International Core of Excellence 2018 ICE Essentials

Foreword

Local insight into key foreign jurisdictions—International Core of Excellence

The impact of the U.S. tax reform will be felt not only in the U.S. but around the world. While it likely will take some time for stakeholders to familiarize themselves fully with the new rules and evaluate their implications and consequences, U.S. businesses soon will have to make real- world decisions that will affect their foreign operations: decisions regarding cash repatriation, adjustments to ownership structures for foreign investments, acquisition financing where multiple jurisdictions are involved, organization of supply chain activities, etc.

When that time comes, the focus will no longer be solely on the new U.S. rules. Companies will be looking for practical solutions that best serve the interest of their businesses and those solutions will have to accommodate non-U.S. tax factors—for example, it is important to be aware that steps taken to limit a tax cost in the U.S. may eventuate in a higher tax burden outside the U.S.

In this respect, one thing has not changed: U.S. companies will still need to integrate non-U.S. tax considerations into their decision-making. Now more than ever, they will need reliable and timely information—as well as actionable insights—on tax policy, legislation and practices affecting their foreign operations if they are to maintain a competitive edge.

We are committed to helping you and your organization navigate the opportunities and challenges of a rapidly evolving global tax environment. The foreign country specialists in the International Core of Excellence (ICE) team have the technical and practical experience to help you identify and address the impact of foreign tax rules on U.S. business drivers. The team’s presence in the U.S. means that specialists are available to provide prompt assistance to U.S. organizations, unimpeded by time zone variations or geographical obstacles. The ICE team is fully integrated into Deloitte’s U.S. International Tax practice, and the groups work together to help develop practical recommendations that address the needs and circumstances of your business. At the same time, the ICE team coordinates with Deloitte’s global network to confirm they are up to date and fully informed on the (often rapidly) evolving tax law and regulatory changes in their home countries.

The 2018 ICE Essentials guide profiles the main features of the tax systems of 15 countries and introduces the specialists of the ICE team. This easy-to-read guide includes vital information on tax rates, residence, incentives, consolidation, anti-avoidance rules, indirect taxation and tax administration. In conjunction with the guide, the ICE team shares regular updates through the “ICEbreaker” series, quarterly single-page synopses of top-of-mind corporate tax issues, legislative updates and other developments relevant to cross-border business.

Our ICE resources are further supplemented by the Deloitte International Tax Source (DITS), a free online database that allows users to view and compare tax information that includes corporate income tax, withholding tax and tax treaty rates and transfer pricing regimes. DITS also houses the full Country Highlights series, which contains profiles of the tax systems of over 140 countries and the full suite of our global tax alerts and newsletters and other tax resources. In addition, Deloitte tax@hand, our global tax app, is a secure digital resource for news and perspectives on 60 jurisdictions, which users can tailor to their interests.

I hope you find our publications informative and of practical use, and I invite you to contact our ICE team of professionals or your local Deloitte contact if you have any questions or require additional information.

For more information on the ICE program, please visit https://www2.deloitte.com/us/en/pages/tax/solutions/international-core-of- excellence.html.

We look forward to working with you.

Kind regards,

Pierre-Henri Revault International Tax Partner, ICE Group Leader, Deloitte Tax LLP

As used in this document, “Deloitte” means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see www. deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. International Core of Excellence 2018 1 Contents

Australia 3

Brazil 9

China 14

France 19

Germany 24

Hong Kong 28

India 32

Italy 40

Japan 47

Luxembourg 52

Mexico 57

Netherlands 61

Russia 66

Switzerland 71

United Kingdom 75

2 Investment basics Australia Currency Australian Dollar (AUD) Foreign exchange control No Accounting principles/financial statements The Australian equivalent of IFRS (A-IFRS) applies. Financial statements must be filed annually. Principal business entities Jonathan Hill These are the public company (“Limited” or Ltd), private company (“Proprietary Limited” Partner or Pty Ltd), partnership, corporate limited partnership, trust, superannuation fund and Tel: +1 718 508 6805 branch of a foreign corporation. [email protected]

Corporate taxation: holds a 10% participation interest also are “same business” test is satisfied. Capital Residence nonassessable nonexempt income. losses are subject to the same tests, but A company is resident in Australia if it may be offset only against capital gains. Taxation of dividends is incorporated in Australia or, if not Australia operates a full imputation system Rate incorporated in Australia, it carries on for the avoidance of economic double The corporate tax rate is 30%, or 27.5% business in Australia and either exercises taxation of dividends. Under this system, for companies with an aggregate annual central management and control there the payment of company tax is imputed to turnover of less than AUD 25 million in or has its voting power controlled by shareholders, in that domestic shareholders the 2017-18 income year (increased from shareholders that are residents of Australia. are relieved of their tax liability to the extent AUD 10 million in the 2016-17 income year, Basis profits have been taxed at the corporate and scheduled to further increase to AUD Resident companies are taxed on worldwide level. Dividends paid out of profits on which 50 million in the 2018-19 income year). income. A nonresident company generally corporate tax has been paid are said to be Legislation has been enacted to reduce the pays taxes only on income derived from “franked” and generally entitle shareholders corporate rate for companies with less than Australian sources. The tax rates and to a tax offset for the corporate tax paid. AUD 50 million of annual turnover to 25% by treatment are the same for companies and the 2026-27 income year. Capital gains branches of foreign companies. However, Assessable income includes any capital Surtax there are exceptions for special types of gains after offsetting capital losses. Net No companies such as cooperative firms, capital gains derived by companies are mutual and other life insurance companies Alternative minimum tax taxed at the 30% corporate rate. Australian and nonprofit organizations, which are taxed No tax residents (generally excluding temporary at slightly different rates. residents) are liable for tax on worldwide Foreign tax credit Taxable income capital gains (subject to double tax relief). The foreign income tax offset (FITO) rules To calculate taxable income, a company Where a company holds a direct voting allow taxpayers to claim a credit or tax generally computes assessable income interest of 10% or more in a foreign offset against Australian tax in respect of and subtracts allowable deductions. company for a certain period, any capital assessable income that is foreign income or Assessable income derived by a company gain or loss on the sale of the shares in the on which they have paid foreign income tax. carrying on business usually would include foreign company may be reduced (see under The amount of the tax offset is equal to the gross income from the sale of goods, “Participation exemption”). Foreign investors foreign income tax paid, subject to a cap. the provision of services, dividends, include capital gains in assessable income The offset may be used only in the income interest, royalties and rent. Assessable only for assets that are “taxable Australian year to which the foreign tax relates; unused income excludes exempt income (e.g. property” (e.g. the business assets of FITO offsets may not be carried forward to certain dividends received from pooled Australian branches of nonresidents and future income years. development funds and income derived direct and indirect interests in Australian Participation exemption by certain entities, such as charities, etc.). real property). Capital gains or losses on the disposal of Income characterized as nonassessable Losses shares in a foreign company, at least 10% nonexempt income also is excluded from Tax losses (reduced by exempt income) may of which is held by an Australian resident assessable income (e.g. income derived by be utilized and carried forward indefinitely company for a certain period, may be certain foreign branches). Foreign equity to offset future assessable income, provided reduced by a percentage that reflects the distributions received (directly or indirectly a “continuity of ownership” (more than 50% degree to which the assets of the foreign through one or more interposed trusts of voting, dividend and capital rights) or a company are used in an active business. and partnerships) from a foreign company in which an Australian corporate tax entity

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Furthermore, foreign equity distributions An Investment Manager Regime (IMR) Technical service fees received (directly or indirectly through one provides concessional taxation treatment Australia does not levy withholding tax on or more interposed trusts and partnerships) in certain circumstances where foreign- payments of technical service fees that fall from a foreign company in which an managed funds invest in Australia using outside the definition of royalties. Australian corporate tax entity holds a 10% Australian resident fund managers. Various Branch remittance tax participation interest are nonassessable other incentives also are available (e.g. film No nonexempt income. tax incentives). Other Holding company regime Withholding tax: Fund payments made to foreign residents No Dividends by an MIT are subject to withholding at Incentives Dividends paid by Australian-resident 15% when made to a foreign resident in a Expenditure on eligible R&D activities is companies from profits already taxed at the country that has an EOI agreement with entitled to beneficial treatment. Under the corporate rate may carry franking credits Australia; otherwise, withholding is required R&D tax incentive program, companies for the tax paid. Dividends are referred at a rate of 30%. with an aggregated group turnover of less to as “fully franked,” “partially franked” or Other taxes on corporations: than AUD 20 million are entitled to a 43.5% “unfranked,” depending on the extent to refundable tax offset and larger companies which a company has chosen to use its Capital duty are entitled to a 38.5% nonrefundable tax franking credits. To the extent distributions No offset on expenditure up to AUD 100 million. to foreign residents are unfranked Payroll tax distributions, they are subject to withholding Investors of an Australian early stage Payroll tax is levied on employers by the tax at the statutory rate of 30%, which may innovation company (ESIC) are eligible for states and territories, with the amount be reduced under a tax treaty. a nonrefundable carryforward tax offset based on salaries, wages and benefits paid equal to 20% of the amounts paid for newly Australia has conduit foreign income rules, to employees. issued equity interests (shares) in the ESIC, under which certain foreign-source income Real property tax provided the investor does not fall within of derived by an Australian resident company See under “Stamp duty” for property the list of specified exclusions (and capped can be distributed to foreign resident transfers. Land tax also is levied by all but at AUD 200,000). There also are capital gains shareholders free of dividend withholding one of the states and territories on entities tax concessions for eligible shares. tax under Australian domestic law. owning land within their borders. Rates of up There are special rules for the taxation of Interest to 3.7% apply, depending on the jurisdiction. a Managed Investment Trust (MIT), which Interest paid by an Australian company In some states, a land tax surcharge may be is a type of collective investment vehicle. to a foreign resident generally is subject applied to foreign or absentee owners. Certain MITs and Attribution Managed to a 10% withholding tax. There are Social security Investment Trusts (AMITs) are subject to a some exemptions, including for certain Employers are required to contribute concessional final withholding tax of 15% publicly offered debentures and limited to a complying superannuation fund or levied on fund payments made to foreign nondebenture debt interests. An interest retirement savings account on behalf of investors resident in countries that have withholding tax exemption applies for their employees, at a rate of 9.5% of the concluded an exchange of information (EOI) interest paid to unrelated foreign financial employee’s “ordinary time earnings,” up to agreement with Australia. Broadly, a fund institutions or government bodies under a maximum earnings base of AUD 52,760 payment represents the Australian-source specific tax treaties. per quarter in 2017/18. Exemptions from net income (other than dividends, interest Royalties the superannuation requirement apply in and royalties) of the trust. Royalties are subject to a withholding tax of limited circumstances. 30%, unless the rate is reduced under a tax treaty.

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Stamp duty to international transactions/dealings •• The arm’s length debt test, under which The states and territories impose stamp between separate legal entities, as well the prescribed level of debt is the duty at rates of up to 5.75% on the transfer as permanent establishments. Covered maximum amount of debt the entity of real property and some other business cross-border transactions include those reasonably could have borrowed from property. Rates vary depending on the involving tangible or intangible property, commercial lending institutions; or state/territory and class of business the provision of services and financing. •• Separate worldwide gearing tests that are property transferred. Stamp duty also is The commonly accepted transfer pricing available to inward and outward investors. imposed on the indirect transfer of real methods in Australia are the comparable property held by certain companies and uncontrolled price, resale price, cost plus, The rules apply to total debt, rather than unit trusts, at rates of up to 5.75%. In some profit split and transactional net margin just related-party foreign debt, and cover states, extra stamp duty may be imposed methods, out of which the most appropriate Australian multinational companies, as well by way of a surcharge (for foreign buyers and reliable method should be applied. The as foreign multinational investors. Taxpayers of residential property) and premium duty Australian Taxation Office (ATO) has powers that, together with their associates, have rates (for high-value residential property). to adjust the pricing of transactions that interest deductions of less than AUD 2 are considered not to be at arm’s length. million per annum or outward investing Transfer tax See also “Disclosure requirements” and entities with 90% or more of their total See under “Stamp duty.” “Rulings,” below. average value of assets consisting of Other Australian assets are exempt from the rules. The government has enacted transfer A petroleum resource rent tax is levied on pricing reforms into Australian law to Controlled foreign companies profits generated from all onshore and ensure that the transfer pricing provisions Qualifying Australian shareholders are offshore Australian petroleum projects, in Australia’s tax treaties can be applied as subject to taxation on an accruals basis on excluding the Joint Petroleum Development a separate assessment power. The transfer their proportionate share of a CFC’s Area (as defined in the Timor Sea Treaty). pricing rules are designed to be applied to “attributable income.” For a foreign company Employers are required to pay fringe situations where a party obtains a transfer to be a CFC, either: (1) five or fewer benefits tax (FBT) on the value of fringe pricing benefit, and require the substitution Australian residents must hold 50% or more benefits (e.g. motor vehicles, low-interest of arm’s length conditions for actual of the company; (2) (subject to additional loans and school fees) provided to their conditions. considerations) a single Australian entity employees, at a rate of 47% (from 31 March must hold no less than 40% of the company; Thin capitalization 2017–31 March 2018) on the grossed-up or (3) five or fewer Australian entities Interest deductions claimed against value of each benefit. FBT is deductible for (including associates) effectively must Australian assessable income for both income tax purposes. control the company. Where the CFC rules foreign controlled Australian investments apply, the Australian shareholder includes in State legislation requires employers to (inward investors) and Australian entities its assessable income its share of the insure employees against work-related investing overseas (outward investors) are attributable income at the end of the CFC’s injuries and compensate them for injury, restricted where an entity’s debt exceeds statutory accounting period. Dividends disability or death arising from, or in the a certain prescribed level. The maximum subsequently paid out of attributable profits course of, employment. allowable debt for inward and outward are treated as nonassessable nonexempt investors generally is determined by income. Anti-avoidance rules: applying one of the following tests: Disclosure requirements Transfer pricing •• The safe harbor test, under which the All taxpayers in Australia must maintain The transfer pricing rules may apply to prescribed debt-to-equity ratio is, broadly, adequate records to document their tax any international transaction. The rules do 60% of total assets less nondebt liabilities affairs, including transfer pricing. While there not necessarily require direct ownership and certain related party investments/ is no requirement to submit documentation between the two transacting parties (i.e. receivables, as disclosed in the accounts. “any connection” between the parties A separate test applies for financial is all that is required). The rules apply institutions;

International Core of Excellence 2018 5 AU

by a certain date, contemporaneous tax An SGE also is required to file general Consolidated returns and transfer pricing documentation is a purpose financial statements with the ATO A tax consolidation regime allows wholly prerequisite to having a reasonably arguable in certain circumstances. owned Australian groups to elect to be position for penalty mitigation purposes. taxed as a single consolidated entity for Other income tax purposes (“tax consolidated Australian taxpayers are required in certain Australia operates a general anti-avoidance group”). The regime focuses on the tax circumstances to file an International rule (GAAR) that supplements other consolidated group as the tax entity and Dealings Schedule (IDS) with their annual specific anti-avoidance rules. The GAAR is a disregards intragroup transactions for income tax return. The IDS requests various provision of last resort and can be applied income tax purposes. The law reduces details in respect of a taxpayer’s cross- by the taxing authority where there is a impediments to group restructuring, allows border related party dealings, including scheme, the sole or dominant purpose of for pooling of losses within the group and specific disclosures in relation to areas that which is to obtain a tax benefit. allows tax-free movement of assets within the ATO considers high risk (i.e. certain types The Multinational Anti-Avoidance Law the group without any formal rollover of transactions and dealings with related (MAAL) targets the avoidance of permanent requirements. There also are rules allowing parties in favorable tax jurisdictions). The establishment status in Australia by foreign certain Australian-resident wholly owned IDS also requires disclosure of information entities. Broadly, the MAAL will apply to subsidiaries of a foreign company to form related to the application of the CFC and thin SGEs where a foreign entity supplies goods a consolidated group known as a multiple capitalization rules (see above). or services to Australian customers, an entry consolidated (MEC) group. In addition, for income years commencing Australian affiliate performs activities in The election to form a tax consolidated on or after 1 January 2016, significant Australia directly in connection with those group or a MEC group is optional. However, global entities (SGEs) (i.e. companies that supplies and there is a relevant “principal once made, the election is irrevocable. are members of groups with annual global purpose” to obtain a tax advantage. income of at least AUD 1 billion) must Filing requirements As from 1 July 2017, a 40% diverted profits provide additional information to the ATO as Tax returns generally must be filed on an tax (DPT) applies to SGEs, on profits part of Australia’s country-by-country (CbC) annual basis based on taxable income for transferred offshore through related transfer pricing reporting requirements. a year of income. The due date for filing party transactions (the “diverted profit”). Three annual statements (a CbC report, the annual return for companies with 30 All Australian cross-border related-party a master file and a local file) must be filed June year-ends is 15 January for large/ transactions where the relevant income is with the ATO in the approved form within medium-size companies (annual turnover subject to foreign tax at a rate less than 24% 12 months of the end of the income year; exceeding AUD 10 million) and 28 February potentially are within the scope of the DPT. however, an exemption may be granted in for all others, following the end of the year certain circumstances. Broadly, the DPT can apply in certain of income. circumstances if a tax benefit is obtained For financial periods beginning on or after Extensions to file the tax return may be in connection with a scheme and it can be 1 July 2017, the ATO expects economic granted in certain cases. concluded that the scheme, or any part of it, groups with turnover in excess of AUD 250 was entered into for the principal purpose of Penalties million to file a Reportable Tax Position (RTP) enabling a tax benefit to be obtained. There Penalties and interest may be imposed for Schedule with their tax returns. The RTP are limited carve-outs for nonapplication of late filing, failure to file, failure to exercise Schedule requires taxpayers to disclose the DPT. due care and tax avoidance and evasion. their contestable and material tax positions. Rulings A Voluntary Tax Transparency Code Compliance for corporations: The ATO can issue public and private encourages the disclosure of more tax and Tax year rulings. Rulings generally are binding on the accounting information from businesses The tax year is 1 July to 30 June, although a ATO where they apply to a taxpayer and with at least AUD 100 million of turnover. substituted year of income may be adopted the taxpayer relies on the ruling by acting in certain circumstances, with approval from in accordance with it. Public rulings may the ATO. apply to all entities or a class of entities, either generally or in relation to a particular arrangement. The ATO will issue a private 6 AU

ruling on the tax consequences of a specific the Social Security Act 1991. only to Australian citizens or permanent scheme at a taxpayer’s request. However, residents. Filing status only the taxpayer requesting the private Each taxpayer must file a separate return; Rates ruling can rely on it. The ATO also operates joint returns are not permitted. Progressive rates up to 47% apply (including an advance pricing arrangement program, a Medicare levy of 2%, see under “Social under which taxpayers can obtain certainty Taxable income security,” below). A tax-free threshold of on the application of the arm’s length Taxable income for personal income AUD 18,200 applies for full-year resident principle to their cross-border dealings with tax purposes includes income from taxpayers (a reduced threshold applies to related parties. employment, business income, certain part-year residents). capital gains and passive income such as Personal taxation: dividends, interest and rental income. Other taxes on individuals: Basis Capital gains Capital duty Resident taxpayers generally are taxed Net capital gains derived from the disposal No on worldwide income, with a tax offset for of assets acquired after 19 September foreign tax paid on foreign income, up to the 1985 are included in assessable income. Stamp duty amount of Australian tax payable on that For assets held for more than one year, The states and territories impose stamp income. Foreign residents are taxable only individuals are taxed on half of the capital duty at rates of up to 5.75% on the transfer on Australian-source income. Residents who gain (“capital gains tax discount”) at their of real property and some other business qualify as “temporary Australian residents” marginal rate. Nonresidents and temporary property. Rates vary between states and are taxable on their worldwide employment residents are ineligible for the capital gains territories and between classes of business income, and on Australian-source tax discount in respect of gains arising after property transferred. In some states, extra investment income and capital gains from 8 May 2012. For assets acquired before 21 stamp duty also may be imposed by way of “taxable Australian property.” September 1999, individuals may choose a surcharge (for foreign buyers of residential property) and premium duty rates (for high- Residence between applying the discount and the value residential property). For tax purposes, an individual is a resident former system under which they are taxed if he/she ordinarily “resides” in Australia at their marginal rate on the entire gain, Capital acquisitions tax or satisfies one of the following statutory indexed for inflation. Indexation of the cost No tests: (1) is domiciled in Australia (unless base of existing assets was frozen at 30 Real property tax the Commissioner of Taxation is satisfied September 1999. See under “Stamp duty” for property that the individual’s permanent home Capital gains tax applicable to nonresidents transfers. Land tax also is levied by all but is elsewhere); (2) has spent more than and temporary residents is now limited to one of the states and territories on entities half the tax year in Australia (unless the “taxable Australian property” disposed of by owning land within their borders. Rates of up Commissioner of Taxation is satisfied that foreign investors. A creditable withholding to 3.7% apply, depending on the jurisdiction. the individual’s home is elsewhere and he/ tax may apply where certain assets (such In some states, a land tax surcharge may be she does not intend to take up residence in as Australian real estate) are sold by foreign applied to foreign or absentee owners. Australia); or (3) is a contributing member (or residents. the spouse or child younger than 16 years Inheritance/estate tax of such a member) to the superannuation Deductions and allowances No fund for officers of the Commonwealth Business expenses may be taken as tax Net wealth/net worth tax Government. A “temporary resident” for tax deductions if they are necessarily incurred No purposes is an individual who meets all of in gaining or producing assessable income. the following criteria: (1) holds a temporary Charitable donations to Australian- Social security visa granted under the Migration Act 1958; registered charities may be tax deductible. Employers are required to contribute (2) is not an Australian resident within the Expenses of a capital, private or domestic to a complying superannuation fund or meaning of the Social Security Act 1991; nature generally are not tax deductible. Tax retirement savings account on behalf of and (3) does not have a spouse who is an residents of Australia are allowed some tax Australian resident within the meaning of offsets, including offsets for dependents. Many government offsets are available International Core of Excellence 2018 7 AU

their employees, at a rate of 9.5% of the Penalties Filing and payment employee’s “ordinary time earnings,” up to Penalties and interest may be imposed for Each GST-registered entity must account a maximum earnings base of AUD 52,760 late filing, failure to file, failure to exercise for its GST obligations on a Business Activity per quarter in 2017/18. Exemptions from due care and tax avoidance or evasion. Statement (BAS) at the end of each tax the superannuation requirement apply in period. Entities with an annual turnover of limited circumstances. Goods and services tax: AUD 20 million or more must file a monthly BAS. In general, entities with an annual In addition to income tax, a 2% levy is Taxable transactions turnover below AUD 20 million can choose payable on the taxable income of most The Goods and Services Tax (GST) is a to file a monthly or a quarterly BAS. Australian residents to fund Medicare, a transaction-based, value-added tax on the universal health program that provides basic inputs and outputs of an organization’s Small businesses voluntarily registered medical and hospital care free of charge, business activities. GST is charged at each for GST are allowed to report and pay GST and DisabilityCare. Relief is available to low- step in the supply chain, with GST-registered annually rather than quarterly, to help income taxpayers. Certain individuals on entities including GST in the price of reduce compliance costs. temporary visas are ineligible for Medicare “taxable” goods and services they supply. Source of tax law: Income Tax Assessment benefits and can apply to the Minister of There are other types of supplies where GST Act 1936 and Income Tax Assessment Act Health for a certificate of exemption. is not included in the price; these include “input taxed” supplies, such as financial 1997, as amended; Foreign Acquisitions and A temporary budget repair levy of 2% also supplies, and “GST-free” supplies, such as Takeovers Act 1975, as amended; A New Tax applied from 2015 to 2017 to taxable income the sale of going concerns and exports System (Goods and Services Tax) Act 1999, exceeding AUD 180,000 in 2016/17 (the of goods and services. Generally, entities as amended; payroll tax acts, stamp duty temporary budget repair levy ceased to that are registered for GST purposes can acts, and land tax acts of the six states and apply as from 1 July 2017). claim a credit for the GST paid on the two territories A further Medicare levy surcharge (up to inputs acquired for use in their enterprise. Tax treaties: Australia has concluded 1.5%) may be imposed on taxpayers whose However, entities making input taxed nearly 50 tax treaties. Australia signed the taxable income exceeds a certain threshold supplies generally are unable to claim such OECD multilateral instrument on 7 June only if they do not hold appropriate private credits, unless one of several concession 2017. hospital insurance. measures applies. Tax authorities: Australian Taxation Office, Rates Compliance for individuals: States and Territories Revenue Offices, 10% Foreign Investment Review Board (FIRB Tax year Registration assists the Australian Treasurer in regulating The tax year is 1 July to 30 June. An entity that carries on an enterprise must foreign investment into Australia, including Filing and payment register for GST if its annual turnover is at or intragroup transactions, and a transaction Resident taxpayers whose taxable income above the registration turnover threshold. requiring FIRB approval can be unwound if exceeds AUD 18,200 (or who have had The current threshold is AUD 150,000 such approval is not obtained) Australian taxes withheld from lower salary per year for not-for-profit entities, and amounts) are required to file an income AUD 75,000 per year for all other entities. tax return. Foreign residents must file an However, an entity that carries on an income tax return if they derive Australian- enterprise may choose to register even if its source income or gains. The return must turnover is below the registration turnover be filed by 31 October for the income year threshold. A nonresident entity carrying on ending on 30 June of the same calendar year an enterprise whose turnover is below the (unless the individual is on a tax agent filing turnover threshold can choose to register program and is eligible for an extended filing for GST to recover the GST it pays on its deadline). inputs.

8 Investment basics Brazil Currency Brazilian Real (BRL) Foreign exchange control Companies generally do not need prior authorization for a foreign exchange transaction, although a record of the transaction must be filed electronically with the central bank. Accounting principles/financial statements Publicly traded companies and nonpublic companies with assets exceeding BRL 240 Andre Illipronti million or gross revenue exceeding BRL 300 million must have external auditors. Only Senior Manager publicly traded companies must publish annual account reports in Brazilian GAAP. Tel: +1 212 436 2349 IFRS is required as from calendar year 2010. Annual reports, balance sheets, income [email protected] statements and minutes of annual meetings must be published in the official gazette and another well-known newspaper. A closed corporation also must publish its financial statements if shareholder equity is equal to or exceeds BRL 2 million. Corporate taxation: Principal business entities Residence These are the limited liability company (LTDA) and joint stock company (SA). Branches are uncommon, since they may operate in Brazil only through a specific ministerial decree. A corporation is resident in Brazil if it is incorporated in Brazil.

Basis contributions on gross income (PIS and Rate Resident companies are taxed on worldwide COFINS), state VAT on sales and services Corporate income tax (IRPJ) is levied on income. A foreign company is subject (ICMS), tax on services (ISS) and social the taxable profits of an entity at a rate to Brazilian taxation only if it carries out security contributions). of 15%. However, as noted below, taking certain sales activities in Brazil through an into account the surtax and the social agent or representative that is domiciled Taxation of dividends contribution on net profits, the combined in the country and that has the power to Dividends received from other Brazilian nominal rate is 34%. legally bind the foreign seller, or through companies and income derived from a domestic branch of the foreign seller. A premiums received on the issuance of new Surtax representative acting as an agent will not shares are not included in taxable income. In addition to the statutory corporate give rise to a taxable presence in Brazil if the income tax rate of 15%, a surtax of 10% on Capital gains final transaction is concluded abroad by the income in excess of BRL 240,000 per year Capital gains are treated the same way as nonresident company. is imposed on legal entities, and a 9% social ordinary income (subject to restrictions contribution tax (CSLL) is levied on adjusted Taxable income on the offsetting of capital losses against net income. For financial institutions, the The basic income tax applies to operating ordinary profits in certain cases). CSLL rate is 20%. profits derived by a company in Brazil. Capital gains derived by a nonresident on an Operating profits are defined as gross Alternative minimum tax investment registered with the central bank operating receipts, less the cost of goods No are subject to progressive rates ranging sold or services rendered; commercial, from 15% to 22.5%. (A 25% rate applies if Foreign tax credit administrative and operating expenses; the gains are derived by a resident of a tax A foreign tax credit for qualifying foreign and other charges, reserves and losses haven.) taxes paid is available to offset the IRPJ authorized by law. and CSLL imposed on foreign-source Foreign investors in the financial market may Brazilian companies may opt annually to income. Further limitations on the credit be subject to different rates. be taxed on actual or presumed income. include a per-company limitation for The “lucro real” method is based on actual Losses foreign subsidiaries (some consolidation annual or quarterly taxable income. The Losses must be segregated as “operating” of branches and of lower-tier subsidiaries “lucro presumido” method, which is available or “nonoperating.” Nonoperating losses may is allowed) and a per-country limitation for if certain requirements are satisfied, is be set off only against nonoperating gains. foreign branches. based on a quarterly estimated or deemed Tax losses incurred in one fiscal year may be Participation exemption taxable income. carried forward indefinitely, but the amount of the carryforward that can be utilized is Dividends received from other Brazilian Qualifying small enterprises with annual limited to 30% of taxable income in each companies are not included in taxable gross income not exceeding BRL 4.8 million carryforward year. The carryback of losses is income. may elect to be taxed under a simplified not permitted. regime (for purposes of corporate income tax, federal excise tax (IPI), federal social

International Core of Excellence 2018 9 BR

Holding company regime Technical service fees Stamp duty No The general withholding tax rate on No technical service and technical assistance Incentives Transfer tax fees, administrative assistance and similar R&D projects and information technology A real estate transfer tax is due upon the payments to nonresidents is 15%, unless qualify for some direct assistance and transfer of title to real property (land, the rate is reduced or eliminated under a tax relief. An exclusion is allowed from buildings). The tax rate is progressive from tax treaty. The rate is 25% if the recipient is the corporate income tax base of 60% to 2% to 6%, calculated, roughly, on the sales resident in a tax haven. 100% of R&D project expenses. The IPI price. The buyer is responsible for payment on the acquisition of assets is reduced Branch remittance tax of the tax. and accelerated depreciation is allowed No Other for R&D assets. Subsidized financing is Although not corporate income taxes, the available to purchase capital goods, invest Other taxes on corporations: PIS/PASEP (social integration program) and in infrastructure projects and build ships. Capital duty COFINS (tax for social security financing) are Export sectors qualify for duty drawback on No federal taxes imposed on gross revenue at imports and for special financing through rates of 0.65% (PIS) and 3% (COFINS), where an export-promotion program. Exporters Payroll tax a Brazilian entity pays corporate income tax of manufactured goods are entitled to a tax See “Social security,” below. under the deemed taxable income regime. refund of a percentage of the value of their Real property tax export revenue, depending on the type of The real property tax is collected by the Where a Brazilian entity pays corporate goods exported. municipality where property is located and income tax based on actual income, the PIS and COFINS rates are 1.65% and 7.6%, There also are regional incentives for federal is calculated on a deemed “sales price” respectively. In the latter case, the Brazilian and state taxes, granted by the Brazilian of the property. The tax rate varies by entity may use input PIS and COFINS credits government. municipality, but may be estimated in the range of 0.3% to 1.5%. to offset its PIS and COFINS liabilities. Withholding tax: Export companies are exempt, as long as Rural property tax is an annual federal tax funds actually entered the country. The Dividends assessed on the ownership of rural property importation of goods and services generally No withholding tax is imposed on dividend at rates ranging from 0.03% to 20%, is subject to PIS and COFINS at a combined distributions to a nonresident that are paid depending on the region and the utilization rate of 11.75% and 9.25%, respectively. from profits earned as from 1 January 1996. of the property. Real estate transfer taxes The tax on services (ISS) is a municipal tax As from calendar year 2015, dividends are also apply (see “Transfer tax” below). imposed on the supply of services, other determined based on IFRS. Social security than services subject to ICMS. Interest Employers are required to contribute 8% of A financial transactions tax (IOF) is imposed Interest paid to a nonresident generally is wages to each employee’s deferred salary on foreign exchange, credit and security subject to a 15% withholding tax unless the account for the severance fund, as well as transactions. rate is reduced under a tax treaty. The rate 20% of an employee’s wages to the public is 25% if the recipient is resident in a tax pension system (National Institute for Social The Contribution for the Intervention in the haven. Security or INSS), and a maximum of 8.8% Economic Domain (CIDE) is imposed at a for other social security taxes. In some rate of 10% on the importation of technical Royalties business sectors, the 20% INSS contribution services and royalties. The general withholding tax rate on royalty has been replaced by a contribution levied payments is 15%, unless the rate is reduced on gross revenue. under a tax treaty. The rate is 25% if the recipient is resident in a tax haven.

10 BR

Anti-avoidance rules: not exceed 2:1, calculated based on the Disclosure requirements proportion of total debt to total direct equity Related party transactions and CFC Transfer pricing investment made by related parties. information must be disclosed in the annual Brazil’s transfer pricing rules apply only to income tax return. Country-by-country cross-border transactions between related Interest paid to an entity or individual reporting standards were introduced as parties and transactions with entities located in a tax haven or that benefits from fiscal year 2016. located in tax haven jurisdictions. The rules from a preferential tax regime (regardless deviate substantially from the OECD transfer of whether the parties are related) may Other pricing guidelines; they do not adopt the be deducted only if the expenses (i) are General anti-avoidance rules apply. Under arm’s length principle, but use fixed margins necessary for the company’s activities, the rules, any amount paid, credited, to calculate the transfer price. The rules and (ii) both of the following thresholds are delivered, used or remitted directly also provide that interest derived from a met: (a) the amount of the Brazilian entity’s or indirectly to an entity or individual cross-border loan is subject to certain limits, indebtedness to the tax haven/preferential incorporated or resident in a tax haven regardless of whether the loan agreement tax regime resident does not exceed 30% of jurisdiction or benefiting from a preferential is registered with the Brazilian central bank. the net equity of the Brazilian entity; and (b) tax regime may be deducted only if The limits vary depending on the type of the Brazilian entity’s total indebtedness to the taxpayer can identify the beneficial currency adopted, type of interest (fixed or all entities located in a tax haven jurisdiction “recipient” of the proceeds; provide variable), etc., and take into account market or benefiting from a preferential tax regime proof that the entity or individual has rates and a spread to be determined by the does not exceed 30% of the net equity of the operational capacity to carry out the Minister of Finance. the Brazilian entity. transaction for which the payment is made; and submit documentation showing the For inbound financial transactions, where Excess interest is treated as a nondeductible purchase price paid and the receipt of the the Brazilian taxpayer is paying interest to expense for IRPJ and CSLL purposes. The goods, rights or the use of services. (See a foreign related party, the annual spread transfer pricing rules affecting cross-border above under “Transfer pricing” and “Thin is limited to a maximum rate of 3.5%. For loans remain in effect, as do the general capitalization” for additional rules specific to outbound financial transactions, where the requirements for deductibility. interest payments.) Brazilian taxpayer is receiving interest from a Controlled foreign companies foreign related party, the annual spread has Profits earned by CFCs and certain foreign Compliance for corporations: a minimum rate of 2.5%. affiliates (noncontrolled subsidiaries) of Tax year Thin capitalization Brazilian entities are included in the base for Calendar year Under the thin capitalization rules, interest calculating the IRPJ and CSLL liability of the paid to related parties that are not located Brazilian controlling or parent company. Consolidated returns in a tax haven jurisdiction and that do Consolidated returns are not permitted; Provided certain requirements are met, not benefit from a preferential tax regime each company must file a separate return. Brazilian taxpayers have the option to make may be deducted on an accruals basis an irrevocable election (on a calendar-year Filing requirements for corporate income tax purposes only basis) to consolidate the profits and losses Every business entity in Brazil (including if (i) the expenses are necessary for the of CFCs until 2022 and to carry forward corporations, partnerships, branches and company’s activities, and (ii) both of the losses incurred by CFCs for five years. Until agencies of companies domiciled abroad) following thresholds are met: (a) the related calendar year 2022, a Brazilian controlling must file an annual income tax return for the party debt-to-equity ratio does not exceed entity in certain business sectors may utilize previous calendar year by the last working 2:1, calculated based on the proportion a 9% presumed credit to offset the income day of July. Corporate taxes (IRPJ and CSLL) of related party debt to direct equity tax related to CFC profits included in its usually are due on annual adjusted profit, investment made by related parties; and taxable income. with monthly advance payments; excess tax (b) the overall debt-to-equity ratio does paid is available to offset future taxes.

International Core of Excellence 2018 11 BR

Penalties Taxable income Rates Late payment of IRPJ and CSLL is subject to Taxable income includes wages, salaries, No tax is levied on annual income up to penalties and interest. bonuses, consulting fees and commissions, BRL 22,848. Tax is levied as follows: (1) 7.5% premiums, directors’ fees and dividends for income between BRL 22,849 and BRL Rulings and interest from foreign sources. It also 33,920; (2) 15% for income between BRL While there is no advance tax ruling system, includes most allowances connected with 33,921 and BRL 45,012; (3) 22.5% for income Brazil allows formal consultations on the employment. The formal profit sharing paid between BRL 45,013 and BRL 55,976; and (4) application of tax laws to the taxpayer’s by a Brazilian employer to employees is 27.5% for income exceeding BRL 55,977. specific facts. The resulting decisions are exempt only for INSS and severance fund binding on all taxpayers, with the possibility Nonresidents of a nontreaty country are purposes. Dividends received from local of an appeal depending on the existence taxed at a flat rate of 25% (on earned sources are tax exempt. of inconsistent separate decisions, in which income) or 15% (on other income, except case an affected taxpayer may request a final Capital gains dividends paid from a Brazilian entity, which statement that binds all taxpayers that have Capital gains are subject to progressive rates are tax-exempt). received decisions on the same facts/law. ranging from 15% to 22.5%. Other taxes on individuals: Personal taxation: Deductions and allowances Instead of itemizing deductions, taxpayers Capital duty Basis may elect the standard annual deduction of No Resident individuals are taxed on their 20% of taxable income, up to a maximum of Stamp duty worldwide income. Nonresidents are taxed BRL 16,754. No only on income from Brazilian sources. Deductions and allowances may include Capital acquisitions tax Residence (subject to additional restrictions): social No In addition to citizens, the following security taxes paid by the employee; individuals are considered tax residents: contributions to private Brazilian pension Real property tax naturalized foreigners; foreigners who plans (up to 12% of gross income); alimony See “Real property tax” and “Transfer tax” hold a permanent visa (which was available or pension payments under a court order; under “Other taxes on corporations.” for new applicants up to 21 November expenses incurred by self-employed Inheritance/estate tax 2017) or a temporary visa with a local individuals to produce business income or States are authorized to tax inheritances at employment contract from the date of to maintain the source of such income; a rates of up to 8%. arrival; and foreigners who hold a temporary standard deduction per dependent up to visa, but no local employment contract, BRL 2,275; educational expenses, up to an Net wealth/net worth tax after completing 183 days of residence in annual limit of BRL 3,561; unreimbursed No Brazil within any 12-month period. New payments for health insurance plans and Social security visa guidelines may affect aspects of tax medical, dental, psychotherapy and physical Employees contribute 8% to 11% to residence in 2018. therapy expenses; and documented social security, depending on their salary Filing status contributions to approved Brazilian cultural, categories. There is an option for married individuals to artistic and audio-visual activities and file a joint tax return for the household. donations to Brazilian Child and Youth Counsels, up to 6% of tax due or 3% if the donation is at the time the tax return is filed.

12 BR

Compliance for individuals: Value added tax:

Tax year Taxable transactions Calendar year Brazil operates a multiple rate system, with tax levied at the federal, state and municipal Filing and payment levels. IPI is a federal excise tax levied on Tax is paid on a monthly basis, either the manufacture of goods and the import through withholding from salary or by of goods into Brazil. Exports are exempt. advance payment for the self-employed. ICMS is a state VAT levied on the circulation Monthly advance payments also are and import of goods and the provision of required for income received outside of interstate and intermunicipal transportation Brazil by Brazilian tax residents. All residents and communications services. who are subject to income tax must file a Rates final annual tax return by the last business The IPI rates depend on the type of product, day of April of the following year. The return at an average rate of 20%. The ICMS is levied must include a statement indicating all their at rates ranging from 4% to 25%. property and rights (domestic or foreign). Registration In addition to filing an income tax return, a IPI and ICMS calculations must be kept in resident individual that owns more than USD proper fiscal books. 100,000 in assets abroad must report these assets to the Brazilian central bank by 5 April Filing and payment of each year. IPI and ICMS are paid monthly. ICMS filing is on a monthly basis. Penalties Late filing of the income tax return will result Source of tax law: 1988 Federal in a penalty of 1% per month on the tax Constitution, National Tax Code of 1966 and due, up to 20%. A minimum penalty of BRL the Federal Income Tax Code 166 applies if no tax was due. A maximum Tax treaties: Brazil has concluded 33 tax penalty of BRL 250,000 applies for the late treaties that currently are effective. or incorrect filing of the Brazilian central bank return. Tax authorities: Brazilian Revenue Service

International Core of Excellence 2018 13 Investment basics China Currency Renminbi (RMB) or Yuan (CNY) Foreign exchange control The government maintains strict exchange controls, although the general trend has been toward a gradual liberalization of China’s foreign exchange markets and specific controls over companies and individuals. Accounting principles/financial statements Accounting standards similar to IFRS are mandatory for publicly held companies listed Hong Ye in China and certain other companies (e.g. banks), and have been widely applied to large Partner and medium-sized enterprises established in China. Tel: +1 212 313 2766 Principal business entities [email protected] China maintains a matrix of laws and regulations that includes pure domestic enterprises, wholly foreign-owned enterprises, equity joint ventures, cooperative joint Corporate taxation: ventures, holding companies, domestic partnerships, foreign-invested partnerships, trusts, branches and representative offices. Branches of foreign companies are Residence permitted for certain industries (e.g. banks and insurance companies). An enterprise An enterprise is resident in China if it that is set up as a company may be established as a joint stock company or a limited is established in China or if its place of liability company. effective management is in China. Effective management is defined as substantial and overall management and control over Taxation of dividends Surtax manufacturing and business operations, An exemption applies for dividends paid by No human resources, financial and property a resident enterprise to another resident Alternative minimum tax aspects of the entity. A foreign company enterprise (with certain limits). Dividends No also will be subject to tax in China if it has received from a foreign entity are included in an “establishment” in China or, if it does not taxable income and generally are subject to Foreign tax credit have an establishment in China, if it derives income tax at a rate of 25%, with a tax credit Foreign tax paid may be credited against income from China. The definition of an granted for foreign tax paid. Chinese tax on the same profits, but the establishment is broad and does not include credit is limited to the amount of China tax Capital gains an exemption for an independent agent. If payable on the foreign income. If the foreign Gains and losses from the transfer of assets a foreign company has an establishment tax credit exceeds the limit, the excess may generally are combined with other operating in China, it will be subject to China tax on be carried forward for five years. An indirect income and taxed at the applicable all income effectively connected with that tax credit also is allowed when dividends enterprise income tax rate. establishment. are distributed to a resident enterprise that Basis Losses holds directly or indirectly at least 20% of Residents are taxed on worldwide income, Losses may be carried forward for five years. the foreign entity (within five tiers) deriving while nonresidents are taxed on China- The carryback of losses generally is not the underlying profits. permitted. source income and income effectively Participation exemption connected with their establishments (if any) Rate No in China. The standard enterprise income tax rate Holding company regime is 25%. Special rates mainly apply to small- Taxable income No Taxable income is the amount remaining scale enterprises (20%, or 10% if certain from gross income in a tax year after requirements are met), enterprises with Incentives deducting allowable expenses and losses, new/high-technology status (15%), advanced The principal incentives include a 15% nontaxable and tax-exempt items and technology service enterprises that perform preferential tax rate applicable to new/ any prior-year loss carryforwards. All qualifying outsourcing services (15%) and high-technology enterprises and advanced documented costs incurred in connection enterprises incorporated in certain regions technology service enterprises, and a 50% with operating activities on a reasonable of China and engaged in encouraged or 75% super deduction for qualifying R&D and actual basis are allowable, except those business activities (15%). Special rates are expenditure. There is a geographically based specifically identified as nondeductible. available for certain other encouraged incentive focused on new/high-technology business. enterprises established as from 2008.

14 CN

The incentive (in addition to the 15% rate Royalties Social security that applies to all new/high-technology A 10% withholding tax, which is lowered The employer is required to contribute enterprises) is a two-year tax holiday, from a 20% statutory rate, applies to approximately 20% of basic payroll to the followed by three years at a 12.5% rate. royalties paid to a nonresident unless the state-administered retirement scheme, Encouraged industries in certain regions rate is reduced under a tax treaty. A 6% VAT as well as to medical insurance, maternity (e.g. western China, Hengqin (Guangdong), generally is applicable, but may be waived insurance, unemployment insurance and Pingtan (Fujian) and Qianhai (Shenzhen)) when royalties are paid for the transfer of work-related injury insurance funds. The can enjoy a reduced 15% enterprise income qualified technology. total employer contribution can be up tax rate until 31 December 2020. Tax to 40% of the employee’s base monthly Technical service fees exemptions and other forms of preferential salary, although the rates can vary across Technical service fees paid to a nonresident treatment apply to the agriculture, the country. The employee is required to are subject to the statutory enterprise forestry, animal husbandry and fishery contribute a certain percentage of his/her income tax rate (i.e. 25%) on a net-profit sectors, software and integrated circuit monthly salary to the above funds. There basis to the extent the services are industries, major infrastructure projects, generally are limits on the total contribution rendered in China, unless the tax is reduced certain environmental projects and certain payable if the employee’s salary reaches a under a tax treaty. A minimum 15% deemed transfers of technology. threshold set by the local authorities. profit rate is used where documents Withholding tax: substantiating costs and expenses are Foreign individuals legally working in China unavailable. A 6% VAT generally will be (including both those locally hired and those Dividends levied, regardless of where the services are seconded from abroad to work) generally A 10% withholding tax, which is lowered rendered. are required to participate in the social from a 20% statutory rate, is imposed on security scheme, unless an exemption Branch remittance tax dividends paid to a nonresident company applies under a bilateral social security No unless the rate is reduced under a tax totalization agreement. Both the employer treaty. As a measure to further promote Other taxes on corporations: and the employee must contribute into foreign investment in China, the government these schemes. has issued rules to provide a deferral of Capital duty withholding tax on dividends and profits No Stamp duty distributed to foreign investors and Stamp duty at varying rates applies to Payroll tax reinvested into encouraged investment contracts, agreements and certain legal No projects in China, with retroactive effect documents. from 1 January 2017. Real property tax Transfer tax Real estate tax, levied on land and buildings, Interest No is paid by the owner of real estate at 1.2% A 10% withholding tax, which is lowered per year on the original cost, less a variable Other from a 20% statutory rate, applies to interest allowance depending on the location, or at Deed tax is imposed at rates between paid to a nonresident unless the rate is 12% per annum on rental income. An urban 3% and 5% on the total value of land use reduced under a tax treaty. A 6% VAT also is land usage tax is imposed on the land area rights or building ownership rights when imposed. occupied, at rates ranging from RMB 0.6 to transferred. Land appreciation tax is RMB 30 per square meter. Other minor local imposed on gains realized on the transfer levies may apply. of real estate. The gain is calculated based on sales proceeds, less certain deductions, and the tax is charged in four bands ranging from 30% to 60%.

International Core of Excellence 2018 15 CN

As from 2018, environment protection Controlled foreign companies Penalties tax will be collected on taxable pollutants Resident companies must include in A late payment surcharge will be imposed (atmospheric pollutants, water pollutants, taxable income their relevant share of the on a daily basis at a rate of 0.05% of the solid waste and noise), based on the undistributed profits of a CFC in certain amount of underpaid tax. Penalties may be “pollution emission equivalent amount.” cases. This rule applies to CFCs incorporated imposed in addition to the late payment in low-tax countries where their effective tax surcharge. An interest-based penalty, Anti-avoidance rules: rates are lower than 12.5%. The inclusion in calculated at the basic RMB lending rate plus Transfer pricing income is not required in certain situations 5%, applies in the case of transfer pricing, China has transfer pricing rules and has (e.g. where the undistributed profits of a CFC thin capitalization, CFC and general anti- adopted a broad definition of associated are lower than a threshold amount). avoidance tax adjustments. enterprises, with a strong emphasis on Disclosure requirements Rulings control. A related party can include an Resident taxpayers are required to disclose There generally is no advance ruling entity with significant control over the related party transactions in the annual procedure, but the tax authorities can issue taxpayer’s senior management, purchases, tax return. There are other disclosure rulings in special cases. Taxpayers normally sales, production and the intangibles and requirements for contracting or services consult their local in-charge tax officials technologies required for the business. provided by nonresident companies, certain when issues arise. As noted above, advance Accepted transfer pricing methodologies foreign investments, etc. pricing agreements may be concluded. are the comparable uncontrolled price, resale price, cost plus, transactional net Other Personal taxation: margin, profit split and other methods that A general anti-avoidance rule requires a Basis comply with the arm’s length principle. bona fide business purpose for any business An individual “domiciled” in the Chinese Contemporaneous documentation is arrangement that has the effect of reducing, mainland is subject to individual income required (with certain exemptions) and deferring or avoiding taxable revenue or tax on his/her worldwide income. A cost sharing agreements may be used for taxable income. In the absence of such a nondomiciled individual staying in China developing intangible property or for shared purpose, the tax authorities have the power for less than one year is subject to personal services arrangements. A resident taxpayer to make adjustments going back 10 years. tax only on China-source income. A that is the ultimate parent of a multinational Compliance for corporations: nondomiciled individual staying in China for group with annual consolidated revenue one full year, but less than five consecutive exceeding a threshold amount or that Tax year full tax years, is subject to individual is appointed as the filing entity of a Calendar year income tax on China-source income, multinational group is required to file a Consolidated returns plus foreign income borne by Chinese country-by-country report. Advance pricing The filing of consolidated returns generally entities or establishments. A nondomiciled agreements are available. is not permitted; each company must file a individual staying in China for more than Thin capitalization separate return. five consecutive full tax years is taxed on Excessive interest expense from related worldwide income as from the sixth year, for Filing requirements party financing is nondeductible for each full tax year spent in China. Enterprises must file a provisional income tax purposes. In general, if an entity’s tax return with the local tax authorities Residence debt-to-equity ratio exceeds 2:1 (5:1 for within 15 days of the end of each quarter, There is no specific definition of a tax financial institutions), the excess portion and pay quarterly installments of tax, resident for personal tax purposes in the of interest expense will be nondeductible, generally based on the profits for the domestic law (see above under “Basis”). unless contemporaneous documentation quarter. An annual tax return and final However, the test for domicile in China is demonstrates the arm’s length nature of the settlement of the tax liability must be made whether an individual is usually or habitually expense. within five months of the end of the tax year. residing in China due to his/her household, family or economic situation.

16 CN

Filing status Rates Social security Each individual must file a separate return; Seven progressive tax rates, ranging Both the employer and the employee must joint filing is not permitted. Non-Chinese between 3% and 45%, are levied on wages contribute to a pension fund, medical nationals may need to register with the and salaries. Dividends, interest, royalties, insurance fund, maternity insurance, competent Chinese tax authorities as soon income from leasing property, income from unemployment insurance and work-related as they become liable to individual income the transfer or assignment of property, injury insurance. The employee is required tax. income from manuscripts and contingency to contribute a certain percentage of his/ income are taxed at 20%. Interest on her monthly salary to the above funds, up to Taxable income bank deposits is temporarily exempt from certain limits set by the local authorities. Taxable income comprises employment individual income tax (previously taxed at income; production and business income; Foreign individuals legally working in China 5%). Income from production and business income derived from the contracting (including both those locally hired and those and income derived from contracting or for, or leasing operations of, enterprises seconded from abroad to work) generally leasing operations are taxed at progressive or institutions; income from personal are required to participate in the social rates between 5% and 35%. Income from services; dividends; interest income (except security scheme, unless an exemption personal services is subject to progressive interest from bank deposits); royalty applies under a bilateral social security rates up to 40%. income; income from leasing property; totalization agreement. Both the employer income from the assignment or transfer of Other taxes on individuals: and the employee must contribute into property; contingency income; income from these schemes. manuscripts; and other income specified as Capital duty taxable by the finance department of the No Compliance for individuals: State Council. Stamp duty Tax year Capital gains Stamp duty at varying rates applies Calendar year to contracts, agreements and certain Gains derived from the sale of property, net Filing and payment documents. of relevant expenses and taxes, are subject Individual income tax on wages and salaries to tax at a rate of 20%. Individuals generally Capital acquisitions tax is calculated and levied on a monthly basis. are exempt from tax on gains from the sale No Withholding agents and individuals who of their sole private dwelling if they have file returns personally must submit a tax Real property tax occupied the residence for five years. return to the tax authorities and make the An individual who rents out his/her property tax payment to the state treasury within 15 Deductions and allowances is subject to real estate tax, which is 12% of days after the end of the month in which the Deductions and allowances are available, the rental income. The rate may be reduced income was derived. Annual filing is required depending on the category of income. to 4% for the leasing of residential property. within three months of the end of the tax Individuals are entitled to a fixed monthly However, the practice may vary across year for individuals with annual income deduction of RMB 3,500 (foreign nationals China, since the rates are determined by the exceeding RMB 120,000. Nondomiciled are entitled to an additional fixed local authorities. deduction of RMB 1,300) for wages and individuals who have resided in China for salaries received in China. Personal basic Inheritance/estate tax less than a full tax year may be exempt contributions also are deductible. These No from the filing requirement. In most cases, an employer or a person who pays taxable include payments to housing funds and Net wealth/net worth tax income to a taxpayer is obliged to act as certain medical insurance, pension and No unemployment insurance payments. a withholding agent and is responsible

International Core of Excellence 2018 17 CN

for filing a tax return and remitting tax goods; 11% for transportation services, Other payments to the tax authorities on behalf construction services, postal services, basic Consumption tax applies to alcoholic of the individual. If there is no withholding telecommunication services, leasing of beverages, luxury cosmetics, diesel fuel, agent, the individual must file his/her tax real estate and the sale of real estate and fireworks, jewelry, motorcycles, motor return and pay the tax assessed. land use rights; and 6% for value-added vehicles, petrol, luxury watches, tobacco, telecommunication services, financial golf equipment, yachts, etc., at rates ranging Penalties services, modern services and lifestyle from 1% to 56% of the value of the goods. A late payment surcharge will be imposed on services and the sale of intangible assets Once the taxpayer’s tax status has been a daily basis at a rate of 0.05% of the amount other than land use rights. A 5% rate may approved by the tax authorities, the vendor of underpaid tax. Penalties may be imposed apply to certain transactions involving real should register as a consumption tax in addition to the late payment surcharge. estate (e.g. sales of real estate that was payer. Returns generally must be filed each Value added tax: acquired by 30 April 2016). Certain calendar month and submitted before the specified cross-border taxable activities 15th day of the following month. Taxable transactions can be zero-rated. VAT applies on the supply of goods; Source of tax law: Enterprise Income Tax the provision of processing, repair or Registration Law; Individual Income Tax Law; Provisional replacement services; and the import of A company is required to register with Rules on Value Added Tax, etc. the local tax authorities at the time of goods. The VAT reform program has been Tax treaties: China has over 100 tax incorporation to have its status recognized. rolled out nationwide to cover all goods and treaties. China signed the OECD multilateral If the taxpayer’s status is approved, VAT services (including those that used to fall instrument on 7 June 2017. under the scope of the business tax that no taxpayers (other than small-scale VAT longer is imposed after 1 May 2016). taxpayers) must register for VAT purposes Tax authorities: Ministry of Finance, State with the tax authorities. A nonresident Administration of Taxation Rates company is not required to register for VAT. The standard VAT rate is 17%, with a lower rate of 11% applying to certain foods, Filing and payment goods, books and utilities. A 3% rate applies VAT returns generally must be filed each under the small-scale taxpayer scheme. calendar month and submitted before the Lower rates apply to certain transactions 15th day of the following month. Taxpayers involving used goods. Exports generally importing goods must pay tax within 15 are zero-rated. The rates under the VAT days after the issuance of the tax payment reform program are as follows: 17% for certificate by Customs. the leasing of moveable and tangible

18 Investment basics France Currency Euro (EUR) Foreign exchange control No Accounting principles/financial statements French GAAP. Financial statements must be filed annually. Principal business entities These are the joint stock company (SA/SAS), limited liability company (SARL), commercial partnership (SNC) and branch of a foreign company.

Pierre-Henri Revault Alain Baudeneau Principal Managing Director Tel: +1 212 436 3430 Tel: +1 212 436 6724 [email protected] [email protected]

Corporate taxation: Losses Foreign tax credit Ordinary losses may be carried forward French domestic law generally does not Residence indefinitely, but may be offset against provide for a credit for foreign taxes. Income A company incorporated in France is taxable profit of a given year only up to an subject to foreign tax that is not exempt deemed to be tax resident. A foreign amount equal to EUR 1 million, plus 50% of from French tax under the territoriality company can be resident in France if it is the taxable result in excess of this amount principle is taxable net of foreign tax paid. managed and controlled in France. for the fiscal year. Losses may be carried However, most tax treaties provide for Basis back for one year in certain cases, up to EUR a tax credit mechanism, which generally France operates a territorial tax system. 1 million. Additional limitations apply to the corresponds to the withholding tax paid Residents and nonresidents are taxable deduction of capital losses on the sale of in the source country, but is capped at the in France on profits allocable to a French shares between related parties. French tax actually due on the net income. business and on French-source income. The portion of the credit exceeding the cap Rate Foreign-source income of French residents is forfeited. The standard corporate income tax rate is generally is not subject to French tax (and 33.33%, with a reduced rate of 28% applying Participation exemption foreign-source losses may not be deducted). on the first EUR 500,00 of taxable income A participation exemption on dividends Taxable income for 2018. The rate will be progressively applies where the recipient owns at least Taxable income is equal to book income, reduced to 25% by 2022. Small or new 5% of the shares of the distributing entity plus or minus certain tax adjustments. businesses may benefit from lower rates. for at least 24 months. If the participation exemption applies, the dividends are Taxation of dividends Surtax 95% tax exempt, resulting in a maximum Dividends generally are included in taxable A 3.3% social surcharge applies to a effective rate of 1.72% (5% x 34.43%). income, although distributions from standard corporate income tax liability However, if an entity is merged shortly qualifying subsidiaries benefit from the exceeding EUR 763,000 (which brings the after making a distribution and the merger participation exemption (see “Participation marginal effective rate to 34.43% (33.33% + is within two years of its acquisition, the exemption,” below). 3.3%)). Small and medium-sized enterprises parent company must choose between benefit from specific exemptions, provided Capital gains having the distribution within the scope of certain conditions (e.g. turnover, capital) are Capital gains generally are subject to the participation exemption and taking a satisfied. corporate tax at the standard rate, but deduction for the loss on the shares of the capital gains derived from the sale of Alternative minimum tax distributing entity. (See also “Other” under qualifying shareholdings can benefit No “Anti-avoidance rules.”) from the participation exemption (see “Participation exemption,” below).

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A participation exemption also applies to Royalties partage equal to 2.5% of net worth, if capital gains arising from the sale of shares Royalties paid to a nonresident entity are the net worth is distributed pro rata to that form part of a substantial investment subject to the standard corporate income the shareholders. Amounts paid to a if the shares have been held for at least 24 tax rate (currently, 33.33%). The rate may be shareholder exceeding its pro rata rights months. The gain is 88% exempt, resulting reduced or eliminated under a tax treaty or in the distribution are taxed as a sale. (For in a maximum effective rate of 4.13% (12% x where the royalties qualify for the benefit of share transfers, see “Transfer tax.”) 34.43%). the EU interest and royalties directive (see Payroll tax “Controlled foreign companies,” below, for Holding company regime Payroll tax is levied on entities that collect rules on noncooperative countries). See “Participation exemption.” revenue not subject to VAT (mostly banks Technical service fees and financial institutions). Incentives Fees paid for commissions, consultancy France offers an R&D tax credit and a tax Real property tax and services performed or used in France credit for competitiveness and employment Several real property taxes apply in France, are subject to the standard corporate (CICE), which take the form of an actual cash including the “CET” (see “Other,” below), the income tax rate. The rate may be reduced payment from the government if the credits taxe fonciere and the “3% tax.” (See also or eliminated under a tax treaty (see have not been used to offset an income tax “Transfer tax,” below.) “Controlled foreign companies,” below, for liability within three years. However, the CICE rules on noncooperative countries). Social security will be abolished as from 1 January 2019 and Contributions payable by the employer vary replaced with a reduction of the employer’s Branch remittance tax depending on the size and type of business share of social security contributions. The after-tax income of a French branch and the location, but in certain cases can of a foreign company is deemed to be exceed 50% of gross pay for the employer. Withholding tax: distributed to nonresidents and is subject to Dividends a 30% branch tax. The tax may be eliminated Stamp duty Dividends paid by a French corporation or reduced under a tax treaty, and is not Stamp duties apply, but they are nominal. due if the foreign head office is located in to a nonresident shareholder are subject Transfer tax the EU/European Economic Area (EEA) and to a 30% withholding tax, unless a tax The sale of real property is subject to a is subject to income tax with no possibility treaty provides for a lower rate or the EU transfer tax at a maximum rate of 5.8%. parent-subsidiary directive applies. Under of opting out or of being exempt; and the the directive, dividends paid by a French income is taxable in the foreign country. The sale of shares of an SARL or SNC is corporation to a qualifying EU parent subject to a transfer tax equal to 3% of Other taxes on corporations: company are exempt from withholding tax the sales price, minus a sum equal to the (see “Controlled foreign companies,” below, Capital duty number of units sold x EUR 23,000/total for rules on noncooperative countries). A fixed EUR 375 duty applies to most number of the company units. A flat rate of transactions that affect a company’s share 0.1% applies for the sale of shares of an SA, Interest capital. The duty is EUR 500 for companies SAS or SCA. The rate is increased to 5% if the Interest paid by a French company to with capital in excess of EUR 225,000, company whose shares are transferred is a a nonresident lender generally is not which is the minimum registered capital real estate company, i.e. if more than 50% subject to withholding tax (see “Controlled for a public company. Capital reductions of the fair market value of the company’s foreign companies,” below, for rules on are taxed at a flat rate of EUR 125. Upon assets correspond to French real property noncooperative countries). dissolution, a company pays a droit de or real property rights.

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The sale of a French going concern, a French through an increase or decrease in purchase another EU/EEA member state. The burden customer list or leasehold rights is subject or sales prices, or by any other means. of proof is on the taxpayer to demonstrate to a 5% transfer tax. The same tax applies to Companies exceeding certain thresholds that decisions on share-related transactions the sale of intellectual property rights (other must maintain contemporaneous transfer are made in France and control of the than patents) that are related to a French pricing documentation. subsidiary’s management is effectively going concern and used in France. undertaken from France or from another Rates on interest paid by French corporate EU/EEA member state. Failing that, a Other taxpayers to related parties are deemed to portion of the interest expenses relating Resident and nonresident companies be at arm’s length if they do not exceed an to the acquisition will be disallowed each operating a French business must pay the index corresponding to the average annual year, in an amount corresponding to the CET (contribution economique territoriale). floating rate applied by banks to two-year ratio between the acquisition price and the The CET has two components: a real loans granted to businesses. If the interest average of the company’s indebtedness for property tax and a tax calculated on rate exceeds that index, the taxpayer will the fiscal year concerned. This will apply until adjusted gross receipts of the French have to demonstrate that it would have the end of the eighth fiscal year following business. paid a similar or higher rate to a bank in a the acquisition. The interest disallowance comparable situation. A number of minor taxes apply to does not apply where: (1) the value of the corporations in France, to fund specific Thin capitalization shares held by a company does not exceed social initiatives. The deduction of interest expense on EUR 1 million; (2) the French company related party debt is deferred if the interest demonstrates that the indebtedness ratio A systemic risk tax at 0.222% applies on exceeds the highest of the following of the group is at least equal to its own; or risks assumed by banks. The tax base is the thresholds: (1) the interest expense on a (3) the French company demonstrates that applicable minimum required regulatory debt equal to 1.5 times the equity; (2) 25% of the loan was aimed at financing assets other capital. The tax is being progressively the borrower’s adjusted EBITDA; and (3) the than the shares. phased out, as the EU Single Resolution amount of interest income received from Fund is being introduced. The systemic Finance charges are capped at 75% of their related parties. An additional deduction may risk tax is scheduled to be phased out net amount. However, the cap does not be available where the borrower is part of a completely by 1 January 2019. apply if the total finance charges incurred, consolidated tax group. including charges disallowed under the thin A financial transaction tax of 0.3% applies Nondeductible interest may be carried capitalization rules, are below EUR 3 million. to transactions involving shares of publicly forward, but as from the second fiscal year traded companies established in France, the Controlled foreign companies following the disallowance, 5% of the total capital of which exceeds EUR 1 billion. The The CFC rules apply to more-than-50%- amount carried over becomes permanently tax is calculated based on the value of the owned or controlled foreign subsidiaries disallowed each year. shares. or permanent establishments of a French The scope of the thin capitalization rules company when the local taxation is less than Anti-avoidance rules: has been extended in certain circumstances 50% of the French rate (i.e. the actual tax Transfer pricing to loans granted by a third-party entity, paid compared to the French tax that would French entities controlled by entities but guaranteed by a related company. be due on the income calculated under established outside France are taxable Acquisition-related expenses are fully French GAAP). In such a case, the French in France on profits transferred, directly deductible only where the shareholding company is: (i) taxed on its pro rata share of or indirectly, to an entity located abroad is actually managed from France or from the income deemed to be received from the

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CFC if the CFC is a permanent establishment Compliance for corporations: Penalties or a branch; or (ii) deemed to have received Late payments and late filing are subject to Tax year distributed income from the CFC if the latter a 10% penalty. If additional tax is payable as The tax year generally is the calendar year, is a subsidiary. EU companies are outside a result of a reassessment of tax, interest is although a taxpayer may choose a different the scope of the CFC rules, unless the charged at 0.2% per month (2.4% per year). year-end date. The tax year is 12 months, structure was put in place to avoid tax. Special penalties can apply in the event of but can be shorter or longer in certain bad faith or abuse of law. Dividends, interest, royalties and payments cases. for services made to companies located Rulings Consolidated returns in a noncooperative country may be Rulings are becoming a regular practice. A Under the fiscal integration regime, a group subject to a 75% withholding tax. Further, special ruling procedure exists to confirm of companies may opt to consolidate profits dividends received from entities located in whether a foreign entity has a permanent and losses so that tax is assessed at the noncooperative countries cannot benefit establishment in France. level of the parent company but is based from the participation exemption. on the group profit or loss. To qualify for Personal taxation: Disclosure requirements consolidation, the parent must, inter alia, Country-by-country reporting is required for be subject to French tax and cannot be Basis certain companies with annual consolidated 95% or more owned directly by French Residents are taxed on worldwide income, group revenue equal to or exceeding EUR corporate taxpayers. Only subsidiaries whereas nonresidents are taxed only on 750 million. that are at least 95% owned, directly or French-source income. indirectly, by the parent can be included Other Residence in the tax group (if subject to French A rule to prevent hybrid mismatches Individuals domiciled in France are corporate tax). Subsidiaries indirectly held disallows an interest deduction on a loan considered resident. An individual normally through a chain of participations that granted by an affiliated company if the is considered domiciled in France if his/her include French companies not part of the interest is not subject to a tax at the level of principal residence, main place of business tax group or non-EU resident companies the lending company that is equal to at least or professional activity or center of financial cannot be part of the group. However, 25% of the tax that would have been due interests is located in France. groups can be consolidated vertically (the under the normal French rules. traditional interpretation) or horizontally Filing status In line with amendments to the EU parent- (French sister companies with a common Married persons file a joint tax return, with subsidiary directive, the French tax code EU parent company may form a horizontally no option to file separately after the year of excludes from the French participation consolidated group). marriage or before the year of divorce. exemption regime distributed profits Filing requirements Taxable income that are deductible from the distributing A self-assessment regime applies. Corporate Taxable income generally includes subsidiary’s taxable income. tax returns normally are due by 30 April employment income, business income, The French tax authorities have the general of the year following the calendar year, or real estate income, investment income and power to disregard or recharacterize all within three months of the year end for a capital gains. transactions, arrangements or legal acts noncalendar financial year. that are fictitious or have been executed or entered into for the sole purpose of avoiding French tax.

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Capital gains Real property tax Value added tax: Capital gains from the disposal of movable Owners are liable for a tax based on the Taxable transactions assets (e.g. securities, bonds) are subject to “rental value” of the property assessed by VAT is levied on the sale of goods and the a unique 30% tax rate (i.e. a 12.8% income the tax authorities. Occupants are liable provision of services, and on imports. tax, plus a 17.2% social contribution). Capital for a dwelling tax based on the rental gains from the disposal of immovable value of the property assessed by the tax Rates property are taxed at a special flat rate of authorities. The standard VAT rate is 20%. Reduced 19%, plus special social security surcharges. rates of 5.5% or 10% apply to most food Inheritance/estate tax products for human consumption and Deductions and allowances Transfers between close relatives are certain other items, and a preferential rate Various deductions and allowances subject to tax at rates ranging from 5% to of 2.1% is payable on some periodicals and are available, based primarily on family 45%, after a rebate (e.g. up to EUR 100,000 medicines reimbursed by the social security circumstances and related to certain types per child). system. Certain transactions are zero-rated of investment or expense incurred during Net wealth/net worth tax or exempt. the year. Households pay wealth tax (on real estate Registration Rates assets only) if the net worth of their Entities subject to VAT must register with the Rates on ordinary income are progressive, real estate exceeds EUR 1.3 million (per tax authorities. ranging from 0% to 45%, plus special social household, rather than per individual). security surcharges for French residents of a Nonresidents must pay tax on their Filing and payment maximum of 15.5%. property in France, unless they are exempt Filing can be monthly, quarterly or annually, under a tax treaty. Rates are progressive, depending on the type of activities and An exceptional contribution applies on ranging from 0.5% to 1.5%. other factors. Companies belonging to the portion of income that exceeds EUR the same group may elect to consolidate 250,000 for single individuals and EUR Social security payment of VAT (but not VAT returns) in 500,000 for married couples. The rate of Social security contributions and certain cases, but VAT grouping is not the contribution is 3% on income between surcharges are deducted at source from possible. EUR 250,000 and EUR 500,000 for single salary payments, with contributions of individuals (EUR 500,000 and EUR 1 million approximately 20% for the employee. Source of tax law: Code General des for married couples) and 4% on the part Impots (CGI) (French Tax Code), and Livre of income exceeding EUR 500,000 for Compliance for individuals: de procedures fiscales(LPF) (French Tax single individuals (EUR 1 million for married Tax year Procedure Code) couples). The measure will remain in effect Calendar year Tax treaties: France has signed tax treaties until the government achieves a zero deficit. Filing and payment with 124 jurisdictions. France signed the Other taxes on individuals: The income tax return generally must be OECD multilateral instrument on 7 June filed by 31 May after the end of the tax year. 2017. Capital duty No Penalties Tax authorities: French Tax Administration Late payments and late filing are subject to Stamp duty a 10% penalty. If additional tax is payable as Stamp duties apply, but they are nominal. a result of a reassessment of tax, interest is Capital acquisitions tax charged at 0.2% per month (2.4% per year). No Special penalties can apply in the case of bad faith or abuse of law.

International Core of Excellence 2018 23 Investment basics Germany Currency Euro (EUR) Foreign exchange control No restrictions are imposed on the import or export of capital; however, a declaration must be filed with customs for cash transfers of more than EUR 10,000 into or out of the EU. Accounting principles/financial statements German commercial GAAP/IFRS applies. Financial statements must be prepared Andreas Maywald annually. Taxpayers are required to maintain their books in Germany, although Director electronic bookkeeping may be transferred abroad if prior approval is obtained from the Tel: +1 212 436 7487 tax authorities. [email protected] Principal business entities These are the joint stock company (AG), limited liability company (GmbH), general and Corporate taxation: limited partnership, sole proprietorship and branch of a foreign corporation.

Residence A corporation is resident if it maintains its registered office (as determined by its against loss carryforwards. According to Participation exemption articles of incorporation) or central place of German change-in-ownership rules, a direct See under “Taxation of dividends” and management in Germany. or indirect change in ownership of more “Capital gains.” Basis than 25%/50% to one purchaser/related Holding company regime Residents are taxed on worldwide income; party results in a partial/complete forfeiture No nonresidents are taxed only on Germany- of all tax losses (both current-year losses source income. Branches are taxed in the and loss carryforwards). Loss forfeiture Incentives same way as subsidiaries. may be avoided in certain intragroup Incentive programs are available, such as restructurings. In addition, losses continue investment allowances for certain start-ups Taxable income to be available to the extent built-in gains and for small and medium-sized businesses. Corporation tax is imposed on a company’s in the loss company are subject to tax in No tax incentives are available for R&D, but profits, which consist of business/trading Germany, or in certain cases where the attractive nonrepayable cash grants are income, passive income and capital gains. historic business of the loss company is offered, e.g. for R&D in the energy sector. Business expenses may be deducted in continued on an unchanged basis. computing taxable income. Withholding tax: Rate Taxation of dividends The corporate tax rate is 15% (15.825%, Dividends Dividends received by a German resident including the solidarity surcharge). The A statutory rate of 25% (26.375%, including corporation (from both resident and foreign municipal trade tax typically ranges between the solidarity surcharge) applies, with corporations) generally are 95% tax exempt; 14% and 17%. The effective corporate tax a possible 40% refund for nonresident however, the exemption is not applicable if rate (including the solidarity surcharge and corporations, giving rise to an effective rate the dividends are treated as tax-deductible trade tax) typically ranges between 30% and of 15.825%, unless the rate is reduced under expenses for the payer. Minimum 33%. a tax treaty. No tax is levied on dividends shareholding requirements apply. qualifying under the EU parent-subsidiary Surtax Capital gains directive. A 5.5% solidarity surcharge is levied on the Capital gains generally are included in corporate income tax. Interest taxable income. Capital gains derived from Withholding tax generally is not levied on the sale of a domestic or foreign corporate Alternative minimum tax interest, except for interest on publicly subsidiary are 95% tax-exempt, unless No traded debt, interest received through a short-term trading rules applicable for Foreign tax credit German payment agent (usually a bank), certain financial enterprises apply. Foreign tax paid may be credited against convertible bonds and certain profit Losses German tax that relates to the foreign participating loans. The statutory rate is 25% Losses may be carried back one year and income, or may be deducted as a business (26.375%, including the solidarity surcharge) carried forward indefinitely. Losses may be expense. Germany typically applies the unless the EU interest and royalties directive offset against profits up to EUR 1 million exemption system. applies or the rate is reduced under a tax without restriction, but only 60% of income treaty. exceeding EUR 1 million may be offset

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Royalties Other earnings before net interest expense, tax, The withholding tax on royalties paid to a Municipal trade tax is an income tax levied regular depreciation and amortization nonresident corporation or an individual by municipalities at a minimum rate of (tax EBITDA). An EBITDA carryforward is is 15% (15.825%, including the solidarity 7%. All entrepreneurs with commercial generated if the taxpayer has net interest surcharge), unless the EU interest and activities carried out through a subsidiary expense lower than 30% of the EBITDA for royalties directive applies or the rate is or a nonresident’s commercial permanent tax purposes, unless an exception to the reduced under a tax treaty. establishment in Germany are liable for interest limitation (see below) applies. The trade tax. Corporations are deemed difference between 30% of the EBITDA and Technical service fees to carry on commercial enterprises the net interest expense (excess EBITDA) No (trade or business), regardless of their may be carried forward and used in the Branch remittance tax actual activities. (Individuals, alone or in following five years when the net interest No partnerships, are not liable for trade tax on expense exceeds 30% of current EBITDA. professional or other independent services The limitation does not apply where: (i) the Other taxes on corporations: unless the activities are deemed to be annual (net) interest burden is less than Capital duty commercial under the income tax law.) The EUR 3 million; (ii) the taxpayer is not part of No municipal trade tax rate varies, but averages a group of companies; or (iii) the taxpayer between 14% and 17% of income. The trade can demonstrate that the equity ratio of Payroll tax tax is based on taxable income as calculated the German borrower does not fall short No, but the employer is required to for corporate income tax purposes, with by more than two percentage points of withhold wage tax on a monthly basis several income adjustments. the worldwide group’s equity ratio. Excess from an employee’s income and remit it to interest may be carried forward indefinitely the tax authorities. Wage tax certificates Shipping companies may apply for lump (although change-in-ownership rules apply). must be transmitted electronically and be sum tonnage taxation in certain cases. Disallowed interest expense will not trigger authenticated by the employer. Anti-avoidance rules: withholding tax. Real property tax Transfer pricing Controlled foreign companies Tax is levied by the municipality in which Business dealings between related Passive income of subsidiaries in low- or no- real estate is located, at a rate of 0.35% of persons must be in accordance with tax jurisdictions will be attributed to German the tax value of the property, multiplied by a transactions that would have been shareholders that hold, directly or indirectly, municipal coefficient. agreed upon by independent third parties more than 50% of the subsidiary (lower Social security dealing at arm’s length, under which the ownership percentages apply where the The employer generally is required to bear underlying principle is the normal degree low-taxed CFC generates passive investment 50% of the wage-related social security of commercial prudence shown by a sound income). Typical passive income is income contributions (health, nursing care, unem- and conscientious business manager. from the rental of real estate, income from ployment and pension insurance). Additional Taxpayers are required to document all facts licensing or income from the lending of charges (e.g. statutory accident insurance, and evidence that support their positions. capital. A jurisdiction is regarded as a low-tax insolvency fund levy, etc.) may apply. Specific transfer pricing rules apply to cross- jurisdiction if the income of the subsidiary is border intragroup transfers of functions. subject to an effective tax rate of less than Stamp duty An exit tax will be imposed on the “profit 25%. Credit and refunds at the shareholder No potential” that is deemed to be transferred, level are taken into account when determining Transfer tax based on the discounted cash flow value of whether the effective tax rate abroad falls A real estate transfer tax of 3.5% to 6.5% of the subsidiary/branch before and after the below the 25% threshold. Credit for tax paid the sales price/value of transferred German restructuring. Germany generally applies the on attributed income can be granted upon the real estate or 95% or more of the shares in authorized OECD approach. application of the taxpayer. a real estate-owning company is levied. The Thin capitalization rate depends on the state in which the real A taxpayer may immediately deduct (net) estate is located. Exceptions may apply for interest expense up to 30% of taxable certain intragroup restructurings.

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Disclosure requirements parent in the consolidation hold the majority not comply with the transfer pricing A taxpayer generally must disclose all facts of the voting rights in the subsidiary from documentation requirements. If the relevant for taxation, especially regarding the beginning of the subsidiary’s fiscal taxpayer fails to submit documentation, transactions with foreign related parties. year. The parties must conclude a profit or submits inadequate documentation, and loss transfer agreement (PLTA), which an additional charge between 5% and Country-by-country (CbC) reporting, in must be in effect and carried out for at 10% of any transfer pricing adjustment (a line with the OECD’s BEPS action item 13, least five consecutive years, unless an minimum of EUR 5,000) can be assessed. is required for financial years commencing important reason exists for termination of An additional charge for the late submission after 31 December 2015 (after 31 December the agreement (e.g. sale of the subsidiary to of documentation can be assessed of at 2016 in the case of secondary reporting). a third party) before the end of the five-year least EUR 100 per day, up to EUR 1 million. Other period. Strict formal requirements for a PLTA For failure to comply with CbC reporting An “anti-double dip” rule applies for apply. Tax consolidation for VAT purposes requirements, penalties up to EUR 10,000 partnership structures. Under the rule, the does not require a PLTA, but the subsidiary may be imposed. tax deduction of “special business expenses” in the consolidation must be financially, Rulings of a partner in a German partnership is organizationally and economically integrated A taxpayer may apply for an advance ruling disallowed if such expenses (typically, with the parent company. on the tax consequences of a proposed financing expenses incurred by the partner Filing requirements transaction. Administrative fees may apply. to acquire or fund the partnership interest) The tax return generally must be filed also are deducted for foreign tax purposes. electronically by 31 May of the year following Personal taxation: The deductibility of certain royalties and the tax year; extension of the filing deadline Basis similar payments made to foreign related to 31 December of the year following the tax Resident individuals are taxed on their parties is restricted if such payments year (for tax assessment periods commencing worldwide income; nonresidents are taxed are subject to a non-OECD compliant before/on 31 December 2017) or to the last only on German-source income. preferential tax regime (i.e. an intellectual day of February of the second year following property regime not based on the “nexus the tax year (for tax assessment periods Residence approach” as described in action 5 of commencing after 31 December 2017) An individual is resident if he/she is the OECD BEPS project) and taxed at an typically is granted if a tax advisor is involved. domiciled or has a habitual abode in effective tax rate of less than 25%. The Quarterly advance payments of corporate Germany. A habitual abode is deemed to deduction limitation applies for payments tax are due in March, June, September and exist if the individual spends more than that are made after 31 December 2017. December. Quarterly advance payments of six months in Germany. Domicile can trade tax are due in February, May, August and be presumed where an individual has Compliance for corporations: November. permanent accommodation at his/her disposal in Germany; it is not necessary Tax year Penalties that the individual actually uses the The tax year is 12 months or the period for Penalties may be imposed for late filing (up accommodation. which accounts are prepared, if shorter. The to 10% of the tax due and a maximum of tax accounting period may not exceed 12 EUR 25,000), as well as for late payment Filing status months in total. of assessed taxes (1% on the outstanding Married couples and members of civil partnerships living together may opt for joint Consolidated returns rounded-down tax amount per month or or separate assessment. Although companies may be taxed on a part thereof). Findings in tax audits generally consolidated basis, each company must do not result in penalties. However, taxes Taxable income file a separate tax return (except for VAT assessed as a result of an audit are subject Taxable income is the sum of income from purposes). Tax consolidation for corporate to interest of 0.5% per full month (6% per employment, the exercise of a trade or income tax and municipal trade tax year). The interest calculation begins 15 profession, agriculture and forestry, capital, purposes (Organschaft) requires that the months after the calendar year in which the rent and leasing and other income. assessment became effective. Penalties also can be imposed if the taxpayer does

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Capital gains Capital acquisitions tax Value added tax: Sales of real estate and rights to private No Taxable transactions property (not business property) generally Real property tax VAT is levied on the sale of goods and the are subject to tax if the taxpayer owned the Tax is levied by the municipality in which provision of services. property for less than 10 years. The sale of real estate is located, at a rate of 0.35% of other private assets generally is taxable if Rates the tax value of the property, multiplied by a the taxpayer held the assets for less than The standard rate is 19%, with a reduced municipal coefficient. one year. Normal tax rates apply. rate of 7% applying to specified transactions. Inheritance/estate tax Certain transactions are exempt. Sixty percent of the capital gain from the Inheritance and gift tax rates range from 7% sale of shares is taxable at the normal Registration to 50%, with various exemptions available. rates if the taxpayer has held a direct German entrepreneurs generally must Business property/assets are valued at fair or indirect interest of 1% or more in the register for VAT purposes. However, if market value. Under certain conditions, the corporation within the last five years. If the turnover did not exceed EUR 17,500 in the inheritance of business property can be taxpayer has held less than 1%, the entire previous calendar year and is estimated 85% or 100% tax free. capital gain from the sale of privately held not to exceed EUR 50,000 in the current shares is subject to a flat 25% tax rate Net wealth/net worth tax calendar year, German entrepreneurs (26.375%, including the solidarity surcharge), No can opt for the special scheme for small regardless of how long the shareholding has businesses, so that no VAT is imposed by the Social security been held. Taxpayers may opt for taxation at German tax authorities. Nonresidents that Employed individuals are required to make their individual tax rate, if lower make taxable supplies of goods or services a contribution for pension, health, nursing in Germany also must register. Deductions and allowances care and unemployment insurance. The Personal allowances are available for employer generally bears 50% of the total Filing and payment the taxpayer and his/her children. Other contribution. The tax year is the calendar year. The deductions, which are subject to restrictions, entrepreneur must file an electronic are available (e.g. social security contributions, Compliance for individuals: quarterly preliminary VAT return by the 10th insurance, medical expenses, etc.). Expenses Tax year day of the following month and pay the VAT may be deducted from the tax base, provided Calendar year due. A refund will be paid if the input tax they were necessary to generate the income. exceeds the VAT. If the tax for the previous Filing and payment calendar year was more than EUR 7,500, Rates An individual can file a tax return to declare monthly preliminary returns must be filed. Rates are progressive up to 45%. A solidarity additional expenses and receive a refund. surcharge of 5.5% (resulting in a top rate of Mandatory tax returns generally are due Source of tax law: Income Tax Act, 47.5%) and a church tax of 9% (8% in Bavaria by 31 May (for tax years up to FY 17) or July Corporate Income Tax Act, Municipal Trade and Baden-Württemberg) are levied on the 31 (for tax years from FY 18 onward) of the Tax Act, VAT Ac Tax Act, Foreign Tax Act, income tax. following year. The final tax is assessed General Tax Code, Real Estate Transfer Tax Act, Real Estate Tax Act and annual tax Private investment income, including after filing of the tax return. If an individual actsTax treaties: Germany has an extensive capital gains, generally is subject to a 25% receives income other than employment tax treaty network (over 90 tax treaties). (26.375%, including the solidarity surcharge) income, quarterly advance payments Germany signed the OECD multilateral final withholding tax. Taxpayers may opt for of income tax are due in March, June, instrument on 7 July 2017, and has listed taxation at their individual tax rate, if lower. September and December. 35 tax treaties that it wishes to be covered Penalties Other taxes on individuals: by the multilateral instrument. See under “Corporate taxation.” Capital duty Tax authorities: Federal Ministry of No Finance, Federal Central Tax Office, Ministry of Finance of the German states Stamp duty No

International Core of Excellence 2018 27 Investment basics Hong Kong Currency Hong Kong Dollar (HKD) Foreign exchange control No Accounting principles/financial statements Hong Kong Financial Reporting Standards. Financial statements must be filed annually. Principal business entities These are the public and private limited liability company, partnership, sole Linda Ng proprietorship and branch of a foreign corporation. Managing Director Tel: +1 212 436 2764 [email protected]

Corporate taxation: Capital gains Participation exemption Capital gains are not taxable. However, gains No Residence on the disposal of assets may be subject A corporation (or other entity) is resident if Holding company regime to profits tax if the disposal constitutes a it is incorporated in Hong Kong or managed No transaction in the nature of trade (a factual and controlled in Hong Kong. determination). Incentives Basis A profits tax exemption for offshore funds is Losses Generally, only Hong Kong-source income is available for specified transactions if certain Losses attributable to a business that earns subject to Hong Kong profits tax. conditions are satisfied. Concessionary tax profits subject to profits tax may be carried rates are available for qualified corporate Taxable income forward indefinitely and set off against treasury centers, qualified aircraft lessors Profits tax is levied on the Hong Kong- future taxable profits of the company. or leasing managers, offshore businesses source profits of businesses carried on in There are specific anti-avoidance rules to of reinsurance companies and authorized Hong Kong. In determining the source of prevent the purchase of a loss company for captive insurance companies, etc. profits, Hong Kong generally adopts the the sole or dominant purpose of using the “operations test,” which involves identifying company’s losses. Losses cannot be carried Withholding tax: the activities that are most important in back. generating the profits and the place at Dividends Rate which these activities are carried out. There is no withholding tax on dividend Profits tax is levied at a rate of 16.5% (15% Expenses generally are deductible to the distributions from a Hong Kong entity. for unincorporated businesses) where the extent they are incurred in the production of company is carrying on business in Hong Interest profits that are chargeable to tax. However, Kong and the relevant income is earned in There is no withholding tax on interest domestic expenses, capital expenditure or derived from Hong Kong. payments from a Hong Kong entity. and losses, taxes and other expenses not incurred for the purpose of producing Surtax Royalties profits are not deductible. If a company’s No Royalty payments made to a nonresident profits are derived from both Hong Kong are deemed to be taxable in Hong Kong Alternative minimum tax sources and non-Hong Kong sources that if made for the use of, or the right to use, No are not assessable to profits tax, expenses intangibles in Hong Kong, or outside Hong attributable to the non-Hong Kong-source Foreign tax credit Kong where the royalty payments are profits are not deductible. Where there is a double tax agreement, deductible for profits tax purposes. The foreign tax paid may be credited against amount deemed taxable is 30% of the gross Taxation of dividends profits tax on the same profits, but the amount of the royalties paid, resulting in an Dividends generally are exempt from profits credit is limited to the amount of Hong Kong effective rate of 4.95% (16.5% x 30%) (or an tax. tax payable on the same income. effective rate of 4.5% for a noncorporate person (15% x 30%)). If the royalty is paid

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to an associated nonresident for the use of Stamp duty Transfer tax intangibles that previously were owned by a Stamp duty is charged on documents No person carrying on business in Hong Kong, connected with the lease, sale or transfer of Other 100% of the royalty is deemed to be taxable, immovable property in Hong Kong, and the Other levies include betting duty (25%-75%) resulting in an effective rate of 16.5% (15% sale of shares. If the above are transferred and the air passenger departure tax (levied for a noncorporate person). at less than market value, stamp duty may on all air passengers departing Hong Kong be imposed based on the market value at Technical service fees (HKD 120)). the date of transfer. No Stamp duty on the transfer of Hong Kong Anti-avoidance rules: Branch remittance tax shares is 0.2% of the value of the shares No Transfer pricing transferred, which is shared equally There are limited provisions in the tax law Other taxes on corporations: between the buyer and seller. An exemption governing business carried on with closely may be available for an intragroup connected nonresident persons. Capital duty transaction if certain conditions are Capital duty was abolished in 2012. satisfied. Thin capitalization There are no thin capitalization rules, but Payroll tax The rate on the lease of immovable property the deduction of interest expense is limited, No is 0.25% of the total rent payable for a especially with regard to interest paid to Real property tax short-term lease (one year or less); 0.5% of nonresidents. Property owners are subject to property tax the annual or average annual rent for a one Controlled foreign companies on rental income derived from property in to three-year lease; and 1% of the annual or No Hong Kong. Property tax is charged at the average annual rent for a lease exceeding standard rate of 15% of the net assessable three years. Disclosure requirements value of the property as determined by rent, The maximum ad valorem stamp duty on Certain related party transactions must be service charges and fees paid to the owner, the sale and conveyance of property is 8.5% disclosed in the profits tax return. less an allowance of 20% for repairs and of the value of property transferred. (The Compliance for corporations: maintenance. A company that derives rental ad valorem stamp duty rate for residential income from property is subject to profits property is proposed to be increased to a Tax year tax and may apply for an exemption from flat rate of 15%, with certain exemptions), The tax year starts on 1 April and ends on property tax. subject to the enactment of the relevant 31 March of the following year. The basis Social security legislation.) In addition, for residential period of tax computation is the accounting For employees whose monthly income is property acquired on or after 27 October year ended in the tax year. 2012, a Special Stamp Duty (SSD) ranging HKD 7,100 or more, the employer is required Consolidated returns from 5% to 20% is levied if the property to deduct 5% (capped at HKD 1,500) as the Hong Kong does not allow groups of is sold within 36 months of purchase. In employee’s contribution to the Mandatory companies to file consolidated returns and addition to ad valorem stamp duty and Provident Fund (MPF) scheme, and then pay there is no group loss relief for members of SSD, a Buyer’s Stamp Duty at a flat rate of an additional 5% as its own contribution. a group of companies. 15% applies to residential property if it is acquired by any person (including a limited company), except a Hong Kong permanent resident, on or after 27 October 2012.

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Filing requirements Personal taxation: various factors, including the place where Tax returns are issued annually on the first the contract was negotiated and concluded Basis business day of April for companies to and where it is enforceable; the residence of The Hong Kong personal income tax report their profits in the accounting year the employer; and where the salary is paid. (salaries tax) covers all income arising in ended in the previous tax year, which ends Income from non-Hong Kong employment or derived from Hong Kong from an office, on 31 March. Companies whose financial is deemed to be sourced in Hong Kong if it employment or pension. Interest income years end between 1 December and 31 is attributable to services rendered in Hong earned by an individual is exempt from tax March normally are granted an extended Kong. Directors’ fees paid to directors of in Hong Kong. Capital gains on financial period to file their tax returns. Assessments a company, the control and management transactions are also effectively exempt are issued once the Inland Revenue of which is exercised in Hong Kong, are from tax. Department receives the tax return. chargeable to salaries tax irrespective of Companies (and unincorporated businesses) Residence where the director resides. Taxable income also must pay a provisional profits tax for Foreign residents who visit Hong Kong for no includes commissions, bonuses, cost of the following tax year, at a rate of 16.5% of more than 60 days in a tax year (from 1 April living allowances, stock option gains, awards, the current year’s profits. This payment is to 31 March of the following year) are not gratuities, allowances (including those for credited against the final profits tax liability, liable to salaries tax on their employment education) and other perquisites derived with any excess payment refunded. income. Employees who already have paid from employment. Dividend income is not tax of substantially the same nature as Hong taxed, but gains from the exercise of share Penalties Kong salaries tax in any territory outside options are taxable. Penalties may be imposed for failure to Hong Kong are exempt in respect of income comply with the Inland Revenue Ordinance Capital gains derived from services rendered in that (IRO). The Commissioner of Inland Revenue Capital gains are not taxable in Hong Kong. territory outside Hong Kong. has the authority to initiate prosecution, Deductions and allowances to compound or to assess additional tax Filing status In arriving at assessable income, the only (which is a form of penalty) in respect of the A married couple may opt for joint or deductions permitted are expenses that are offense. separate assessment. wholly, exclusively and necessarily incurred Rulings Taxable income in the production of assessable income. For Taxpayers may request an advance ruling Individuals are taxed on their total Hong general expenses, the scope for obtaining from the Inland Revenue Department on Kong income from employment, less deductions is limited. Allowable deductions the application of provisions of the IRO. An deductible expenses, charitable donations include mandatory contributions to a advance pricing arrangement program has and personal allowances. The source of recognized occupational retirement scheme, been introduced. employment income is determined by self-education expenses, home loan

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interest, elderly residential care expenses Net wealth/net worth tax Penalties and donations to approved charities. No Penalties may be imposed for failure to comply with the Inland Revenue Ordinance. Rates Social security Personal income is taxed in Hong Kong at For employees whose monthly income The Commissioner of Inland Revenue has progressive rates. The marginal tax rates is HKD 7,100 or more, the employer is the authority to institute prosecution, range from 2% to 17% (on chargeable required to deduct 5% as the employee’s to compound or to assess additional tax income less personal allowances), with a cap contribution to the MPF scheme and then (which is a form of penalty) in respect of the at the standard rate of 15% (on chargeable pay an additional 5% as its own contribution. offence. income without the deduction of personal Self-employed persons also contribute 5% Value added tax: allowances). of their relevant income and may choose to contribute on a monthly or annual basis. Taxable transactions Other taxes on individuals: The maximum deduction is HKD 1,500 per Hong Kong does not levy VAT. month. All benefits derived from mandatory Capital duty Rates No contributions must be preserved until the N/A scheme member reaches the retirement Stamp duty age of 65, when he/she may withdraw the Registration See above under “Corporate taxation.” benefits in a lump sum. N/A Capital acquisitions tax Filing and payment Compliance for individuals: No N/A Tax year Real property tax Source of tax law: Inland Revenue The tax year starts on 1 April of each year Property owners are taxed on rental income Ordinance and case law and ends on 31 March of the following year. derived from property in Hong Kong. The Tax treaties: Hong Kong has signed 38 tax is charged at the standard rate of 15% Filing and payment double tax agreements. Hong Kong signed of the net assessable value of the property The Inland Revenue Department issues tax the OECD multilateral instrument on 7 June as determined by rent, service charges and returns to individual taxpayers on the first 2017. fees paid to the owner, less an allowance of working day of May each year. 20% for repairs and maintenance. Tax authorities: Inland Revenue Department Inheritance/estate tax No

International Core of Excellence 2018 31 Investment basics India Currency Indian Rupee (INR) Foreign exchange control There is a simplified regulatory regime for foreign exchange transactions and liberalized capital account transactions. Current account transactions are permitted unless specifically prohibited and are monitored by the central bank. Foreign investment is permitted in most industries, although sector-specific caps have been set for foreign investment in certain industries, such as defense, civil aviation, telecommunications, banking, insurance, pension, retail Rajiv Anand trade, etc. The government has introduced various programs to make India an attractive Partner hub for manufacturing and attract global investments and is taking measures to simplify Tel: +1 212 436 2391 the processes to set up or exit from business in India. [email protected] Accounting principles/financial statements Accounting standards issued by the Institute of Chartered Accountants of India apply, Corporate taxation: which largely are based on IAS. India has initiated steps toward the convergence of its Residence accounting standards with IFRS (subject to a few carve-outs); these standards are called Indian Accounting Standards (Ind AS). For accounting periods commencing on or after 1 A corporation is resident if it is incorporated April 2016, the Ind AS are mandatory for listed and unlisted companies meeting certain in India or if its place of effective net worth thresholds, in various phases. management, in that year, is in India. Principal business entities A partnership firm, LLP or other non- Various forms of business entity are permitted. These include the public/private limited individual entity is considered resident liability company, one-person company (owned by a resident individual), partnership in India if any part of the control and firm, limited liability partnership (LLP), sole proprietorship, branch office, liaison office, management of its affairs takes place in project office or site office of a foreign corporation. India.

Basis Taxation of dividends Dividends paid by a domestic company Residents are taxed on worldwide Dividends paid by a domestic company are that are liable to DDT may be reduced by: income; nonresidents are taxed only on subject to dividend distribution tax (DDT) (1) the amount of dividends received from Indian-source income. Indian-source at 15% of the aggregate dividend declared, a domestic subsidiary company during the income may include capital gains arising distributed or paid. The DDT payable is financial year, if the subsidiary has paid DDT; from the transfer of any share or interest required to be grossed up. The effective and (2) dividends received from a foreign in a company or entity registered or rate is 20.3576%, including a 12% surcharge subsidiary company, provided tax is payable incorporated outside India if the share or and a 3% education cess. Dividends subject on such dividend income by the domestic interest directly or indirectly derives its to DDT generally are exempt from tax in company at the reduced base rate of 15%. substantial value from assets located in the hands of the recipient. As from 1 April India. Foreign-source income derived by a Capital gains 2017, an additional income tax of 10% (plus resident company is subject to corporation The tax treatment depends on whether the surcharge and cess) applies on a gross tax in the same way as Indian income. A gains are long or short term. Gains are long basis on dividend income that is declared, branch of a foreign corporation is taxed as a term if the asset is held for more than three distributed or paid by a domestic company foreign corporation. years (one year in the case of listed shares to a resident individual, Hindu Undivided and specified securities, and two years in Taxable income Family (HUF) or partnership firm if the the case of unlisted shares and immovable Tax is imposed on a company’s profits, aggregate dividend income of the recipient property (land, buildings or both)). which consist of business/trading income, exceeds INR 1 million per annum. passive income and capital gains. Income Long-term gains on listed shares and Dividends received from a foreign company resulting from the indirect transfer of assets specified securities are exempt if the generally are subject to corporation tax, with located in India is included. Normal business transaction is subject to securities a credit for any foreign tax paid. However, expenses, as well as other specified items, transaction tax (STT). The exemption dividends received by an Indian company may be deducted in computing taxable generally is not available if the equity shares from a foreign company in which the Indian income. were acquired on or after 1 October 2004 company holds at least 26% of the equity and the acquisition was not chargeable to shares are subject to tax at a reduced STT; however, the Central Board of Direct base rate of 15% on the gross income. A Taxes has clarified that the exemption surcharge and cess also are imposed.

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is available in specified cases (such as Losses incurred from the letting out of royalties and fees for technical services. A acquisitions under preferential allotment, “house property” may be offset against other credit is available for MAT paid against tax off market acquisitions, acquisitions during heads (categories) of income only up to INR payable on normal income, which may be a delisted period, etc.). Where gains on 200,000. Unabsorbed losses from house carried forward for offset against income tax listed shares and specified securities are not property may be carried forward for up to payable in subsequent years. As from 1 April subject to STT, a 10% tax applies (without eight years for offset against the income 2017, the tax credit may be carried forward the benefit of an inflation adjustment). The from house property of subsequent years. for up to 15 years. applicable tax rate on long-term capital Rate Any person other than a corporation gains derived by a nonresident from the sale The standard rate is 30% for domestic (including an LLP) is liable to an alternate of unlisted securities is 10% (without the companies and 40% for foreign companies minimum tax (AMT) at 18.5% (plus any benefit of foreign currency conversion or an and branches of foreign companies. Taking applicable surcharge and cess) of the inflation adjustment). Gains on other long- into account the surcharge and cess, the adjusted total income where the normal term assets are taxed at 20%, but with the highest effective rate is 34.608% for domestic income tax payable is less than the AMT. benefit of an inflation adjustment. companies and 43.26% for foreign companies. AMT also is imposed on a person eligible A 25% rate, plus the surcharge and cess, Short-term gains on listed shares and may be elected by certain new resident for investment-linked incentives. The specified securities that are subject to manufacturing companies (incorporated on or adjusted total income is the total income STT are taxed at 15%; gains from other after 1 March 2016), if the company does not before giving effect to the AMT provisions, short-term assets are taxed at the normal claim certain specified deductions, incentives, as increased by certain deductions claimed tax rates. A surcharge and cess also are etc. A 25% rate, plus the surcharge and cess, in computing the total income, including imposed. also is applicable for financial year 2017-18 the tax holiday claimed by units in a Special to domestic companies with total turnover Economic Zone (SEZ). A tax credit is allowed An unlisted domestic company is liable to or gross receipts of up to INR 500 million in for the AMT paid against the tax payable pay an additional tax of 20% on income financial year 2015-16. on normal income. From 1 April 2017, the distributed to a shareholder on account of a Surtax tax credit may be carried forward up to 15 buyback of the company’s shares. A 7% surcharge applies to domestic years. Losses companies if income exceeds INR 10 million Foreign tax credit Business losses and capital losses may be (2% for foreign companies), and a 12% Foreign tax paid may be credited against carried forward for eight years, with short- surcharge applies if income exceeds INR Indian tax on the same profits, but the term capital losses offsetting capital gains 100 million (5% for foreign companies). An credit is limited to the amount of Indian on both long and short-term assets, and additional 3% cess is payable in all cases. tax payable on the foreign income. Specific long-term capital losses offsetting only long- Alternative minimum tax rules have been introduced regarding the term capital gains. Other than unabsorbed Minimum Alternate Tax (MAT) is imposed mechanism for granting a foreign tax credit. depreciation (which may be carried forward at 18.5% (plus any applicable surcharge indefinitely), losses may be carried forward Participation exemption and cess) on the adjusted book profits only if the tax return is filed by the due date. No, except for DDT in some cases of corporations whose tax liability is less Unabsorbed depreciation may be offset than 18.5% of their book profits. MAT does Holding company regime against any income, whereas business not apply to certain income of foreign No losses may be offset only against business companies, including capital gains on profits in subsequent years. transactions involving securities, interest,

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Incentives A deduction of 100% of the profits derived Interest A deduction of up to 150% as from financial by an eligible start-up from an eligible Interest paid to a nonresident on a foreign year 2017-18 (limited to 100% as from business may be elected by the taxpayer for currency borrowing or debt generally is financial year 2020-21) is available in respect any three consecutive assessment years out subject to a 20% withholding tax, plus the of capital and revenue expenditure on of the seven years beginning from the year of applicable surcharge and cess. scientific research conducted in-house incorporation (for companies/LLPs set up on A 5% withholding tax rate, plus the by specified industries, and for payments or after 1 April 2016 and before 1 April 2019). applicable surcharge and cess, applies made to specified organizations for scientific A concessional tax rate of 10% (plus the to certain types of interest paid to a research. surcharge and cess) is applicable on gross nonresident, including interest paid on A 100% deduction is allowed for the sum income arising from royalties in respect of a specific borrowings in foreign currency and paid to a company registered in India that is patent developed and registered in India by interest on investments made by a foreign carrying on scientific research activities, to a a person resident in India. No deduction is institutional investor or a qualified foreign research association or to a university, college allowed for any expenditure or allowance in investor in a rupee-denominated bond of or other institution engaged in research in respect of such royalty income. an Indian company, or in a government social science or statistical research. security. Undertakings set up in SEZs are exempt Investment-linked incentives (a 100% from tax on their export profits, subject to If the nonresident does not have a deduction for capital expenditure other than compliance with other conditions. Other tax permanent account number (PAN), i.e. a tax expenditure incurred on the acquisition of holidays are available based on industry and registration number, tax must be withheld land, goodwill or financial instruments) are region. at the higher of the applicable tax treaty available for specified activities. As from rate or 20%; however, this does not apply if financial year 2017-18, an investment-linked Withholding tax: the payments are in the nature of interest incentive in the form of 100% deduction is Dividends and the foreign taxpayer furnishes the available for developing and/or maintaining Dividends are not subject to withholding tax. prescribed documents to the payer. and operating an infrastructure facility (i.e. a However, the company paying the dividends If the interest income derived by a road, highway project, water-supply project, is subject to DDT. nonresident does not fulfill certain port, etc.), subject to specified conditions. As from 1 April 2017, an additional income prescribed conditions for concessional A deduction of up to 150% (limited to 100% tax of 10% (plus the surcharge and cess) withholding tax rates, a withholding tax as from financial year 2020-21) is available applies on a gross basis on dividend income rate of 30% (for individuals and entities for expenditure incurred on a “notified” that is declared, distributed or paid by a other than a foreign company) or 40% (for agricultural extension or skill development domestic company to a resident individual, a foreign company), plus the applicable project. HUF or partnership firm if the aggregate surcharge and cess, will apply. The rates may be reduced under a tax treaty. Certain capital expenditure for the right dividend income of the recipient exceeds to use spectrum for telecommunication INR 1 million per annum. services will be allowed as a deduction over the period of the right to use the spectrum.

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Royalties Other taxes on corporations: Transfer tax Royalties paid to a nonresident are subject STT is levied on the purchase or sale of Capital duty to a 10% withholding tax, plus the applicable equity shares, derivatives, units in an equity- No surcharge and cess. The rate may be oriented fund or units of a business trust reduced under a tax treaty. Payroll tax listed on a recognized stock exchange in The employer is responsible for withholding India. If a treaty applies, but the nonresident does tax on salary income. not have a PAN, tax must be withheld at Other the higher of the applicable tax treaty rate Real property tax An equalization levy of 6% on the amount of or 20%; however, this does not apply if the Municipalities levy property taxes (based consideration for specified services received payments are in the nature of royalties on assessed value) and states levy land- by a nonresident without a permanent and the foreign taxpayer furnishes the revenue taxes. establishment (PE) in India must be withheld prescribed documents to the payer. by a resident payer or a nonresident payer Social security with a PE in India. “Specified services” Technical service fees The employer generally contributes 12% of include online advertising or any provision Technical service fees paid to a nonresident eligible wages per month to the provident for digital advertising space, other related are subject to a 10% withholding tax, plus fund—8.33% of the wages (up to INR 15,000) facilities or services or any other service that the applicable surcharge and cess. The rate is applied to the pension fund, with the may be notified by the central government. may be reduced under a tax treaty. balance paid to the provident fund (except The income subject to levy will not be taxed in the case of “international workers,” where If a treaty applies, but the nonresident does in the hands of the recipient. the pension contribution by the employer is not have a PAN, tax must be withheld at 8.33% of the wages). For employees joining Customs duties are levied by the central the higher of the applicable tax treaty rate the provident fund on or after 1 September government, generally on the import of or 20%; however, this does not apply if the 2014, the entire employer contribution (12% goods (GST as well as non-GST goods) into payments are in the nature of technical of wages) is applied to the provident fund. India, although certain exported goods also service fees and the foreign taxpayer are liable to customs duties. furnishes the prescribed documents to the Stamp duty payer. Specified instruments, transfers of shares in an Indian company in a physical form, Branch remittance tax transactions involving real estate and other No specified transactions (including a court order for an amalgamation/demerger) in India attract stamp duties that are levied under the Indian Stamp Act and the stamp acts of the various states (with rates varying significantly between states).

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Anti-avoidance rules: The Indian transfer pricing documentation Other requirements have been updated to To discourage transactions with persons Transfer pricing incorporate the specific reporting regime located in jurisdictions that do not The transfer pricing regime is influenced in respect of country-by-country reporting effectively exchange information with India, by OECD norms, although the penalty and the master file provided for under the transactions with persons situated in certain provisions in India are stringent compared OECD/G20 BEPS project. jurisdictions designated by the government to those in certain other countries. The will be subject to the Indian transfer pricing definition of “associated enterprise” extends Where the application of the arm’s rules and income paid to persons in those beyond a shareholding or management length price would reduce the income jurisdictions will be subject to a minimum relationship, since it includes some deeming chargeable to tax in India or increase a withholding tax of 30%. clauses. The transfer pricing provisions loss, no adjustment will be made to the also cover specified domestic transactions income or loss. If a taxpayer that benefits The general anti-avoidance rule (GAAR) (including payments to related parties) if from a tax holiday is subject to a transfer provisions, which were to be implemented the aggregate value of those transactions pricing adjustment, the benefit will be as from 1 April 2015, were deferred exceeds INR 200 million in one year. denied to the extent of the adjustment. and apply to investments made after 1 Secondary adjustment provisions have April 2017. The GAAR empowers the tax The pricing of these transactions must be been introduced through Finance Act, 2017, authorities to declare an arrangement an determined with regard to arm’s length requiring cash repatriation for any kind of impermissible avoidance arrangement if it principles, using methods prescribed transfer pricing adjustment. was entered into with the main purpose of under India’s transfer pricing rules, which obtaining a tax benefit, and: (1) it creates are similar to the methods prescribed in Safe harbor rules provide for the automatic rights or obligations that normally would the OECD guidelines, with an additional acceptance of a taxpayer’s transfer price not be created between persons dealing sixth method, i.e. an “other method.” The that equals or exceeds specified amounts. at arm’s length; (2) it results, directly or arm’s length price is determined based on A taxpayer also may enter into an advance indirectly, in the misuse or abuse of the multiple-year data, and based on a range or pricing agreement (APA). Income Tax Act; (3) it lacks commercial the arithmetic mean (depending on certain substance or is deemed to lack commercial prescribed conditions). Thin capitalization substance; and (4) it is carried out in a No The taxpayer is required to maintain detailed manner that would not be used for bona information and transfer pricing documents Controlled foreign companies fide purposes. The GAAR will apply to substantiating the arm’s length nature of No arrangements where the tax benefit related-party transactions. Companies are exceeds INR 30 million. Once the GAAR is Disclosure requirements also required to submit a certificate to the invoked, tax treaty benefits also may be A nonresident with a liaison office in India tax authorities (in a prescribed format) from denied for the arrangement. is required to prepare financial statements, a practicing chartered accountant that sets annual activity certificates, etc. on its out the details of associated enterprises, activities and submit this information to the international transactions, etc., along with Indian tax officer within 60 days from the the methods used to determine an arm’s end of the financial year. length price. The certificate must be filed by the due date of filing the annual tax return, i.e. 30 November of each year.

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Compliance for corporations: Rulings is 182 days in the given year, instead of The Authority for Advance Rulings (AAR) 60 days. An individual is “not ordinarily Tax year issues rulings on the tax consequences of resident” if he/she has been a nonresident The tax year is the fiscal year (1 April to 31 transactions or proposed transactions with in nine out of the 10 preceding years, or has March). nonresidents. It also is able to issue rulings been in India for less than 730 days during Consolidated returns in relation to the tax liability of residents the preceding seven years. Consolidated returns are not permitted; in prescribed cases, and on whether an Filing status each company must file a separate return. arrangement is an impermissible avoidance arrangement. Rulings are binding on Each taxpayer must file a return; the concept Filing requirements the applicant and the tax authorities for of joint filing does not exist in India. Taxes on income in a fiscal year usually are the specific transaction(s). APAs also are paid in the next fiscal year (“assessment” Taxable income possible. year). Companies must submit a final Income from employment, including most return by 30 September (30 November for Personal taxation: employment benefits, is fully taxable after companies required to file a certificate on considering applicable exemptions. Profits international transactions (see “Transfer Basis derived by an individual from carrying on a pricing”)) of the assessment year, stating An individual who is resident and ordinarily trade or profession generally are taxed in income, expenses, taxes paid and taxes resident in India normally is taxed on the hands of the individual, after applying due for the preceding tax year. Returns for worldwide income, subject to the provisions available tax exemptions and tax-free noncorporate taxpayers that are required by of a relevant tax treaty. A person who is not thresholds (see “Rates” below). See under law to have their accounts audited also are ordinarily resident generally does not pay “Corporate taxation” regarding the taxation due on 30 September. All other taxpayers tax on income earned outside India unless of dividends. must submit a return by 31 July. Taxpayers it is derived from a business or profession Capital gains claiming tax holidays or carrying forward tax controlled or established in India, or the See under “Corporate taxation.” losses must file their returns on or before income is accrued or received in India or the due date. deemed to have accrued or been received in Deductions and allowances India. A nonresident is subject to tax only on Deductions are available in respect of Companies must make four advance Indian-source income. certain payments and investments, such as payments of their income tax liabilities contributions to the provident fund, pension during the accounting year, on 15 June (15% Residence funds, medical insurance or life assurance of total tax payable); 15 September (30% of An individual is resident in India if he/she policies and some savings schemes, etc., total tax payable); 15 December (30% of total spends at least 182 days in the country subject to applicable limits. tax payable); and 15 March (25% of total tax in a given year, or at least 60 days if the payable). individual has spent at least 365 days in Rates India in the preceding four years. For an Rates are progressive up to 30%, plus the Penalties Indian citizen leaving India for the purpose applicable cess. A 10% surcharge applies Penalties apply for failure to file a return of employment or as a member of the crew if income exceeds INR 5 million and a 15% and certificate of international transactions, of an Indian ship, and for an Indian citizen/ surcharge applies if income exceeds INR 10 failure to comply with withholding tax person of Indian origin working abroad who million, subject to applicable marginal relief. obligations and under-reporting and visits India while on vacation, the threshold misreporting of income.

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The first INR 300,000 is exempt for resident Social security underpayments). Returns are due by 31 July senior citizens (aged 60 years or over, but Employees (including “international workers” (30 September for specified individuals) of under 80 years), and INR 500,000 is exempt but not “excluded employees,” as defined in the assessment year. Electronic filing of tax for very senior citizens (at least 80 years the Provident Fund Act) contribute 12% of returns is mandatory if: (1) taxable income of age); for all others, the first INR 250,000 eligible wages per month to the provident exceeds INR 500,000; (2) the individual has is exempt. A tax rebate up to INR 2,500 is fund, with a matching 12% contribution by foreign assets (including a financial interest allowed for individuals with taxable income the employer. However, where India has in any entity or signing authority for any of up to INR 350,000. entered into a social security agreement account); (3) the individual is claiming any (SSA) with the relevant overseas country, relief for foreign taxes; or (4) any refund is Other the international worker (subject to certain claimed in the return. See under “Corporate taxation” regarding conditions) is not liable to contribute to the the AMT. AMT is not applicable to Penalties provident fund in India. An international individuals, associations of persons and Penalties apply for failure to file a return, worker may be either: (1) a foreign employee bodies of individuals if their adjusted total failure to comply with withholding tax working for an establishment in India to income does not exceed INR 2 million. obligations and concealment of income. which the Provident Fund Act applies; or (2) Other taxes on individuals: an Indian employee seconded to a country Goods and services tax: with which India has entered into an SSA Capital duty and who has not obtained a “certificate of Taxable transactions No coverage” and is eligible for SSA benefits. Goods and services tax (GST) was introduced in India on 1 July 2017. GST Stamp duty Other replaces various indirect tax levies such Specified instruments and transactions in Customs duty is levied on the import of as value added tax (VAT), central sales tax India attract stamp duties that are levied goods into India, although certain exported and central excise duty (except for a few under the Indian Stamp Act and the stamp goods also are liable to customs duties. specified non-GST goods); service tax; entry acts of the various states (with rates varying tax; entertainment tax; and various other significantly between states). Compliance for individuals: local taxes previously levied on most goods Capital acquisitions tax Tax year and services. GST is a destination-based No The tax year is the fiscal year (1 April to 31 consumption tax applicable on the supply March). of goods or services. GST is a part of the Real property tax aggregate customs duty levied on imports. Municipalities levy property taxes (based Filing and payment Exports and supplies to Special Economic on assessed value) and states levy land- The employer withholds tax on salary Zones are zero-rated for GST purposes. revenue taxes. income. All individual taxpayers are required to file an individual tax return. Individuals The central GST (CGST) and state GST (SGST) Inheritance/estate tax must prepay 100% of the final tax due by the simultaneously are levied on a common tax No end of the fiscal year, either via withholding base on all intrastate transactions. In the Net wealth/net worth tax at source or by making advance payments in case of interstate supplies of goods and No four installments (with interest payable on services, integrated GST (IGST) is levied at

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a rate that is an aggregate of the CGST and Filing and payment Registration for VAT and central sales tax is SGST. GST compliance is a completely electronic mandatory for taxpayers dealing in affected process. Specific returns and filing and goods if the business’s sales turnover GST applies to all goods and services payment frequencies are prescribed for exceeds a threshold (INR 500,000 in most other than alcoholic liquor for human different types of taxpayers, with normal states), although certain state VAT laws consumption and certain petroleum taxpayers being required to file monthly also specify monetary limits of sales and/or products (see under “Other,” below). returns plus an annual return. Monthly purchases. Rates return filings and tax payments are due by VAT, central sales tax and state excise duty Goods and services are categorized under the 20th day of the following month. returns and payments generally are due a structure with five different rates: 0%, 5%, Until March 2018, the government has either monthly or quarterly, based on the 12%, 18% and 28%. There is no standard relaxed the return submission requirements amount of the tax liability. rate per se, but the rate for most services for small suppliers (i.e. suppliers having is 18%. There is a special rate of 0.25% on GST paid on procurements of goods and turnover up to INR 15 million). rough precious and semi-precious stones, services cannot be offset against a VAT or and 3% on gold. Other state excise duty liability. Similarly, a VAT or Alcohol for human consumption and state excise duty liability cannot be offset In addition to GST, a GST compensation cess certain petroleum products (petroleum against a GST credit. of 15% to 96% applies on a few “demerit” crude, motor spirit (petrol), high speed and luxury items, such as aerated drinks, Source of tax law: Income-tax Act; Annual diesel, natural gas and aviation turbine fuel) cars and tobacco products. finance acts; Customs Act; State VAT and continue to be taxed under the VAT regime. Central Sales Tax laws; Central, State and Registration Interstate sales of these goods continue Integrated GST laws; Foreign Trade Policy Registration is state-specific and subject to a to be liable to central sales tax. Alcohol for 2015-2020 threshold exemption of aggregate turnover human consumption also is liable to state (throughout India) of INR 2 million (INR 1 Tax treaties: India has comprehensive tax excise duty, while the above petroleum million in certain states). The threshold treaties with 95 countries. India signed the products continue to be liable to central exemption does not apply in specific cases, OECD multilateral instrument on 7 June excise duty. The standard rates for VAT, such as in the case of persons making an 2017. central sales tax and state excise duty on interstate taxable supply, persons who these products vary across the states, while Tax authorities: Income Tax Department, are required to pay tax under the reverse- the standard rate for central excise duty Authority for Advance Rulings charge mechanism, etc. depends on the nature of the petroleum product.

International Core of Excellence 2018 39 Investment basics Italy Currency Euro (EUR)

Foreign exchange control There are no foreign exchange controls or restrictions on repatriating funds. Residents and nonresidents may hold foreign currency within and outside the country, and direct and indirect investments may be made in any currency. However, funds held outside Italy or repatriated to Italy without a bank intermediary must be declared for tax purposes. Stefano Schiavello Accounting principles/financial statements Partner Italian GAAP and IFRS/IAS. Financial statements must be prepared annually. Tel: +1 212 436 7407 Consolidated accounts must be prepared if certain thresholds are exceeded. [email protected] Principal business entities These are the joint stock company (SpA), limited liability company (SrL) and branch of a Corporate taxation: foreign company.

Residence A company is resident for tax purposes if its legal seat, place of effective management or main business activity is in Italy for the A company that records tax losses for five participation was acquired; (3) the company greater part of the fiscal period (i.e. at least consecutive fiscal years—or in four out in which the participation is held is not 183 days). A foreign company that holds of the five years and that does not meet considered a “black list” entity for purposes a controlling participation in an Italian prescribed levels of profit, as determined of Italy’s controlled foreign company (CFC) company is deemed to have its place of on the basis of certain coefficients, in the regime; and (4) the company in which the effective management in Italy and, therefore, remaining year—will be considered a non- participation is held carries out a business to be resident in Italy for corporate operating company as from the sixth fiscal activity (this requirement will not be met tax purposes if the foreign company is year. The non-operating company regime if assets are represented primarily by real controlled by an Italian resident or managed usually applies to small companies, but property not used in the business activity). by Italian residents representing the application of the regime may be avoided by The last two conditions must have been majority of its board of directors. requesting a ruling from the tax authorities. satisfied continuously over the last three years or the life of the company, if shorter. Basis Italian companies may opt for a branch Resident companies are taxed on worldwide exemption regime that provides for the Capital gains realized by nonresident income; nonresident companies are taxed taxation of a branch’s income in only the companies on the sale of “nonqualified only on Italian-source income. foreign country in which the permanent participations” (see “Rates” under “Personal establishment (PE) is established. The taxation”) ordinarily are taxed at a 26% flat Taxable income option, which allows an exemption for the rate. Sales of qualified participations are Taxable income for a resident company income deriving from the foreign PE, is taxed at the ordinary corporate tax rate on or an Italian branch of a foreign company irrevocable and must be applied to all PEs of 58.14% of the gains. As from 2019, the 26% is business income, which consists of the Italian company (“all in-all out”). flat rate also generally will apply to capital net income earned in a financial period. gains from qualified participations. In some Business income encompasses all income Taxation of dividends cases, capital gains from qualified and derived by the company or branch, e.g. See “Participation exemption,” below. nonqualified participations may be exempt, income from a trade, passive income (e.g. Capital gains according to specific rules or a relevant tax dividends, interest and royalties) and capital Capital gains normally are treated as treaty. gains. Taxable income is based on the ordinary income and taxed at the 24% results shown in the profit and loss (P&L) Losses corporate income tax rate. Capital gains account, with certain adjustments. Losses may be carried forward and offset derived from the sale of participations, against corporate taxable income. However, Certain companies that are loss-making however, are 95% exempt from taxation if 20% of taxable income in any year cannot or whose turnover is less than a defined the following requirements are met: (1) the be offset by carried-forward losses and will percentage of the value of various classes participation has been held for a minimum be subject to corporate tax in accordance of assets are referred to as “non-operating continuous period that may range between with the “minimum tax” rule. Losses incurred companies” and are taxed on a deemed 12 and 13 months; (2) the participation is by a company during its first three taxable minimum income at a higher corporate tax classified as a financial fixed asset in the periods may be carried forward and used rate. first financial statement closed after the

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to fully offset corporate taxable income, but for the participation exemption for capital IRES and IRAP purposes) for a percentage of only if the losses relate to a new business gains, see under “Capital gains,” above.) The the revenue deriving from the licensing or activity (e.g. the losses may not have been same exemption applies to income from direct exploitation of qualifying IP (excluding incurred in the course of a merger or some hybrid financial instruments. However, trademarks), and an election into the regime business contribution). The carryback of the exemption does not apply if the foreign is irrevocable for five years. The exemption losses is not permitted. subsidiary is a black-list entity and, in some is equal to 50% as from 2017. cases, where the dividends are distributed Rate by a black-list entity through an interposed Withholding tax: The corporate tax (IRES) rate is 24%, plus foreign non-black-list entity. Under certain the regional tax on productive activities Dividends conditions, the dividends distributed by a (IRAP, 3.9% in general)—see “Other taxes on Dividends paid to a nonresident corporation black-list entity are 50% exempt. Provided corporations” below. For banks and other generally are subject to a 26% final specific requirements are met, a foreign tax financial institutions (excluding SGRs and withholding tax (with a potential refund credit is granted for taxes paid abroad on SIMs), the corporate tax rate is 27.5%. “Non- of the foreign tax paid on the dividend the same profits by the black-list entity. The operating” entities are subject to a 34.5% by the recipient, up to 11/26ths of the tax period in which the dividends accrued corporate tax rate. Italian withholding tax) unless the rate is is relevant in determining the nature of the reduced under a tax treaty or the dividends Surtax dividends received (from a black-list entity qualify for an exemption under the EU No or not) and the applicability of the related parent-subsidiary directive. A domestic exemption. Alternative minimum tax final withholding tax of 1.20% applies to There is no AMT, but a presumptive taxable Holding company regime dividends distributed to shareholders income applies to non-operating companies There is no specific holding company regime, resident in an EU/European Economic Area under certain conditions—see “Taxable although, as described above, dividends and (EEA) country. income,” above. capital gains on the sale of a participation Interest may benefit from a 95% exemption. Foreign tax credit Italian-source interest payable to a A tax credit is allowed against Italian net tax Incentives nonresident generally is subject to a 26% for final foreign taxes paid on foreign-source Incentives are available in the form of capital final withholding tax. Interest derived from earnings in the year in which the taxes were grants, “easy-term” loans, tax credits or a direct/indirect investment in government paid. The amount of the foreign tax credit super/hyper depreciation. Some incentives bonds and similar securities is subject to a may not exceed the amount of Italian tax are granted automatically if specified 12.5% substitute tax (domestic exemptions due. requirements are met; others require apply). The withholding tax may be reduced the completion of evaluation procedures. under a tax treaty or eliminated under the Participation exemption Certain incentives must be negotiated. EU interest and royalties directive. Domestic and foreign-source dividends paid by subsidiaries to Italian resident corporate Italian companies and Italian branches of Royalties taxpayers are 95% exempt from corporate foreign companies may apply for an optional Royalties paid to a nonresident company are income tax. There is no holding period or patent (intellectual property (IP)) box regime, subject to a 30% withholding tax calculated minimum ownership percentage to qualify provided certain conditions are satisfied. (generally) on 75% of the gross royalty, for the exemption. (Different rules apply The regime provides an exemption (for both resulting in an effective tax of 22.5%. The withholding tax may be reduced under a tax treaty or eliminated under the EU interest and royalties directive.

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Technical service fees instruments, if one of the parties to the out through electronic means), according Fees paid to a nonresident for the use transaction is an Italian tax resident). The to a specific ministerial decree (to be issued of industrial, commercial or scientific tax rate is 0.2% of the transaction value, by 30 April 2018), regardless of where the equipment located in Italy are subject to a reduced to 0.1% where the sale takes place transaction is concluded and to the extent final 30% withholding tax, unless reduced on a listed market (a flat tax is applied on the the services carried out by the provider under a tax treaty. Management fees are value of derivative instruments). (resident or nonresident) exceed 3,000 exempt from withholding tax. transactions in a calendar year. The new Transfer tax equalization tax is likely to be applied as Branch remittance tax The transfer/contribution of real property from 2019. No situated in Italy is subject to transfer tax (registration, mortgage and cadastral tax) Anti-avoidance rules: Other taxes on corporations: and/or VAT, with the rate depending on Transfer pricing Capital duty the property transferred, the status of the The business income of a resident A negligible fixed registration tax is levied on transferor and other factors. enterprise arising from transactions with contributions of cash in exchange for shares. Other nonresidents that directly or indirectly Other assets contributed may be subject to IRAP, the regional tax on productive control the resident company, are under a registration tax or VAT, depending on the activities, is levied on the net value of the the control of the resident company or are situation. production derived in each Italian region controlled by the same entity that controls Payroll tax by resident companies. IRAP is calculated the resident company is assessed on the No on the “net added value” of production, basis of the arm’s length value of the goods as defined by the relevant tax rules (but transferred, services rendered or services Real property tax basically derived from the statutory received. The municipal authorities levy tax on accounts). the possession of immovable property OECD guidelines generally are followed at various rates, depending on the The ordinary IRAP rate applicable for to determine the arm’s length price, and municipality. Under certain conditions, manufacturing/trading companies is 3.9%. both traditional methods (comparable construction companies are not subject to For banks and other financial institutions/ uncontrolled price, cost-plus and resale the real property tax. companies (including holding companies), price methods) and profit-based methods the ordinary IRAP rate is 4.65%, and for (e.g. the transactional net margin method) Social security insurance companies, the rate is 5.9%. are used and may be acceptable based on Mandatory social charges are payable the specific circumstances. by the employer and vary depending on If the taxpayer has net interest expense, the employee’s job and the size of the 10% of the annual IRAP paid is deductible A withholding tax exemption or a reduced workforce. Specific exemptions apply, from the IRES taxable base. IRAP paid in rate under an applicable tax treaty may be provided certain conditions are satisfied. connection with nondeductible employment denied to the extent the price paid is higher expenses also is deductible from the IRES than arm’s length. Stamp duty taxable base. Stamp duty is levied on legal and banking Transfer pricing documentation is not transactions, at varying rates. A 3% equalization tax will have to be mandatory (but see under “Disclosure withheld by Italian residents on the price requirements”), but a taxpayer can obtain A “Tobin tax” applies in the form of a stamp paid (net of VAT) in relation to specific protection against penalties in the event of duty on transfers of shares and other business-to-business services that qualify a transfer pricing adjustment by maintaining financial instruments issued by Italian as digital transactions (i.e. those carried appropriate documentation and disclosing joint stock companies (including derivative the existence of that documentation in the annual income tax return.

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Thin capitalization favorable structural treatment for tax Other Italy does not have thin capitalization purposes that leads to a reduction of the Other specific anti-abuse provisions may rules per se, but net interest expense is nominal tax rate below the 50% threshold. apply. These primarily target tax havens, deductible only up to an amount equal The CFC regime also is applicable when the losses, excess ACE and interest expense to 30% of EBITDA (plus financial leasing foreign entity is not considered a black-list carryforwards in the case of extraordinary installments). Both excess net interest entity if the entity is subject to an actual tax transactions (e.g. mergers and demergers), expense and EBITDA may be carried forward rate lower than 50% of the Italian rate and withholding tax exemptions under EU indefinitely to increase the deduction of more than 50% of its income is passive or directives and the assessment of Italian tax interest expense in a subsequent year. derived from intercompany services. residence for foreign entities.

In addition, a corporate income tax The income of a CFC is attributed to Compliance for corporations: deduction (the ACE) is permitted for a the Italian resident in proportion to its notional yield of the annual increase in a participation in the CFC, and the profits of Tax year company’s equity (with certain exclusions the CFC are taxed in the hands of the Italian Taxpayers may use the calendar year or a and deductions). The notional yield is 1.5% resident at its average tax rate. However, financial year. from the 2018 fiscal year (reduced from for companies, the average rate cannot Consolidated returns 1.6% for the 2017 fiscal year). The deduction be lower than the ordinary corporate Tax consolidation is available to domestic is available each year, provided the equity income tax rate of 24%. Taxes definitively groups, i.e. an Italian parent company and increase is not diminished. The amount paid abroad (i.e. underlying taxes) may be its resident subsidiaries that are under for the computation of the ACE deduction credited against the Italian tax levied on the its direct or indirect control. The control may be reduced by an amount equal to CFC income. requirement is met when the parent the increase of investments in financial Application of the CFC regime may be company holds more than 50% of the share instruments (other than participations) avoided by obtaining a ruling from the capital of another company and is entitled as compared to the amount shown in the tax authorities. In the absence of a ruling, to more than 50% of the profits of that financial statements for 2010, and to avoid the taxpayer may avoid the application company. the risk of doubling the ACE deduction in of the CFC regime by providing evidence certain other cases. Domestic consolidation also may be that certain conditions are satisfied (e.g. adopted if the controlling entity or a Controlled foreign companies demonstrating that its participation in the subsidiary (with an Italian branch) is a Under the CFC regime, profits of a CFC is not designed for the purpose of nonresident company, provided certain nonresident entity are attributed to an allocating income to a black-list entity). conditions are satisfied. Italian resident where the resident directly Disclosure requirements or indirectly controls the nonresident entity Under domestic consolidation, a single A country-by-country reporting obligation and the nonresident is considered a black- taxable income is calculated for all has been introduced requiring certain list entity for purposes of Italy’s CFC rules. consolidated companies. Once an election multinational entities to submit an annual An entity is considered a black list entity for consolidation is made, it may not report showing the amount of their revenue, if it is resident in a jurisdiction other than be revoked for three years unless the gross profit, taxes paid and accrued and an EU/EEA country that has concluded an subsidiary ceases to be controlled by the other indicators of actual economic activity. exchange of information agreement with parent company. Domestic tax consolidation Italy, if: (1) the jurisdiction has a nominal is not available to companies benefiting from corporate income tax rate lower than 50% a reduction of the corporate tax. of the Italian rate; or (2) the entity benefits from a special tax regime that grants

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If certain requirements are met, a worldwide Personal taxation: Deductions and allowances tax consolidation regime is available, under Deductions for dependents, employment Basis which all foreign controlled companies must income, social security contributions Residents are taxed on worldwide income; be included in the tax group (i.e. the “all in-all and other specific expenses (e.g. family nonresidents are taxed only on Italian- out” principle). charges, medical expenses) are available in source income. calculating taxable income. Tax consolidation is not available for IRAP Residence purposes. Rates For income tax purposes, an individual The personal income tax is progressive, Filing requirements is deemed to be resident if he/she is rising to a top rate of 43% for income A company must file the annual corporate registered at the civil registry or is domiciled exceeding EUR 75,000. The other rates income tax returns (IRES and IRAP) in Italy for more than 183 days in a year. are: 23% on income up to EUR 15,000; 27% electronically within nine months following Filing status on EUR 15,001-EUR 28,000; 38% on EUR the end of the financial year. However, Joint filing is possible under specific 28,001-EUR 55,000; and 41% on EUR 55,001- companies with a calendar year end have circumstances. EUR 75,000. until the end of October 2018 to file the tax return for the 2017 fiscal year. Taxable income Additional regional tax applies at rates Individual income tax is imposed on ranging from 0.7% to 3.33%, depending Two advance payments of corporate income employment income, income from on the region in which the individual is tax must be made: the first installment is independent activities, income from capital, domiciled. An additional municipal tax 40% of the amount of corporate income tax business income, income from immovable ranging from 0% to 0.9% also may apply, paid in the previous year, and the second is property and other miscellaneous income. depending on the taxpayer’s municipality. 60% of the previous year’s tax. A company must make these advance payments by the A special regime is applicable for inbound Under certain circumstances, private end of the sixth month and by the end of the employees under certain circumstances— employees may apply a flat tax of 10% on 11th month of the financial year. if all relevant requirements are met, bonuses earned up to EUR 3,000. Bonuses 50% of their Italian-source income from in kind are exempt from tax and social Penalties employment is tax exempt. Another special charges in certain instances. The tax rules include a comprehensive set regime is applicable specifically for inbound of penalty and interest provisions for failure Resident individuals are taxed on interest at researchers and highly skilled employees— to pay and failure to file, with the amounts a flat 26% rate (12.5% for interest on Italian if all the relevant requirements are met, ordinarily determined based on the specific treasury bonds or similar bonds). 90% of their Italian-source income from violation (above specific thresholds, tax employment may be tax exempt. The 26% flat rate also ordinarily applies violations are criminal offenses). to dividends and capital gains related to Capital gains Rulings nonqualified participations. For listed Capital gains derived by an individual on Advance rulings relating to transfer pricing companies, a participation representing the disposal of Italian immovable property may be obtained from the tax authorities. more than 2% of the voting rights or more normally are taxed as miscellaneous income, Such rulings also may apply to dividends and than 5% of the share capital is treated as a but are exempt from tax if the individual royalties. A ruling also may be requested qualified participation; for other companies, held the property for more than five years. from the authorities for other reasons, such a qualified participation is one representing Gains derived from the sale of a principal as to avoid application of the CFC and the more than 20% of the voting rights or more residence are not subject to tax. For capital non-operating company regimes or anti- than 25% of the share capital. gains on the disposal of shares, see “Rates,” abuse provisions, or to obtain the correct below. interpretation of an unclear tax provision.

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As from 1 January 2018, the 26% flat rate Under certain conditions, nonresident 3.3% depending on the municipality in which also generally applies to dividends related individuals moving their tax residence to the property is situated. The TARI rates also to qualified participations. In relation to Italy may apply an EUR 100,000 lump-sum vary depending on the municipality. profits generated up to the end of 2017 and tax on their income earned abroad. Inheritance/estate tax distributed from 2018 to 2022, the regime The taxable amount generally is represented described below will apply. As from 2019, the Other taxes on individuals: by the value of the assets and rights 26% flat rate generally will apply to capital Capital duty inherited. Rates are 4%, 6% or 8%, gains related to qualified participations. A negligible fixed registration tax is levied on depending on the relationship between the Resident individuals holding qualified contributions of cash in exchange for shares. deceased and the beneficiaries. Exemptions participations generally are taxed at the Contributions of other assets may trigger up to EUR 1 million may apply for bequests ordinary income tax rate on 58.14% of the registration tax at various rates. to close relatives. dividends received that were generated Stamp duty Net wealth/net worth tax before 2018 (40% for profits generated Stamp duty is levied on legal and banking Financial assets held abroad by a resident before 2007 and 49.72% for profits transactions at varying rates. individual (i.e. bank accounts, participations, generated after 2007 but before 2017), or etc.) are taxed at 0.2% of the market value. 58.14% of the capital gains realized before The Tobin tax applies in the form of a Immovable property outside Italy owned 2019. stamp duty on transfers of shares and other financial instruments issued by Italian by a resident individual is subject to tax at a Nonresident individuals generally are taxed joint stock companies (including derivative rate of 0.76% of the original cost or market at the ordinary income tax rate on 58.14% instruments, if one of the parties to the value of the property (cadastral value of the of Italian-source capital gains related transaction is an Italian tax resident). The property owned in an EU or EEA country). to qualified participations; the taxable tax rate is 0.2% of the transaction value, A lower 0.4% rate may apply to principal percentage was 49.72% for gains realized reduced to 0.1% where the sale takes place residences. before 2018. (If a sale was carried out before on a listed market. A flat tax applies on the Social security 2018 but the payment is not received until value of derivative instruments. Individuals working in Italy normally are 2018, the taxable percentage is 49.72%.) The subject to social security contributions, 26% flat rate generally will apply to gains Capital acquisitions tax with rates depending on the sector and realized as from 2019. No the employee’s job title. Social security in Nonresident individuals ordinarily are Real property tax respect of the state pension fund borne by taxed at the 26% flat rate on dividends Property owners, whether or not resident the employee generally is equal to 9.19%, (with a potential refund up to 11/26ths, see in Italy, are liable for a property tax on plus 1% over EUR 46,630 (up to a cap of above), capital gains related to nonqualified buildings and land owned in Italy for EUR 101,427) for employees who started participations (in some cases an exemption their own use or as investments. The tax contributing to an obligatory social security may apply based on a relevant tax treaty) comprises three different elements: IMU scheme after 1 January 1996. For those and interest. Nonresident individuals (wealth tax), TASI (tax for services) and TARI who started contributing before that date, resident in a “white list” country (as identified (tax on refuse). The basic rate of IMU is contributions are calculated on the total by a specific decree), however, are not taxed 0.76% of the taxable value of the property, amount of employment income received on capital gains related to nonqualified but the competent municipality can increase (new rates could be approved during 2017). participations, and the same capital gains or reduce the basic rate by up to 0.3%. IMU realized by nonresidents on the disposal of normally does not apply to an individual’s shares listed on a stock market are exempt. main residence. TASI rates range from 0% to

International Core of Excellence 2018 45 IT

Other Penalties Taxpayers also are required to submit An additional 10% tax is levied on bonuses, Penalties and interest apply for late filing, quarterly reports on invoices and customs stock options and variable payments paid failure to file and tax avoidance and evasion. bills—although a taxpayer may opt for to directors operating in the financial sector. semiannual filing—and a quarterly report Value added tax: The tax is payable only on the portion of on their VAT calculations, by the end of variable compensation exceeding the fixed Taxable transactions the second month following the relevant remuneration. VAT is levied on the supply of goods and quarter/half-year. services, and on imports. Compliance for individuals: Source of tax law: Corporate Income Tax Where deductible input VAT is charged on Law, Regional Tax on Productive Activities Tax year purchases of goods and/or services, the Law, Individual Income Tax Law and VAT Law, Calendar year deduction must be taken in the VAT return and decrees and instructions issued by the Filing and payment for the year in which the related right arises Ministry of Finance or, at the latest, in the VAT return for the year All resident and nonresident taxpayers who Tax treaties: Italy has concluded more in which the relevant invoice is received. derive income subject to individual income than 100 tax treaties. Italy signed the OECD tax must file an annual tax return, except for Rates multilateral instrument on 7 June 2017. individuals deriving only exempt income or The standard VAT rate is 22%, with reduced Tax authorities: Ministry of Finance, Tax income subject to a final withholding tax and rates of 4%, 5% and 10%. VAT exemptions Income Agency (Agenzia delle entrate) other specific categories of income. apply to financial services, medical services, The “Modello 730” tax return must be filed gaming and gambling, export sales and the by 23 July of the calendar year following contribution of assets to a company (e.g. the relevant fiscal year; while the “Modello purchases of capital goods). UNICO” tax return must be filed by 31 Registration October of the year following the relevant A taxpayer carrying out taxable supplies in fiscal year (deadlines not falling on working Italy is required to register for VAT purposes. days are postponed to the next working day). Filing and payment Salaries and professional fees are subject to Taxpayers are required to submit a VAT deduction of tax at source. return electronically by the end of April of the following calendar year.

46 Investment basics Japan Currency Japanese Yen (JPY) Foreign exchange control There are no controls, but some reporting requirements apply. Accounting principles/financial statements Japanese GAAP. Financial statements must be prepared annually. Principal business entities These are the joint stock company, limited liability company, partnership and branch of a Linda Ng foreign corporation. Managing Director Tel: +1 212 436 2764 [email protected]

Corporate taxation:

Residence A company that has its principal or main office in Japan is considered to be resident. Local management is not required. 5% of shares, or holds more than 33.3% The NOL carryforward period is nine years of the shares but for less than six months (ten years for NOLs incurred during fiscal Basis before the dividend determination, 50% years starting on or after 1 April 2018). SMEs A resident corporation is taxed on of the dividend is excluded from taxable may carry back losses for one year. worldwide income; a foreign corporation income. If a corporation owns 5% or less generally is taxed only on certain Japan- Rate of the shares, 20% of the dividend is source income. However, if a foreign The national standard corporation tax rate excluded from taxable income. A foreign corporation has a permanent establishment of 23.4% (23.2% for fiscal years starting on dividend exemption system exempts 95% of (PE) in Japan, any income attributable to the or after 1 April 2018) applies to ordinary dividends received by a Japanese company PE is taxable. The corporate tax rate for a corporations with share capital exceeding from its qualifying shareholdings of 25% branch is the same as for a subsidiary. JPY 100 million. or more in foreign companies that have Taxable income been held for at least six months before Companies also must pay local inhabitants The taxable income of a corporation in the dividend determination date. However, tax, which varies with the location and size each accounting period is the excess of foreign dividends that are deductible in of the firm. The inhabitants tax, charged gross taxable revenue over total deductible the source country are excluded from the by both prefectures and municipalities, business expenses. No gain or loss generally exemption and are fully includable in taxable comprises the corporation tax levy (levied is recognized for certain assets transferred income. as a percentage of national corporation tax) between 100% subsidiaries. and a per capita levy (determined based on Capital gains capital and the number of employees). Taxation of dividends Capital gains are taxable as ordinary income; Dividends received by a resident capital losses generally are deductible. The local enterprise tax, another tax corporation from another resident imposed by the prefectures, is classified as Losses corporation are excluded from taxable an income-based tax and factor-based tax. Only 55% (50% for fiscal years starting on income for corporation tax purposes if The factor-based enterprise tax has three or after 1 April 2018) of a company’s taxable the recipient holds 100% of the dividend- components: progressive rates of up to 3.6% income may be offset by net operating paying corporation for a certain period. If a of taxable profits, 1.2% of a “value-added” losses (NOLs). A small or medium-sized corporation owns more than 33.3% of the factor and 0.5% of share capital and capital enterprise (SME) with share capital of shares in a dividend-paying corporation surplus. no more than JPY 100 million is exempt for at least six months before the date the from the NOL restriction, unless the SME The effective tax rate for corporations right to receive a dividend is determined, is owned by a large corporation. NOL (inclusive of the inhabitants and local the dividend (less the dividend-receiving carryforwards may be further restricted enterprise taxes), based upon the maximum resident corporation’s interest expense in certain situations, including a change of rates applicable in Tokyo to a company allocated to the dividend) is excluded from ownership of more than 50% in connection whose paid-in capital is over JPY 100 million, taxable income. If a corporation holds with a discontinuance of an old business is approximately 30%. 33.3% or less of the shares but more than and commencement of a new business.

International Core of Excellence 2018 47 JP

Surtax Interest Social security A 2.1% surtax applies on the withholding Interest on loans paid to a nonresident The employer must withhold the employee’s tax for certain Japan-source income, as corporation generally is subject to a 20% contribution and make its own contributions discussed below under “Withholding tax.” withholding tax, while the rate on deposits to social security tax, which has several and bonds is 15%. A 2.1% surtax effectively components. The highest combined Alternative minimum tax increases the rates to 20.42% and 15.315%. employer portion is approximately 16.342%. No The rate often is reduced under a tax treaty. Stamp duty Foreign tax credit Royalties Stamp duty of JPY 200 to JPY 600,000 Foreign tax paid may be credited against Royalties paid to a nonresident are subject is imposed on the execution of taxable Japanese tax, subject to certain limitations. to a 20% withholding tax, unless the rate is documents. An indirect foreign tax credit (deemed paid reduced under a tax treaty. A 2.1% surtax foreign tax credit) generally is unavailable. Transfer tax effectively increases the domestic rate to The transfer of certain assets is subject to Participation exemption 20.42%. stamp duty on contracts executed in Japan. There is no participation exemption in Technical service fees respect of capital gains, but there is a 95% Other A 20% withholding tax generally is levied on foreign dividend exemption (see above Other taxes include registration and license Japan-source service fees, unless exempt under “Taxation of dividends”). taxes. Share registration tax is assessed on under a tax treaty. A 2.1% surtax effectively the registration of new or additional share Holding company regime increases the domestic rate to 20.42%. capital, at 0.7%. No Branch remittance tax Incentives No Anti-avoidance rules: Various tax credits are available, including an Transfer pricing Other taxes on corporations: R&D credit. The prices of goods and services exchanged There are tax incentives available for Capital duty between internationally affiliated entities increasing wages and salaries (for fiscal Capital duty is included in the local must be consistent with the arm’s length years starting between 1 April 2013 and 31 inhabitants tax (per capita levy) and the principle. Internationally affiliated entities March 2018) and for job creation (effective factor-based local enterprise tax includes a are defined, among others, as those with a until 31 March 2018), which may be taken in levy on capital. relationship consisting of a direct or indirect foreign shareholding of 50% or more, or the same fiscal year if certain adjustments Payroll tax a “control in substance” relationship. The are made. The employer must withhold income tax and burden is on the taxpayer to demonstrate social security contributions at source. Special tax incentives have been introduced that the pricing is reasonable. Failure to for qualified companies doing business in Real property tax do so may give rise to a transfer pricing designated regions/zones. The municipal fixed assets levy is assessed adjustment, at the discretion of the tax at an annual rate of 1.4%. A real estate authorities. Advance pricing agreements Withholding tax: acquisitions tax of 3%-4% (temporarily, on the reasonableness of the taxpayer’s Dividends 1.5%-2%) of the assessed value applies at methodology and results may be obtained A 20% withholding tax normally is levied on the time land or buildings are acquired, and from the tax authorities. (See also under dividends paid to a nonresident, unless the a real estate registration tax is imposed on “Disclosure requirements.”) rate is reduced under a tax treaty. The rate is the assessed value of real property at rates 15% for dividends paid by a listed company ranging from 0.4% to 2%, depending on the to a nonresident. A 2.1% surtax increases type of transfer. the domestic rates to 20.42% and 15.315%.

48 JP

Japan recently adopted a three- foreign controlling shareholder; (2) a third forward tax losses, the dividends received tiered approach to transfer pricing party provides a loan to the Japanese entity deduction, the foreign dividend exemption, documentation—country-by-country (CbC) that is guaranteed by a foreign controlling etc.), and adding back net interest payments reporting, a master file and a local file— shareholder; or (3) a third party provides to related persons and certain other which generally is consistent with action 13 a loan to the Japanese entity based on expenses. De minimis exceptions to the of the OECD BEPS project. The new rules arrangements involving bonds and certain application of the earnings stripping rules apply for fiscal years beginning on or after 1 repo transactions. exist for: (1) net interest payments to related April 2016 for CbC reporting and master file parties not exceeding JPY 10 million, or (2) There is a debt-to-equity safe harbor ratio purposes, and for fiscal years beginning on net interest payments to related parties of 3:1 (2:1 for certain repo transactions). or after 1 April 2017 for local file purposes. A that are not more than 50% of the total This effectively means that there will be a “Notification for Ultimate Parent Entity” also interest expenses. Where both the earning restriction only if the debt from the foreign must be submitted for fiscal years beginning stripping and the thin capitalization rules are controlling shareholder (or specified third on or after 1 April 2016. applicable, the larger of the two potential party) exceeds three times the amount of disallowances will apply. To the extent the Thin capitalization net equity the shareholder/third party owns, application of the above rules gives rise to Japan’s thin capitalization rule primarily and the total debt exceeds three times the nondeductible related party interest, such restricts the deductibility of interest equity. In such a situation, interest expenses interest expense may be carried forward payable (including certain guarantee fees) calculated on the excess debt are treated and deducted (within the limitation) against by a Japanese corporation or a foreign as nondeductible expenses for Japanese taxable income arising during the following corporation liable to pay corporation tax in corporate income tax purposes. If the seven fiscal years. Japan, to its foreign controlling shareholder taxpayer can demonstrate the existence (or certain third parties) if the interest is not of comparable Japanese corporations that Controlled foreign companies subject to Japanese tax in the hands of the have a higher debt-to-equity ratio, that For Japanese tax purposes, a CFC may recipient. A foreign controlling shareholder higher ratio may be used. include any non-Japanese company is defined as a foreign corporation or that has an effective tax rate of less Earning stripping rules nonresident individual that: (1) directly than 20%, if the company is more than Where net interest payments to related or indirectly owns 50% or more of the 50% controlled, directly or indirectly, by persons (i.e. interest payments to related total outstanding shares of the Japanese Japanese shareholders. A CFC is considered persons, less relevant interest income) corporation (i.e. a parent-subsidiary “controlled” by Japanese shareholders where exceed 50% of adjusted taxable income relationship); (2) is a foreign corporation in Japanese shareholders directly or indirectly in a fiscal year, the excess portion is which 50% or more of the total outstanding own more than 50% of the outstanding nondeductible. For these purposes, shares are directly or indirectly owned shares. “related persons” is defined broadly, and by the same shareholder that directly or includes similar controlling and affiliate Japanese companies that (together with indirectly owns 50% or more of the shares relationships to those discussed under “Thin their associated persons) hold 10% or more of the relevant Japanese entity (i.e. a capitalization.” The rules also can apply to of the outstanding shares of a CFC must brother-sister relationship); or (3) otherwise interest payments to certain third parties report their share of the taxable profits of exercises control over the Japanese entity. (e.g. where a third party provides a loan the CFC on a current basis. When a company This rule also is applicable in situations that is guaranteed by a related person). To is classified as a CFC, the Japanese company involving certain third parties, including summarize, “adjusted taxable income” is generally is taxed on the taxable profits of situations where: (1) a third party provides a taxable income without applying certain the CFC on a pro rata basis corresponding loan to the Japanese entity that is funded by provisions (including offsetting brought- to its shareholding. The CFC rules may be a back-to-back loan arrangement with the

International Core of Excellence 2018 49 JP

waived if a foreign subsidiary has fixed to enter into the consolidated tax regime, applicable tax year (or, for a newly formed facilities engaged in business in the foreign in principle, the group cannot voluntarily company, apply before the end of the first country and conducts business activities revoke this status. year) and must meet certain requirements in that country. Even if a CFC satisfies the in relation to their accounting systems and Consolidated taxable income is calculated above conditions, certain passive income is recordkeeping. for the consolidated group as a single tax subject to tax in the hands of the Japanese unit, by aggregating the separate taxable Penalties parent company. income of each subsidiary in the group Various penalties are imposed on taxpayers New CFC rules will apply as from a CFC’s and applying necessary adjustments. that underreport their total tax due and fiscal year starting on or after 1 April 2018. Consolidated tax liability is calculated based that fail to timely submit tax payments and The new rules introduce a new category of on consolidated taxable income multiplied tax returns. Penalties are not deductible for CFC that includes “paper,” “cash box” and by the applicable tax rate, adjusted for Japanese tax purposes. “black listed” companies with an effective various tax credits. The group’s consolidated Rulings tax rate of less than 30%. The inclusion tax liability is allocated to the individual Japan has a limited advance ruling system. of taxable profits from such CFCs cannot corporations in the group based on the Written rulings generally are available to be waived. The new rules also expand taxable income or loss of each corporation. the public, and the availability of a ruling the definition of “controlled” to include In principle, when forming/joining the is subject to certain restrictions (e.g. no companies controlled in substance, consolidated group, existing subsidiaries are hypothetical cases). regardless of the shares owned. subject to the mark-to-market rule, and the Disclosure requirements separate return limitation year rule (under Personal taxation: Disclosure requirements apply to the which a subsidiary’s NOLs incurred before Basis 10%-or-more shareholders of CFCs. joining the group can be carried forward and An individual who is domiciled or who has Transactions with foreign related parties offset only against its own taxable income). a residence in Japan for one year or more should be disclosed (on Form 17(4)) and There are some exceptions to these rules is a resident. A non-Japanese national who submitted with the tax return. for subsidiaries held for more than five has spent five years or less in Japan in the years and subsidiaries that meet certain Other preceding 10-year period is regarded as a requirements. Broadly applicable anti-avoidance rules are nonpermanent resident. in place. Filing requirements Residence A corporation or a branch must file a final Permanent residents are taxed on their Compliance for corporations: tax return and pay its final taxes due within worldwide income. Nonpermanent residents Tax year two months after the close of its fiscal year. are taxed on their Japanese-source income A corporation selects its fiscal year when it Taxes must be prepaid within two months and on foreign-source income paid in or begins operations in Japan. The accounting from the end of the sixth month of the tax remitted into Japan. Nonresidents are taxed period must not exceed 12 months. A year, in an amount equal to either: (1) 50% on their Japanese-source income. branch’s tax year generally is the same as of the tax payable on the previous year’s Filing status the tax year of its head office. earnings; or (2) the actual tax liability for the first six months. Joint filing is not permitted. Additionally, the Consolidated returns tax rates are uniform and are not dependent A Japanese domestic parent corporation Companies may file either a “blue” or a on marital or other status. and its 100%-owned domestic subsidiaries “white” return. The blue return carries a Taxable income may elect to file a consolidated tax return wide range of privileges, such as deductions, Most income, including employment income for national tax purposes only, i.e. local including tax loss carryforwards and and investment income, is taxable. Specified taxation is calculated on a stand-alone basis. accelerated depreciation. To use this form, deductions, allowances and credits are Once such a group has been approved firms must apply before the beginning of the available to reduce tax.

50 JP

Capital gains Inheritance/estate tax Registration Individuals are taxed on gains from the Progressive rates up to 55% apply for An existing company may elect to be a sale of shares at 20%. Long-term gains of inheritance/estate/gift tax. consumption taxpayer if taxable sales for individuals from the sale of real property consumption tax purposes do not exceed Net wealth/net worth tax are taxed at 20%, and short-term gains are JPY 10 million in the “base period” (two No taxed at 39%. years before the current year, or the first Social security six months of the prior year), subject to Deductions and allowances Social security tax comprises several certain other conditions. In principle, a Subject to certain restrictions, deductions components. The highest combined new company with share capital of less are granted for social insurance premiums employee’s portion is approximately than JPY 10 million should be automatically paid under Japanese government plans, life 15.510%. The employer must withhold the exempt from filing consumption tax returns insurance premiums, earthquake insurance employee’s contribution. until taxable sales exceed JPY 10 million in premiums, charitable contributions, the base period, or a timely consumption qualified medical expenses, etc. Personal Compliance for individuals: taxpayer election is filed. The election is deductions are allowed for the individual, a binding for a minimum of two taxable years. dependent spouse and children aged 16 or Tax year Other than this election, no registration older. Exemptions exist for the disabled and Calendar year procedures exist. the elderly. Filing and payment Filing and payment Rates Employment income and investment income A company must file a consumption Progressive rates up to 55% apply generally are withheld at source. Self- tax return and remit the applicable tax (combined national and local inhabitants employment business income is calculated to the tax authorities if the company tax). A surtax of 2.1% applies to national tax in a similar manner as for corporations, and is a consumption taxpayer (see under due, to help pay for recovery following the must be self-reported. “Registration,” above). The frequency 2011 earthquake. Penalties of remittances depends on the total Japan imposes various penalties on Other taxes on individuals: consumption tax collected. The amount taxpayers who underreport their total of creditable input JCT generally depends tax due and who fail to timely submit tax Capital duty on total sales, the taxable sales ratio and payments and tax returns. Penalties are not No the method to determine input JCT. Other deductible for Japanese tax purposes. Stamp duty thresholds/tests also may be applicable. Stamp duty of JPY 200 to JPY 600,000 Consumption tax: Source of tax law: Corporation Tax Law, is imposed on the execution of taxable Income Tax Law, Consumption Tax Law, Taxable transactions documents. Special Taxation Measures Law Japanese consumption tax, similar to a Capital acquisitions tax European-style VAT, is levied on the supply Tax treaties: Japan has concluded 68 See “Real property tax,” below. of goods and services in Japan; the sale income tax treaties. Japan signed the OECD Real property tax or lease of certain assets in Japan; the multilateral instrument on 7 June 2017. import of goods; and certain digital services A municipal fixed assets levy is assessed Tax authorities: National Tax Agency (NTA) at an annual rate of 1.4%. Additionally, a provided in Japan by nonresidents. real estate acquisitions tax of 3% to 4% Rates (temporarily, 1.5%-2%) of the assessed value The current rate is 8% (combined national applies at the time land or buildings are and local tax rate) for taxable transactions, acquired and a real estate registration tax and 0% in certain circumstances (e.g. export is imposed on the assessed value of real transactions). property at rates ranging from 0.4% to 2%, depending on the type of transfer.

International Core of Excellence 2018 51 Investment basics Luxembourg Currency Euro (EUR)

Foreign exchange control No

Accounting principles/financial statements Luxembourg GAAP/IFRS. Financial statements must be prepared annually.

Principal business entities Jean-Michel Henry Public company (société anonyme or SA), private limited company (société à Partner responsabilité limitee or Sàrl), Société par actions simplifiées (SAS), partnership and Tel: +1 212 436 5457 branch of a foreign corporation. [email protected]

Corporate taxation: Rate state are not exempt under the participation A corporate income tax rate of 18% applies exemption regime if the payments are Residence to a company whose taxable income deductible in the other member state. The A company is resident in Luxembourg if exceeds EUR 30,000. The rate is 15% if benefits of the participation exemption its legal seat or central administration is in annual taxable income does not exceed EUR regime also will not apply where the Luxembourg. 25,000. A municipal business tax also may transaction qualifies as an abuse of law Basis be levied (see “Other,” below). under the general anti-abuse rule. Residents are taxed on worldwide Surtax Holding company regime income; non-residents are taxed only on Corporate income tax is increased by a See “Participation exemption,” above. Luxembourg-source income. Foreign-source contribution of 7% to the unemployment income derived by residents generally is Incentives fund. subject to corporation tax in the same way A global investment tax credit is available as Luxembourg-source income. Branches Alternative minimum tax for 8% of the acquisition value of the first are taxed in the same way as subsidiaries. No EUR 150,000 of investments made during the year, and 2% of the excess over EUR Taxable income Foreign tax credit 150,000. A supplementary investment tax Taxable income is calculated based on the Foreign tax paid may be credited against credit of 13% of the acquisition value of profit as stated in the commercial balance Luxembourg tax if the foreign tax is qualifying investments made during the tax sheet, plus certain adjustments provided for comparable to Luxembourg corporate year also is available. under the tax law. income tax. The credit is limited to the amount of Luxembourg income tax payable Luxembourg’s intellectual property (IP) Taxation of dividends on the foreign income. box regime was abolished in 2016. A new Dividends received by a resident company IP regime, which is expected to be voted are included in taxable income, unless the Participation exemption on in 2018, likely would apply as from participation exemption regime applies. Dividends and capital gains derived fiscal year 2018. Based on the draft law, by a qualifying entity from a qualifying Capital gains the new regime would provide for an 80% shareholding may be exempt from Capital gains generally are included in exemption on income derived from the Luxembourg corporate income tax and taxable income and taxed at the standard commercialization of certain IP rights, as municipal business tax if the entity deriving corporate tax rate. However, capital gains well as a 100% exemption from net worth the income holds or commits to hold the derived from the sale of shares may be tax. However, under grandfathering rules, participation, directly or indirectly, for an exempt from corporate income tax in IP rights introduced before 1 July 2016 still uninterrupted period of at least 12 months certain cases. could benefit, through 30 June 2021, from and the participation does not fall below the old regime (under which 80% of income Losses 10% or below an acquisition price of EUR resulting from the exploitation of the rights Losses incurred up to the fiscal year that 1.2 million (EUR 6 million for capital gains) and 80% of the capital gains arising from ended on 31 December 2016 may be carried throughout that period. disposal of the rights are exempt from tax. forward indefinitely. Losses incurred as from Dividends received by an eligible Qualifying rights also would be exempt from 2017 are restricted to a period of 17 years. Luxembourg parent entity from an eligible net worth tax). The carryback of losses is not permitted. subsidiary located in another EU member Qualifying investment fund vehicles are not subject to corporate income tax and municipal business tax.

52 LU

Withholding tax: Other taxes on corporations: Other Municipal business tax may be imposed at Dividends Capital duty rates ranging from 6% to 12%, depending on Dividends paid to a nonresident company No. A registration fee of EUR 75 is imposed where the undertaking is located. generally are subject to a 15% withholding on incorporation or amendments to bylaws. tax, unless the rate is reduced under a A net worth tax of 0.5% on total net assets Payroll tax tax treaty. No tax is withheld on dividends up to EUR 500 million and 0.05% on total net No paid to a qualifying company under the assets of EUR 500 million or more (subject EU parent-subsidiary directive, unless Real property tax to the minimum net worth tax requirements the transaction qualifies as an abuse of Municipalities in Luxembourg impose a land described below) is imposed on taxpayers law under the general anti-abuse rule. tax of 0.7% to 1% on the unitary value of real subject to corporate income tax, but an Luxembourg has extended the benefits of property, including industrial plants. This exemption from, or a reduction in, the tax the directive to parent companies resident is multiplied by coefficients fixed by each may be available. in non-EU tax treaty countries, provided municipality and varies according to the type Luxembourg collective entities that own conditions similar to those under the of real property. qualifying holding and financing assets Luxembourg participation exemption are Social security exceeding both 90% of their total balance satisfied and the parent company is subject Employers must make social security sheet and the amount of EUR 350,000 are to a tax similar to Luxembourg corporate contributions (including for pension, illness subject to a minimum net worth tax of EUR income tax. and accident insurance) on behalf of their 4,815; where the total balance sheet does Interest employees at a total rate of 12.45% to not exceed EUR 350,000, the minimum net Luxembourg does not levy withholding tax 15.20%, depending on various factors. worth tax is EUR 535. on interest. However, profit-sharing bonds Stamp duty Other Luxembourg companies are subject and debt instruments with remuneration Stamp duty is levied at various rates on the to a progressive minimum net worth tax, linked to the issuer’s profits are taxed as registration of notary deeds, bailiff deeds depending on the total balance sheet asset dividends at a 15% rate. and certain action by a court. value. The tax ranges from EUR 535 (for Royalties a total balance sheet up to EUR 350,000) Transfer tax Luxembourg does not levy withholding tax to EUR 32,100 (for a total balance sheet Transfer tax is applicable mainly to the on royalties. exceeding EUR 20 million). transfer of immovable property. The basic Technical service fees rate is 6%, plus a 1% transcription tax. For tax-consolidated Luxembourg collective Luxembourg does not levy withholding tax For real estate located in the municipality entities, all entities in the group are subject on technical service fees. of Luxembourg, an additional charge to the minimum net worth tax (payable by amounting to 50% of the transfer tax is the parent entity). However, the aggregate Branch remittance tax imposed. Exemptions are available. amount due by a tax consolidated group is No limited to EUR 32,100.

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The minimum net worth tax is reduced by Disclosure requirements Filing requirements the corporate income tax due the previous Country-by-country reporting, in line with Corporate income tax, net worth tax and year. the OECD’s BEPS action 13, is required for municipal business tax returns must be fiscal years commencing as from 1 January submitted before 31 May of the following Other taxes include gift tax, customs duty, 2016. tax year. This date may be extended upon subscription tax and registration taxes (e.g. request. Tax returns must be stated in lease contracts and loan agreements). Compliance for corporations: euros, although, in certain circumstances, a Anti-avoidance rules: Tax year company may determine its taxable income The tax year for a company is either the in a currency other than the euro. Transfer pricing –Transactions between calendar year or the company’s accounting related parties are required to be conducted Capital companies (i.e. the SAS, Sàrl and year ending in a particular calendar year. on arm’s length terms. The tax authorities partnership limited by shares) may be can request documents to examine Consolidated returns entitled to self-assessment. transactions with related parties. Taxpayers Fiscal consolidation is allowed for corporate As from fiscal year 2018, Luxembourg should be able to justify their transactions and municipal business tax purposes, but companies must file their corporate income and provide a valid business rationale, not for net worth tax purposes, except for tax, net worth tax and business tax returns through transfer pricing documentation the minimum net worth tax (see “Other via an electronic filing tool. based on a functional and risk analysis. taxes on corporations,” above). A fiscal unity Reporting requirements apply (see may be formed vertically by a Luxembourg Penalties “Disclosure requirements,” below). company, or a Luxembourg permanent A 0.6% monthly interest charge applies for establishment (PE) of a foreign company that failure to pay or for late payment of tax. New tax measures have been introduced to is subject to a tax equivalent to Luxembourg Failure to submit the tax return, or late support Luxembourg as a prime financial corporate income tax, and its wholly owned submission, results in a penalty of 10% of center, including new guidance and (at least 95%) Luxembourg subsidiaries/ the tax due and a fine up to EUR 25,000. In clarification on the transfer pricing rules for Luxembourg PEs of a foreign company the case of a late payment authorized by the Luxembourg entities engaged in intragroup that are subject to a tax equivalent to tax authorities, the rate ranges from 0% to financing activities. Luxembourg corporate income tax. 0.2% per month, depending on the period A company may request an advance pricing of time. In certain cases, a horizontal fiscal unity agreement from the Luxembourg tax may be formed between companies with Rulings authorities. the same direct or indirect parent company A corporate taxpayer may request an Thin capitalization (without the parent company being part of advance tax decision from the Luxembourg There is no specific legislation but, in the consolidation). tax authorities. practice, the tax administration uses a debt- to-equity ratio of 85:15 for the financing of participations.

Controlled foreign companies No

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Personal taxation: Capital gains Rates Short-term capital gains are taxed as current Progressive rates up to 42% apply. Income Basis income (at progressive rates up to 42%); tax due is increased by: (1) a contribution of Resident individuals are taxed on their long-term gains receive more favorable 7% to the employment fund (9% for income worldwide income. Nonresidents are taxed treatment, including an exemption of EUR exceeding EUR 150,000); and (2) a 1.4% only on Luxembourg-source income. 50,000 for gains realized in a 10-year period dependency contribution. Residence and taxation of the remaining long-term Investment income in the form of dividends An individual is considered a resident gains at 50% of the taxpayer’s global rate. is subject to a 15% withholding tax. See also of Luxembourg if he/she is domiciled in Gains derived by an individual from real “Capital gains,” above. Luxembourg or his/her customary place of estate are considered long-term if the abode is in Luxembourg. property was held for more than two years. Other taxes on individuals: A temporary regime is applicable until 31 Filing status December 2018 under which long-term Capital duty Married individuals are subject to joint gains for real estate are taxed at 25% of No taxation. Individuals linked by a legal the taxpayer’s global tax rate. Gains on an partnership also can opt for joint taxation Stamp duty individual’s private residence normally are provided certain conditions are fulfilled. As Stamp duty usually is levied on the exempt. from 2018 (tax return filed in 2019) married registration of notary deeds, bailiff deeds taxpayers can elect to be taxed separately Gains derived by an individual on shares and certain actions by a court. (strict deadlines apply). are long-term if the shares were held for Capital acquisitions tax more than six months, and are taxable only Nonresident taxpayers can request to be Certain gifts and donations must be if the shareholding exceeds 10%. Gains on assimilated to resident taxpayers under registered (notably, those involving movable assets are exempt if the assets certain conditions. New rules concerning immovable property). The rates range were held for more than six months. nonresident married taxpayers (in particular, from 1.8% to 14.4%, depending on the the election of tax class and disclosure of Deductions and allowances relationship between the donor and donee. foreign income) are applicable as from 2018 Subject to certain restrictions, deductions Real property tax (tax return filed in 2019). are permitted for the following: insurance Municipalities in Luxembourg impose a land premiums for life, accident and sickness Taxable income tax of 0.7% to 1% on the unitary value of real policies; individual pension schemes; Luxembourg law distinguishes several property, including industrial plants. This alimony and annuities; childcare categories of income, including income from is multiplied by coefficients fixed by each and housekeeping costs; charitable employment, self-employment, business municipality, and varies according to the contributions; interest on personal and and agriculture. Losses from one category type of real estate. mortgage loans; and home saving and of income generally may be set off against loan schemes. Allowances are granted for income from another category in the same employment income, dividend and interest year. Investment income in the form of income and pension income. Single parents dividends is subject to withholding tax. may benefit from an additional abatement.

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Inheritance/estate tax Penalties Other Inheritance tax is levied in Luxembourg if Late payment of tax triggers automatic Taxpayers with an annual turnover of the deceased was resident in Luxembourg default interest of 0.6% per month. Failure less than EUR 30,000 benefit from a VAT at the time of his/her death. The tax base to submit a tax return, or late submission, is franchise regime, but they still must register is the market value of the entire net estate subject to a penalty of 10% of tax due and for VAT and file an annual VAT return. inheritance at the time of death. Rates a fine up to EUR 25,000. If late payment is The tax authorities can impose a fine range from 0% to 48%, depending on authorized by the tax authorities, the rate ranging from EUR 250 to EUR 10,000 in the proximity of the relationship and the ranges from 0% to 0.2% per month. cases where returns are not filed or are amount of the assets bequeathed to each filed late, and a penalty of up to 10% per beneficiary. Exemptions are applicable in Value added tax: year in cases of the late payment of VAT. certain cases. Taxable transactions Additionally, a fine up to of EUR 25,000 per Net wealth/net worth tax VAT is levied on the supply of goods and day can be imposed for failure to provide No services. information or documents when requested.

Social security Rates Source of tax law: Law of 4 December Social security contributions apply to wages The standard rate is 17%. An intermediate 1967, as amended, on Income Tax; Law of 12 and salaries and are due from both the rate of 14% applies, e.g. to the management February 1979, as amended, on Value Added employer (at rates of approximately 12% to and safekeeping of securities, the sale of Tax, Law of 16 October 1934, as amended, 15%) and the employee (at 12.20 to 12.45%). wine and printed advertising materials. on Net worth tax, Law of 1 December 1936, Contributions for both employers and A reduced rate of 8% applies, e.g. to the as amended, on Municipal Business Tax, employees are computed on a capped basis supply of gas and electricity; and a super Abgabenordung dated 22 May 1931 and (approximately EUR 119,915.16 for 2018), reduced rate of 3% applies, e.g. to the sale of Steueranpassungsgesetz dated 16 October and must be withheld by the employer. Self- books, the supply of water, pharmaceuticals, 1934 employed individuals must register for social most food products and radio and television Tax treaties: Luxembourg has 80 effective security purposes and pay approximately broadcasting services. Certain services are tax treaties. Luxembourg signed the OECD the same rates as the combined rates for an exempt, e.g. financial, health and medical multilateral instrument on 7 June 2017. employer and an employee. services and the leasing of immovable property. Tax authorities: Administration of Direct Compliance for individuals: Registration Contributions, the Administration de Tax year In principle, taxpayers must be VAT l’Enregistrement et des Domaines (VAT and Calendar year registered (a derogation may apply under other indirect taxes) and the Administration certain conditions). of Customs & Excise Filing and payment Tax returns are due by 31 March of the year Filing and payment following the tax year. The filing deadline A taxpayer must file at least an annual VAT may be extended at the taxpayer’s request. return. Depending on annual turnover, a Self-employed individuals must make taxpayer may be requested to file monthly quarterly prepayments of tax, in amounts or quarterly VAT returns, in addition to the that are fixed by the tax authorities based annual return. Monthly and quarterly VAT on the most recent final assessment. returns must be filed within 15 days of the end of the period and the annual VAT return, A taxpayer may request an advance depending on the taxpayer’s situation, must tax decision from the Luxembourg tax be filed before 1 March or 1 May of the authorities. An administrative fee will apply following year. if the request is in connection with individual business matters.

56 Investment basics Mexico Currency Mexican Peso (MXN)

Foreign exchange control None, and no restrictions are imposed on the import or export of capital. Repatriation payments may be made in any currency. Both residents and nonresidents may hold bank accounts in any currency in any part of the world; however, for some accounts located in Mexico but kept in a foreign currency, the currency must be the US dollar. Josemaria Cabanillas Director Accounting principles/financial statements Tel: +1 718 508 6804 Mexican GAAP (with increasing conformity to international standards) applies. [email protected] Financial statements must be prepared annually. Principal business entities Corporate taxation: These are the corporation (SA), limited liability company (SRL) and branch of a foreign corporation. Residence An entity is resident in Mexico if it is managed and controlled in Mexico. Mexican companies with investments in Holding company regime Basis renewable sources of energy may create a No Residents are taxed on worldwide income; special net profit account (CUFIER), and if nonresidents are taxed only on Mexican- Incentives such a company distributes dividends that source income. Foreign-source income Special rules apply to maquiladoras. are not paid from the CUFIER account, the derived by residents is subject to tax in Incentives are granted for national payer will be required to pay tax (30% on a the same way as Mexican-source income. cinematographic and theatrical productions, grossed-up amount) on the distribution. Branches are taxed in the same way as as well as investments in high performance subsidiaries. Capital gains sports, electric vehicle power feeders, Mexican entities are not subject to special technology and R&D projects, the FIBRAS Taxable income tax treatment on capital gains, and the use (real estate investment trust) regime and Corporate tax is imposed on a company’s of capital losses is restricted in some cases. risk capital. profits, which consist of business/trading income, passive income and capital Losses Immediate depreciation for investments gains. Normal business expenses may be Losses may be carried forward for 10 years, in certain new assets is available as from deducted in computing taxable income. subject to applicable inflation adjustments. 1 January 2016 for taxpayers with income Inflationary accounting for tax purposes is The carryback of losses is not permitted. up to MXN 100 million; no income limit applicable to certain types of revenue and applies to taxpayers with investments Rate expenses. in the construction and improvement 30% of transport infrastructure and those Taxation of dividends Surtax with activities related to the treatment, Dividends received by a Mexican resident No processing or transport of oil, natural gas company from another Mexican resident and petrochemicals. company are exempt from corporate tax. Alternative minimum tax Dividends received from a foreign company No Five special economic zones have been are subject to corporate tax in the period launched that provide preferential income Foreign tax credit the dividends are payable, but a credit for tax, VAT and customs duty treatment for Foreign tax paid may be credited against underlying corporate and withholding tax companies operating in the zones. Mexican tax on the same profits, but the generally is available for foreign tax paid. credit is limited to the amount of Mexican If dividends from a Mexican company tax payable on the foreign income. are not paid from the “CUFIN account” Participation exemption (i.e. previously taxed profits), the payer is No required to pay tax.

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Withholding tax: Branch remittance tax A special excise tax on production and Rules that are similar to the CUFIN rules for services is levied on the sale of certain Dividends dividends apply. Permanent establishments goods and the provision of certain services. A company that distributes dividends distributing dividends or gains to their head (including distributions derived from office are subject to an additional tax of 10% Anti-avoidance rules: investments in renewable sources of energy on such dividends or gains. and made from the CUFIER account) to a Transfer pricing nonresident or resident individual must Other Rules following the OECD guidelines apply withhold a 10% tax, which is considered a There are certain other circumstances to cross-border and domestic transactions. final tax. For nonresidents, the 10% rate may in which withholding tax may apply on The following transfer pricing methods be reduced under a tax treaty. payments made to nonresidents, such as may be used in Mexico: the comparable payments relating to immovable property, uncontrolled price (CUP) method is A grandfather rule applies, under which salaries, fees, capital gains, etc. considered the preferred method, followed CUFIN balances as of 31 December 2013 by the cost plus and resale price methods. are not subject to withholding tax when Other taxes on corporations: Profit-based methods are to be used if the distributed in the future. CUP, cost plus and resale price methods are Capital duty not applicable. The profit split and residual The 10% tax may be reduced for dividends No paid to individuals resident in Mexico if profit split methods, and the transactional profits generated in 2014, 2015 and 2016 are Payroll tax operating margin method are not applicable reinvested and distributed as from 2017. Payroll taxes apply at the state level. in specific circumstances. Documentation rules apply. Advance pricing agreements are Real property tax Interest available. Interest paid to a nonresident generally is The municipal authorities levy “rates” on subject to withholding tax at rates ranging the ownership of real property. Rates are Thin capitalization from 4.9% (interest paid to a bank) to 35%. deductible in calculating the corporation tax Interest payments made by a Mexican A 40% rate applies where interest payments liability. resident company on a loan from a nonresident related party are nondeductible are made to a related party located in a tax Social security for income tax purposes to the extent the haven. The rate may be reduced under a tax Employer contributions for social security debt-to-equity ratio of the payer company treaty. and other related contributions (e.g. housing exceeds 3:1. Royalties and retirement) are mandatory, with rates Royalties paid to a nonresident are subject ranging from 15% to 25%, depending on the Debts incurred for the construction, to a withholding tax of 35% (patents and salary structure of the group of employees. operation or maintenance of productive infrastructure linked to strategic areas, trademarks) or 25% (other kinds of royalties), Stamp duty or for the generation of electricity, are unless the rate is reduced under a tax treaty. No A 40% rate applies where royalties are paid excluded from the application of the thin to a related party located in a tax haven. Transfer tax capitalization rules. A transfer tax of between 2% and 5% applies The leasing of machinery and equipment Controlled foreign companies to the transfer of real estate. generally is considered a royalty. Income is attributed to Mexican tax Technical service fees Other residents (including resident foreigners) Fees paid for technical assistance are While not a tax, mandatory profit sharing from “controlled” entities where more than subject to a 25% withholding tax, unless the rules imply that an entity is obliged to 20% of their income is passive income rate is reduced under a tax treaty. distribute 10% of taxed profits to its (broadly defined) that is taxed locally at a employees no later than May of the year rate less than 75% of Mexico’s statutory following the year in which the profits were rate. Reporting rules may apply. generated.

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Disclosure requirements Filing requirements Filing status External tax auditors are required to Under the self-assessment regime, Tax returns are filed individually, regardless disclose on the tax audit report when a advance corporate tax must be paid in 12 of marital status. taxpayer has entered into a transaction that installments. The annual tax return must Taxable income is not considered viable by the Mexican tax be filed within the first three months of the Income is taxed, in part, under a schedular authorities. following year (no extensions are available). system, although some categories of income Mexico has adopted country-by-country An advance electronic signature certificate can be mixed to determine taxable income. (CbC) reporting in accordance with the must be available, electronic accounting Profits derived from the carrying on by an recommendations under the OECD’s BEPS records must be maintained and the individual of a trade or profession generally project. Under the rules, companies that general ledger must be submitted to the tax are taxed in the same way as profits derived enter into transactions with related parties authorities on a monthly basis. by companies. A separate regime applies to (in Mexico or abroad) and receive income interest earned by individuals. All taxpayers are required to issue digital equal to or greater than MXN 686,252,580 invoices with respect to their transactions. Capital gains must file a master file and a local file, and Capital gains arising from an individual’s sale Mexican multinational enterprise groups Penalties of publicly traded shares, including financial that receive income equal to or higher than Penalties apply for noncompliance with the derivatives, are subject to a 10% tax on the MXN 12 billion also must file a CbC report. tax rules. gains. Other Rulings Deductions and allowances An optional tax audit report may be filed The tax authorities will issue rulings on the Subject to certain restrictions and caps (the for taxpayers that have more than 300 tax consequences of actual transactions. lower of MXN 130,000 or 15% of taxable employees, gross income exceeding MXN income), deductions are granted for medical 100 million or assets exceeding MXN 79 Personal taxation: expenses and medical insurance, retirement million. Basis annuities, mortgage interest, etc. Medical, Mexican nationals are taxed on their Compliance for corporations: dental and hospital expenses (among worldwide income. Nonresidents are taxed others) are deductible with no restrictions Tax year only on Mexico-source income. when they derive from an “inability” or Calendar year Residence disability under the terms of the relevant Consolidated returns An individual is considered resident if he/ laws. A tax integration regime a group to defer she has a permanent home in Mexico. If an Personal allowances are available to the income tax for up to three years, taking individual has a home in two countries, the taxpayer and his/her spouse, children and into account only the profits and losses of key factor in determining residence is the dependents. entities in the group. location of the individual’s center of vital interests. Mexican nationals are, in principle, Rates considered tax residents, subject to the Rates are progressive up to 35%. permanent home and/or the center-of-vital- Other interests test. See “Incentives” under “Corporate taxation,” above, for a temporary incentive relating to the repatriation of capital.

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Other taxes on individuals: Compliance for individuals: Value added tax:

Capital duty Tax year Taxable transactions No Calendar year VAT is levied on the sale of goods, leasing and the provision of services, as well as on Stamp duty Filing and payment imports. No Tax on employment income is withheld by the employer and remitted to the tax Rates Capital acquisitions tax authorities. Other types of income, such as The general VAT rate is 16% and a 0% rate No income from the provision of services and applies to food, medicine and certain other Real property tax leasing income, are subject to withholding. items (with some exceptions). The municipal authorities levy “rates” on Income not subject to withholding is self- Registration the ownership of real property. Rates are assessed; the individual must file a tax All persons must be registered to be able to deductible in calculating the individual’s return and make prepayments of tax. Final credit the VAT paid to vendors, suppliers or taxable income related to leasing of real tax is due on 30 April following the tax year at the border. Nonresidents supplying goods property. (no extensions are available). or services in Mexico must register. Inheritance/estate tax An advance electronic signature certificate Filing and payment No must be available. For individuals carrying The VAT return must be submitted monthly, on a business activity, electronic accounting Net wealth/net worth tax within the first 17 days of the following records must be maintained and a general No month. ledger submitted on a monthly basis. Social security VAT paid for expenses and investments Penalties Employed individuals are required to make made during the preoperational period is (i) Penalties apply for noncompliance with the social security contributions, with the creditable on the VAT return for the month tax rules. amount based on the individual’s salary. the taxpayer begins business operations; or (ii) submitted for refund during the month following the VAT payment, based on an estimation of future VAT-taxable activities.

Source of tax law: Income Tax, Value Added Tax, Federal Tax Code

Tax treaties: Mexico has 56 income tax treaties in force. Mexico signed the OECD multilateral instrument on 7 June 2017.

Tax authorities: Servicio de Administración Tributaria (SAT or Tax Administration Service)

60 Investment basics Netherlands Currency Euro (EUR)

Foreign exchange control No

Accounting principles/financial statements IAS/IFRS/Dutch GAAP. Financial statements must be filed annually.

Principal business entities Godfried Schutz These are the public company (naamloze vennootschap or NV), private limited Partner liability company (besloten vennootschap or BV), partnership (commanditaire Tel: + 718 508 6112 vennootschap or CV, vennootschap onder firma or VOF, etc.), cooperative and [email protected] branch of a foreign company.

Corporate taxation:

Residence requirement is not met or because one Rate Companies that have their management of the three tests is not met and the The corporate tax rates in 2018 are 20% in the Netherlands and, in principle, all subsidiary has not been subject to any on the first EUR 200,000 of taxable profits, companies incorporated according to Dutch form of corporate income tax, any profit and 25% on taxable profits exceeding EUR civil law, are regarded as resident. derived from the shares will be taxed at 200,000. The rates in both brackets will be Basis the normal corporate rate without a credit. reduced, in stages, by a total of 4% by 2021: Residents are liable to tax on their If the participation exemption does not 1% in 2019; 1.5% in 2020; and 1.5% in 2021. worldwide income; nonresidents are apply because one of the three tests is not In 2021, the rate in the first bracket will be taxed only on Netherlands-source met, but the subsidiary has been subject 16% and the rate in the second bracket will income. Exemptions may apply for certain to corporate income tax, a tax credit will be 21%. income from shareholdings, permanent be granted. The amount of the credit Surtax establishments (PEs) and innovative varies: the maximum credit is 5%, and for No activities (see under “Participation EU subsidiaries, a credit is granted for the exemption” and “Incentives”). Branches actual amount of corporate income tax, up Alternative minimum tax of foreign companies and subsidiaries to the Dutch corporate income tax levied on No are treated the same way in determining the dividends. Foreign tax credit corporate income tax, although branches Capital gains Foreign withholding taxes can be credited usually are exempt from withholding tax Capital gains derived from the sale of a under tax treaties. If there is no tax treaty, on profit remittances to their foreign head participation are exempt if the participation the foreign withholding taxes can be offices. exemption applies (see “Participation credited only if the income comes from Taxable income exemption”). Other capital gains are taxed developing countries. Where a PE of a Dutch Corporate income tax is due on all profits at the normal corporate rate. Gains arising company is engaged in low-taxed portfolio derived from conducting a business, on a (de-)merger may be exempt if certain activities, a credit will be granted for foreign including trading income, foreign-source requirements are met. tax paid on such activities. income, passive income and capital gains. In Losses Participation exemption principle, all costs relating to the business Losses may be carried forward for nine The participation exemption applies to are deductible. years and carried back for one year. Certain dividends and capital gains derived from Taxation of dividends restrictions apply to losses incurred by a shareholdings of at least 5%, provided: (1) Dividends received by a Dutch resident company whose activities are at least 90% the subsidiary is not held as a mere portfolio company are exempt if the participation finance and/or holding activities. investment; (2) the subsidiary is subject to exemption applies (see “Participation a reasonable effective tax rate based on exemption”). If the participation exemption Dutch tax principles (“subject to tax test”); does not apply, either because the holding

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or (3) less than 50% of the assets of the Withholding tax: (corporate) income tax that would have subsidiary consist of “passive” assets, based been due had the recipient been a Dutch Dividends on the fair market value of the assets (“asset resident. A similar refund also is available, A 15% withholding tax generally is levied on test”). If the participation exemption is not in certain cases, to a resident of a third dividends paid to resident or nonresident applicable, a credit for the underlying tax country that exchanges information with the shareholders, unless the rate is reduced may be obtained. Netherlands. under an applicable tax treaty or the Group financing/licensing activities generally participation qualifies for an exemption The Dividend Withholding Tax Act contains are deemed to be portfolio investment under the EU parent-subsidiary directive various anti-abuse rules. The dividend activities, i.e. participations predominantly or domestic law. As from 1 January 2018, withholding tax is likely to be abolished engaged in these activities must meet test Dutch holding cooperatives are required to in 2019 or 2020, except where abusive (2) or (3) for the participation exemption to withhold tax from dividends in certain cases. situations are involved. apply. In domestic situations, dividends are exempt Interest Even if the participation exemption applies, from withholding tax if the participation The Netherlands does not levy withholding dividends and interest payments received exemption applies or if a fiscal unity for tax on interest. Interest on a hybrid loan are taxable if the payment is tax deductible corporate income tax purposes exists can qualify as a dividend for tax purposes, in the country of the payer. between the dividend payer and the in which case the rules for dividends apply. recipient. However, a withholding tax on interest is Holding company regime planned to be introduced in 2019 or 2020 to See “Participation exemption.” Domestic rules implementing the EU apply in cases of abuse. parent-subsidiary directive provide for Inc entives an exemption from withholding tax Royalties Various investment deductions and reliefs on dividends paid to EU/EEA parent The Netherlands does not levy withholding are available. companies under the same conditions as for tax on royalties. However, a withholding tax Under the “innovation box” regime, income distributions to a Dutch parent. on royalties is planned to be introduced derived from self-developed intellectual As from 1 January 2018, the exemption from in 2019 or 2020, for cases where abuse is property (R&D) is effectively taxed at a withholding tax also applies to dividends involved. rate of 7% (up from 5% in 2017). As from paid to a parent company in a third country Technical service fees 1 January 2017, the OECD modified nexus that has concluded a tax treaty with the The Netherlands does not levy withholding approach applies, with the result that R&D Netherlands that contains “qualifying tax on technical service fees. expenses incurred by an affiliated entity are provisions” relating to dividend withholding disregarded and more stringent conditions tax. Branch remittance tax are imposed on the type of R&D activities No Tax withheld on dividends paid to that qualify for the innovation box. nonresident individuals and companies A special tonnage tax regime applies to may be refunded, provided the recipient shipping companies. is a resident of another EU/EEA member state and is the beneficial owner of the A 0% tax liability or an exemption is provided dividends. The refund will be equal to the for qualifying investment funds. amount of tax withheld that exceeds the

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Other taxes on corporations: Anti-avoidance rules: Other The abuse of law doctrine applies where Capital duty Transfer pricing the purpose of a transaction or series of No Intracompany pricing for goods and transactions is the avoidance of tax. services must be at arm’s length, and Payroll tax documentation must be maintained on In addition to the restrictions on the Companies are required to withhold tax on intragroup transactions. Acceptable transfer deductibility of interest discussed above, wages paid to employees. pricing methods include the comparable various other rules can result in the (partial) Real property tax uncontrolled price, resale price, cost plus, disallowance of a deduction for interest Municipalities impose an annual tax at profit split and transactional net margin expense incurred by a Dutch taxpayer. varying rates on owners of real property methods, with transaction-based methods These include: (1) anti-base erosion rules related to the value of the immovable preferred over profit-based methods. It is that essentially cover the conversion of property. Real estate tax is deductible for possible to enter into an advance pricing equity into intragroup debt without a corporate income tax purposes. agreement for the use of a certain transfer valid business purpose; (2) rules on the pricing method. acquisition of shares against debt from a Social security related party without meeting a business Social security contributions on employment Thin capitalization purpose test or an effective tax rate test; income are payable by both the employer There currently are no thin capitalization and (3) rules on debt-funded acquisitions and the employee. The contributions are rules in the corporate income tax code. of Dutch companies that limit an interest calculated on gross salary, less pension Controlled foreign companies deduction for acquisition holdings. premiums withheld from the salary. There is no specific CFC legislation, but There are rules that disallow the deduction An income-dependent health insurance there is an obligation to annually re-assess of interest costs relating to excess debt contribution, disability insurance shareholdings of 25% or more in low-taxed (deemed to be) associated with the contribution and unemployment insurance companies whose assets consist of at least acquisition price of participations. The contribution also are levied. 90% “passive” assets. According to EU excess debt is calculated based on a regulations, CFC rules must be introduced Stamp duty mathematical rule, under which operational in 2019. No participations acquired from a third party Disclosure requirements generally are excluded. Transfer tax As a result of the OECD BEPS project, CbC A 6% real estate transfer tax is payable When forming a fiscal unity between a reporting requirements are in effect that on the acquisition of real property in the parent company and an acquired subsidiary, required information to be provided to the Netherlands, or certain related rights. A interest expense relating to the acquisition tax authorities on revenue, income, tax paid reduced rate of 2% applies to the transfer of may be deducted only up to the taxable and accrued, employment, capital, retained a residence. income of the parent company. Several earnings, tangible assets and activities of a exceptions and thresholds may apply to all multinational group. of these rules. Rules apply for the automatic exchange of cross-border rulings, CbC reports and transfer pricing agreements between the tax authorities of EU member states.

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Compliance for corporations: dividend withholding tax rules would have Other to be applied as if no fiscal unity exists (this See “Disclosure requirements,” above. Tax year rule also could affect existing fiscal unities). The tax year generally corresponds to the Personal taxation: calendar year, although a deviating year may Filing requirements be used if so provided in the company’s A provisional assessment, generally based Basis articles of association. The tax year usually on information from the previous two years, Residents are taxed on their worldwide is 12 months, but shorter or longer periods usually is issued in the first month of the income. are permitted in the year of incorporation. taxpayer’s financial year. This assessment Nonresidents are taxed only on is payable in monthly installments for the Consolidated returns Netherlands-source income. In certain remaining months of the year. Provided certain conditions are satisfied, a cases, nonresident individuals with Dutch- parent company may form a fiscal unity with Corporate income tax returns must be source income are treated as a limited one or more of its subsidiaries, under which filed annually, within five months of the national taxpayer, in which case they are the losses of one company may be offset end of the fiscal year. However, extension taxed on foreign-source income but are against the profits of another company of this deadline is possible. Businesses are entitled to some credits. and fixed assets of one company may be expected to file all returns electronically. Residence transferred to another company without The tax return must be accompanied by Residence is based on factors, such as corporate income tax consequences. To all information required to determine employment, family circumstances, etc. qualify for fiscal unity status, the parent taxable profits, including the balance company must own at least 95% of the sheet and profit-and-loss account and Filing status economic and legal ownership of the shares any other information requested by the Married couples must file a joint assessment of the subsidiary and the parent company tax inspector. If a company does not meet unless a petition for a divorce has been and the subsidiaries must have the same these obligations or does not file a proper filed. Unmarried couples must file a joint financial year. In certain cases, a Dutch PE tax return, the inspector may issue an assessment if certain conditions are of a foreign company may be included in a estimated assessment. satisfied. fiscal unity. Penalties Taxable income A fiscal unity may be formed via a company Administrative penalties may be imposed for Income is categorized and taxed under one based in another EU member state, and it late filing or failure to file a Dutch return, or of three “boxes.” Box 1 is income from an is possible to form a fiscal unity, in certain for the late payment or nonpayment of tax. enterprise, employment and housing. Box cases, with an EU/EEA-resident parent Criminal penalties may be imposed if the 2 is income from substantial interests (5% company. Dutch authorities can prove fraud or gross or more). Box 3 is income from savings and negligence. investments. Remedial legislation has been announced as a result of the opinion of the Advocate Rulings Capital gains General (AG) of the Court of Justice of the A taxpayer may request an advance ruling In principle, capital gains are taxed at European Union (CJEU) in two cases relating from the tax authorities on the application progressive rates in Box 1. If the gains are to the Dutch fiscal unity regime. The AG of the participation exemption to holding related to a substantial interest, a 25% rate concluded that the Netherlands may not companies in international structures; applies in Box 2. If the gain relates to an favor domestic situations by allowing a the use of hybrid financing instruments investment, the gains are not taxed as such benefit that is not open to cross-border and hybrid entities; the existence of a PE in Box 3. There is no capital gains tax on groups. If the CJEU follows the AG’s opinion, in the Netherlands; or the classification of gains from the sale of a dwelling. tighter rules will be proposed, which means activities, i.e. group services or shareholder that some corporate income tax and activities.

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Deductions and allowances Inheritance/estate tax Value added tax: All expenses incurred that are necessary Inheritance tax is due on inheritances Taxable transactions to obtain taxable income in Boxes 1 and 2 received from Dutch residents. Dutch VAT is levied at each stage in the chain of generally are deductible, except expenses nationals who emigrate from the production and distribution of goods and related to employment. Certain expenses Netherlands still are considered residents services. VAT applies on the supply of goods, of a mixed character are not deductible or during a 10-year period. Rates vary between the rendering of services, the acquisition are deductible subject to certain limits. In 10% and 40%. of goods by businesses and the import of relation to Box 3, liabilities are deductible Net wealth/net worth tax goods. from the taxable base. No Rates Rates Social security The standard VAT rate is 21%, with a Box 1 income is subject to progressive rates State social security contributions are reduced rate of 6% applying for certain of 36.55% up to 51.95%, with a 14% base payable by all individuals resident in the goods and services. The reduced VAT rate deduction for entrepreneurs; Box 2 income Netherlands. Additional social security is expected to be raised to 9% as from 1 is taxed at a rate of 25%; and under Box 3, contributions are payable by employees and January 2019. This VAT rate applies to goods a fixed presumed gain (of the market value the self-employed. like foodstuffs, medicines and books. of the Box 3 assets minus debt) is taxed at a flat rate of 30%. The fixed presumed gain in Other Registration Box 3 is based on the average distribution of An insurance premium tax is levied at a rate There is no registration threshold in the the Box 3 assets on savings and investments of 21%. Netherlands; all VAT payers are required to (the capital mix). The calculation of the register. Landlords in the regulated sector that rent actual presumed gains for each year are out more than 50 houses are subject to a Filing and payment based on past market returns realized. landlord tax, charged on the average value Depending on the amount of VAT payable, Other taxes on individuals: of the houses. The taxable base consists of VAT returns are filed monthly, quarterly or the total value of the houses minus 50 times annually. Capital duty the average value. The tax rate is 0.591% for Source of tax law: Grondwet voor het No 2018. Koninkrijk der Nederlanden (Constitution Stamp duty Compliance for individuals: of the Kingdom of the Netherlands), as No specified in various tax acts Tax year Capital acquisitions tax Calendar year Tax treaties: The Netherlands has A 6% real estate transfer tax is payable concluded more than 100 tax treaties. on the acquisition of real property in the Filing and payment Netherlands, or certain related rights. In principle, the tax return must be filed The Netherlands signed the OECD A reduced rate of 2% applies on the before 1 May of the following calendar year. multilateral instrument on 7 June 2017. acquisition of a residence. Payment must be made upon assessment. Tax authorities: Belastingdienst (Tax Real property tax Penalties revenue) Municipalities impose tax at varying rates on Administrative penalties may be imposed owners of real property in their municipality for late filing or failure to file a Dutch return, on an annual basis. Real property tax is or the late payment or nonpayment of not deductible for individual income tax tax. Criminal penalties are imposed if the purposes. Dutch authorities can prove fraud or gross negligence.

International Core of Excellence 2018 65 Investment basics Russia Currency Russian Ruble (RUB) Foreign exchange control Some exchange control restrictions apply to Russian residents (including Russian citizens and legal entities) and to foreign currency transactions, but none apply to the distribution of profits to a nonresident entity. For these transactions, residents must provide the authorized bank with the documents confirming the decision to distribute the profits. Residents and nonresidents can hold bank accounts in any currency. Estella Dzhantukhanova Director As from 1 January 2018, all Russian citizens and foreign holders of Russian residence Tel: +1 212 436 3928 permits are considered Russian “currency control residents” that are required to notify [email protected] the tax authorities when a foreign bank account is opened, changed or closed and when there is a movement of funds in the foreign account. The legislation also restricts the use of foreign bank accounts by Russian currency control residents, and all transactions Corporate taxation: made via foreign bank accounts must be in line with the Russian law. Persons that have spent less than 183 days in Russia in a reporting period are exempt from the reporting Residence requirement and restrictions on the use of foreign bank accounts. An entity is a Russian resident if it is incorporated in Russia, if its actual place of Accounting principles/financial statements management is in Russia or if it is deemed Russian accounting standards apply and financial statements generally must be to be a Russian resident under an applicable prepared annually. tax treaty. Companies with securities traded on a stock exchange, banks, insurance companies, non-state pension funds, management companies of investment funds, investment unit Basis trusts, clearing companies, federal state-owned and joint stock companies the shares Russian tax residents are taxed on of which are federal property (as per the list approved by the Russian government) and worldwide income; foreign entities are any other companies that prepare consolidated financial statements as required by taxed on income from commercial activities the law or their registration documents are required to prepare consolidated financial undertaken in Russia and on passive income statements under IFRS. This requirement is in addition to stand-alone statements from Russian sources. prepared under Russian accounting standards. Annual consolidated IFRS financial statements must be audited, presented to shareholders and filed with the Central Bank. Taxable income Profits tax is imposed on a company’s As from 19 June 2017, the reporting year for purposes of the IFRS consolidated financial statements can be a year other than a calendar year. This decision must be specifically profits, which consist of business/trading documented in the entity’s articles of association. Certain types of entities are not income, passive income and capital eligible, including banks, insurance and clearing companies, non-state pension and gains. Normal business expenses may be investment funds, certain state-owned companies and other companies that are deducted in calculating profits, provided required to include their IFRS consolidated financial statements in the annual report. they are economically justified, incurred in Principal business entities the generation of income and supported by These are the public and nonpublic joint stock company, limited liability company, adequate documentation. partnership, sole proprietorship and branch of a foreign entity. Taxation of dividends Dividends received by a Russian entity from Russian and foreign entities generally Rate Participation exemption are subject to tax at a rate of 13% (but see 20% To qualify for the participation exemption “Participation exemption,” below). for dividends, a Russian company must hold Surtax a participation of at least 50% for at least Capital gains No Capital gains are taxed as ordinary income 365 days. A foreign investee must not be a at the normal corporate rate (but see Alternative minimum tax resident in a “black list” jurisdiction. No “Participation exemption,” below). A participation exemption is available for Losses Foreign tax credit capital gains on the sale of unlisted shares Losses (except for losses derived from Foreign tax paid may be credited against and participations in Russian companies activities subject to a 0% profits tax rate) Russian tax on the same profits, but the and listed shares in high-technology Russian may be carried forward for an unlimited credit is limited to the amount of Russian tax companies (and, until 2023, listed bonds of period but cannot exceed a cap (for 2017- payable on the foreign income. Russian companies and listed investment 2020, the cap is 50% of the tax base of the units that are considered high-technology) current period). The carryback of losses is acquired after 1 January 2011 and held for not permitted. more than five years.

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Holding company regime Technical service fees to 8.5% of the full amount of an individual’s No No employment income, depending on the degree of inherent risk in the employee’s Incentives Branch remittance tax occupation. Various types of tax incentives are available. No For example, a reduction in the profits Income earned by foreign employees hired Other tax rate to 15.5% (from the standard 20% under the highly-qualified specialist regime Other Russian-source payments made tax rate), a property tax exemption and is exempt from social security contributions to a foreign company may be subject to other benefits are available for investment (only accident insurance contributions are withholding tax at various rates. projects in many regions. Deductions from due). income chargeable to profits tax may be Other taxes on corporations: Most foreign nationals, including citizens of available for companies incurring qualifying the Eurasian Economic Union are subject to capital expenditure. Special tax regimes Capital duty the same contributions as Russian nationals. (e.g. regional investment projects, special No investment contracts or “territories of Payroll tax Employees are not obligated to pay social advanced social and economic growth”) Russian organizations, as well as branches security contributions in Russia. allow a 0% profits tax rate and other and representative offices of foreign Stamp duty benefits. Companies that participate in the organizations established in accordance Stamp duty may be levied on certain Skolkovo Innovation Center may benefit with the Russian law, are required to transactions and documents, but it usually from a 10-year tax holiday. A 0% profits withhold personal income tax on the income is nominal. tax rate applies to a range of educational paid to individuals. and medical services. A 150% deduction Transfer tax for profits tax purposes is available to all Real property tax No companies with qualifying R&D expenditure. See under “Other,” below. Other Technology and software companies may Social security Property tax is a regional tax, with rates benefit from reduced social security rates. The employer is required to make pay- established by the regional authorities related contributions for pension, social Withholding tax: (as well as tax exemptions not directly and medical insurance. The tax authorities provided in the tax code). The tax base Dividends administer most types of social security includes immovable fixed assets and certain Dividends paid to a foreign entity or to a payments. The social security contribution movable fixed assets owned by the taxpayer, nonresident individual are subject to a 15% rates for 2018 are as follows: for pension excluding land (which is subject to land withholding tax, unless the rate is reduced contributions, 22% of an employee’s tax). The tax base generally is calculated under a tax treaty. remuneration up to RUB 1,021,000, plus based on the depreciated book value of the 10% of any excess over this cap; for Interest assets as of the balance sheet date, and social insurance contributions, 2.9% of Interest paid to a nonresident is subject the tax rate for the property cannot exceed an employee’s remuneration up to RUB to a 20% withholding tax, unless the rate 2.2% (1.1% for movable property, unless 815,000 (the rate is 1.8% of an employee’s is reduced under a tax treaty. Russian exempt under the regional legislation). For remuneration in the case of foreign companies are exempt from the withholding certain types of administrative, business nationals in Russia on a temporary basis); obligation on Russian-source income of and trading premises, real estate owned and for medical insurance, 5.1% of the full foreign legal entities within Eurobond-like by foreign companies and not allocated to remuneration. structures, under certain conditions. a permanent establishment in Russia and Mandatory accident insurance contributions certain other premises, the tax base is the Royalties are paid separately from the above cadastral value of the real estate and the tax Royalties paid to a nonresident are subject insurance contributions to the Social rate for the property cannot exceed 2%. to a 20% withholding tax, unless the rate is Insurance Fund, at rates ranging from 0.2% reduced under a tax treaty.

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Land tax is a municipal tax, and its Controlled foreign companies Disclosure requirements application is governed by local regulations A Russian (corporation or individual) is taxed Certain information must be disclosed to and the tax code. The local authorities set on the undistributed profits of a CFC at a the tax agent on persons exercising rights to the land tax rate. Under the tax code, these rate of 20% or 13%, respectively. The CFC certain securities issued by Russian entities rates may not exceed 0.3% of the cadastral provisions are applicable where an entity or and accounted for in the depositary account value of land that is used for agricultural an individual that is considered a Russian tax of a foreign nominee holder (including purposes and dwellings, and 1.5% of the resident has an interest of more than 25% certain types of shares and bonds), foreign cadastral value of other land. The tax (10%, if more than 50% is owned, directly authorized holder or depositary program. base is the cadastral value of the land as or indirectly, by Russian tax residents) in a This information may be made available to determined under the land legislation. nonresident entity. the tax authorities in some cases. Where the information is not disclosed, a 30% A threshold exemption for inclusion of a Anti-avoidance rules: withholding tax may be applied to the CFC’s undistributed profits in the tax base income derived from such securities (except Transfer pricing of a Russian entity or individual is set at RUB dividends). Comprehensive transfer pricing rules, 10 million. which are substantially in line with OECD Russian tax residents are required to notify Where the CFC rules apply, the relevant principles, apply. Acceptable transfer pricing the Russian tax authorities of the following: methods are the comparable uncontrolled profits of the CFC are computed based price method, the resale price method, the on its stand-alone financial statements if •• A direct and/or indirect participation in cost plus method, the comparable profits at least one of the following conditions is a foreign company if the participation method and the profit split method. satisfied: exceeds 10%;

Transfer pricing documentation •• The auditor’s opinion with respect to the •• The establishment of a foreign structure requirements apply (see also below under CFC’s financial statements is presented that is not a legal entity; and “Disclosure requirements”). It is possible to and the opinion is not negative, and the •• Any interest in a CFC in which Russian tax obtain advance pricing agreement. auditor does not refuse to express this residents exercise control. opinion; and/or Thin capitalization In addition, foreign entities owning The thin capitalization rules restrict the •• The CFC is a tax resident in a country that immovable property in Russia that is subject deductibility of interest on loans granted has concluded a tax treaty with Russia, to property tax are required to disclose by certain foreign and Russian affiliated and the country exchanges information information regarding their direct and parties or guaranteed by such parties with Russia. indirect shareholders to the Russian tax (loans guaranteed by affiliated parties but If the conditions for computing a CFC’s authorities. granted by non-affiliated banks generally profits based on its financial statements Legal entities must determine and maintain can be excluded from the scope of the thin are not satisfied, the CFC’s profits must information on their ultimate beneficial capitalization rules). The maximum debt-to- be computed in accordance with the owners and update the data annually under equity ratio is 3:1 for related legal entities general Russian tax rules. In addition, the Russian anti-money laundering legislation. in general, and 12.5:1 for banks and leasing general rules can be used at the taxpayer’s companies. Excess interest is nondeductible discretion (this approach, if chosen, must be Russia has committed to the automatic by the borrower for Russian profits tax used for five consecutive tax periods). exchange of information under the common purposes and is recharacterized as a reporting standard starting from 2018, with dividend distribution subject to dividend 2017 as the first reporting period. withholding tax.

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Non-Russian financial institutions are Rulings Special rules apply for income derived required to report certain information to the Opinions of the tax authority may be from transactions with securities issued tax authorities on Russian account holders granted to large taxpayers within the by Russian entities and delivered by on an annual basis (i.e. “Russian FATCA”). horizontal tax monitoring procedure. depositaries to foreign entities acting on behalf of an individual. Russia has adopted the three-tiered An advance pricing agreement may be approach to transfer pricing documentation obtained by the largest taxpayers under the Deductions and allowances (i.e. the local file, master file and CbC report) transfer pricing rules. Subject to certain restrictions, resident for large multinational groups. The first taxpayers may be able to claim tax reporting period for which large MNEs must Personal taxation: deductions related to property and file the CbC report is fiscal year (FY) 2017 Basis investments (in securities and in personal (voluntary filling also is available for FY 2016). Russian residents are taxed on their investment accounts), charitable worldwide income. Nonresidents are taxed contributions, voluntary pensions, life Compliance for corporations: only on Russian-source income. insurance and medical and education Tax year expenses. A standard deduction applies to Residence Calendar year. individuals with very low income. An individual is resident if he/she spends Consolidated returns 183 days or more in Russia during a A deduction up to RUB 2 million is Russian companies forming a group with calendar year. granted on the acquisition of real estate; 90% (or more) direct or indirect ownership the deduction is up to RUB 3 million for Filing status may file a consolidated corporate income mortgage interest. Taxable income from Each individual must file a tax return; joint tax return for the preceding calendar year if the sale of property (except for immovable filing or assessment for spouses is not total tax payments exceeded RUB 10 billion property) that was owned for less than permitted. and revenue and assets exceeded RUB 100 three years may be decreased by expenses billion and RUB 300 billion, respectively, Taxable income incurred, or by a minimum deduction of calculated according to Russian accounting Taxable income consists of any receipt (in RUB 1 million (for immovable property) and standards. cash or in kind) by an individual, or that RUB 250,000 (for other property, except is subject to an individual’s discretionary securities). Taxpayers electing to file a consolidated disposal, subject to certain exceptions. group return must continue to file as a The minimum deduction applicable to Profits earned from self-employment consolidated group for at least five years. the sale of nonresidential property is RUB activities generally are calculated under the 250,000. Filing requirements same rules as profits derived by companies. The annual profits tax return must be filed Rates Capital gains by 28 March after the close of the previous A flat rate of 13% applies to Russian Income derived from the sale of shares of a tax year. residents on most types of income, and a Russian company, unlisted stock in a Russian 30% rate applies toRussian-source income Penalties company or listed stock in a high-technology of nonresidents, unless the rate is reduced Penalties generally are 20% of the relevant Russian company where the shares are under a tax treaty. tax (or 40% if the default is intentional), plus acquired after 1 January 2011 and held late payment interest and fixed penalties. for more than five years, is exempt. Gains Dividends are taxed at a rate of 13% for Criminal penalties also may apply. from the sale of other types of property, residents and 15% for nonresidents, unless except for immovable property, by Russian the rate is reduced under a tax treaty. residents are exempt after a three-year holding period. A five-year holding period applies to immovable property that is acquired as from 1 January 2016.

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A 30% withholding tax may apply to certain Net wealth/net worth tax Rates income from securities if the relevant No The standard VAT rate is 18%; reduced information is not disclosed to the tax agent rates of 10% and 0% may apply in certain Social security (see “Disclosure requirements” under “Anti- circumstances (e.g. the export of goods). Only a self-employed individual must avoidance rules,” above). contribute to social security since Registration The employment income of highly qualified contributions are borne by the employer. A foreign entity cannot register for VAT foreign professionals is taxable at a rate of purposes only; general tax registration is 13% (even during periods of nonresidence Compliance for individuals: applicable for all taxes. As from 1 January for tax purposes), rather than the 30% rate Tax year 2017, foreign entities providing e-services that otherwise would apply. Calendar year that are deemed to be supplied in Russia to private customers, as well as related As from 2018, deemed income of Russian Filing and payment foreign intermediaries, must register for tax residents from beneficial loans (i.e. Tax on employment income is withheld tax purposes and account for and pay any where the interest rate on loans made in by the employer and remitted to the tax relevant VAT. The same rules will apply as foreign currency is lower than 9%) received authorities. In certain cases, individuals from 1 January 2019 with respect to supplies from affiliated parties is taxed at a 35% must report their income by filing a tax of e-services by foreign entities and foreign rate. (Prior to 2018 the 35% rate applied to return no later than 30 April following intermediaries to businesses. deemed income from all beneficial loans.) the year of assessment, with any tax outstanding due by 15 July. Filing and payment Other taxes on individuals: The general VAT return is filed on a quarterly Foreign nationals leaving Russia must Capital duty basis. Payments are made in three equal submit an exit tax return no later than one No monthly installments and are due no later month before departure and pay any tax than the 25th calendar day of each of the Stamp duty due within 15 days of the filing date. three consecutive months following the Stamp duty is levied, but it is usually Penalties reporting quarter (with certain exceptions, nominal. Penalties apply for noncompliance. No e.g. reverse charge VAT and VAT payable by Capital acquisitions tax extensions are available. foreign suppliers of e-services). No Source of tax law: Tax Code of the Russian Value added tax: Real property tax Federation Taxable transactions Tax is imposed annually at rates ranging Tax treaties: Russia has concluded 82 VAT is levied on the sale of goods, the from 0.1% to 2% of the cadastral value or the income tax treaties. Russia signed the OECD provision of services deemed to be supplied total inventory value, adjusted by a “deflator” multilateral instrument on 7 June 2017. coefficient. in the Russian territory, the transfer of property rights and the import of goods. Tax authorities: Federal Tax Authority Inheritance/estate tax No

70 Investment basics Switzerland Currency Swiss Franc (CHF) Foreign exchange control No restrictions are imposed on the import or export of capital. Accounting principles/financial statements Swiss GAAP. Financial statements must be prepared annually. Principal business entities These are the corporation (AG), limited liability company (GmbH) and branch of a Moise Schoenmann foreign company. Senior Manager Tel: +1 212 313 1642 [email protected]

Corporate taxation: reassessed for tax purposes. Capital gains Participation exemption derived from the sale of a participation of at Dividends generally are taxable for the Residence least 10% in a company (whether resident or recipient company, although relief is granted Companies with their legal seat (registered nonresident) benefit from participation relief for dividends received from a qualifying office) or place of effective management in if the participation has been held for more participation in a resident or nonresident Switzerland are considered resident for tax than one year. company. A participation is considered purposes. qualifying if the company owns at least 10% Losses Basis of the capital of the company paying the Losses may be carried forward for seven Resident companies are taxed on their dividends or the participation has a value of years and may be set off against any income worldwide income, except for profits at least CHF 1 million. or capital gains. The carryback of losses is derived from foreign branches and foreign not permitted. Holding company regime immovable property, which are tax-exempt. The holding company tax privilege is granted Nonresident companies are taxed on Rate to companies whose primary statutory permanent establishment/branch income Tax is imposed at both the federal and purpose is the holding of participations and/or immovable property located in cantonal/communal levels. The federal tax (i.e. when at least 2/3 of the total assets Switzerland. rate of 8.5% is levied on net income (since consist of investments in subsidiaries or, income and capital taxes are deductible in Taxable income alternatively, at least 2/3 of income consists determining taxable income, the effective Corporate income tax is levied on a of dividends) and that have no active trade tax rate is 7.8%). Taking into account both company’s net profits, which consist of or business in Switzerland. A company that the federal and the cantonal/communal business/trading income, passive income enjoys the holding company privilege is income tax, the combined effective income and capital gains. Foreign-source income fully exempt from cantonal and communal tax rate typically is between 12% and 24% is included in taxable income, but relief is income taxes. The effective federal income for companies subject to ordinary taxation, granted for dividend income from qualifying tax rate on nondividend income is 7.8%. depending on the place of residence. participations. Business expenses are Incentives deductible in computing taxable income. Surtax The mixed company tax privilege is granted Gains and losses from the conversion of No to companies with predominantly foreign financial statements in a functional currency Alternative minimum tax business activities. A business activity is into CHF are disregarded for tax purposes. No deemed to be performed predominantly Taxation of dividends outside Switzerland if generally at least Foreign tax credit See under “Participation exemption.” 80% of the total gross income is derived Foreign-source income is included in taxable from foreign sources and at least 80% of Capital gains income, but relief is granted for dividend expenses are incurred abroad. Foreign- There is no specific capital gains tax levied at income from qualifying participations. source income of a mixed company is taxed the federal level. Capital gains on the sale of Foreign-source income is taxed net of at a combined effective rate of typically assets are treated as ordinary income (and foreign taxes; no credit is granted for between 9% and 11% (including federal tax). losses are deductible), regardless of how foreign tax paid (except for nonrefundable Swiss-source income is taxed at ordinary long the assets have been held. If assets are withholding tax on dividends, interest and rates for cantonal/communal and federal sold to a shareholder or related corporation royalties under an applicable tax treaty). at a price below market value, gains may be

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income tax purposes. Incentives also are Technical service fees Transfer tax available for domiciliary companies, principal Switzerland does not levy withholding tax on The transfer of securities by Swiss securities companies and finance branches. Tax service fees. dealers is subject to a 0.15% tax on Swiss holidays may be available. securities and a 0.3% tax on foreign Branch remittance tax securities. Withholding tax: No Other Dividends Other taxes on corporations: Corporate net wealth tax is imposed at Dividends paid to a nonresident are Capital duty varying rates depending on the canton and subject to a 35% withholding tax. Under No, but see under “Stamp duty.” the type of tax privilege (typically between the Switzerland-EU agreement, which 0.001% and 0.5%). The net wealth tax may provides Switzerland access to benefits Payroll tax be credited against the income tax liability in similar to those in the EU parent-subsidiary There is no general payroll tax, but payroll many cantons. directive, withholding tax is reduced to 0% tax is levied on the wages of foreigners on cross-border payments of dividends without permanent Swiss residence. For all Anti-avoidance rules: between related companies residing in EU other Swiss resident employees, wages are Transfer pricing member states and Switzerland when the taxed as part of ordinary income. Switzerland has no formal transfer pricing capital participation is 25% or more and Real property tax legislation or documentation requirements, certain other criteria are met. In addition, Some cantons levy real property tax. although all related party transactions with many tax treaties provide for reduced Swiss entities must be carried out on arm’s rates for qualifying investments. The Social security length terms. In general, Switzerland follows repayment of nominal share capital and The employer generally is required to pay the OECD transfer pricing guidelines. See capital contribution reserves is exempt from 50% of an employee’s social security and also “Disclosure requirements,” below. withholding tax. pension fund contributions. The employer must deduct contributions from salary and Thin capitalization Interest remit the total amount to the social security Safe haven thin capitalization rules require Under domestic law, no withholding tax authorities. a minimum equity ratio for each asset class is levied on interest. Exceptions apply to (e.g. receivables may be debt financed by interest derived from deposits with Swiss Stamp duty 85%, investments by 70% and intellectual banks, bonds and bond-like loans, which A 1% stamp duty is levied on contributions property by 70%). In addition, safe haven are subject to a 35% withholding tax at the to the equity of a Swiss company, whether interest rates apply. federal level. Interest paid to a nonresident in cash or in kind. A CHF 1 million exemption on receivables secured by Swiss real threshold applies to the issuance of Controlled foreign companies estate is subject to tax at source. The 35% shares. Reorganizations, such as mergers, No withholding tax and the tax at source levied spinoffs of corporate assets or transfers Disclosure requirements under domestic law can be reduced under a of a company’s domicile from abroad to CbC reports for qualifying enterprises must tax treaty. Switzerland typically are exempt from stamp be exchanged as from 2018. Advance tax duty. Royalties rulings may be subject to the spontaneous Switzerland does not levy withholding tax on exchange of information. royalties.

72 CH

Other Residence The cantons levy a separate capital gains tax Measures against treaty abuse may apply, An individual is deemed to be resident in on the sale of real property, but no canton including a base erosion test. Switzerland if he/she intends to stay in levies tax on personal capital gains from Switzerland permanently (as indicated by movable property that is not considered an Compliance for corporations: the location of the center of personal and asset of a business. business interests), if he/she is physically Tax year Deductions and allowances present in Switzerland for at least 30 days Accounting year Various expenses may be deducted in to carry out a professional activity or if he/ computing taxable income, including Consolidated returns she is physically present in Switzerland for at interest on loans, alimony and certain Consolidated returns are not permitted; least 90 days (regardless of purpose). each company is required to file a separate donations. Personal allowances are granted return. Filing status to the taxpayer, his/her spouse and A married couple is assessed jointly. dependent children. Filing requirements There is combined tax return filing for both Taxable income Rates federal and cantonal income tax purposes. Federal income tax applies to all income Rates for federal tax are progressive up to A self-assessment procedure applies. Filing derived from compensation for work 11.5%. Cantonal/communal income taxes deadlines depend on the canton. performed and income from capital (both also apply. real and movable property). Gross income Penalties from Swiss capital is taxable; income from Other taxes on individuals: Penalties apply for late filing or failure to file. foreign capital is taxed only after deduction Capital duty Rulings of nonrefundable foreign withholding No Advance rulings may be obtained from taxes. At the federal level, partial taxation Stamp duty the tax authorities on various matters, applies to income from participations of No such as tax consequences of a planned at least 10%. Similar relief provisions have transaction or the tax-privileged treatment been enacted, or are being enacted, at the Capital acquisitions tax of a company. See also “Disclosure cantonal level. All cantons levy taxes on No requirements,” above. personal income, with deductions that vary from the federal deductions. Real property tax Personal taxation: Some cantons levy real property tax. Capital gains Basis Capital gains and capital appreciation Inheritance/estate tax Resident individuals are taxed on their derived from the sale or realization of assets There is no federal inheritance and gift tax, worldwide income, except for profits from through the increased value of tangible and although the cantons may levy the tax. foreign businesses, foreign branches and intangible assets of a business are subject Net wealth/net worth tax foreign immovable property, which are tax- to tax. Gains realized on the sale of shares There is no federal tax, but the cantons levy exempt. Nonresidents are taxed on Swiss or real property generally are not subject to net wealth/net worth tax. employment income, business profits and federal tax. profits attributable to Swiss immovable property.

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Social security Penalties Registration Federal old age and disability insurance Penalties apply for late filing or failure to file. Enterprises conducting business in (AHV/IV/EO) is mandatory for all employees. Switzerland and whose annual worldwide The annual contribution of 10.25% of Value added tax: turnover exceeds CHF 100,000 must register total employee remuneration (with no Taxable transactions for VAT purposes, even if Swiss VAT-able ceiling) is divided between the employer VAT applies to the sale of goods and services turnover is lower or minimal. and employee. The employer is required in Switzerland, and to the import of goods Filing and payment to deduct contributions from salary and and services into Switzerland. Exports VAT returns generally must be filed remit the total amount to the social security of goods and most services provided to quarterly, and the relevant VAT amount authorities. Professional pension plans are nonresident recipients are, in principle, zero- remitted to the federal tax authorities within mandatory for employees. Private pension rated. The acquisition and sale of intellectual 60 days after the end of quarter. plans are voluntary. property are VAT-able transactions. Source of tax law: Direct Federal Tax Compliance for individuals: Rates Law (DBG), Tax Harmonization Law (StHG), The standard VAT rate is 8% (2017) and Tax year Withholding Tax Law (VStG), Stamp Tax Law 7.7% (2018). Certain goods and services Calendar year (StG), VAT Law (MWSTG) and various federal are subject to a reduced rate of 2.5% (2017 decrees/ordinances and cantonal tax laws Filing and payment & 2018) and others (e.g. most banking Filing deadlines vary from canton to canton services, insurance premiums, residential Tax treaties: Switzerland has concluded and apply for both federal and cantonal/ real estate, education, health and regulated more than 80 treaties. Switzerland signed communal taxes. Cantons tax at source the casinos) are exempt. A special 3.8% (2017) the OECD multilateral instrument on 7 June wages of foreigners working temporarily in and 3.7% (2018) rate applies to the hotel and 2017. Switzerland (i.e. the employer must deduct lodging industry. Tax authorities: Federal, Cantonal and the tax from salary and remit it on behalf of Communal Tax Administrations the foreign employee to the tax authorities).

74 Investment basics United Kingdom Currency Pound Sterling (GBP) Foreign exchange control No Accounting principles/financial statements UK GAAP/IAS. Financial statements must be filed annually. Principal business entities These are the public and private limited liability company, limited liability Miles Humphrey partnership, limited partnership, partnership, real estate investment trust (REIT) Partner and branch of a foreign corporation. Tel: +1 212 436 6184 [email protected]

Corporate taxation: buildings or other tangible fixed assets. The exemption also can apply to small Instead, tax relief is available for qualifying companies receiving dividends and Residence capital expenditure on plant and machinery distributions from UK companies or foreign A company is UK resident if it is incorporated (including certain integral features in companies resident in a jurisdiction that in the UK or its place of central management buildings) at an annual writing-down has concluded a tax treaty with the UK that and control is in the UK. allowance of 8%/18% on a reducing-balance includes a nondiscrimination provision. Basis basis, depending on the type of asset. Full (A small company is a “micro or small A UK resident company is subject to relief is available for the first GBP 200,000 enterprise,” as defined by the EU). corporation tax on worldwide profits and of expenditure (excluding automobiles) Capital gains gains (see “Taxable income,” below), with incurred per annum per business/group of Capital gains form part of a company’s credit granted for overseas taxes paid. companies. taxable profits. Gains or losses on the Foreign profits and losses (including those There is a limit on deductions that can be disposal of substantial shareholdings in both from certain capital assets) arising from taken for financing costs. These “interest UK and foreign companies can be exempt. a permanent establishment (PE) of a UK restriction” rules broadly apply where the The main conditions, broadly, require the resident company may be excluded by aggregate tax deductions for net financing selling company to have continuously making an irrevocable election. The effect costs of UK group companies exceed owned at least 10% of the shares of the of the election may be deferred where the either 30% of tax EBITDA or, if the taxpayer company being sold for at least 12 months PE has incurred a loss. Anti-diversion rules so elects, the ratio of group net interest in the six years before disposal, and the based on the CFC rules (see “Controlled expense compared to accounting EBITDA company being sold must be trading or foreign companies,” below) may restrict the (capped at 100%). There is a de minimis the holding company of a trading group profits that can be excluded from the charge exemption from the interest restriction (without, to a substantial extent, any to UK tax by virtue of the election. rules, under which the first GBP 2 million of nontrading activities) for at least 12 months A nonresident company is subject to tax interest expense is allowable. Where certain before the disposal (longer in some cases). only in respect of UK-source profits, which conditions are satisfied, restricted interest In certain circumstances, the company include the income of a UK PE of the can be carried forward and deducted in being sold also must be either trading or nonresident, certain income and gains from future periods if additional capacity arises. the holding company of a trading group UK real estate, certain UK-source interest immediately after the disposal. There is a Taxation of dividends income and royalties and gains on assets broader exemption for certain “qualifying A dividend exemption applies to most used for the purposes of a PE’s trade. institutional investors.” dividends and distributions unless received Taxable income by a bank, an insurance company or other A nonresident company generally is not For a UK resident company, corporation financial trader. Dividends received by a subject to tax on its capital gains unless tax is imposed on trading income, several non-small UK company on most ordinary the asset is held through a UK PE or, in baskets of nontrading income and shares and many dividends on nonordinary certain cases, where UK land/property is capital gains. Normal business expenses shares from another company (UK or owned. Where an election has been made may be deducted in computing taxable foreign) are exempt from UK corporation to exclude the profits of PEs (see “Basis,” income, provided these are not capital tax, with no minimum ownership period above), the exclusion also may apply to gains expenditure. No deduction is available for or minimum ownership level requirement. and losses of certain capital assets of the PE. the depreciation or amortization of land,

International Core of Excellence 2018 75 UKJP

The annual tax on enveloped dwellings A 25% rate applies as from 1 April 2015 companies may claim an “above the line” (ATED)-related capital gains applies to both where multinational companies use artificial R&D credit at a rate of 12% as from 1 UK resident and nonresident companies arrangements to divert profits overseas to January 2018. and certain other vehicles disposing of UK avoid UK tax. A patent box regime allows companies residential property valued at more than A 28% rate applies to gains that arise on to elect to apply a preferential rate of GBP 500,000. Exemptions from this charge disposal of UK residential property where corporation tax of 10% to all profits are available in various circumstances. the gain is ATED-related (see “Capital gains,” attributable to qualifying patents. All gains on the disposal of UK residential above). There are creative industry tax reliefs of property held by nonresident individuals, Surtax up to an additional 100% deduction for trustees, partners, some funds and No qualifying expenditure on film production, narrowly-held companies are taxed. animation, video gaming, high-end television Alternative minimum tax Losses broadcasts (including children’s television No Trading losses generally can offset total programs), orchestral concerts and profits of the year (including capital Foreign tax credit theatrical productions. gains), with carryback of the excess to the A UK resident company is subject to preceding year permitted. Trading losses corporation tax on its worldwide profits Withholding tax: arising before 1 April 2017 may be carried (including capital gains), with credit given for Dividends forward and set against trading profits of most overseas taxes paid. As noted above There typically is no withholding tax on future years indefinitely. Trading losses (see “Basis,” above), a UK company may elect dividends paid by UK companies under arising after 1 April 2017 generally can be to exempt the profits and losses of foreign domestic law, although 20% withholding carried forward and set off against any PEs from UK corporation tax, provided tax generally applies to distributions paid profits, or group relieved. In both cases, certain conditions are satisfied. No credit is by a REIT from its tax-exempt rental profits carried forward losses are restricted to available where such profits are excluded (subject to relief under a tax treaty). 50% of profits above a groupwide GBP 5 from UK taxation. million limit per year. If there is a change Interest Participation exemption of ownership of the company and a major Interest paid to a nonresident is subject Most dividends, including foreign dividends, change in the nature and conduct of the to 20% withholding tax, unless the rate is are exempt (see “Taxation of dividends,” trade within specified time limits, trading reduced under a tax treaty or the interest is above). In addition, capital gains on the losses may be lost. exempt under the EU interest and royalties disposal of substantial (i.e. generally 10% or directive. A reduction of the withholding Capital losses may be offset only against more) shareholdings in certain companies tax rate under a tax treaty is not automatic; capital gains and only may be carried are not subject to corporation tax (see advance clearance must be granted by the forward. “Capital gains,” above). UK tax authorities.

Rate Holding company regime Royalties The main rate of corporation tax is 19%, See “Participation exemption,” above. Royalties paid to a nonresident are subject reducing to 17% as from 1 April 2020. The Incentives to a 20% withholding tax, unless the rate is main rate does not apply to “ring fence” An enhanced tax deduction of 230% is reduced under a tax treaty or the royalties profits from oil rights and extraction available for certain R&D expenditure for are exempt under the EU interest and small or medium-sized companies. Large royalties directive. Advance clearance is not required to apply a reduced treaty rate.

76 UK

Technical service fees For residential property, the SDLT rates are Anti-avoidance rules: No between 0% and 12% (increased to 15% for Transfer pricing certain property), depending on the value Branch remittance tax Comprehensive transfer pricing provisions of the property. The rates for nonresidential No apply to transactions with both domestic property are 0% to 5%. A 15% rate applies to and foreign companies. The UK transfer purchases of residential property valued at Other taxes on corporations: pricing rules follow OECD principles. The more than GBP 500,000 by companies and rules include a requirement to prepare Capital duty certain other vehicles, though relief from the documentation to demonstrate compliance No 15% rate is available for some businesses. with the arm’s length standard. Advance Payroll tax In certain circumstances, transfers within pricing agreements are possible in certain No a tax group may be free from stamp duty/ situations. SDLT. Real property tax Thin capitalization The national nondomestic rate is payable Transfer tax The arm’s length principle applies. There by occupiers of business premises. Local See “Stamp duty,” above. are no safe harbor provisions. Advance thin authorities collect the tax by charging a capitalization agreements are available. (See Other uniform business rate, which is deductible “Taxable income,” above, for debt cap rules.) in computing income subject to corporation The ATED is an annual tax charge that tax. applies where companies and certain other Controlled foreign companies entities own UK residential property valued CFC provisions are applicable where, Council tax applies to the occupation of at more than GBP 500,000, regardless broadly, a UK company has a direct or domestic property. of the residence of the entity owning the indirect interest of at least 25% in a Social security property. The amount of ATED payable nonresident company that is controlled Employers are required to make earnings- depends on the property value band in by UK residents. The regime operates related social security contributions, which the property is classified. Relief on an income stream basis. There is a together with employee payroll deductions from ATED is available where, broadly, the “gateway” test and a number of provisions (see “Other taxes on individuals,” below). property is used for business purposes and that may apply to exempt a company from is not occupied by a person connected with the rules. Where the CFC rules apply, the Stamp duty the company or other entity that owns the relevant profits of the CFC are computed Stamp duty at 0.5% applies on the transfer property. as though it were UK resident and its UK of UK shares and is payable by the shareholder is subject to tax accordingly. transferee. Shipping companies may elect to pay In addition, an overseas finance company tonnage tax in lieu of the normal corporation can be fully or partially exempt from a CFC Stamp duty land tax (SDLT) is charged on tax. transfers of UK real property. Land and charge on profits derived from certain buildings transaction tax (LBTT) is charged overseas group financing arrangements. instead of SDLT on Scottish property. Land The partial exemption works by taxing 25% Transaction Tax will be charged instead in of the finance company profits at the main Wales from 1 April 2018. corporate tax rate (resulting in an effective rate of 4.75% based on a main rate of 19%).

International Core of Excellence 2018 77 UKJP

Disclosure requirements Compliance for corporations: Rulings Certain tax arrangements that result in a UK tax legislation includes a number of Tax year UK tax advantage and fall within prescribed anti-avoidance provisions for which advance The tax year is the shorter of 12 months hallmarks must be disclosed to the UK tax statutory clearance may be sought. Also, or the period for which the accounts are authorities by, e.g. a promoter, and the user under a nonstatutory clearance procedure, prepared. must note the use of such arrangements the UK tax authorities’ view of the tax on the tax return. Separately, certain Consolidated returns consequences of specific transactions transactions valued at more than GBP All companies file separate tax returns. can be sought, on a named basis, with full 100 million must be reported to the UK However, losses may be “group relieved” disclosure, where there is both commercial tax authorities within six months of the between UK group companies (broadly, significance and material uncertainty. transaction; these include, for example, the where one is a 75% subsidiary of another issuance of shares or debentures by, or the or both are 75% subsidiaries of the Personal taxation: transfer or permitting the transfer of shares same corporate parent in terms of share Basis or debentures of, a foreign subsidiary of ownership, rights to income and rights on Individuals who are resident and domiciled a UK company. There is a list of excluded a winding up, taking account of direct and in the UK are subject to tax on their transactions that do not need to be indirect holdings). There are other group worldwide income and gains. Different reported. rules that apply to capital gains allowing, for treatment may apply where a person is UK example, the intragroup transfer of assets The UK has implemented country-by- resident but not UK domiciled. at no gain/no loss for tax purposes or the country reporting requirements under the transfer of gains/losses between group Residence OECD BEPS project that apply to groups members. A statutory residence test applies that with consolidated revenue of EUR 750 is based on a combination of physical million in the previous year. Under the UK Filing requirements presence and connection factors with the rules, a report must be filed with the UK tax The UK operates a self-assessment regime. UK and other jurisdictions. authorities within 12 months of the end of Large companies pay tax in quarterly the fiscal year of the group. installments starting in month seven of Domicile is a concept distinct from residence. their financial year. The tax return must be An individual’s domicile status may be Other filed within 12 months of the period end. determined by the domicile of his/her There are many specific anti-avoidance Electronic filing is mandatory for all company parents or can be acquired by choice. UK rules. tax returns. resident but non-UK domiciled taxpayers can A general anti-abuse rule (GAAR) applies enjoy favorable tax treatment in respect of Penalties across a wide range of taxes, including income and assets outside the UK. Companies are liable to a fixed penalty of corporation tax, income tax, capital gains Individuals who have been resident in at least GBP 100 for failure to file a tax return by the tax and stamp duty land tax. The legislation 15 of the preceding 20 tax years are deemed due date, plus an additional GBP 100 if the gives the UK tax authorities power to to be UK domiciled for all tax purposes. return is not submitted within three months potentially apply the GAAR to counteract tax Individuals who were born in the UK and have of the due date. Further penalties may apply advantages arising from tax arrangements UK domicile at birth and are UK resident will to returns filed at least six months late. Tax- that are abusive. also be deemed UK domiciled for all tax geared penalties can be sought for matters purposes (subject to a short grace period for such as tax returns that are carelessly or inheritance tax purposes) even if they have deliberately incorrect. Interest is paid on late been resident overseas and acquired a paid tax. domicile of choice overseas in the interim.

78 UK

Filing status All gains on the disposal of UK residential The rate of capital gains tax is determined by Individuals file tax returns separately, property held by nonresident individuals, the total of capital gains and income. Capital irrespective of marital status. trustees, partners, some funds and gains tax is payable at a rate of 20% where narrowly-held companies are taxed. an individual is liable to pay income tax at Taxable income the higher or additional rate or the dividend Individuals who are UK resident under the Deductions and allowances upper or additional rate. For 2017/18, if statutory residence test and domiciled in the Individuals are given a personal allowance taxable income is less than GBP 33,500, UK are subject to UK tax on their worldwide deduction from total pre-tax income (GBP the rate of capital gains tax is 10%, except income. Residents who are not domiciled 11,500 for 2017/18). The personal allowance to the extent that the gains, when added to or deemed domiciled in the UK may make for income tax is gradually reduced to nil for income, would exceed the GBP 33,500 limit. a claim for the remittance basis of taxation all individuals with “adjusted net income” In that case, the excess is taxed at 20%. An to apply to overseas income, in exchange above GBP 100,000. 8% surcharge applies for gains on residential for an additional tax liability of GBP 30,000 Rates property and carried interest. per annum for taxpayers who have been UK Income tax is charged at progressive rates. resident for seven out of the previous nine Entrepreneurs’ relief reduces the rate of For 2017/18, the rates for non-savings tax years, and rising to GBP 60,000 once capital gains tax to 10% for certain business income are as follows: 20% (basic rate) on resident for 12 out of the previous 14 tax assets, subject to a lifetime limit of GBP income up to GBP 33,500 (GBP 31,500 for years. The remittance basis also may apply 10 million of gains per individual. No tax is Scottish residents); 40% (higher rate) on without the requirement to make a claim, if payable on gains up to the annual exempt income between GBP 33,501 (GBP 31,501 (broadly) the unremitted overseas income amount of GBP 11,300. for Scottish residents) and GBP 150,000; and and overseas capital gains are less than 45% (additional rate) on income over GBP GBP 2,000 or if certain other conditions are Other taxes on individuals: 150,000. fulfilled. Capital duty Scottish residents are UK resident Capital gains No individuals with a close connection to Individuals who are domiciled and resident Scotland, typically based on the location Stamp duty in the UK are subject to capital gains tax on of their only or main home. Scottish rates Stamp duty at 0.5% is imposed on the all chargeable assets, regardless of where of income tax only apply to non-savings transfer of UK shares. Stamp duty land tax they are situated. Similar to the rules for income. is charged on transfers of UK real property overseas income, an individual who is not (residential and nonresidential). See “Other domiciled or deemed domiciled in the UK In 2017/18, the first GBP 5,000 of dividend taxes on corporations,” above. may make a claim for the remittance basis of income is taxable at 0% (the “dividend taxation to apply to any capital gains on non- allowance”). Dividend income exceeding the Capital acquisitions tax UK assets (see “Taxable income,” above). An allowance is taxed at 7.5%, 32.5% or 38.1%. No annual exemption of GBP 11,300 is available The dividend allowance will reduce to GBP Real property tax to reduce capital gains, except in tax years 2,000 in 2018/19. The national nondomestic rate is payable by where a claim for the remittance basis is The “personal savings allowance” provides individual occupiers of business premises. made. Where individuals who leave the UK a 0% tax rate on “savings income”. The Local authorities collect the tax by charging to become nonresident realize gains in a allowance is GBP 1,000 for basic rate a uniform business rate, which is deductible tax year after their departure, such gains taxpayers, GBP 500 for higher rate in computing taxable income. Council tax normally are not chargeable to UK capital taxpayers or nil for additional rate applies to the occupation of domestic gains tax, unless the individuals are absent taxpayers. property. from the UK for five years or less and they acquired the asset before they left.

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Inheritance/estate tax Compliance for individuals: will exceed this threshold within the next 30 Inheritance tax is charged on property days. Voluntary registration is possible for Tax year passing on death, certain gifts made within businesses making taxable supplies below The tax year is 6 April to the following 5 April. seven years of death and some lifetime this threshold. transfers (e.g. to most trusts). Where due, Filing and payment Deregistration is possible if taxable supplies inheritance tax is payable on assets in Tax on employment income is withheld by fall below GBP 83,000 (for 2017/18). If a excess of GBP 325,000 at a rate of 40% (20% the employer under the Pay As You Earn business does not have a place of business for certain lifetime transfers). (PAYE) system and remitted to the tax in the UK, the registration threshold does authorities. Tax on income not subject to A family home allowance was introduced as not apply. The registration date will be PAYE and capital gains tax is self-assessed. If from April 2017, provided the property is left the earlier of the date the business makes an individual is required to file a tax return, to descendants. This will be added to the taxable supplies in the UK or the date it must be filed by 31 October (or 31 January, existing GBP 325,000 threshold, meaning the business expects it will make taxable if filing online) after the tax year. Payment of the total tax-free allowance for a surviving supplies in the next 30 days. tax is due by 31 January after the tax year. spouse/civil partner will be GBP 1 million by Payments on account of tax may be required Filing and payment 2020/21. The allowance gradually is reduced on 31 January in that tax year and 31 July in VAT returns generally are due on a quarterly for estates worth more than GBP 2 million. the following tax year. basis (taxable persons are allocated one of Transfers between spouses and civil three VAT return periods). A taxable person Penalties partners, during life or upon death, generally also may be allowed to complete returns on Individuals are liable to a penalty of GBP 100 are exempt from inheritance tax unless only a monthly basis. for failure to file a tax return by the due date. the donor spouse has a UK domicile. The penalties escalate if the return is filed A surcharge may be imposed for failure to For non-UK domiciled individuals, only UK more than three months after the due date. file the VAT return by the due date or failure property is subject to inheritance tax. Tax-geared penalties also can be sought for to pay the VAT due. late payment of tax and tax returns that are Net wealth/net worth tax Source of tax law: Income and Corporation carelessly or deliberately incorrect. Interest No Taxes Act 1988, Taxation of Chargeable is paid on tax paid late. Gains Act 1992, VAT Act 1994, Income Tax Social security (Earnings and Pensions) Act 2003, Income National Insurance Contributions (NIC) Value added tax: Tax (Trading and Other Income) Act 2005, are payable by employers, employees and Taxable transactions Income Tax Act 2007, Corporation Tax Act self-employed individuals. For example, for VAT applies to most sales of goods, the 2009, Corporation Tax Act 2010, Taxation 2017/18, weekly paid employees pay NIC at provision of services and imports. (International and Other Provisions) Act a rate of 12% on weekly income between 2010, Inheritance Tax Act 1984 and annual GBP 157 and GBP 866 and 2% on income Rates Finance Acts exceeding this amount. For employers, NIC The standard VAT rate is 20%, with a is payable at a rate of 13.8% on all income in reduced rate of 5% for certain items. There Tax treaties: The UK has concluded excess of GBP 157 per week for 2017/18. For also are some specific zero-rated reliefs and approximately 130 tax treaties. The UK 2017/18, self-employed individuals pay NIC exemptions. signed the OECD multilateral instrument on at a rate of 9% on annual income between Registration 7 June 2017. GBP 8,164 and GBP 45,000 and 2% on the Registration is compulsory for businesses Tax authorities: HM Revenue & Customs excess, together with a fixed charge of GBP whose taxable supplies exceed GBP 85,000 2.85 per week. (for 2017/18) in a given year or where a business expects that its taxable supplies

80 International Core of Excellence 2018 81 As used in this document, “Deloitte” means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte USA LLP, Deloitte LLP and their respective subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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