of capital assets held as part of an investment. commercial accounts, which may be tax deductible. The term “capital assets” are confined to land and buildings, membership interest in a company, partnership or trust, a security

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or other financial asset and an option, right or interest in respect of 6.4 Would a branch beneﬁt from double tax relief in its the aforementioned assets. jurisdiction?

5.2 Is there a participation exemption for capital gains? The tax treaty would only provide for residents of a contracting state to be entitled to treaty relief. Since a branch does not satisfy such The IRA does not provide for any participation exemption for criteria, they would not be entitled to the benefit of such tax treaty. capital gains. However, there are a limited number of treaties, such as a treaty with the United States, wherein the capital gains from the 6.5 Would any withholding tax or other similar tax be alienation of shares is subject to a participation exemption. imposed as the result of a remittance of proﬁts by the branch? 5.3 Is there any special relief for reinvestment? Profit remittances of a non-resident company are charged with income tax at the rate of 14% of such remittances. This is the Yes, subject to the limitations that the replacement asset should be liability of the non-resident company in Sri Lanka and the payment acquired within six months before or one year after the realisation. is not made as withholding tax.

5.4 Does your jurisdiction impose withholding tax on the 7 Overseas Proﬁts proceeds of selling a direct or indirect interest in local assets/shares? 7.1 Does your jurisdiction tax proﬁts earned in overseas branches? There is no withholding tax. However, if such sale does not involve a share listed on a Stock Exchange in Sri Lanka, the non-resident Yes, if the company is resident in Sri Lanka, all its profits and person may be liable to income tax in Sri Lanka on the basis of there income, wherever it arises from, will be subject to income tax in Sri being an investment gain from the realisation of an asset. In such Lanka. As such, the overseas branches will be subject to the same an instance, the non-resident person is required to file a return with income tax laws. the Inland Revenue Department within one month of realisation and pay its tax prior to remitting the sales proceeds from Sri Lanka. 7.2 Is tax imposed on the receipt of dividends by a local

6 Local Branch or Subsidiary? company from a non-resident company? If a local company holds more than a 10% shareholding in a non- 6.1 What taxes (e.g. capital duty) would be imposed upon resident company, the dividends received from such non-resident the formation of a subsidiary? company would be exempt from income tax in the hands of the local company. There are no taxes imposed on the formation of a subsidiary.

7.3 Does your jurisdiction have “controlled foreign 6.2 Is there a difference between the taxation of a local company” rules and, if so, when do these apply? subsidiary and a local branch of a non-resident company (for example, a branch proﬁts tax)? There are no such rules in force at the moment. However, it should be noted that in the case of a foreign company, if the control and There are no significant differences between the taxation of a locally management of its business is exercised in Sri Lanka, such company formed subsidiary and a branch of a non-resident company. would be deemed to be resident in Sri Lanka for the purposes of the A locally formed company is deemed to be resident in Sri Lanka IRA. and as such is liable to pay income tax on all its profits and income, wherever they arise or derive from, whether in Sri Lanka or overseas. 8 Taxation of Commercial Real Estate Branches of a non-resident on the other hand would still be considered as non-resident entities and are only liable to the extent 8.1 Are non-residents taxed on the disposal of commercial that the income arises in or is derived from a source in Sri Lanka. real estate in your jurisdiction? It should be noted, however, that the standard double taxation treaty provides for the concept of a “permanent establishment” and There is no special taxation on the disposal of real estate in Sri Lanka it is only if the branch office satisfies such criteria that the profits by foreigners. The general laws under the IRA would apply. Profits attributable to such permanent establishment will be subject to would either be an investment gain which would be taxed at the rate income tax in Sri Lanka. of 10% or it may amount to business profits which would be taxed at the rate of 28%. 6.3 How would the taxable proﬁts of a local branch be determined in its jurisdiction? 8.2 Does your jurisdiction impose tax on the transfer of an Taxable profits would be such profits to the extent that the income indirect interest in commercial real estate in your jurisdiction? arises in or is derived from a source in Sri Lanka. This means that Sri Lanka does not impose tax on the transfer of an indirect interest all profits and income derived from a source in Sri Lanka would be in real estate located in Sri Lanka. taxable. Head office expenses incurred in relation to the branch office would be tax deductible so far as such expenses do not exceed 10% of the taxable profits of the branch office. 8.3 Does your jurisdiction have a special tax regime for The above is subject to the provisions relating to “permanent Real Estate Investment Trusts (REITs) or their equivalent? establishments” that may be applicable when a standard double taxation treaty is in force. Sri Lanka does not have a special tax regime for REITs or their equivalent.

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9 Anti-avoidance and Compliance 10.3 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond the OECD’s 9.1 Does your jurisdiction have a general anti-avoidance or recommendations? anti-abuse rule? No, it does not. Yes, the IRA has specific anti-avoidance rules which are based on the principles in the UK. Furthermore, there are specific provisions 10.4 Does your jurisdiction support information obtained with regard to income splitting and an arm’s length standard for under Country-by-Country Reporting (CBCR) being made arrangements between associated persons. available to the public?

9.2 Is there a requirement to make special disclosure of No, it does not. avoidance schemes? 10.5 Does your jurisdiction maintain any preferential tax No such requirement exists. regimes such as a patent box?

9.3 Does your jurisdiction have rules which target not only No, it does not. taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax avoidance? 11 Taxing the Digital Economy

No, it does not. 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture digital 9.4 Does your jurisdiction encourage “co-operative presence? compliance” and, if so, does this provide procedural beneﬁts only or result in a reduction of tax? No, it has not.

No such requirement exists. 11.2 Does your jurisdiction favour any of the G20/OECD’s “Pillar One” options (user participation, marketing intangibles 10 BEPS and Tax Competition or signiﬁcant economic presence)?

10.1 Has your jurisdiction introduced any legislation in No, it does not. response to the OECD’s project targeting BEPS?

Sri Lanka does not have any such legislation.

10.2 Has your jurisdiction signed the tax treaty MLI and deposited its instrument of ratiﬁcation with the OECD?

No, it has not.

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Naomal Goonewardena is a founding partner of Nithya Partners. He has multidisciplinary qualifications in law and finance and is a leading attorney in financial and tax law in Sri Lanka. He advises companies from various industries on all aspects and types of taxation, especially income tax and VAT. He also represents companies in litigious tax matters. Prior to joining the Firm, he was a Senior Tax Manager at Ernst & Young. He has also been a lecturer in Tax Law at the Sri Lanka Law College from 2003 to 2018 and is a member of the Committee of Taxation of the Ceylon Chamber of Commerce. He served as a legal advisor to the Board of Review of the Inland Revenue Department from 1998 to 2002.

Nithya Partners, Attorneys-at-Law Tel: +94 11 2712 625 (ext. 209) 97A, Galle Road Email: [email protected] Colombo 03 URL: www.nithyapartners.com Sri Lanka

Savini Tissera joined Nithya Partners in December 2014 after completing her legal studies at the University of Warwick (UK). She is attached to the corporate division of the Firm and assists in commercial matters including advice on foreign direct investments, mergers and acquisitions and advice on regulatory matters for both local and foreign clients. Further, she assists both in tax advisory and litigious tax matters. She has also been trained in transfer pricing at the International Bureau of Fiscal Documentation (“IBFD”), Amsterdam. She is currently studying for her Executive Master of Laws conducted by the London School of Economics and Political Science (UK).

Nithya Partners, Attorneys-at-Law Tel: +94 11 2712 625 (ext. 216) 97A, Galle Road Email: [email protected] Colombo 03 URL: www.nithyapartners.com Sri Lanka

Nithya Partners was established in 1997 with the goal of delivering modern 500 and the Tax Directors Handbook. The firm has a strong reputation for and client-focused services in corporate and financial law and we advise a corporate tax planning expertise, advising clients on complex tax disputes and broad range of local and foreign clients comprising several quoted and tax-efficient structures, and has acted on behalf of both local and multi- unquoted companies, multinationals, financial institutions, investment funds national clients in a number of high-profile tax cases. and statutory bodies. Our work covers areas such as foreign direct invest- www.nithyapartners.com ments, mergers and acquisitions, corporate restructurings, loan syndications and securitisations. Apart from our involvement in some of the largest mergers and acquisitions and corporate restructurings in Sri Lanka in recent times, we have also played a lead role in several loan syndications, debt structuring and securitisations. The firm’s tax practice is the strongest amongst the legal firms in the country and we have consistently been ranked No. 1 for tax in Sri Lanka by The Legal

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Switzerland Switzerland

Maurus Winzap

Janine Corti

Walder Wyss Ltd. Fabienne Limacher

1 Tax Treaties and Residence 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on beneﬁts” articles)? 1.1 How many income tax treaties are currently in force in In recent years, the treaties entered into by Switzerland have often your jurisdiction? contained specific anti-treaty shopping or anti-abuse provisions. However, even if a treaty lacks such a provision, a reservation of By September 2019, Switzerland had concluded more than 100 abuse of rights is inherent in all tax treaties according to the juris- income double tax treaties (“DTT”) and it is striving to further prudence of the Swiss Federal Supreme Court. extend its treaty network. Moreover, Switzerland has enacted unilateral measures against the In addition, Switzerland has access to benefits similar to those in improper use of tax treaties by way of the Anti-Abuse Decree of the European Union (“EU”) Parent-Subsidiary Directive and the EU 1962 and the subsequent circulars issued by the Swiss Federal Tax Interest and Royalties Directive through the Agreement on the auto- Administration (“SFTA”). These unilateral rules only apply in the matic exchange of information (“AEOI”) in tax matters entered into absence of a specific treaty provision to payments made to a Swiss by Switzerland with the European Union (“EU”), which provides company (i.e. in inbound situations) and are designed to prevent the for a withholding tax exemption for cross-border payments of abuse of Swiss intermediary companies. dividends, interest and royalties between related entities. Due to the international tax developments and following the Furthermore, the Multilateral Convention to Implement Tax signing of the MLI, which contains a further-reaching “principle Treaty Related Measures to Prevent Base Erosion and Profit Shifting purpose test”, the Anti-Abuse Decree was partially repealed in 2017 (“Multilateral Instrument” or “MLI”) that was developed to and transformed into an ordinance. efficiently implement some of the BEPS measures into the existing

networks of bilateral DTTs will enter into force for Switzerland on 1 December 2019. In this respect, it should be noted that the impact 1.5 Are treaties overridden by any rules of domestic law on the MLI on Switzerland’s treaty network will be limited as (whether existing when the treaty takes effect or introduced Switzerland intends to implement the BEPS minimum standards by subsequently)? renegotiating its DTTs on a bilateral basis and designated only 12 (out of over 100) treaties that will be amended through the MLI. In the hierarchy of legal norms, international law principally overrides domestic law in case of a conflict. However, the Swiss Federal 1.2 Do they generally follow the OECD Model Convention or Supreme Court has established a rare exception whereby a federal act may take precedence over international law if the Swiss another model? parliament has deliberately legislated in breach of a treaty (so-called Most of the Swiss DTTs follow the OECD Model Tax Convention “Schubert practice”). on Income and on Capital (“OECD MTC”). 1.6 What is the test in domestic law for determining the 1.3 Do treaties have to be incorporated into domestic law residence of a company? before they take effect? Companies are considered to be Swiss tax resident and thus subject International treaty provisions become an integral part of Swiss law to unlimited taxation on their worldwide income in Switzerland if: upon ratification and are automatically valid without any need for (i) their statutory seat, and/or (ii) their place of effective manage- any further incorporation into Swiss domestic law. ment is/are situated in Switzerland.

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2 Transaction Taxes credit is not recoverable or deductible unless an option to tax is available and exercised. If a taxable business makes both taxable supplies and exempt supplies without credit for input tax, it may only recover 2.1 Are there any documentary taxes in your jurisdiction? or deduct input tax on non-attributable costs according to its deduction pro rata. Switzerland levies the following documentary taxes: Furthermore, input tax may not be recovered on costs that are not

used for the business acting as such (e.g. private use). One-time capital duty

The issuance of new shares by, and capital contributions to, a Swiss resident company are subject to one-time capital duty at a rate of 1% 2.5 Does your jurisdiction permit VAT grouping and, if so, (issuances up to CHF 1 million are exempt therefrom). However, is it “establishment only” VAT grouping, such as that applied restructuring and migration as well as recapitalisation relief is available. by Sweden in the Skandia case?

Securities transfer tax In Switzerland, it is possible to form a VAT group that qualifies as a The transfer of taxable securities is subject to securities transfer tax at a single taxable person for VAT purposes. In accordance with the ECJ rate of 0.15% for Swiss securities and 0.3% for foreign securities, case “Skandia”, VAT grouping is limited to entities located in respectively, if taxable securities are transferred against consideration Switzerland and may include Swiss permanent establishments of and at least one of the parties or intermediaries involved qualifies as a foreign companies. In this context, the supply of services by the Swiss securities dealer and none of the exemptions applies. Swiss foreign head office to its Swiss permanent establishment (whether securities dealers include banks and bank-like financial institutions as or not it is part of a Swiss VAT group) is regarded as a supply for defined by Swiss banking law as well as Swiss investment fund managers. VAT purposes between two separate taxpayers that may attract VAT It also includes individuals, companies, partnerships and branches of in Switzerland (reverse charge). foreign companies whose essential activities consist in trading or acting as intermediaries in transactions involving taxable securities. Further, 2.6 Are there any other transaction taxes payable by Swiss companies that do not engage in the securities trading business companies? and Swiss pension funds qualify as securities dealers if they hold taxable securities with a book value exceeding CHF 10 million. Apart from VAT, companies are liable for real estate transfer tax and securities transfer tax (see question 2.1). Insurance premium tax Certain insurance premiums are subject to an insurance premium tax at 2.7 Are there any other indirect taxes of which we should a rate of 5% (standard rate) or 2.5% (in case of life insurance premiums). be aware? Real estate transfer tax In Switzerland there are indirect taxes on mineral oil, alcohol and Real estate transfer taxes may be triggered upon the sale of real tobacco, the emissions of carbon dioxide, heavy traffic, radio and estate property situated in Switzerland or a real estate company. television broadcasting.

2.2 Do you have Value Added Tax (or a similar tax)? If so, at 3 Cross-border Payments what rate or rates?

In Switzerland, Value-Added Tax (“VAT”) is levied at a standard rate 3.1 Is any withholding tax imposed on dividends paid by a of 7.7%. A reduced rate of 2.5% applies to some goods such as locally resident company to a non-resident? medicine, newspapers, books and food. Further, accommodation services (hotels) are taxed at a special rate of 3.7%. Effective and constructive dividend distributions (including the distribution of liquidation proceeds and stock dividends) made by a Swiss resident company to its shareholders are subject to Swiss with- 2.3 Is VAT (or any similar tax) charged on all transactions holding tax at a rate of 35%. The Swiss company is required to or are there any relevant exclusions? withhold the payable withholding tax from the dividend and transfer the latter to the SFTA. Distributions based on a capital reduction Taxable transactions subject to VAT include: (i) the supply of goods and/or reserves paid out of capital contributions are not subject to or services for consideration within the Swiss territory, (ii) the Swiss withholding tax. purchase of services from abroad (reverse charge), and (iii) the Swiss withholding tax is refundable or creditable in full to a Swiss importation of goods (import VAT). tax resident corporate and individual shareholder as well as to a non- Certain supplies, in particular financial services, insurance and real Swiss tax resident corporate or individual shareholder who holds the estate transactions as well as healthcare, education, culture, sport, shares through a Swiss branch office if such a recipient is the social care, gambling and lotteries are exempt from VAT without beneficial owner of the distribution received and the income is credit. In such cases, the taxable persons are not entitled to deduct recognised in the income statement or reported in the income tax the input tax charged on costs. In addition, certain supplies are clas- return of the recipient, as the case may be. sified as tax-exempt with credit or zero-rated, typically in relation to Shareholders who are not resident in Switzerland for tax purposes the exportation of goods from Switzerland. These transactions (and who are not conducting a trade or business through a Swiss allow the recovery or deduction of input tax. branch office) may be entitled to a full or partial refund of Swiss withholding tax if the country in which such a recipient resides for 2.4 Is it always fully recoverable by all businesses? If not, tax purposes has concluded a DTT with Switzerland and further what are the relevant restrictions? conditions of such a DTT are met. Under certain circumstances, a full refund is also conceivable under the AEOI. Businesses registered for VAT may recover or deduct the VAT paid If the conditions set out by the applicable DTT are met, the on costs (“input tax”) provided that such costs are attributable to recipient of the dividends may request a refund of the Swiss with- taxable supplies, including zero-rated supplies. Input tax related to holding tax by the end of the calendar year for up to three years after supplies of goods or services that are exempt from VAT without the end of the calendar year in which the dividends were due.

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Relief at source is available (instead of paying the relevant tax and 3.5 If so, is there a “safe harbour” by reference to which tax subsequently claiming a refund thereof) under certain circumstances, provided that an application for the notification procedure has been relief is assured? filed with and granted by the SFTA prior to any distributions. The According to the circular letter no. 6 issued by the SFTA on 6 June permit granted for the respective relief at source is valid for three 1997, the maximum underlying debt for each asset category is deter- years and can be renewed thereafter. mined by a safe harbour debt-to-equity ratio as shown in the table It should be noted that DTT relief is conditional upon strict below. The calculation is based on the fair market values of the substance requirements such as local office space, employees and busi- underlying assets. ness activities. In addition, the foreign entity must be properly capitalised in line with the Swiss thin capitalisation rules (see question 3.4). Cash and cash equivalents 100% Accounts receivable 85% 3.2 Would there be any withholding tax on royalties paid by Other receivables 85% a local company to a non-resident? Inventories 85% Royalty payments made by Swiss residents are not subject to Swiss Other current assets 85% withholding tax unless excessive royalty payments are made to related Domestic and foreign bonds in CHF 90% parties (i.e. if the arm’s length principle is not adhered to). Such Foreign bonds in foreign currency 80% excessive royalty payments would be re-qualified into constructive dividend distributions subject to 35% Swiss withholding tax. Listed domestic and foreign shares 60% Non-listed domestic and foreign shares 50% 3.3 Would there be any withholding tax on interest paid by Participations 70% a local company to a non-resident? Loan receivables 85% Property/equipment 50% Under Swiss domestic tax law, withholding tax is only levied on interest from: (i) Swiss bonds, or (ii) customer deposits held with Swiss banks. Factory premises/plants 70% Under the current law, a Swiss fixed term instrument will be char- Home property, construction land 70% acterised as a “bond” if it cannot be excluded pursuant to its terms Other real estate 80% that it is held at any time by more than 10 creditors that are not banks. Swiss withholding tax is also triggered if a Swiss borrower has more Cost of constitution, increase of capital and 0% than 20 lenders that are not banks under any type of fixed term debt organisation instruments in the aggregate. Any Swiss withholding tax on such Goodwill 70% interest may be reduced under an applicable DTT. By contrast, individual loans, including intercompany loans, are not As an exception thereto, a safe harbour debt-to-equity ratio of 6:1 subject to Swiss withholding tax. However, intercompany loans or the applies to finance companies. In addition, a Swiss company which intercompany funding of a Swiss company, respectively, must be does not observe the safe harbour rules may always prove that a compliant with: (i) the safe harbour interest rates published annually higher debt is still at arm’s length. by the SFTA (alternatively, evidence must be provided that the interest rate is at arm’s length); and (ii) the Swiss thin capitalisation rules (see 3.6 Would any such rules extend to debt advanced by a question 3.4 and 3.5). If not, the interest payment is (in full or in part) re-characterised as a constructive dividend distribution with the third party but guaranteed by a parent company? corresponding Swiss withholding tax consequences. Under this The Swiss thin capitalisation rules extend to third-party debt scenario, the treaty rate for dividend payments would be applicable. guaranteed by a related party. Further, a specific withholding tax may be levied on interest payments if a loan is secured by a mortgage on real estate located in Switzerland. Whereas the tax rate is 3% on the federal level, it differs 3.7 Are there any other restrictions on tax relief for interest from canton to canton on the cantonal level. This source tax may payments by a local company to a non-resident, for example be refunded (in full or in part) under a DTT. pursuant to BEPS Action 4?

3.4 Would relief for interest so paid be restricted by Interest payments on related-party debt must be both in compliance with the thin capitalisation rules and the safe harbour interest rates reference to “thin capitalisation” rules? published annually by the SFTA (alternatively, evidence must be The tax practice regarding thin capitalisation is laid down in a circular provided that the interest rate is at arm’s length). letter no. 6 issued by the SFTA on 6 June 1997, which places a limit Further, Switzerland takes the view that the existing thin on the maximum amount of debt granted by related parties on which capitalisation rules are sufficient to prevent unreasonable interest deductible interest payments are available. According to the circular deductions and, thus, has not introduced further measures in letter, each asset category of the borrowing Swiss company must be connection with Action 4 of the BEPS project. As far as the authors financed by a certain equity portion, i.e. the maximum underlying can tell, there is no intention on the part of the Swiss legislator to debt for each asset category is determined by a safe harbour debt-to- change the current rules and implement new ones. equity ratio (see question 3.5). To the extent that related-party debt (including related-party guaranteed third-party debt) exceeds the 3.8 Is there any withholding tax on property rental maximum permissible debt as determined based on these rules, the payments made to non-residents? company is deemed to be thinly capitalised for tax purposes. As a consequence, excess related-party debt, if any, will be: (i) No Swiss withholding tax is levied on property rental payments. considered as hidden equity for capital tax purposes, (ii) interest However, if the payment is: (i) made to a related party, and (ii) not payments made on such related party debt are not tax deductible, at arm’s length, such excessive payments would be re-qualified into and (iii) would be re-qualified into constructive dividend constructive dividend distributions subject to 35% Swiss withholding distributions with the respective Swiss withholding tax consequences. tax.

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3.9 Does your jurisdiction have transfer pricing rules? 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, proﬁts? Switzerland does not have any statutory transfer pricing rules. However, as a general rule, intercompany charges must be at arm’s Corporate income taxes are levied at ordinary rates on the taxable length. The tax authorities accept the transfer pricing methods profit of the taxpayer regardless of whether the profit is distributed described by the OECD guidelines. or retained. However, it should be noted that in most cantons Further, special guidelines apply concerning the minimum and ordinary dividend distributions reduce the relevant capital tax base. maximum interest on loans granted to or from shareholders or Furthermore, such profit distributions are subject to Swiss with- related parties. With regard to the arm’s length character of the holding tax which may be fully or partly refundable (see question 3.1). interest rate, the SFTA annually publishes safe harbour interest rates in its circular letters. 4.7 Are companies subject to any signiﬁcant taxes not

4 Tax on Business Operations: General covered elsewhere in this chapter – e.g. tax on the occupation of property?

4.1 What is the headline rate of tax on corporate profits? Companies are subject to an annual capital tax on the cantonal and municipal level. The tax is calculated based on the net equity Corporate income tax is levied on the federal, cantonal and (nominal share capital, capital contribution reserves, reserves and municipal level. The effective corporate income tax rates vary from retained earnings) plus any embedded equity and/or any other taxed canton to canton respectively from municipality to municipality and embedded reserves to the extent that the aggregate taxable capital is range between 12% and 24% (ordinarily taxed companies). allocable to Switzerland. The applicable tax rates vary from about In the course of the implementation of the Corporate Tax 0.001% to 0.53%. In some cantons, the corporate income tax is Reform (“STAF”) as of 1 January 2020, the existing tax privileges creditable to the annual capital tax. (such as finance branches, mixed, domiciliary, principal and holding Certain cantons/municipalities levy an annual property tax on the company regimes) will be abolished and replaced by other OECD taxable value of the property situated in that specific canton/municipality compliant measures (e.g. IP box, R&D super deduction and notional without taking into account any related debts or mortgages. The property interest deduction), leading to a reduced corporate income tax is taxed at its location, irrespective of where the owner is resident. liability. Furthermore, most cantons reduced their corporate income tax rates. 5 Capital Gains 4.2 Is the tax base accounting profit subject to 5.1 Is there a special set of rules for taxing capital gains adjustments, or something else? and losses? As a general rule, the statutory financial statements form the basis for the determination of the taxable income of a Swiss company. Capital gains derived from the sale of movable assets are generally However, this tax base is subject to certain adjustments according to subject to corporate income tax on the federal, cantonal and municipal Swiss tax law (e.g. in case of constructive dividend distributions). level and capital losses are tax-deductible. The participation exemption applies to capital gains derived from a disposal of a qualifying participation of at least 10% provided that the minimum holding period 4.3 If the tax base is accounting profit subject to of one year is met and leads to a virtual tax exemption of such qualifying adjustments, what are the main adjustments? capital gains (see question 5.2). However, recaptured depreciations (difference between acquisition costs and book value) on such qualifying The main adjustments relate to expenditures which are not commer- participations are subject to ordinary taxation. Tax losses may be carried cially justified and, hence, non-deductible for tax purposes (in forward for the next seven years (see question 4.5). particular, expenses vis-à-vis related parties that are not at arm’s length). With regard to immovable assets, there are two different systems of taxing capital gains derived from the disposal of real estate properties 4.4 Are there any tax grouping rules? Do these allow for by companies or the transfer of an interest in a real estate company in relief in your jurisdiction for losses of overseas subsidiaries? Switzerland on the cantonal/municipal level. On the one hand, there is the monistic system where corporate income tax is levied only on recap- In Switzerland, each company is considered as a separate taxpayer tured depreciations and the appreciation of value above acquisition costs for corporate income tax purposes. Accordingly, no income tax is subject to real estate capital gains tax. On the other hand, there is the grouping or loss consolidation is available in Switzerland (i.e. no dualistic system where the recaptured depreciation deductions as well as group taxation). the appreciation of value above acquisition costs are exclusively subject For VAT purposes, on the other hand, legal entities, partnerships to ordinary corporate income tax. On the federal level, ordinary taxation and individuals who have their domicile or seat in Switzerland as well applies with regard to such immovable assets. as Swiss branches of foreign entities may form a group. In this case, transactions within the VAT group are not subject to Swiss VAT as 5.2 Is there a participation exemption for capital gains? the group members are registered as a single taxable entity. A participation exemption is available which applies to capital gains 4.5 Do tax losses survive a change of ownership? (difference between the sales price and the acquisition costs) derived from a disposal of a qualifying participation (at least 10%) provided Tax losses may be carried forward and offset against any taxable that the minimum holding period of one year is met. income generated in the next seven years and do not forfeit as a The corporate income tax liability will be reduced by the ratio between consequence of a change of ownership. the net participation income (taking into account administrative and Furthermore, tax losses may be transferred to another Swiss financing costs) and the aggregate taxable income. In the event of losses resident company or branch in the course of a tax-neutral or tax loss carryforwards, the qualifying participation income will be restructuring (e.g. merger, spin-off, transfer of a business operation) offset against these tax losses, wiping out the ensuing tax benefit. if such a transfer is not considered as abusive.

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5.3 Is there any special relief for reinvestment? 6.3 How would the taxable proﬁts of a local branch be determined in its jurisdiction? According to the Swiss restructuring rules as outlined in circular letter no. 5 issued by the SFTA on 1 June 2004, mergers, spin-offs, Swiss tax law regulates the profit allocation between head office and conversions and transfers of assets may be executed tax-neutrally, i.e. branch only in a very rudimentary way. In case of a Swiss branch hidden reserves on such assets can be rolled over, provided that (i) the of a foreign legal entity, a fiction of full independence is generally tax liability remains in Switzerland, and (ii) the assets and liabilities will assumed and the taxable profit is typically determined based on be transferred at book value and the further requirements (e.g. business separate branch accounts (direct method). operation, operating fixed asset, qualifying participation), if any, are met. Moreover, the taxation of a capital gain derived from the disposal 6.4 Would a branch beneﬁt from double tax relief in its of fixed assets (including real estate) or participations could, under certain circumstances, be deferred if such assets are replaced by other jurisdiction? assets that are required for the business operations in Switzerland. A Swiss branch is not entitled to benefit from DTTs entered into by

Switzerland. However, the Swiss branch could claim the DTT bene- 5.4 Does your jurisdiction impose withholding tax on the fits arising from the DTTs between the source state and the state in proceeds of selling a direct or indirect interest in local which the head office is located to the extent the relevant income is assets/shares? allocated to such a Swiss branch.

No Swiss withholding tax in Switzerland is levied on the direct or 6.5 Would any withholding tax or other similar tax be indirect sale of local assets/shares in Switzerland. imposed as the result of a remittance of proﬁts by the branch?

6 Local Branch or Subsidiary? The repatriation of profits by the Swiss branch to its head office is not subject to any withholding or other taxes in Switzerland. 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? 7 Overseas Proﬁts

The issuance of new shares by and capital contributions to a Swiss 7.1 Does your jurisdiction tax proﬁts earned in overseas resident company are subject to one-time capital duty at a rate of 1% branches? (issuances up to CHF 1 million are exempt therefrom). However, restructuring and migration as well as recapitalisation relief is available. Income attributable to foreign enterprises, permanent establishments One-time capital duty is not triggered in the event of an allocation or real estate located abroad is exempt from taxation in Switzerland. of capital to a Swiss branch.

7.2 Is tax imposed on the receipt of dividends by a local 6.2 Is there a difference between the taxation of a local company from a non-resident company? subsidiary and a local branch of a non-resident company (for example, a branch proﬁts tax)? In general, dividends received constitute taxable income. However, the participation exemption applies if the participation represents In general, a Swiss branch of a foreign head office is subject to the more than 10% of the nominal share capital or reserves of the same corporate income and capital tax as a Swiss company. In the distributing company or it has a fair market value of at least CHF 1 case of Swiss companies, the corporate income tax is levied on the million (see question 5.2). worldwide income with the exception of income attributable to foreign permanent establishments or immovable property. By 7.3 Does your jurisdiction have “controlled foreign contrast, a Swiss permanent establishment of a non-Swiss head company” rules and, if so, when do these apply? office is taxed in Switzerland on the profit and equity allocated to such a Swiss branch. The allocation is usually based on separate Switzerland does not have any controlled foreign company rules. financial statements, as if the branch office were a corporate entity separate from its head office. Further, any dividend or liquidation dividend in excess of the 8 Taxation of Commercial Real Estate nominal share capital plus capital contribution reserves made by a Swiss company is subject to Swiss withholding tax at a rate of 35%, 8.1 Are non-residents taxed on the disposal of commercial which may be partly or fully refundable. By contrast, the remittance real estate in your jurisdiction? of funds from a Swiss branch to its head office is possible without triggering Swiss withholding tax. Any capital gains derived from the disposal of real estate properties While one-time capital duty is levied on the incorporation of a situated in Switzerland by (Swiss or foreign) companies are either Swiss company, if the founders’ contribution exceeds CHF 1 million, subject to corporate income tax or a combination of corporate income the one-time capital duty will not fall due in the event of a Swiss tax and real estate capital gains tax. The same basically holds true for branch as such a branch does not constitute a legal entity that could the sale of a real estate company, whereby most cantonal tax laws issue ownership rights. require that a majority stake in a real estate company is sold. A real The transfer of taxable securities is subject to securities transfer estate company is defined as a company whose main actual purpose tax if taxable securities are transferred against consideration and at is to hold property and which is mainly engaged in purchasing, selling least one of the parties or intermediaries involved qualifies as a Swiss and leasing of property. securities dealer and no exemption applies. Swiss companies that do Furthermore, many (but not all) cantons levy a real estate transfer not engage in the securities trading business qualify as securities tax (ranging between 1% and 3%) on the transfer of real estate. The dealers if they hold taxable securities with a book value exceeding real estate transfer tax is generally computed based on the sales price. CHF 10 million. Branches, on the other hand, do not qualify as securities dealers merely on account of holding of taxable securities.

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8.2 Does your jurisdiction impose tax on the transfer of an 9.4 Does your jurisdiction encourage “co-operative indirect interest in commercial real estate in your compliance” and, if so, does this provide procedural beneﬁts jurisdiction? only or result in a reduction of tax?

In certain cantons, the indirect transfer of residential or commercial Whilst there are no statutory rules for “co-operative compliance”, it is real estate by way of a sale of a majority stake (in certain cantons common practice in Switzerland to discuss planned structures and already a minority stake) of a real estate company triggers real estate transactions with the tax authorities in advance and to obtain legal transfer tax and real estate capital gains tax (see question 8.1). certainty on the tax consequences by seeking the tax authorities’ written approval prior to entering into any transactions (so-called “tax ruling”). 8.3 Does your jurisdiction have a special tax regime for An advance tax ruling is binding upon the tax authorities based on the principle of dealing in good faith and deploys effects in subsequent Real Estate Investment Trusts (REITs) or their equivalent? tax assessment procedures. However, it does not provide procedural Switzerland does not have a special tax regime for REITs. benefits or a reduction of tax for which there is no legal basis. Special rules apply to funds with direct ownership of real estate. As a general rule, funds are treated as transparent for Swiss tax 10 BEPS and Tax Competition purposes. This means that the income and capital is directly attributed to the investors. Funds with direct ownership of real 10.1 Has your jurisdiction introduced any legislation in estate are, however, treated as non-transparent (i.e. the fund is response to the OECD’s project targeting BEPS? considered as the taxpayer) and taxed on any income at reduced rates. Given that funds with direct ownership of real estate are Switzerland has adopted the global minimum standard included in already taxed, there is basically no taxation on the level of the Action 13 of the OECD base erosion and profit shifting (“BEPS”) investor. For this reason, no withholding tax is charged on the project for the automatic exchange of country-by-country reports. distribution or accrual of income from direct property holdings by The relevant legal framework entered into force on 1 December the fund. 2017 and includes the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (“CbC-MCAA”), 9 Anti-avoidance and Compliance the associated Swiss Federal Act on the International Automatic Exchange of Country-by-Country Reports of Multinationals (“CbC 9.1 Does your jurisdiction have a general anti-avoidance or Act”) and the Ordinance on International Automatic Exchange of Country-by-Country Reports (“CbC-Ordinance”). anti-abuse rule? Further, as part of Action 5 of the BEPS project, the spontaneous Switzerland lacks a general statutory anti-avoidance rule in its domestic exchange of information on certain categories of tax rulings was tax law. As a consequence, the Swiss Federal Supreme Court has introduced as a minimum standard and the respective legal stepped in and developed an anti-abuse doctrine, applicable to all types framework to implement this standard became effective in of Swiss taxes, to counteract abusive tax planning. According to this Switzerland on 1 January 2017. Switzerland has exchanged informa- judicially developed anti-abuse doctrine, tax authorities have the right tion on certain categories of tax rulings since 2018. to tax the taxpayer’s legal structure based on its economic substance, In addition, the MLI will enter into force for Switzerland on 1 provided that such a structure has an unusual and inappropriate char- December 2019. The MLI was developed as a measure pertaining to acter, can only be explained by tax reasons and will lead to significant Action 15 of the BEPS project addressing how other BEPS measures can tax savings if recognised by the tax authority. be efficiently implemented into the existing networks of bilateral DTTs. Furthermore, the Swiss population approved the new corporate tax reform on 19 May 2019 that will enter into force on 1 January 9.2 Is there a requirement to make special disclosure of 2020. This reform implements, inter alia, measures in response to avoidance schemes? the results of the BEPS project.

No special disclosure is required under Swiss law. However, if a legal arrangement is considered as being abusive by the competent Swiss 10.2 Has your jurisdiction signed the tax treaty MLI and tax authority, it is disregarded from a tax point of view and taxed in deposited its instrument of ratiﬁcation with the OECD? accordance with its economic substance (see question 9.1). Switzerland signed the MLI on 7 June 2017 and deposited its instrument of ratification on 29 August 2019. In Switzerland, the 9.3 Does your jurisdiction have rules which target not only MLI will enter into force on 1 December 2019. taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax avoidance? 10.3 Does your jurisdiction intend to adopt any legislation to In the event of tax avoidance, affairs are arranged with a view to tackle BEPS which goes beyond the OECD’s recommendations? taking advantage of weaknesses or ambiguities in a tax system, which Currently, Switzerland does not intend to adopt any BEPS measures is not a punishable offence under Swiss law. If such a structure is that go beyond the OECD’s recommendations. considered improper or abusive, it will be disregarded and taxed in accordance with its economic substance (see questions 9.1 and 9.2). Thus, tax avoidance cannot be equated with tax evasion or fraud, 10.4 Does your jurisdiction support information obtained which is a punishable offence under Swiss law as it involves the use under Country-by-Country Reporting (CBCR) being made of illegitimate means. Only to the extent that such a tax offence available to the public? occurs, other persons who instigate, assist or participate in the tax evasion or fraud may also be targeted and punished. Information obtained under the Automatic Exchange of Country- by-Country Reports is directed exclusively at the relevant tax authorities and will not be made available to the public.

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Multinational companies in Switzerland had to produce a report 11.2 Does your jurisdiction favour any of the G20/OECD’s for the first time for the fiscal year 2018 and the reports will be first “Pillar One” options (user participation, marketing intangibles exchanged in the year 2020. or signiﬁcant economic presence)? 10.5 Does your jurisdiction maintain any preferential tax Up until now, the Swiss State Secretariat for International Finance regimes such as a patent box? (“SIF”) has only taken a general stance on the taxation of the digitalised economy public without making a statement about a In the course of the implementation of the STAF as of 1 January favoured option. Overall, the SIF supports a multilateral approach 2020, existing tax privileges (such as finance branches, mixed, under which profits should be allocated and taxed where added value domiciliary, principal and holding company regimes) will be abolished is created and which do not cause double or over-taxation. and replaced by other OECD compliant measures (e.g. IP box, R&D super deduction notional interest deduction). Furthermore, most cantons will reduce their corporate income tax rates.

11 Taxing the Digital Economy

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

Up until now, Switzerland has not taken any unilateral action in connection with the taxation of the digitalised economy. Neither does it plan to introduce any interim measures such as a digital tax implemented by certain EU countries. On 31 May 2019, the OECD published a work plan on the tax challenges arising from the digitalisation of the economy and Switzerland actively participates in this process of developing consensus-based international tax rules that adapt to the changing business models in a digitalised economy.

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Maurus Winzap is a partner and heads the tax team. Maurus’ practice covers all areas of domestic and international corporate taxation. He acts for a broad range of corporate and financial clients, and has developed significant expertise in planning and advising on M&A and private equity transactions, structured financings, corporate restructurings, relocations, capital market transactions, collective investment schemes and management incentive programmes. Maurus is a Member of the Executive Committee of the International Fiscal Association (“IFA”) and a Member of the Executive Board of the Swiss Tax Law Association (Swiss branch of IFA). He regularly lectures and publishes in his areas of practice. Maurus has been recommended by several international directories such as Chambers, The Legal 500, Who’s Who Legal and Best Lawyers as a leading lawyer. Clients appreciate that he is “exceptionally strong”, “very dynamic”, “commercially-minded” and “practical” (Chambers 2018). Born in 1972, Maurus received his degree in law from the University of Zurich in 1997 and his Master of Laws from the University of Virginia in 2002. He was admitted to the Zurich Bar in 1999 and became a Swiss Certified Tax Expert in 2004. Maurus speaks German and English.

Walder Wyss Ltd. Tel: +41 58 658 56 05 Seefeldstrasse 123 Email: [email protected] P.O. Box, 8034 Zürich URL: www.walderwyss.com Switzerland

Janine Corti is a counsel in the tax team. She is working in the fields of domestic and international corporate tax and has professional experience in the financial services area. She focuses particularly on national and international restructurings, migrations, tax planning, employee participation programmes, capital market transactions and M&A projects. In addition, she is at the board of the Zurich section of EXPERTsuisse. Born in 1981, Janine Corti was educated at the University of Zurich (lic.iur. 2007) and graduated as certified tax expert in 2012. She worked as a tax manager in an international advisory firm and in the tax department of a Swiss bank. Janine Corti speaks German and English.

Walder Wyss Ltd. Tel: +41 58 658 56 49 Seefeldstrasse 123 Email: [email protected] P.O. Box, 8034 Zürich URL: www.walderwyss.com Switzerland

Fabienne Limacher is a managing associate in the tax team. She is working in the fields of domestic and international corporate tax as well as individual tax. She focuses particularly on national and international corporate reorganisations, restructurings, structured finance, financial and insurance products as well as private clients. Born in 1986, Fabienne Limacher was educated at the University of Berne (MLaw 2010) and the University of Sydney (LL.M. 2018), was admitted to the bar in 2012 and graduated as certified tax expert in 2016. She worked as a research assistant for the Institute for Tax Law at the University of Berne and as a trainee with Walder Wyss. In addition, she gained work experience as a trainee at the cantonal Court and the public prosecutor’s office of Canton Nidwalden. Fabienne Limacher’s professional languages are German and English. She also speaks French. She is registered with the Zurich Bar Registry and admitted to practice in all Switzerland.

Walder Wyss Ltd. Tel: +41 58 658 56 49 Seefeldstrasse 123 Email: [email protected] P.O. Box, 8034 Zürich URL: www.walderwyss.com Switzerland

With around 220 lawyers and six locations in all of the main economic centres, Walder Wyss is one of the most successful commercial law ﬁrms in Switzerland. Our clients include national and international companies, publicly held corporations and family businesses as well as public law institutions and wealthy individuals. www.walderwyss.com

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United Kingdom United Kingdom

Zoe Andrews

Slaughter and May William Watson

1 Tax Treaties and Residence the main purposes of the creation or assignment of the relevant shares, loan or right to royalties is to take advantage of the article. The BEPS project proposed, as a minimum standard, that countries 1.1 How many income tax treaties are currently in force in adopt a “principal purpose test” (“PPT”) that is very similar to the your jurisdiction? anti-avoidance rule already seen in the UK’s treaties, a US-style limitation on benefits test, or a combination of both. Like most The United Kingdom has one of the most extensive treaty networks other countries, the UK favours the PPT. in the world, with over 140 comprehensive income tax treaties currently in force. One of the consequences of an exit from the 1.5 Are treaties overridden by any rules of domestic law European Union (assuming the UK loses the benefit of the Parent- Subsidiary and Interest and Royalties Directives and repeals the UK (whether existing when the treaty takes effect or introduced legislation implementing them) will be greater reliance on the UK’s subsequently)? treaty network to provide exemption from withholding taxes. In some cases, there will still be tax leakage, such as on dividends The UK’s General Anti-Abuse Rule (the “GAAR”, discussed in received in the UK from Germany and Italy and royalties paid from question 9.1 below) can, in principle, apply if there are abusive the UK to Luxembourg (see question 3.2 below). arrangements seeking to exploit particular provisions in a double tax treaty, or the way in which such provisions interact with other provisions of UK tax law. 1.2 Do they generally follow the OECD Model Convention or

another model? 1.6 What is the test in domestic law for determining the They generally follow the OECD model, with some inevitable residence of a company? variation from one treaty to the next. As part of the OECD’s BEPS project (see question 10.1 below), changes were made to the There are two tests for corporate residence in the UK. The first is definition of “permanent establishment” (“PE”) in Article 5 of the the incorporation test. Generally (that is, subject to provisions which Model Convention. However, the UK will not apply to its existing disapply this test for certain companies incorporated before 15 treaties the changes extending the definition to “commissionaire” March 1988), a company which is incorporated in the UK will auto- (and similar) arrangements. This is because of the risk that this matically be resident in the UK. extension could lead to a proliferation of PEs where there is little or Secondly, a company incorporated outside the UK will be resident no profit to attribute to any of them. in the UK if its central management is in the UK. This test is based on case law and focuses on board control rather than day-to-day management, though its application will always be a question of fact 1.3 Do treaties have to be incorporated into domestic law determined by reference to the particular circumstances of the before they take effect? company in question. Both tests are subject to the tie-breaker provision of an applicable Yes. A tax treaty must be incorporated into UK law and this is done double tax treaty. If the tax treaty treats a company as resident in by way of a statutory instrument. A treaty will then enter into force another country and not as a UK resident, the company will also be from the date determined by the treaty and will have effect in treated as non-UK resident for domestic UK tax purposes. It is relation to the taxes covered from the dates determined by the treaty. notable that the treaties which the UK has renegotiated in the past The UK’s diverted profits tax (discussed at question 10.1 below) was few years generally do not contain the standard tie-breaker based on deliberately engineered as a new tax so as to fall outside the legis- the company’s “place of effective management” (“POEM”). As a lation which incorporates tax treaties into UK law. result, the tax treaty status of a company which is managed in the

UK but incorporated, for example, in the Netherlands, will be 1.4 Do they generally incorporate anti-treaty shopping uncertain pending agreement between the two revenue authorities rules (or “limitation on beneﬁts” articles)? (“mutual agreement procedure” (“MAP”)). The UK Government has said it will propose similar provisions in its bilateral negotiations In general, the UK has avoided wide limitation on benefits articles in the future and has agreed to the replacement of POEM with and prefers specific provision in particular articles. For example, the MAP under Article 4 of the Multilateral Convention to implement Dividends, Interest or Royalties article may provide that the UK will the BEPS treaty changes. not give up its taxing rights if, broadly, the main purpose or one of

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2 Transaction Taxes The basis on which input tax can be recovered continues to be a vexed topic, generating some important judicial decisions.

2.1 Are there any documentary taxes in your jurisdiction? 2.5 Does your jurisdiction permit VAT grouping and, if so, Stamp duty is a tax on certain documents. The main category of is it “establishment only” VAT grouping, such as that applied charge takes the form of an ad valorem duty, at 0.5% of the consider- by Sweden in the Skandia case? ation, on a transfer on sale of stock or marketable securities (or of an interest in a partnership which holds such stock or securities). In The UK permits VAT grouping but not “establishment only” VAT practice, stamp duty has little relevance if the issuer of the stock or grouping. Under the UK’s VAT grouping rules, where a foreign securities is not a company incorporated in the UK. company is eligible to join a UK VAT group registration and does The UK’s Office of Tax Simplification (“OTS”) published a so, the entirety of that company’s activities are then subsumed within report in July 2017 on digitising and modernising the stamp duty the UK VAT group registration, rather than solely the activities of process, the core recommendations of which initially received a that company’s UK branch. Please also see question 4.4 below. positive response from the Government. In July 2019, however, the Government announced that most of the proposed changes have 2.6 Are there any other transaction taxes payable by been parked pending a wider review of the stamp duty regime. As companies? a result, the physical stamping of documents will, unfortunately, continue. Please see question 2.6 below for details of the closely Stamp duty land tax (“SDLT”) related stamp duty reserve tax, and also of the stamp duty land tax SDLT is a tax on transactions involving immovable property and is (or the equivalent in each of Scotland and Wales) that applies to land payable by the purchaser. The top rate of SDLT on commercial transactions in the UK. property is 5% and applies where (and to the extent that) the consideration exceeds £250,000. (For transactions involving 2.2 Do you have Value Added Tax (or a similar tax)? If so, at residential property, the rate can in some cases be as much as 15%.) what rate or rates? The standard charge on the rental element of a new lease is 1% of the net present value (“NPV”) of the rent, determined in accordance The UK has had VAT since becoming a member of the European with a statutory formula, rising to 2% on the portion of NPV above Economic Community in 1973 and the UK VAT legislation gives £5 million. effect to the relevant EU Directives. There are three rates of VAT: SDLT has been replaced in Scotland with the Land and Buildings ■ the standard rate of VAT is 20% and applies to any supply of Transaction Tax and in Wales with the Land Transaction Tax, both goods or services which is not exempt, zero-rated or subject to of which have a similar scope to SDLT. the reduced rate of VAT; ■ the reduced rate of VAT is 5% (e.g. for domestic fuel); and Stamp duty reserve tax (“SDRT”) ■ there is a zero rate of VAT which covers, for example, books, SDRT is charged on an agreement to transfer chargeable securities children’s wear and most foodstuffs. for money or money’s worth (whether or not the agreement is in Whilst the fundamental VAT rules within the UK may not change writing). Subject to some exceptions, “chargeable securities” are much upon its exit from the EU (not least because VAT has gener- (principally) stocks or shares issued by a company incorporated in ated a substantial proportion of total UK tax receipts), transactions the UK, and units under a UK unit trust scheme. SDRT is imposed in both goods and services between the UK and the other 27 EU at the rate of 0.5% of the amount or value of consideration, though countries are likely to be affected significantly. the rate is 1.5% if UK shares or securities are transferred (rather than issued) to a depositary receipt issuer or a clearance service and the 2.3 Is VAT (or any similar tax) charged on all transactions transfer is not an integral part of the raising of share capital. SDRT liability is imposed on the purchaser and is directly enforce- or are there any relevant exclusions? able. Where a transaction is completed by a duly stamped The exclusions from VAT are as permitted or required by the instrument within six years from the date when the SDRT charge Directive on the Common System of VAT (2006/112/EC) (as arose, there is provision in many cases for the repayment of any amended). Some examples of exempt supplies are: SDRT already paid or the cancellation of the SDRT charge. ■ most supplies of land (unless the person making the supply, or an associate, has “opted to tax” the land); 2.7 Are there any other indirect taxes of which we should ■ insurance services; and be aware? ■ banking and other financial services. Customs duties are generally payable on goods imported from 2.4 Is it always fully recoverable by all businesses? If not, outside the EU and, depending on the terms of the UK’s exit from the EU, could start to apply to imports from the EU. However, the what are the relevant restrictions? European Union (Withdrawal) Act 2018 will incorporate the latest Input tax is only recoverable by a taxable person (a person who is, EU customs code into UK law so that for any transitional period, or is required to be, registered for VAT). Input tax is attributed in or, until such time as it may be changed in the event of a “no-deal accordance with the nature and tax status of the supplies that the Brexit”, the existing EU legislation is replicated in UK law upon the person intends to make. UK’s exit. Input tax on supplies wholly used to make taxable supplies is Excise duties are levied on particular classes of goods (e.g. alcohol deductible in full. Input tax wholly used to make exempt or non- and tobacco). Insurance premium tax is charged on the receipt of business supplies is not deductible at all. Where a taxable person a premium by an insurer under a taxable insurance contract. makes both taxable and exempt supplies and incurs expenditure that Environmental taxes include the following: landfill tax; aggregates is not directly attributable to either (for example, general overheads), levy; climate change levy; and a carbon reduction charge. The the VAT on the expenditure must be apportioned between the Government proposes to introduce a new tax on plastic packaging supplies. from April 2022.

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3 Cross-border Payments amount which it would have borrowed from an independent lender. The assets and income of the borrower’s direct and indirect subsidiaries can be taken into account to the extent that an uncon- 3.1 Is any withholding tax imposed on dividends paid by a nected lender would recognise them, but the assets and income of locally resident company to a non-resident? other group companies are disregarded.

In most cases, no withholding tax is imposed on dividends paid by 3.5 If so, is there a “safe harbour” by reference to which tax a UK resident company. Dividends deriving from the tax-exempt business of a UK Real Estate Investment Trust (“REIT”) are, relief is assured? however, subject to withholding tax at the rate of 20% if paid to There are no statutory safe harbour rules. Historically, HMRC non-resident shareholders (or to certain categories of UK resident adopted a rule of thumb that a company would not generally be shareholder); this may be reduced to 15%, or in a few cases less, by regarded as thinly capitalised where the level of debt to equity did an applicable double tax treaty. not exceed a ratio of 1:1 and the ratio of income (“EBIT”) to

interest was at least 3:1. HMRC’s current guidance moves away from 3.2 Would there be any withholding tax on royalties paid by this to apply the arm’s length standard on a case-by-case basis and a local company to a non-resident? sets out broad principles that should be considered; and the ratio cited most often is debt to EBITDA (earnings before interest, tax, In the absence of a double tax treaty and provided that the UK legis- depreciation and amortisation). lation implementing the Interest and Royalties Directive (2003/49/EC) does not apply, the rate of withholding tax on most 3.6 Would any such rules extend to debt advanced by a royalties is 20%. There is no withholding tax on film and video royalties. third party but guaranteed by a parent company? The UK legislation implementing that Directive provides that Yes. A company may be thinly capitalised because of a special there is no withholding tax on the payment of royalties (or interest) relationship between the borrower and the lender or because of a by a UK company (or a UK PE of an EU company) to an EU guarantee given by a person connected with the borrower. A company which is a “25% associate”. The exemption does not apply “guarantee” for this purpose need not be in writing and includes any to the extent that any royalties (or interest) would not have been paid case in which the lender has a reasonable expectation that it will be if the parties had been dealing at arm’s length. An EU company for paid by, or out of the assets of, another connected company. these purposes is a company resident in a Member State other than

the UK. HMRC has confirmed that this UK legislation will continue to 3.7 Are there any other restrictions on tax relief for interest apply in the event of a “no-deal Brexit”. payments by a local company to a non-resident, for example Finance Act 2019 introduced a new income tax charge on pursuant to BEPS Action 4? offshore receipts in respect of intangible property, including royalty payments, received in low or no tax jurisdictions in connection with The UK has introduced an EBITDA-based cap on net interest sales to UK customers. Although it was originally proposed as a expense as recommended in the OECD report on BEPS Action 4. withholding tax, it was enacted as a self-assessed income tax charge A fixed ratio rule limits corporation tax deductions for net interest recoverable from UK affiliates of the person exploiting the expense to 30% of a group’s UK “tax EBITDA” (so excluding, for intangible property, if not collected directly. example, non-taxable dividends); there is also a group ratio rule based on the net interest to EBITDA ratio for the worldwide group. 3.3 Would there be any withholding tax on interest paid by A consequence of the new 30% EBITDA cap is the repeal of the a local company to a non-resident? UK’s previous interest restriction rule known as the worldwide debt cap, although a rule with “similar effect” has been integrated into the In the absence of a double tax treaty and provided that the UK legis- new interest restriction rules to ensure that a group’s net UK interest lation implementing the Interest and Royalties Directive does not deductions cannot exceed the global net third-party interest expense apply, the rate of withholding tax on “yearly” interest which has a of the group. UK source and is paid to a non-resident is generally 20%. There is no withholding tax, however, where interest is paid on 3.8 Is there any withholding tax on property rental quoted Eurobonds or on debt traded on a multilateral trading facility payments made to non-residents? operated by a recognised stock exchange in an EEA territory. Since 1 January 2016, tax treaty protection has also been supplemented by In principle, such payments are subject to withholding tax (by the new rules for “private placements”. In commercial terms, this is a tenant or agent) at 20%, being the basic rate of income tax in the form of selective, direct lending by non-bank lenders (such as UK. However, the non-resident can register as an overseas landlord insurers) to corporate borrowers, but in practice HMRC appear to under the Non-resident Landlord Scheme (the “NRL Scheme”) and be happy for the regime to apply to standard syndicated bank loans. then account for income tax itself, again at 20%. Most commercial The compliance burden is comparatively light and the regime is landlords that are non-resident opt for registration under this particularly useful where the lender is in a jurisdiction whose tax scheme. treaty with the UK does not entirely eliminate withholding tax on One notable consequence of the reductions in the rate of corpor- interest. ation tax in recent years (see question 4.1 below) is that a UK corporate landlord may be paying less tax on UK source rent than a 3.4 Would relief for interest so paid be restricted by non-resident landlord. This disparity is to be removed from 6 April reference to “thin capitalisation” rules? 2020, however, when non-UK resident companies carrying on a UK property business are to be brought within the scope of corporation The UK has a thin capitalisation regime which applies to domestic tax on income. (As is noted in question 8.1 below, gains made by as well as cross-border transactions. A borrower is considered non-resident companies on the disposal of a direct or indirect according to its own financial circumstances when determining the interest in UK land came within the charge to corporation tax from

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6 April 2019.) It appears that such non-resident landlords will still subsidiaries, but the exact test for whether a group exists depends have to be registered under the NRL Scheme if they are to receive on the tax in question. UK-source rent free of withholding tax. Group relief group 3.9 Does your jurisdiction have transfer pricing rules? Losses (other than capital losses) can be surrendered from one UK resident group company to another UK resident group company. Yes. The UK transfer pricing rules apply to both cross-border and Losses can also be surrendered by or to a UK PE of a non-UK domestic transactions between associated companies. group company. A UK PE of an overseas company can only If HMRC do not accept that pricing is at arm’s length, they will surrender those losses as group relief if they are not relievable (other raise an assessment adjusting the profits or losses accordingly. It is than against profits within the charge to UK corporation tax) in the possible to make an application for an advance transfer pricing overseas country. Similarly, a UK company can surrender the losses agreement which has the effect that pricing (or borrowing) in of an overseas PE if those losses are not relievable (other than accordance with its terms is accepted as arm’s length. against profits within the charge to UK corporation tax) in the over- In cross-border transactions, the double taxation caused by a seas country. transfer pricing adjustment can be mitigated by the provisions of a The UK legislation permits group relief to be given in the UK for tax treaty. otherwise unrelievable losses incurred by group members established Changes to the OECD Transfer Pricing Guidelines made in elsewhere in the EU, even if they are not resident or trading in the response to BEPS are automatically followed in UK domestic law. UK. However, the applicable conditions are very restrictive, so in practice UK companies can rarely benefit from this rule. It remains 4 Tax on Business Operations: General to be seen whether it will be repealed after Brexit in any event, as it was only introduced to comply with EU law. Please also see question 4.5 below as regards a legislative change 4.1 What is the headline rate of tax on corporate proﬁts? which allows the surrender of carry-forward losses. The headline rate was 28% as recently as 2010 but is now 19%; and it is due to fall to 17% from April 2020 as part of a package of tax Capital gains group reforms designed to enhance UK competitiveness. However, banks There is no consolidation of capital gains and losses, but it is poss- have, since 2016, paid an 8% surcharge on top of the headline rate ible to make an election for a gain (or loss) on a disposal made by of corporation tax. one capital gains group member to be treated as a gain (or loss) on a disposal by another group member. Capital assets may be transferred between capital gains group 4.2 Is the tax base accounting proﬁt subject to members on a no gain/no loss basis. This has the effect of adjustments, or something else? postponing liability until the asset is transferred outside the group or until the company holding the asset is transferred outside the In general terms, tax follows the commercial accounts subject to group. When a company leaves a capital gains group holding an adjustments. asset which it acquired intra-group in the previous six years, a

degrouping charge may arise. However, in many cases, the 4.3 If the tax base is accounting proﬁt subject to degrouping charge will be added to the consideration received for adjustments, what are the main adjustments? the sale of the shares in the transferee company and will then be exempt under the substantial shareholding regime (see question 5.2 Certain items of expenditure which are shown as reducing the below for details of this regime). profits in the commercial accounts are added back for tax purposes, and deductions may then be allowable. For example, in the case of Stamp duty and SDLT groups most plant or machinery, capital allowances on a reducing balance Transfers between group companies are relieved from stamp duty basis (at various rates depending on the type of asset and the level or from SDLT where certain conditions are met. of expenditure incurred – the rules are not very generous) are substituted for accounting depreciation. VAT group UK tax legislation has been amended to deal with various issues Transactions between group members are disregarded for VAT arising from companies adopting International Accounting purposes (although HMRC have powers to override this in certain Standards for their accounts and, in certain circumstances, related circumstances). Broadly, two or more corporate bodies are eligible adjustments are required for tax purposes. In particular, changes to be treated as members of a VAT group if each is established or have been made in order to preserve the current tax treatment of has a fixed establishment in the UK and they are under common leases following the introduction of International Financial control. Finance Act 2019 extended the eligibility criteria, from a Reporting Standard 16 (leasing). date to be set by regulations, to permit non-corporate entities (such Since autumn 2015, a revised set of rules governing the tax treat- as partnerships and individuals) who have a business establishment ment of corporate debt and derivative contracts has been in place. in the UK and control a body corporate to join a VAT group, subject The revised regime includes a broad anti-avoidance provision which to certain conditions. Please also see question 2.5 above. may lead to an increase in the circumstances in which the taxation of such financial instruments deviates from their accounting treat- 4.5 Do tax losses survive a change of ownership? ment. Tax losses may survive a change of ownership but, like many other 4.4 Are there any tax grouping rules? Do these allow for jurisdictions, the UK has rules which can deprive a company of relief in your jurisdiction for losses of overseas subsidiaries? carry-forward losses in certain circumstances following such a change. The policy objective is to combat loss-buying but the rules Yes. The UK does not permit group companies to be taxed on the can easily apply where there is no tax motivation for the change in basis of consolidated accounts, but the grouping rules achieve a ownership. degree of effective consolidation for various tax purposes. A group With effect from 1 April 2017, significant changes have been consists, in most cases, of a parent company and its direct or indirect made to the carry-forward loss regime more generally. On the

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positive side, where specified conditions are met the changes enable 5.3 Is there any special relief for reinvestment? carried-forward losses incurred on or after 1 April 2017 to be carried forward and set off against other income streams and against profits There is rollover relief for the replacement of certain categories of from other companies within a group; this is more flexible than the asset used for the purposes of a trade. Rollover is available to the old rules, although the new flexibility is substantially restricted where extent that the whole or part of the proceeds of disposal of such there is a change in ownership of the company with losses. The assets is, within one year before or three years after the disposal, negative aspect of the changes is that the amount of taxable profit applied in the acquisition of other such assets. that can be offset by carried-forward losses is restricted to 50%, It is a feature of the UK’s rules that the replacement assets have though this only applies to taxable profits in excess of £5 million to remain within the UK tax net. In 2015, a similar requirement was (calculated on a group basis). Unlike the first measure, this applies held by the CJEU to be a restriction on freedom of establishment to historic losses, not just those incurred on or after 1 April 2017. (European Commission v Germany (C-591/13)): the Court ruled that the From 1 April 2020, a similar restriction is proposed for carried- taxpayer should be able to choose between immediate payment or forward capital losses and the £5m allowance will then be applied bearing the administrative burden of deferring the tax. With the UK across both types of losses. There are different restrictions for preparing to exit the EU, however, it seems unlikely that the UK will banks. change its rules to permit a deferral.

4.6 Is tax imposed at a different rate upon distributed, as 5.4 Does your jurisdiction impose withholding tax on the opposed to retained, profits? proceeds of selling a direct or indirect interest in local assets/shares? No, it is not. This occurs only in very specific circumstances; one example is on 4.7 Are companies subject to any significant taxes not the sale of UK patent rights by a non-resident individual who is covered elsewhere in this chapter – e.g. tax on the subject to UK income tax on the proceeds of the sale (or by a non- occupation of property? resident company which is subject to UK corporation tax, if the buyer is an individual). Business rates are payable by the occupier of business premises based on the annual rental value. The rate depends on the location 6 Local Branch or Subsidiary? of the business premises and the size of the business. Business rates are a deductible expense for corporation tax purposes. 6.1 What taxes (e.g. capital duty) would be imposed upon An annual tax on enveloped dwellings (“ATED”) is payable by the formation of a subsidiary? companies and certain other “non-natural persons” if they own interests in dwellings with a value of more than £500,000. There are There are no taxes imposed on the formation of a subsidiary. reliefs available, including where the dwelling is being or will be used for genuine commercial activities. 6.2 Is there a difference between the taxation of a local There are special regimes for the taxation of certain types of activity or company, such as oil exploration (profits from which are subsidiary and a local branch of a non-resident company (for taxed at 30% and are also subject to a “supplementary charge”, the example, a branch profits tax)? rate of which is currently 10%) and UK REITs (which are not generally taxed on income or gains from investment property). Yes: a UK resident subsidiary will pay corporation tax on its worldwide income and gains unless it makes the election described in 5 Capital Gains question 7.1 below, whereas a UK branch is liable to corporation tax only on the items listed in question 6.3. Subject to the exceptions noted immediately below, the charge to 5.1 Is there a special set of rules for taxing capital gains UK corporation tax imposed on a non-resident company currently and losses? applies only where the non-resident company is trading in the UK through a PE; this means that a branch set up for investment Corporation tax is chargeable on “profits”, which includes both purposes only, and not carrying on a trade, is not subject to UK income and capital gains. There is, however, a separate regime for corporation tax, though certain types of income arising in the UK computing capital gains. This contains more exemptions, but also − notably rent and interest − may be subject to income tax through has the effect that capital losses can only be used against gains, not withholding (at 20%). against income. The exceptions relate to UK land. A non-resident company can now be subject to corporation tax even where it does not have a PE 5.2 Is there a participation exemption for capital gains? in the UK, if it is nonetheless trading “in” the UK and the trade consists of “dealing in or developing” UK land. From 6 April 2019, Yes. A substantial shareholdings exemption (“SSE”) allows trading non-UK resident companies are subject to corporation tax on their groups to dispose of trading subsidiaries without a UK tax charge. gains from direct and indirect disposals of interests in UK land The SSE is narrower and more complex than the participation (where certain conditions are met (see question 8.1 below)). And as exemption found in some other countries, though some of the noted in question 3.8 above, from 6 April 2020 UK-source rent will original restrictions have been removed. come within the charge to corporation tax in the hands of non-UK Capital gains realised on the disposal of assets by non-residents resident companies. are not generally subject to corporation tax unless the assets were used for the purposes of a trade carried on through a UK PE, as 6.3 How would the taxable profits of a local branch be noted in question 6.3 below, though see question 8.1 for an exception relating to UK land. determined in its jurisdiction?

Assuming that the local branch of a non-resident company is within the UK statutory definition of “permanent establishment” (which

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is based on, but not quite the same as, the wording of Article 5 of and exemptions. These include a finance company partial exemption the OECD Model Convention), it will be treated as though it were (“FCPE”) which (while the main rate of corporation tax is 19%) a distinct and separate entity dealing wholly independently with the results in an effective UK corporation tax rate of 4.75% on profits non-resident company. It will also be treated as having the equity earned by a CFC from providing funding to other non-UK members and loan capital which it would have if it were a distinct entity, which of the relevant group. Indeed, in some instances such profits will means that the UK’s thin capitalisation rules will apply to it. not be caught by the CFC charge at all. Subject to any treaty provisions to the contrary, the taxable profits The Commission’s state aid investigation concluded that the of a PE through which a non-resident company is trading in the UK FCPE was partially non-compliant with state aid rules before would comprise: changes were made to it with effect from 1 January 2019. The ■ trading income arising directly or indirectly through, or from, Commission concluded that applying an exemption to profits which the PE; were attributable to UK “significant people functions” was not a ■ income from property and rights used by, or held by or for, the justified derogation. The UK government and a large number of PE (but not including exempt distributions); and taxpayers have appealed the Commission’s decision. ■ capital gains accruing on the disposal of assets situated in the A change that took effect from 8 July 2015 adds a punitive UK and effectively connected with the operations of the PE. element to the new regime: a group which has losses can no longer use them against a CFC charge. This reduces the attractiveness of 6.4 Would a branch benefit from double tax relief in its the FCPE for groups with carried-forward losses. A couple of aspects of the UK’s CFC rules have been revised to jurisdiction? ensure that the rules are fully compliant with the EU Anti-Tax The UK domestic legislation does not give treaty relief against UK Avoidance Directive (“ATAD”). tax unless the person claiming credit is resident in the UK for the accounting period in question. This means that the UK branch of 8 Taxation of Commercial Real Estate a non-resident company cannot claim treaty relief. Unilateral tax credit relief may be allowed for tax paid outside the 8.1 Are non-residents taxed on the disposal of commercial UK in respect of the income or chargeable gains of a UK branch real estate in your jurisdiction? or agency of a non-UK resident person if certain conditions are fulfilled. Tax payable in a country where the overseas company is Since 6 April 2019, non-UK resident companies are subject to taxable by reason of its domicile, residence or place of management corporation tax on their gains from direct and indirect disposals of is excluded from relief. interests in UK land (whether commercial or residential) where certain conditions are met. 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the 8.2 Does your jurisdiction impose tax on the transfer of an branch? indirect interest in commercial real estate in your jurisdiction? No, it would not. From 6 April 2019, non-resident companies are in specified circum- 7 Overseas Profits stances subject to a charge to corporation tax on the disposal of an interest in a property-rich entity. 7.1 Does your jurisdiction tax profits earned in overseas branches? 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent? As a general rule, and subject to tax treaty provisions, the UK taxes the profits earned in overseas branches of UK resident companies. Yes. Since 2007, the UK’s REIT regime has enabled qualifying A UK company can, however, elect for the profits (including capital companies to elect to be treated as REITs. The conditions for gains) of its overseas branches to be exempt from UK taxation. The qualification include UK residence, listing (on a main or secondary downside of such an election is that the UK company cannot then stock market), diversity of ownership and a requirement that three- use the losses of the overseas branch. An election is irrevocable and quarters of the assets and profits of the company (or group) are covers all overseas branches of the company making the election. attributable to its property rental business. The aim of the regime is that there should be no difference from 7.2 Is tax imposed on the receipt of dividends by a local a tax perspective between a direct investment in real estate and an investment through a REIT. Accordingly, a REIT is exempt from company from a non-resident company? tax on income and gains from its property rental business but Foreign dividends and UK dividends (other than “property income distributions of such income/gains are treated as UK property dividends” from a UK REIT) are treated in the same way. They are income in the hands of shareholders and, as noted in question 3.1 generally exempt in the hands of a UK company, subject to some above, are liable to 20% withholding tax (subject to exceptions). complex anti-avoidance rules and an exclusion for dividends paid by a “small” company which is not resident in the UK or a “qualifying 9 Anti-avoidance and Compliance territory”. 9.1 Does your jurisdiction have a general anti-avoidance or 7.3 Does your jurisdiction have “controlled foreign anti-abuse rule? company” rules and, if so, when do these apply? Although a GAAR was enacted in the UK for the first time in 2013, It does, though the UK’s current CFC regime has a more territorial the UK courts have not yet been asked to make sense of it. One focus than its predecessor. Profits which arise naturally outside the reason for this is that, before invoking the GAAR, HMRC must ask UK are not supposed to be caught. There are also various exclusions an independent advisory panel (the GAAR Panel) for its opinion as

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to whether the GAAR should apply (though it can use a GAAR 9.4 Does your jurisdiction encourage “co-operative Panel opinion in one case to counteract “equivalent arrangements” compliance” and, if so, does this provide procedural beneﬁts used by other taxpayers). The GAAR Panel opinions to date have all been in HMRC’s favour. Another reason is the massive financial only or result in a reduction of tax? deterrent to challenging HMRC’s application of the GAAR. If the Yes. HMRC have encouraged co-operative compliance for a number GAAR applies, HMRC can counteract the tax advantage by the of years; it is meant to go hand in hand with HMRC’s risk assessment making of “just and reasonable” adjustments. Taxpayers who enter strategy and enable HMRC to concentrate resources on the higher into arrangements on or after 15 September 2016 that are counter- risk, less co-operative taxpayers. It initially led to an improved acted by the GAAR are liable to a penalty of 60% of the relationship between taxpayers and HMRC and, while it may not counteracted tax unless they “correct” their tax position before the result in lower tax liabilities, it does reduce compliance costs. More arrangements are referred to the GAAR Panel. recently, though, there has been a perception that HMRC has become The GAAR contains two tests: are there arrangements which have more likely to litigate even where the taxpayer is co-operative. as their main purpose securing a tax advantage; and if so, are they

arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action (the justly 10 BEPS and Tax Competition maligned “double reasonableness” test)? This is to be assessed “having regard to all the circumstances”, including consistency with 10.1 Has your jurisdiction introduced any legislation in policy objectives, whether there are any contrived or abnormal steps response to the OECD’s project targeting BEPS? and whether the arrangements exploit any shortcomings in the relevant provisions. The UK was the first country to commit formally to implementing As predicted, the GAAR has had little impact on corporate the country-by-country template, and regulations have been in effect taxpayers, as they had already begun to adopt a more conservative since March 2016. approach to tax planning; and the 60% penalty will doubtless prove The UK, controversially, pre-empted the BEPS project and intro- a strong incentive for taxpayers to settle future cases before they are duced, with effect from 1 April 2015, an entirely new tax – the referred to the GAAR Panel. “diverted profits tax” (“DPT”) – which is intended to protect the UK The ATAD includes an anti-avoidance rule which is broader than tax base. It has two main targets: where there is a substantial UK the UK’s GAAR but the UK has not yet shown any signs of operation but sales to UK customers are made by an affiliate outside implementing the EU GAAR. the UK, in such a way that the UK operation is not a PE of the non- UK affiliate; and where the UK operation makes deductible payments 9.2 Is there a requirement to make special disclosure of (e.g. royalties for intellectual property (“IP”)) to a non-UK affiliate, these are taxed at less than 80% of the rate of corporation tax and avoidance schemes? the affiliate has insufficient “economic substance”. As a deterrent, The UK has disclosure rules (with the acronym “DOTAS”) which the rate applicable to the “diverted” profits is 25%, which is materially are designed to provide HMRC with information about potential tax higher than the rate at which tax would otherwise have been payable. avoidance schemes at an earlier stage than would otherwise have The UK has modified its patent box regime in response to Action been the case. This enables HMRC to investigate the schemes and 5 (Countering Harmful Tax Practices) (see question 10.4 below). introduce legislation (often a new “targeted anti-avoidance rule”) to “Anti-hybrids” legislation has been in effect from 1 January 2017 counteract the avoidance where appropriate. (see question 10.2 below). These rules are being revised to comply The Government sees these mandatory disclosure rules as the fully with ATAD. answer to Action 12 of the BEPS project (that taxpayers be required Legislation to implement Action 4 (Deductibility of Interest) (see to disclose their aggressive tax planning arrangements). question 3.7 above) was included in Finance (No.2) Act 2017, with retrospective effect from 1 April 2017.

9.3 Does your jurisdiction have rules which target not only 10.2 Has your jurisdiction signed the tax treaty MLI and taxpayers engaging in tax avoidance but also anyone who deposited its instrument of ratiﬁcation with the OECD? promotes, enables or facilitates the tax avoidance? Yes: the UK has signed the MLI and deposited its instrument of Yes: the Finance Act 2017 brought in new rules under which advisers ratification with the OECD on 29 June 2018. It has also notified and others who “enable” the implementation of “abusive tax most of its treaties to the OECD so that (subject to the relevant arrangements” can be penalised if those arrangements are inef- treaty partner’s agreement) the modifications to the UK’s treaties fective. required by BEPS can be made. The Government has also co-opted third parties in the fight against tax evasion. From 30 September 2017, the Criminal Finances Act 2017 introduced two new corporate offences of failure to 10.3 Does your jurisdiction intend to adopt any legislation to prevent the facilitation of UK or foreign tax evasion. This can make tackle BEPS which goes beyond the OECD’s organisations liable for the actions of their employees and other recommendations? persons performing services for or on behalf of the organisation (so potentially including any contractor or sub-contractor) unless the Yes. The first example of a measure not required by the OECD organisation can show that it has reasonable procedures in place to BEPS reports is the DPT (see question 10.1 above). prevent these offences being committed. The “anti-hybrids” regime provides a second example. The UK The Government intends to implement the EU intermediaries has implemented very broad rules which, because of the absence of disclosure rules which provide for the mandatory disclosure of a motive test or a UK tax benefit test, mean that third-party, cross-border “potentially aggressive tax planning arrangements” by commercially motivated transactions are potentially within scope. intermediaries (EU Directive 2018/882). Draft regulations and guidance were published in July 2019 for consultation prior to final regulations being made by the end of the year.

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A third example is the UK’s extension of royalty withholding tax. 11 Taxing the Digital Economy In particular, this will now effectively have extra-territorial scope in some circumstances: where the way in which sales are made in the UK creates an actual PE or, in DPT terms, an “avoided” PE, IP 11.1 Has your jurisdiction taken any unilateral action to tax royalties paid out of (say) the European hub for sales activities will digital activities or to expand the tax base to capture digital be treated for the purposes of UK withholding tax as having been presence? paid out of the UK, to the extent it is “just and reasonable” to do so. The Finance Act 2019 then introduced a new income tax charge Yes. Although the UK is keen to agree a reform of the international on offshore receipts in respect of intangibles (including royalties) tax rules on a multilateral basis, the Government has proposed legis- which relate to sales to UK customers. lation to enact a revenue-based digital services tax (“DST”) from There has also been a tendency for the Government to accelerate April 2020 as an interim measure. The DST will be imposed at a rate the introduction of measures; besides its pre-emptive strike with of 2% on the revenues of search engines, social media platforms and DPT, discussed in question 10.1, the Government rushed through a online marketplaces which derive value from UK users. Associated corporate interest restriction (question 3.7), whereas the report on online advertising business is also in scope if operated on an online BEPS Action 4 had recommended that reasonable time be given to platform that facilitates the placing of online advertising and derives entities to restructure existing financing arrangements before interest significant benefit from its connection with the social media plat- restriction rules come into effect. form, search engine or online marketplace. In order to ease double taxation, the revenues from online market- 10.4 Does your jurisdiction support information obtained places will be reduced to 50% of the revenues from the transaction when the other user in respect of the transaction is normally located under Country-by-Country Reporting (CBCR) being made in a country that operates a similar tax to the DST. available to the public? The DST will apply to in-scope businesses when the group’s worldwide revenues from these digital activities are more than The Government has spoken out in favour of public CBCR, though £500m and more than £25m of the revenues are derived from UK the OECD has subsequently expressed concern that it would do users. If the group’s revenues exceed these thresholds, its revenues more harm than good if only some jurisdictions require public derived from UK users will be taxed at a rate of 2%. There is an reporting and there is a lack of consistency in what has to be allowance of £25m, which means a group’s first £25m of revenues reported. The UK legislation contains a power to switch on public derived from UK users will not be subject to DST. reporting but this is unlikely to be used before a multilateral agree- Businesses will be able to elect to make an alternative calculation ment is in place. based on UK operating margin. This is to ensure that where a UK

activity is loss-making, no DST needs to be paid on revenues 10.5 Does your jurisdiction maintain any preferential tax attributable to that activity. regimes such as a patent box? The draft legislation contains a requirement that it be reviewed by the Treasury before the end of 2025 and a report laid before Until 30 June 2016, the UK had a patent box regime which allowed Parliament. The Government is committed to disapplying the DST an arm’s length return on IP held in the UK to qualify for a reduced once an appropriate international solution is in place. tax rate of 10% even if all the associated research and development (“R&D”) activity was done outside the UK. In light of BEPS 11.2 Does your jurisdiction favour any of the G20/OECD’s Action 5, IP which was already in the patent box on 30 June continues to benefit from the old rules for five years. IP not already “Pillar One” options (user participation, marketing intangibles in the patent box on that date qualifies only to the extent it is gener- or signiﬁcant economic presence)? ated by R&D activities of the UK company itself, or by R&D outsourced to third parties; and acquired IP and IP generated by The UK favours user participation. The consultation document on R&D outsourced to associates are no longer eligible for the patent the interim DST emphasised that an international solution would box. need to meet the UK’s policy objective of leading to a greater Where IP has been generated from a combination of “good” and allocation of profit of highly digitalised businesses to the countries “bad” expenditure, a fraction of the patent income qualifies for the in which their users are located, regardless of whether the solution patent box and, in calculating this, there is a 30% uplift for “good” has a broader application. expenditure, to soften the impact of these rule changes.

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Zoe Andrews is a senior professional support lawyer in the Slaughter and May Tax Department, covering all aspects of UK corporate tax and international tax developments affecting the UK. Particular areas of interest in recent years have included the development of FATCA and other automatic exchange of information regimes, BEPS and the taxation of the digitalised economy.

Slaughter and May Tel: +44 20 7090 5017 One Bunhill Row Email: [email protected] London URL: www.slaughterandmay.com EC1Y 8YY United Kingdom

William Watson joined Slaughter and May in 1994 and became a partner in the Tax Department in 2004. His practice covers all UK taxes relevant to corporate and financing transactions. Particular areas of interest include real estate and the oil & gas sector; however, William also has extensive experience more generally of mergers & acquisitions, demergers and other corporate structuring, debt and equity financing and tax litigation. William is listed as a leading individual in the Tax section of Chambers UK, Chambers Europe and Chambers Global, 2019. He is also listed in the latest edition of the International Tax Review’s Tax Controversy Leaders Guide and in Who’s Who Legal, 2019 and is recommended for Corporate Tax in The Legal 500, 2019.

Slaughter and May Tel: +44 20 7090 5052 One Bunhill Row Email: [email protected] London URL: www.slaughterandmay.com EC1Y 8YY United Kingdom

Slaughter and May is a leading international law firm with a worldwide “Slaughter and May is one of the best legal firms I have had the pleasure to corporate, commercial and financing practice. Our highly experienced Tax work with. All members of the firm have been responsive and extremely group deals with the tax aspects of all corporate, commercial and financial competent.” – Chambers UK, 2019 transactions. Alongside a wide range of tax-related services, we advise on: “Outstanding London office offering pan-European tax advice alongside its ■ structuring of the biggest and most complicated mergers & acquisitions extensive ‘best friends’ network of prominent firms. Particular strength in and corporate finance transactions; structuring and the establishment of joint ventures. Provides sophisticated ■ development of innovative and tax-efficient structures for the full range of expertise on high-profile M&A and financing transactions. Client roster financing transactions, working with lawyers from our Financing group; includes leading multinational companies from a variety of sectors including telecoms, retail and life sciences, as well as private equity houses.” – ■ documentation to implement transactions, to ensure that it meets tax objectives; Chambers Europe, 2019 “Their knowledge, client service, responses and ability to cut through complex ■ tax aspects of private equity transactions and investment funds from issues are outstanding.” – Chambers Europe and Global, 2019 initial investment to exit; and Winners of the Best Corporate Tax Practice award at Tolley’s Taxation Awards ■ tax investigations and disputes from initial queries to litigation or 2018. settlement. *The Best Friends Tax Network comprises BonelliErede (Italy), Bredin Prat We also provide a general tax and stand-alone tax consultancy service which (France), De Brauw Blackstone Westbroek (the Netherlands), Hengeler Mueller aims to offer constructive and innovative tax solutions. Much of our work has (Germany), Slaughter and May (UK) and Uría Menéndez (Spain and Portugal). an international dimension and we work closely with members of the Best www.slaughterandmay.com Friends Tax Network* and other leading local tax advisers to enable our clients to meet their objectives in the most positive and tax efficient way. “Slaughter and May’s ‘high quality’ team provides ‘very commercial’ advice to clients on the taxation aspects of large corporate and fund-related transactions. The firm also has a well-developed tax advisory practice which draws on the ‘excellent technical and practical knowledge’ within the group.” – The Legal 500, 2019

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USA USA

Joseph M. Pari

Devon M. Bodoh

Weil, Gotshal & Manges LLP Lukas Kutilek

1 Tax Treaties and Residence To become effective under United States law, income tax treaties must be approved by a two-thirds majority vote of the U.S. Senate, followed by a ratification by the President of the United States. 1.1 How many income tax treaties are currently in force in Specific implementation legislation is not required. your jurisdiction? 1.4 Do they generally incorporate anti-treaty shopping The United States currently has in force 58 income tax treaties covering 66 jurisdictions. Four income tax treaties are currently rules (or “limitation on beneﬁts” articles)? awaiting U.S. Senate approval, namely proposed treaties with Yes. Most United States income tax treaties in force include a Hungary and Poland (replacing treaties in force) and Chile and limitation on benefits article and, in addition, those treaties may Vietnam (entering into a treaty for the first time). In addition, contain other anti-treaty shopping provisions. The 2016 U.S. Model protocols amending treaties currently in force with Japan, Income Tax Convention includes (i) the limitation on benefits article, Luxembourg, Spain and Switzerland have been approved by the U.S. which prevents residents of third-country jurisdictions from Senate and are awaiting presidential ratification. obtaining benefits under a treaty, (ii) a “triangular branch” provision,

which limits treaty benefits for income attributable to a third-country 1.2 Do they generally follow the OECD Model Convention or permanent establishment if little or no tax is paid in the permanent another model? establishment’s jurisdiction, (iii) the “special tax regime” concept, which denies treaty benefits for items of income subject to a The United States’ treaties generally do not follow the OECD Model preferential tax regime, and (iv) a limitation that denies treaty benefits Convention. The United States follows its own model (currently the for certain payments made by expatriated entities. 2016 U.S. Model Income Tax Convention), which had originally Some of the most significant income tax treaties that include developed from the OECD Model Convention and thus generally neither a limitation on benefits article nor a triangular branch parallels its structure. Similar to the introduction to the OECD provision are the treaties with Hungary and Poland. However, new Model Convention, the preamble to the U.S. Model Convention has treaties that include both such provisions are currently awaiting U.S. been updated to explicitly state the underlying policy that treaties Senate approval to replace these treaties. should eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance 1.5 Are treaties overridden by any rules of domestic law (the “single tax principle”). Despite their similarities, there are important differences between the (whether existing when the treaty takes effect or introduced two models. For example, under the U.S. Model Convention, a person subsequently)? other than an individual that is a resident of both contracting states is treated as not being a resident of either contracting state for purposes Yes. The U.S. Constitution provides that the Constitution, Acts of of claiming treaty benefits, whereas under the OECD Model Congress and treaties are the “supreme Law of the Land”. The U.S. Convention, the competent authorities of the contracting states should Supreme Court has held that the U.S. Constitution prevails in cases endeavor to determine such person’s residence by mutual agreement. where it conflicts with a federal law or a treaty. Federal legislation Also, the United States generally insists on the inclusion of the limitation (including the Internal Revenue Code of 1986, as amended (the on benefits article to tackle treaty abuse, as opposed to the principal “Internal Revenue Code”)) and income tax treaties are on equal purpose test advanced by the multilateral instrument developed under footing under the U.S. Constitution and thus the later-in-time rule the OECD Base Erosion and Profit Shifting (“BEPS”) initiative. (lex posterior derogat legi priori) generally applies. Nevertheless, U.S. courts first attempt to interpret the law in order to give effect to both the federal law and a treaty, and, although it is widely believed to not 1.3 Do treaties have to be incorporated into domestic law be required, some authorities seem to require a clear and manifest before they take effect? legislative intent to override a treaty by the federal law.

1.6 What is the test in domestic law for determining the 2.5 Does your jurisdiction permit VAT grouping and, if so, residence of a company? is it “establishment only” VAT grouping, such as that applied by Sweden in the Skandia case? The United States generally uses the place of incorporation rule for determining corporate tax residence, under which a corporation is a This is not applicable. “domestic corporation” if it is created or organized in the United States under the law of the United States, any U.S. state or the 2.6 Are there any other transaction taxes payable by District of Columbia. In addition to tax residence, the classification of an entity under companies? the “check-the-box regulations” must be determined because such Various other transaction taxes may apply at the state and local levels. classification governs if and how such entity is taxed for U.S. federal For example, most U.S. states impose an ad valorem real property income tax purposes. Domestic and foreign business entities may transfer tax. be classified as corporations, partnerships or entities disregarded as

separate from their owners. A business entity with two or more owners is classified either as a corporation or a partnership, and a 2.7 Are there any other indirect taxes of which we should business entity with only one owner is either classified as a corpor- be aware? ation or is disregarded as an entity separate from its owner. An entity is classified as a “per se corporation” if it is organized U.S. states and local governments impose various other indirect taxes under a U.S. federal statute or a U.S. state statute that describes the such as excise taxes, mortgage recording taxes, telecommunication entity as incorporated or as a corporation, body corporate or body taxes or insurance premium taxes. politic, if it is a foreign entity in a form enumerated in the regulations or if it falls within certain other categories. If an entity does not 3 Cross-border Payments meet any of these requirements, it is an “eligible entity” with respect to which its classification is elective. Default classification rules 3.1 Is any withholding tax imposed on dividends paid by a determine initial classification, which can be changed by filing the locally resident company to a non-resident? appropriate forms with the Internal Revenue Service (“IRS”); by default, a “domestic eligible entity” is a partnership if it has two or Yes. Non-U.S. tax residents are generally taxed in the United States on more owners or is disregarded as an entity separate from its owner U.S.-sourced income associated with passive investment assets, including if it has a single owner, and a “foreign eligible entity” is a partnership dividends, interest, rents, royalties and other “fixed or determinable if it has two or more owners and at least one has unlimited liability, annual or periodic gains, profits and income” (collectively referred to as an association (which is a per se corporation) if all owners have “FDAP”), to the extent such items of income are not effectively limited liability or is disregarded as an entity separate from its owner connected with the conduct of a U.S. trade or business or attributable if it has a single owner with limited liability. to a permanent establishment (see question 6.3). Such FDAP is subject to a 30% gross basis substantive tax that is enforced by withholding at 2 Transaction Taxes the source. Thus, dividends paid by a U.S. corporation to a non-U.S. tax resident are generally subject to a 30% U.S. withholding tax, unless that 2.1 Are there any documentary taxes in your jurisdiction? tax is reduced by an applicable income tax treaty.

Certain U.S. states and local jurisdictions impose documentary taxes, 3.2 Would there be any withholding tax on royalties paid by but there are no such taxes imposed under federal law. a local company to a non-resident?

2.2 Do you have Value Added Tax (or a similar tax)? If so, at Yes. Royalty income generally constitutes FDAP (see question 3.1) what rate or rates? and is subject to a 30% U.S. withholding tax, unless that tax is reduced by an applicable income tax treaty. The United States does not impose a value added tax at the federal, state or local level. Some states, however, impose sales and use taxes 3.3 Would there be any withholding tax on interest paid by on retail purchases of goods or services. In addition, the U.S. federal a local company to a non-resident? government imposes excise taxes on the purchase of certain specified goods (such as gasoline) or activities (such as commercial Yes. Interest income generally constitutes FDAP (see question 3.1) and highway usage). The rates vary based on the type of tax and is subject to a 30% U.S. withholding tax, unless that tax is reduced or jurisdiction. eliminated by an applicable income tax treaty. In addition, the “portfolio interest exemption” (“PIE”) generally exempts, from the otherwise 2.3 Is VAT (or any similar tax) charged on all transactions applicable withholding tax, interest paid on registered obligations held or are there any relevant exclusions? by non-U.S. persons that own less than 10% of the voting power of the payer. The PIE is subject to various requirements and exceptions (for State and local sales and use taxes usually include exceptions for example, it is not available to (i) banks receiving interest on ordinary- specified goods or services (such as food or medical care), parties course loans, and (ii) certain controlled foreign corporations). (such as diplomats and governments) or certain types of transactions (such as the sale of stock or other specified corporate reorgan- 3.4 Would relief for interest so paid be restricted by izations). reference to “thin capitalisation” rules?

2.4 Is it always fully recoverable by all businesses? If not, Generally, no. Although the United States imposes various what are the relevant restrictions? limitations on the deductibility of interest expenses, the availability of the PIE or treaty benefits to non-U.S. persons is not directly Because sales and use taxes are typically imposed on consumers, they limited by such limitation. are generally not recoverable.

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3.5 If so, is there a “safe harbour” by reference to which tax from whatever source derived”; thus, the United States employs a global definition of income based on the accretion concept, where relief is assured? any accession to wealth (other than mere appreciation of asset value This is not applicable. with nothing more) constitutes income unless the Internal Revenue Code expressly excludes it.

3.6 Would any such rules extend to debt advanced by a 4.3 If the tax base is accounting proﬁt subject to third party but guaranteed by a parent company? adjustments, what are the main adjustments? This is not applicable. This is not applicable.

regulations, are very detailed and complex. Very generally, certain 3.8 Is there any withholding tax on property rental U.S. entities classified as corporations for U.S. federal income tax payments made to non-residents? purposes may elect to join in filing a consolidated return if they are members of an “affiliated group”. An affiliated group is generally Yes. Rental income generally constitutes FDAP (see question 3.1) one or more chains of corporations connected through stock owner- and is subject to a 30% U.S. withholding tax, unless that tax is ship with a common parent corporation, which must satisfy certain reduced by an applicable income tax treaty. detailed stock-ownership rules with respect to the subsidiary corporations (generally requiring at least 80% ownership measured by 3.9 Does your jurisdiction have transfer pricing rules? voting power and value, but disregarding certain debt-like preferred stock). Sales, dividends and other intercompany transactions Yes. The Internal Revenue Code authorizes the IRS to adjust items between members of a consolidated group are generally deferred of income, deductions, credits or allowances of commonly until a transaction occurs with a non-member. Groups of corpor- controlled taxpayers to prevent tax evasion. The applicable standard ations filing consolidated returns are subject to various special rules, in examining intercompany transactions is that of a “taxpayer such as rules on intercompany transactions, loss disallowance rules, dealing at arm’s length with an uncontrolled taxpayer” (arm’s length loss sharing rules, several liability among members of the group with standard), which generally is met if the results of the transaction are respect to federal income taxes and basis adjustments with respect consistent with the results that would have been realized if uncon- to subsidiary member stock owned by other members of the trolled taxpayers had engaged in a comparable transaction under consolidated group. comparable circumstances (standard of comparability). The U.S. tax In addition, many U.S. states allow or require consolidation for regulations include detailed rules regarding how such standards may state corporate income tax purposes. be met. If the IRS exercises its adjustment authority, the taxpayer bears the burden of proof to show that the arm’s length standard 4.5 Do tax losses survive a change of ownership? was met. Although transfer pricing documentation generally is not required The Internal Revenue Code and the tax regulations include numerous by law, it is recommended that taxpayers maintain contemporaneous complex rules regarding loss utilization. One important anti-loss documentation to support their transfer pricing practices, and trafficking rule limits the deductibility of losses by a corporation if taxpayers are subject to various generally-applicable reporting there has been a sufficient change of ownership in the stock of such obligations. Valuation misstatement penalties and reporting penalties corporation. If the elements of the rule are met, the amount of may apply. losses that may be utilized per year generally is limited by the product of (i) the corporation’s fair market value at the time of the ownership 4 Tax on Business Operations: General change and (ii) a published rate of return (1.77% as of October 2019). That limitation, however, is subject to certain complex poten- 4.1 What is the headline rate of tax on corporate proﬁts? tial adjustments. For purposes of this rule, a relevant change of ownership generally occurs when, over a three-year testing period, The maximum U.S. corporate income tax rate is currently 21%. In certain large shareholders (generally holding at least 5% measured by addition, U.S. states and local governments may levy corporate value) increase their ownership in a corporation that is entitled to use income taxes on the same (or similar) tax base, but such taxes are net operating loss carryovers (or certain built-in asset losses) by more generally deductible from the federal income tax base for corpor- than 50 percentage points. In addition, the limitation is reduced to ations. The average combined U.S. federal, state and local corporate zero in cases where the loss corporation subject to the limitation income tax rate is 25.89%. discontinues or changes to a sufficient extent its business. Another rule generally disallows a corporation’s losses entirely if a person or 4.2 Is the tax base accounting proﬁt subject to persons acquire stock of a corporation possessing 50 percent or more adjustments, or something else? of the voting power or value of the stock of that corporation and the principal purpose of the acquisition is tax avoidance. The U.S. federal income tax is imposed on “taxable income”, which In the context of consolidated returns (see question 4.4), the is calculated as “gross income” reduced by deductions allowed under separate return limitation year (“SRLY”) rules limit the use of losses the Internal Revenue Code. Gross income is defined as “income of a corporation incurred in taxable years when it was not a member

of its current consolidated group, such that they may generally only 5.3 Is there any special relief for reinvestment? offset income determined by reference to only such corporation’s items of income, gain, deduction and loss. Many other rules not discussed The Internal Revenue Code includes various nonrecognition herein, in the interest of brevity, may also limit the use of losses. provisions under which a built-in gain is deferred (or in the case of a tax-free subsidiary spin-off, eliminated) rather than recognized and 4.6 Is tax imposed at a different rate upon distributed, as included in taxable income in the specified transaction. For example, opposed to retained, proﬁts? such provisions include like-kind exchanges of real property, involuntary conversion, transfers of property between spouses or Generally, no. However, whether an entity distributes its earnings or incident to a divorce and certain corporate reorganizations such as not may be relevant for various reasons. With respect to corpor- mergers, stock sales or liquidations. ations, tax is generally imposed at the corporate and the shareholder In addition, the 2017 tax reform introduced a regime under which level, where corporations are not allowed to deduct dividends paid taxpayers may defer or partially eliminate certain capital gains by and shareholders are taxed when they receive a dividend distribution investing in a “qualified opportunity fund” located in any of the out of the corporation’s current or accumulated earnings and profits “qualified opportunity zones” enumerated by the IRS. (i.e., classical system of corporate taxation). With respect to partnerships, corporations organized under subchapter S of the Internal 5.4 Does your jurisdiction impose withholding tax on the Revenue Code, or entities disregarded as separate from their owners proceeds of selling a direct or indirect interest in local (see question 1.6), tax is generally imposed only on the investor level assets/shares? and regardless of whether such entities distribute their profits. Real estate investment trusts (“REITs”) (see question 8.3) and regulated The United States generally imposes an indirect capital gains with- investment companies (“RICs”) are subject to special tax regimes holding tax on non-U.S. taxpayers with respect to gains from the under which tax is mainly imposed at the shareholder level, but disposition of U.S. real property and stock of U.S. corporations REITs and RICs may be subject to tax on any retained earnings. holding certain threshold amounts of U.S. real property (see ques- Qualified dividends received by individual shareholders may be tions 8.1 and 8.2). taxed at a preferential tax rate, and certain corporations may qualify for a dividend received deduction with respect to certain dividend 6 Local Branch or Subsidiary? distributions received from other corporations. The retention of profits may also trigger additional tax liability, such as the accumulated earnings tax imposed on corporations 6.1 What taxes (e.g. capital duty) would be imposed upon formed or availed for the purpose of avoiding the income tax with the formation of a subsidiary? respect to its shareholders, or the personal holding company tax imposed on corporations that mainly derive passive-category income Most U.S. states impose filing fees on the formation of corporations and the majority of which is owned by five or fewer individuals. and limited liability companies, but there are no such taxes imposed under federal law.

4.7 Are companies subject to any significant taxes not 6.2 Is there a difference between the taxation of a local covered elsewhere in this chapter – e.g. tax on the subsidiary and a local branch of a non-resident company (for occupation of property? example, a branch profits tax)? Various other taxes may apply in addition to the taxes discussed or mentioned in this chapter, such as the federal excise tax imposed on Generally, no. Both U.S. subsidiaries and U.S. branches are subject to insurance and reinsurance premiums paid to non-U.S. persons, social two levels of tax: a U.S. subsidiary is taxed (i) on its business profits security and Medicare tax and unemployment tax imposed on on a net basis (see question 4.1), and (ii) on dividend distributions on employers, and other state and local taxes which may vary greatly a gross basis (see question 3.1); and a U.S. branch’s foreign home across U.S. states and municipalities. office is taxed (i) on its U.S. business profits on a net basis (see question 6.3), and (ii) by a branch profits tax (see question 6.5). 5 Capital Gains 6.3 How would the taxable profits of a local branch be 5.1 Is there a special set of rules for taxing capital gains determined in its jurisdiction? and losses? A U.S. branch is taxed on a net basis on income that is “effectively connected with the conduct of a trade or business within the United Generally, yes. For individual taxpayers, gains from the disposition of States” (“ECI”). Such tax is imposed on the branch’s home office. capital assets held for more than one year (i.e., long-term capital gains) In addition, the home office may elect income to be treated as ECI. are subject to preferential tax rates, and losses from the disposition of If the home office is a tax resident in a jurisdiction with which the capital assets may offset capital gains and, if they exceed such gains, United States has an income tax treaty in force, such tax may be ordinary income up to $3,000 per year. For corporate taxpayers, gains limited to income that is attributable to the home office’s permanent from the disposition of capital assets are subject to regularly applicable establishment within the United States (generally a lower threshold; tax rates, and losses from the disposition of capital assets may only however, certain exceptions from ECI may result in business profits offset capital gains. Individuals may carry unused capital losses not reaching the level of ECI, despite the United States having forward indefinitely, and corporations may carry unused capital losses taxing rights under a treaty). back three years and forward five years.

6.4 Would a branch beneﬁt from double tax relief in its 5.2 Is there a participation exemption for capital gains? jurisdiction? No. The United States allows a participation exemption only with respect to certain dividend distributions received by a corporation Yes. The home office of a U.S. branch may be entitled to benefits (see question 7.2). under an applicable income tax treaty.

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6.5 Would any withholding tax or other similar tax be In addition, a foreign corporation with predominantly passive- category income or assets may be classified as a “passive foreign imposed as the result of a remittance of profits by the branch? investment company” (“PFIC”), which may subject its owners to Yes. A U.S. branch is generally subject to a 30% branch profits tax several onerous consequences, but which may generally be amelior- on the “dividend equivalent amount” (“DEA”), which generally ated by certain elections. consists of effectively connected earnings and profits for a taxable year, calculated as earnings and profits attributable to ECI without 8 Taxation of Commercial Real Estate diminution by any distributions made during such taxable year, and adjusted by any increase or decrease in the home office’s U.S. assets, 8.1 Are non-residents taxed on the disposal of commercial net of U.S. liabilities. The branch profits tax is designed to achieve real estate in your jurisdiction? parity between the taxation of U.S. branches and U.S. subsidiaries of foreign entities. Yes. Non-U.S. tax residents are subject to U.S. tax on a net basis on In addition to the tax imposed on the DEA, the branch profits tax their gain from the disposition of a “U.S. real property interest” also applies to interest paid by a U.S. branch if the recipient is a non-U.S. (“USRPI”), which generally includes an interest in U.S. real property. person not engaged in a U.S. trade or business, and to “branch excess In addition, that tax is enforced by a withholding regime that interest” (determined by a formula provided in the tax regulations). generally requires buyers to withhold 15% of the fair market value of the disposed USRPI. That withholding is generally required with 7 Overseas Profits respect to all sales of U.S. real property unless proper certification is provided (for example, certifying that the seller is not a foreign 7.1 Does your jurisdiction tax profits earned in overseas person). This regime is colloquially referred to as “FIRPTA” as it was enacted by the Foreign Investment in Real Property Tax Act. branches?

Yes. The United States generally imposes a worldwide taxation on 8.2 Does your jurisdiction impose tax on the transfer of an U.S. business entities and a foreign branch is considered as an entity indirect interest in commercial real estate in your separate from its owner. As such, foreign branch income is deemed jurisdiction? to be derived directly by the U.S. home office and is thus subject to corporate income tax on a net basis. Foreign branch income is Yes. A USRPI (see question 8.1) includes an interest in stock of a generally determined based on the amount of income reflected on “U.S. real property holding corporation” (“USRPHC”), which is the foreign branch’s separate books and records, and the U.S. home generally a U.S. corporation that holds U.S. real property whose fair office is allowed a foreign tax credit on taxes paid in the branch’s market value is at least 50% of the fair market value of all of its real jurisdiction (subject to certain limitations and “basketing” rules). property and assets used in its trade or business. Sellers of corporate stock may generally provide a certification by the corporation upon 7.2 Is tax imposed on the receipt of dividends by a local sale that the corporation is not a USRPHC and avoid FIRPTA tax company from a non-resident company? and withholding (although the IRS is not bound by the certification). Publicly traded corporations are subject to certain exceptions from Generally, yes. However, the local company may be allowed a limited both the substantive tax and withholding requirements. participation exemption (enacted in 2017 and designed as a 100% dividend received deduction) if, generally, (i) both the recipient and the 8.3 Does your jurisdiction have a special tax regime for payer entity are classified as corporations for U.S. tax purposes, (ii) the Real Estate Investment Trusts (REITs) or their equivalent? local corporation owns at least 10% of the vote or value of the payer corporation, and (iii) the local corporation has held the stock of the Yes. If certain detailed conditions are satisfied (for example, the payer corporation for at least 365 days within the two-year period REIT is a corporation, trust or an association beneficially owned by beginning one year prior to the stock becoming ex-dividend. at least 100 persons, distributes at least 90% of its income to its shareholders, at least 75% of its income is derived from real property 7.3 Does your jurisdiction have “controlled foreign and at least 95% of its gross income is derived from specific passive company” rules and, if so, when do these apply? sources such as rent), REITs are not subject to U.S. corporate income tax other than on any retained earnings, and their taxation is Yes. A foreign corporation is a controlled foreign corporation similar to the taxation of pass-through entities such as partnerships. (“CFC”) if U.S. shareholders (i.e., U.S. resident persons that directly, The taxation of REITs is very complex and multiple technical indirectly or constructively own at least 10% of the vote or value of requirements must be met to benefit from the special tax regime. the foreign corporation) own stock that represents more than 50% of the vote or value in such corporation. In addition, application of 9 Anti-avoidance and Compliance certain attribution rules may deem, for example, sister companies to be constructive CFCs. The two major consequences of CFC clas- 9.1 Does your jurisdiction have a general anti-avoidance or sification are that its 10% U.S. shareholders must include in income anti-abuse rule? (i) their pro rata share of the CFC’s “subpart F income” (generally passive category income such as dividends, interest, royalties, capital There are various judicially-developed doctrines that are comparable to a gains or “foreign base company income”), and (ii) their global general anti-abuse rule, such as the “substance-over-form”, “step trans- intangible low-taxed income (“GILTI”), which is generally the excess action”, “economic substance”, “business purpose” and “sham of the shareholders’ pro rata share of the CFC’s gross income transaction” doctrines. All these doctrines generally serve a similar (reduced by certain items) over a 10% deemed return on the CFC’s purpose: to look beyond the form of a transaction and disallow otherwise aggregate adjusted bases of depreciable tangible property used in the applicable tax benefits if the transaction violates the spirit of the law. In CFC’s trade or business. U.S. corporations are generally taxed on addition, the economic substance doctrine was added to the Internal GILTI at a preferential tax rate, and amounts taken into account in Revenue Code and carries with it a 20% non-compliance penalty, which determining subpart F income are disregarded in calculating GILTI. can be increased to 40% if the transaction is not properly disclosed.

9.2 Is there a requirement to make special disclosure of Such additional tax is designed as a 10% minimum tax (scheduled to increase to 12.5% in 2025) imposed on modified taxable income. avoidance schemes? The United States also recently enacted a new limitation on the Yes. The tax regulations require a taxpayer that has participated in deductibility of interest expense (very generally limited to 30% of a “reportable transaction” to file a disclosure statement with the IRS. EBITDA and, from 2022, EBIT) and country-by-country reporting Although not all reportable transactions are avoidance schemes, they consistent with the BEPS recommendations, and has the limitation include as a category “listed transactions”, which are transactions on benefits article in most of its income tax treaties. that the IRS has specifically identified as transactions with a potential for tax-avoidance. 10.2 Has your jurisdiction signed the tax treaty MLI and deposited its instrument of ratiﬁcation with the OECD? 9.3 Does your jurisdiction have rules which target not only No. The United States is not a signatory of the MLI. taxpayers engaging in tax avoidance but also anyone who

promotes, enables or facilitates the tax avoidance? 10.3 Does your jurisdiction intend to adopt any legislation to Yes. A person that provides any material aid, assistance or advice tackle BEPS which goes beyond the OECD’s recommendations? with respect to organizing, managing, promoting, selling, implementing, insuring or carrying out any “reportable transaction” Generally, no. It is unlikely that new international tax legislation will (see question 9.2), and earns certain threshold amounts for such aid, be enacted soon after the tax reform in 2017. The U.S. has been qualifies as a “material advisor” and must file a disclosure statement working on finalizing the implementing tax regulations under the with the IRS. various tax provisions enacted by the reform, many of which are consistent with the BEPS recommendations (see question 10.2).

9.4 Does your jurisdiction encourage “co-operative 10.4 Does your jurisdiction support information obtained compliance” and, if so, does this provide procedural beneﬁts under Country-by-Country Reporting (CBCR) being made only or result in a reduction of tax? available to the public? Yes. The Advance Pricing and Mutual Agreement (“APMA”) program allows taxpayers to enter into an agreement with the IRS No. Although the United States issued tax regulations requiring country- regarding transfer pricing methodology. The APMA program is by-country reporting by U.S. multinational enterprises, the information designed to promote certainty between taxpayers and the IRS and the government obtains is confidential and used solely for tax purposes. to save resources by preventing potential disputes. The Compliance Assurance Process (“CAP”), available to certain 10.5 Does your jurisdiction maintain any preferential tax large corporate taxpayers, offers a real-time issue resolution through regimes such as a patent box? open, cooperative and transparent interaction between taxpayers and the IRS prior to filing a tax return. Generally, no. In 2017, the United States enacted a regime that offers Other co-operative compliance programs include the Pre-Filing domestic corporations a deduction for “foreign-derived intangible Agreements Program, which allows taxpayers to resolve issues with the income” (“FDII”), which is an amount that exceeds a deemed return IRS prior to filing a tax return, the Competent Authority Assistance, on tangible assets (arguably attributable to intangibles). However, which allows the IRS to assist taxpayers with the application of income rather than being a patent box, the deduction for FDII is designed to tax treaties, the Industry Issue Resolution Program, under which the neutralize the effect of GILTI (see question 7.3) to incentivize U.S. IRS issues guidance resolving frequently disputed issues, and various corporations to allocate intangible income to CFCs. dispute resolution and settlement programs. 11 Taxing the Digital Economy 10 BEPS and Tax Competition 11.1 Has your jurisdiction taken any unilateral action to tax digital 10.1 Has your jurisdiction introduced any legislation in activities or to expand the tax base to capture digital presence? response to the OECD’s project targeting BEPS? No. The United States opposes unilateral actions to tax digital presence. Yes. In 2017, the United States enacted legislation generally intended to be consistent with the recommendations in the two final reports 11.2 Does your jurisdiction favour any of the G20/OECD’s under Action 2 of the BEPS. This legislation, and the tax “Pillar One” options (user participation, marketing intangibles regulations proposed thereunder, generally neutralize double non- taxation effects of (i) inbound dividends involving hybrid or signiﬁcant economic presence)? arrangements, by either denying a participation exemption or requiring domestic inclusion (depending on whether the hybrid dividend The OECD digital tax initiative is a high priority of the U.S. is received by a domestic corporation or a CFC), and (ii) outbound Department of the Treasury, which Treasury favors proposals that deductible interest or royalty payments that produce a deduction/no are not limited to digital companies and that propose modest inclusion outcome due to hybridity by disallowing such deduction. reallocation of non-routine profits (such as the modified residual In addition, the United States enacted the BEAT, which targets profit split method). base erosion by imposing additional tax on certain large U.S. corporations that make deductible payments to foreign related parties.

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Joseph M. Pari is Co-Chair of Weil’s Tax Department and is based in New York and Washington, D.C. Mr. Pari has extensive experience advising on federal income taxation of domestic and cross-border mergers, acquisitions, spin-offs, other divestiture types, restructurings, bankruptcy and non-bankruptcy workouts, acquisition financing and the use of pass-through entities in acquisitive and divisive transactions, with an emphasis on corporate tax planning, the utilization of net operating losses and other tax attributes and consolidated return matters. Mr. Pari was named among Who’s Who Legal’s Thought Leaders - Global Elite in 2020 for Corporate Tax, has been selected for inclusion in publications including Chambers Global, Chambers USA, Best Lawyers in America, The Legal 500 US, Who’s Who Legal, The International Who’s Who of Business Lawyers and Washington D.C. Super Lawyers and Turnarounds & Workouts magazine, and was named Washington, D.C. Tax Lawyer of the Year by Best Lawyers in America in 2012.

Weil, Gotshal & Manges LLP Tel: +1 202 682 7001 2001 M Street, NW, Suite 600 Email: [email protected] Washington, D.C. 20036 URL www.weil.com USA

Devon M. Bodoh is a partner in Weil’s Tax Department and is based in Washington, D.C. Mr. Bodoh is the head of the Firm’s international and cross- border Tax practice and a member of the Tax Department’s leadership team. Mr. Bodoh advises clients on cross-border mergers, acquisitions, spin-offs, other divisive strategies, restructurings, bankruptcy and non-bankruptcy workouts, the use of net operating losses, foreign tax credits and other tax attributes and consolidated return matters. Mr. Bodoh is recognized as an expert in Who’s Who Legal: The International Who’s Who of Corporate Tax and as a “Bankruptcy Tax Specialist” by Turnarounds & Workouts magazine, frequently speaks for groups including the Practising Law Institute, International Fiscal Association, DC Bar, Tax Executives Institute, the American Bar Association, the American Institute of Certified Public Accountants, Fundaçao Brasileira de Contabilidade and the Latin Lawyer, and has been an adjunct professor at George Mason University School of Law.

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Lukas Kutilek is an associate in Weil’s Tax Department and is based in New York. Mr. Kutilek participates in the representation of Firm clients with respect to the tax aspects of a wide range of corporate transactions, including domestic and cross-border mergers and acquisitions, joint ventures, spinoffs, restructurings and international tax planning. Mr. Kutilek was a recommended attorney in World Tax 2018, published by International Tax Review, and is a member of the International Fiscal Association. He received his J.D., magna cum laude, and as a member of the Order of the Coif, from the University of Michigan Law School and his J.D., summa cum laude, from the Charles University in Prague. Weil, Gotshal & Manges LLP Tel: +1 212 310 8441 767 5th Avenue Email: [email protected] New York, NY 10153 URL: www.weil.com USA

Founded in 1931, Weil, Gotshal & Manges LLP has been a preeminent provider corporate transactions, restructurings and other commercial matters. We of legal services for more than 80 years. With approximately 1,100 lawyers in advise on some of the biggest, most complex and highest profile domestic offices on three continents, Weil has been a pioneer in establishing a and cross-border transactions. We not only understand the nature of our geographic footprint that has allowed the Firm to partner with clients wherever clients’ transactions, but also understand their businesses, and are a critical they do business. The Firm’s four departments, Corporate, Litigation, Business part of the team that works to accomplish each client’s business goals. Our Finance & Restructuring and Tax, Executive Compensation & Benefits, and clients rely on us to deliver innovative, comprehensive and tax-efficient more than two dozen practice groups are consistently recognized as leaders solutions on nearly every type of domestic and cross-border transaction in their respective fields. Weil has become a highly visible leader among major presenting significant tax issues. law firms for its innovative diversity and pro bono initiatives, the product of a www.weil.com comprehensive and long-term commitment which has ingrained these values into our culture. Our proven, demonstrated experience allows the Firm to provide clients with unmatched legal services. Please see www.weil.com for more information, including awards and rankings. Weil’s global Tax Department offers comprehensive knowledge of how the complex and continually evolving nature of tax law plays a crucial role in

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Zambia Zambia

Joseph Alexander Jalasi

Eric Silwamba, Jalasi and Linyama Legal Practitioners Mailesi Undi

1 Tax Treaties and Residence 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? 1.1 How many income tax treaties are currently in force in Yes, VAT is charged at either 0% (zero-rated) or 16% (standard- your jurisdiction? rated).

As at 11 October 2018, Zambia had signed 24 double tax treaties. 2.3 Is VAT (or any similar tax) charged on all transactions 1.2 Do they generally follow the OECD Model Convention or or are there any relevant exclusions? another model? Yes, VAT is charged at the standard rate on all supplies of goods and services that are not exempt or zero-rated. The Value-Added Tax They generally follow the OECD Model; however, some have Act, Chapter 331 Volume 19, provides for a schedule of exempt or variations. zero-rated supplies and imports.

1.3 Do treaties have to be incorporated into domestic law 2.4 Is it always fully recoverable by all businesses? If not, before they take effect? what are the relevant restrictions? Yes, Section 74 of the Income Tax Act gives power to the President Yes, VAT is recoverable as a claim subject to restrictions set out in to enter into double tax treaties. The treaties are incorporated into the VAT (General) Rules, e.g. a claim must be made within three national law by Statutory Instruments, which are a form of delegated months of the date of invoice; the time limit and invoice on which legislation. a claim has to be made must comply with the VAT Rules.

Businesses that provide partially exempt supplies can only claim 1.4 Do they generally incorporate anti-treaty shopping input tax credit to the extent of their taxable supplies, i.e. they can rules (or “limitation on beneﬁts” articles)? only claim and recover VAT on their purchases partially, according to approved apportionment bases. At the time of writing this Zambia has a general anti-avoidance rule in its tax law and general Article, the National Budget had proposed restrictions on input anti-abuse provisions are present in most tax treaties. claims on consumables and restrictions on petroleum and electricity VAT input claims. 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced 2.5 Does your jurisdiction permit VAT grouping and, if so, subsequently)? is it “establishment only” VAT grouping, such as that applied by Sweden in the Skandia case? A double tax treaty, once incorporated by way of a Statutory Instrument, becomes part and parcel of Zambian domestic law. Yes, the Value Added Tax Act states that two or more companies incorporated in Zambia are eligible to be treated as a recognised 1.6 What is the test in domestic law for determining the group if: residence of a company? (a) one of them controls the others; (b) one person, whether a company or an individual, controls them A company is said to be resident if it is incorporated or formed all; or under the laws of Zambia, or if the place of central management (c) two or more individuals carrying on a business in partnership and control of the company’s business or affairs is in Zambia. control them all.

2 Transaction Taxes 2.6 Are there any other transaction taxes payable by companies? 2.1 Are there any documentary taxes in your jurisdiction? Yes, apart from VAT, there is Withholding Tax (WHT), Property No, there are not. Transfer Tax (PTT), Mineral Royalty and Customs and Excise Duty.

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2.7 Are there any other indirect taxes of which we should 4 Tax on Business Operations: General be aware? 4.1 What is the headline rate of tax on corporate proﬁts? Other indirect taxes include Customs and Excise Tax. The standard rate of Corporate Tax on profits is 35%. However, 3 Cross-border Payments income from the agriculture sector and non-traditional exports (all exports except copper and cobalt) is levied at 10%, and companies 3.1 Is any withholding tax imposed on dividends paid by a listed on the Lusaka Stock Exchange are taxed at the rate of 33%, 30% locally resident company to a non-resident? where Zambians hold at least 33% of the shares, while telecommunication companies with an income exceeding K250,000 are Yes, at the rate of 20%. This is subject to the existence of a double taxed at 40%. Businesses with a turnover of up to K800,000, excluding tax treaty. consultancy and passive income, are taxed under turnover tax at 4%.

3.2 Would there be any withholding tax on royalties paid by 4.2 Is the tax base accounting proﬁt subject to a local company to a non-resident? adjustments, or something else?

Yes, at the rate of 20%. Yes, it is.

3.3 Would there be any withholding tax on interest paid by 4.3 If the tax base is accounting proﬁt subject to a local company to a non-resident? adjustments, what are the main adjustments?

Yes, at the rate of 20%. The main adjustments are as follows: ■ Deductions are limited to expenditure actually incurred wholly 3.4 Would relief for interest so paid be restricted by and exclusively for the purposes of the business. ■ Wear and tear allowances replace accounting depreciation. reference to “thin capitalisation” rules? ■ Foreign exchange gains and losses are only taxable/deductible if they generate revenue in nature, and only when realised. Yes, there is a new thin capitalisation limit on interest deductions for ■ There are limitations on the deductions for bad and doubtful interest amounts exceeding 30% of EBITDA. This took effect on debts. 1 January 2019. ■ There is no deduction of expenditure and losses specifically Our law also requires that the transaction is undertaken at an arm’s listed in Section 44 of the Income Tax Act. length rate by reference to:

(a) the appropriate level or extent of the issuing company’s overall indebtedness; 4.4 Are there any tax grouping rules? Do these allow for (b) whether the amount issued would have been provided as a loan relief in your jurisdiction for losses of overseas subsidiaries? on an arm’s length basis; and (c) the rate of interest and other terms that would apply to such an No, there are not. arm’s length loan. 4.5 Do tax losses survive a change of ownership? 3.5 If so, is there a “safe harbour” by reference to which tax Yes. However, Part IV (Section 30) of the Income Tax Act only relief is assured? allows deduction of losses brought forward from the same source, There are none. provided that a loss can only be carried forward for a period of five years.

3.6 Would any such rules extend to debt advanced by a 4.6 Is tax imposed at a different rate upon distributed, as third party but guaranteed by a parent company? opposed to retained, proﬁts? Our law is silent on this. No. There is, however, a 15% WHT imposed on profit distributions.

3.7 Are there any other restrictions on tax relief for interest 4.7 Are companies subject to any signiﬁcant taxes not payments by a local company to a non-resident, for example covered elsewhere in this chapter – e.g. tax on the pursuant to BEPS Action 4? occupation of property? In 2018 Zambia adopted the BEPS Action 4 Plan on interest deduction limitation. No, except for normal statutory imposts such as local authority rates.

3.8 Is there any withholding tax on property rental 5 Capital Gains payments made to non-residents? 5.1 Is there a special set of rules for taxing capital gains Yes, it is charged at the rate of 10%. and losses?

There is no Capital Gains Tax in Zambia. However, there is PTT 3.9 Does your jurisdiction have transfer pricing rules? which is charged on the realisable value of the property being trans- Yes, it does. ferred.

5.2 Is there a participation exemption for capital gains? 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? This is not applicable. Yes, it is. 5.3 Is there any special relief for reinvestment? 7.3 Does your jurisdiction have “controlled foreign This is not applicable. company” rules and, if so, when do these apply? 5.4 Does your jurisdiction impose withholding tax on the Zambia does not have a controlled foreign company regime. proceeds of selling a direct or indirect interest in local assets/shares? 8 Taxation of Commercial Real Estate

This is not applicable. 8.1 Are non-residents taxed on the disposal of commercial

real estate in your jurisdiction? 6 Local Branch or Subsidiary? Yes – the disposal is subject to Property Transfer Tax at the rate of 6.1 What taxes (e.g. capital duty) would be imposed upon 5% of the realised value, and Value-Added Tax at the rate of 16% the formation of a subsidiary? for commercial property.

There are none. 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your 6.2 Is there a difference between the taxation of a local jurisdiction? subsidiary and a local branch of a non-resident company (for example, a branch proﬁts tax)? Yes, any transfer in interest in a lease of more than five years would be subject to Property Transfer Tax at the rate of 5% of the realised No, the same rates apply. There is Withholding Tax on profit repat- value. riation by branches, at the rate of 20%, from 1 January 2019. 8.3 Does your jurisdiction have a special tax regime for 6.3 How would the taxable proﬁts of a local branch be Real Estate Investment Trusts (REITs) or their equivalent? determined in its jurisdiction? Yes – income from the rental of real property is subject to a turnover The rules are the same for branches and companies. However, tax at the rate of 10%. where the branch is established by an entity that is established in a jurisdiction with whom Zambia has a Double Taxation Agreement, 9 Anti-avoidance and Compliance then the specific rules in that Double Taxation Agreement that govern profit attribution to branches would apply. 9.1 Does your jurisdiction have a general anti-avoidance or

anti-abuse rule? 6.4 Would a branch beneﬁt from double tax relief in its jurisdiction? Yes, this is provided for under the provisions of Section 95 of the Income Tax Act. Yes, it would. 9.2 Is there a requirement to make special disclosure of 6.5 Would any withholding tax or other similar tax be avoidance schemes? imposed as the result of a remittance of proﬁts by the branch? Yes, related-party transaction disclosure is required.

Yes – there is a 20% WHT on remittance of branch profits. 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who 7 Overseas Proﬁts promotes, enables or facilitates the tax avoidance?

7.1 Does your jurisdiction tax proﬁts earned in overseas Yes, Section 95 of the Income Tax Act. branches? 9.4 Does your jurisdiction encourage “co-operative Zambia principally operates a source-based system for the taxation compliance” and, if so, does this provide procedural beneﬁts of income. Income deemed to be from a Zambian source is generally subject to Zambian Income Tax. However, the residence only or result in a reduction of tax? of a person/entity in Zambia will widen the scope of taxation to Zambia does not have a system of private and public binding rulings include interest and dividend income from abroad. Consequently, or co-operative compliance arrangements. Zambian residents will also be subject to Income Tax on interest and dividends from a source outside Zambia.

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Yes; The Income Tax (Transfer Pricing) Rules, Interest Deduction 11 Taxing the Digital Economy Restrictions and Section 95 of the Income Tax Act on anti- avoidance. Zambia has joined the inclusive framework. 11.1 Has your jurisdiction taken any unilateral action to tax

digital activities or to expand the tax base to capture digital 10.2 Has your jurisdiction signed the tax treaty MLI and presence? deposited its instrument of ratiﬁcation with the OECD? No, it has not. No, Zambia has not signed the tax treaty MLI.

11.2 Does your jurisdiction favour any of the G20/OECD’s 10.3 Does your jurisdiction intend to adopt any legislation to “Pillar One” options (user participation, marketing intangibles tackle BEPS which goes beyond the OECD’s or signiﬁcant economic presence)? recommendations? There is no official position, but the tax authority seems to support This information is not yet available in the public domain. taxation of the digital economy.

10.4 Does your jurisdiction support information obtained under Country-by-Country Reporting (CBCR) being made available to the public?

No, Zambia does not support information obtained under CBCR being made available to the public.

Joseph Alexander Jalasi is the Head of Tax, Mining, Corporate and the Banking and Finance Departments. He has several years of experience in litigation and over 18 years’ experience in tax practice. He served as the Registrar of the Revenue Appeals Tribunal, now renamed as the Tax Appeals Tribunal, for seven years. He has successfully argued and settled a number of multi-million-dollar tax disputes. Joseph served as Chief Policy Analyst Legal Affairs in the President’s Office under the late President Levy Mwanawasa. He also served as legal advisor to former President of Zambia, Rupiah Banda. Mr. Jalasi’s expertise in tax practice in Zambia is also recognised in The Legal 500. Chambers and Partners describes Mr. Jalasi as follows: “Joseph Jalasi is noted for his work on banking and finance, and environmental litigation. He has a strong reputation and is considered by commentators to have had ‘considerable success in commercial litigation and constitutional law matters’.”

Eric Silwamba, Jalasi and Linyama Legal Practitioners Tel: +260 211 256530 Plot No. 12 at William Burton Place Email: [email protected] Chilekwa Mwamba Road URL: www.ericsilwambaandco.com Off Lubu/Saise Roads Longacres, Lusaka Zambia

Mailesi Undi is the firm’s Associate and specialises in Dispute Resolution, Taxation and Corporate work. She is an upcoming tax litigation lawyer and has had several appearances before the Tax Appeals Tribunal. She has advised several multi-national clients on various taxation matters including Transfer Pricing and Value Added Tax.

Eric Silwamba, Jalasi and Linyama Legal Practitioners is a Zambian law firm. The firm has been in existence for over 30 years as Eric Silwamba and Company. In 2013 it was rebranded to Eric Silwamba, Jalasi and Linyama Legal Practitioners following the admission to partnership of Joseph Jalasi and Lubinda Linyama. It has developed over the years to the level of being among the top law firms in Zambia. The firm has represented multinational companies in respect of issues relating to Value-Added Tax, Income Tax, Customs and Excise Tax. Their clientele varies from multinationals in the Telecom, Mining, Agriculture, Banking and Energy sectors. In May 2017, the firm expanded its international footprint by being admitted to the Dentons Nextlaw Referral Network. The International Network will enhance the firm’s service delivery with regard to serving multijurisdictional clients. www.ericsilwambaandco.com

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