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Holding Companies of Europe – Tax Planning for European Expansion in a Changing Landscape r u c h e l m a n HOLDING COMPANIES OF EUROPE – TAX PLANNING FOR EUROPEAN EXPANSION IN A CHANGING LANDSCAPE Insights Special Editions TABLE OF EDITORS’ NOTE CONTENTS For several years, the summer edition of Insights has examined the use of holding Editors’ Note companies as part of European tax planning. Introduction .................................. 3 Historically, these plans followed a roadmap designed to deconstruct business op- erations, placing production, financing, and I.P. functions with separate group mem- B.E.P.S. & Holding Companies .. 21 bers in different countries. If the roadmap was carefully followed, European taxes could be driven down in ways that did not result in immediate U.S. taxation under European Tax Law..................... 42 Subpart F. Luxembourg .............................. 60 However, the year 2017 sounded the death knell for old-fashioned cross-border tax planning. By the end of 2017, too many barriers were in place to realistically believe Switzerland ................................ 79 that old planning strategies would still yield benefits. Netherlands ............................... 89 The first barrier consisted of the actions taken by the O.E.C.D. to curtail base ero- sion and profit shifting through the B.E.P.S. Project. The second barrier was a Ireland ..................................... 104 never-ending stream of directives issued by the European Commission and pro- posals by the European Parliament attacking various tax plans involving affiliated Spain ....................................... 115 companies. Finally, the U.S. enacted the Tax Cuts & Jobs Act (“T.C.J.A.”) in late December 2017, which turned cross-border tax planning on its head. The T.C.J.A. United Kingdom ....................... 127 included many changes to U.S. international tax law. Belgium ................................... 162 • The scope of the C.F.C. rules in the U.S. was expanded in ways that not even Congress anticipated. Sweden ................................... 188 • A dividends received deduction with a low ownership threshold replaced the Denmark .................................. 196 indirect foreign tax credit. Austria ..................................... 212 • Outbound transfers of property for use in an active trade or business con- ducted outside the U.S. were made fully taxable for a U.S.-based group. France ..................................... 222 • G.I.L.T.I. provisions were adopted to impose current U.S. tax on a large por- Italy .......................................... 246 tion of a C.F.C.’s operating income. This edition of Insights addresses these and other impediments that must be over- Germany .................................. 268 come in planning cross-border operations. It begins with a detailed overview of post-T.C.J.A. U.S. tax law, comparing old rules with new realities. From there, Cyprus ..................................... 280 B.E.P.S. provisions applicable on a global basis are addressed, followed by Europe- Malta ........................................ 299 an attacks on illegal State Aid and abusive tax planning within Europe. It concludes with detailed explanations of corporate tax rules in 15 European jurisdictions by About Us recognized experts in the respective countries. We hope you enjoy this issue. - The Editors This edition of Insights is based on material written by the same authors and published in different format in the Corporate Tax Practice Series: Strategies for Corporate Acquisitions, Dispositions, Spin-Offs, Joint Ventures, Reorganizations & Restructurings 2018 edited by Louis S. Freeman, available at 1-800-260-4754; www.pli.edu. The copyright is held by the Practising Law Institute, and the material is reproduced with its permission. Insights Special Edition | Table of Contents | Visit www.ruchelaw.com for further information. 2 INTRODUCTION Author GLOBAL TAX PLANNING IN A PRE-2018 WORLD Stanley C. Ruchelman Ruchelman P.L.L.C. Prior to 2018, widely-used tax plans of U.S.-based multinational groups were de- New York, United States signed to achieve three basic goals in connection with European operations: (i) the reduction of European taxes as European profits were generated, (ii) the integration of European tax plans with U.S. tax concepts to prevent Subpart F from applying to intercompany transactions in Europe, and (iii) the reduction of withholding taxes and U.S. tax under Subpart F as profits were distributed through a chain of European companies and then to the global parent in the U.S. Reduction of Taxes in Europe The first goal – the reduction of European taxation on operating profits – often en- tailed the deconstruction of a business into various affiliated companies, which can be illustrated as follows: • Group equity for European operations was placed in a holding company that served as an entrepôt to Europe. • Tangible operating assets related to manufacturing or sales were owned by a second company or companies where the facilities or markets were located. • Financing was provided by a third company where rulings or legislation were favorable. • Intangible property was owned by a fourth company qualifying as an innova- tion box company. All of the authors acknowledge the assistance of Francesca York, a If the roadmap was carefully followed, European taxes on operations could be driv- paralegal at Ruchelman P.L.L.C., for converting 17 separate submissions en down in ways that did not result in immediate U.S. taxation under Subpart F. prepared by persons having a A simplified version of the plan that was widely used by U.S.-based multinational multitude of birth languages into a groups involved the following steps: cohesive and accurate monograph. • Form an Irish controlled foreign corporation (“TOPCO”) that is managed and controlled in Bermuda. • Have TOPCO enter into a qualified cost sharing agreement with its U.S. par- ent providing for the emigration of intangible property to TOPCO for exploita- tion outside the U.S. at an acceptable buy-in payment that could be paid over time. • Have TOPCO form a Dutch subsidiary (“DCO”) to serve as a licensing compa- ny, and an Irish subsidiary (“OPCO”) to carry on active business operations. • Make check-the-box elections for DCO and OPCO so that both are treated Insights Special Edition | Table of Contents | Visit www.ruchelaw.com for further information. 3 as branches of TOPCO. • Have TOPCO license the rights previously obtained under the qualified cost sharing agreement to DCO and have DCO enter a comparable license agree- ment with OPCO. The use of check-the-box entities within Europe eliminated Subpart F income from being recognized in the U.S. A functionally comparable arrangement could be ob- tained for intercompany loans where such loans were required for capital invest- ments. The qualified cost sharing arrangement eliminated the application of Code §367, which otherwise would mandate ongoing income inclusions for the U.S. par- ent as if it sold the intangible property pursuant to a deferred payment arrangement. Any intercompany dividends paid within the group headed by TOPCO were ignored for Subpart F purposes because of the check-the-box elections made by all of TOP- CO’s subsidiaries. At the same time, deferred taxes were not reported as current period expenses on financial statements prepared by the U.S. parent provided the underlying earnings were permanently invested abroad. Meanwhile, earnings were funneled up to the European group equity holder and recycled for further expansion within the European group. Intragroup payments typ- ically did not attract withholding tax under the Parent-Subsidiary Directive (“P.S.D.”) or the Interest and Royalty Directives of the European Commission (“E.C.”). For other U.S.-based groups – primarily, those companies that regularly received dividend payments from European operations – the use of a holding company could reduce foreign withholding taxes claimed as foreign tax credits by the U.S. parent in many instances. This was true especially where the U.S. did not have an income tax treaty in force with a particular country or the treaty provided for relatively high withholding tax rates on dividends. Nonetheless, sophisticated planning was often required to take full advantage of the foreign tax credit because of various limitations and roadblocks that existed under U.S. tax law. Foreign Tax Credit Planning in the U.S. Although the foreign tax credit has often been described as a “dollar-for-dollar re- duction of U.S. tax” when foreign taxes are paid or deemed to be paid by a U.S. parent company, the reality has been quite different. Only taxes that were imposed on items of “foreign-source taxable income” could be claimed as credits.1 This rule, known as “the foreign tax credit limitation,” was intended to prevent foreign income taxes from being claimed as a credit against U.S. tax on U.S.-taxable income. The U.S., as with most countries that eliminate double taxation through a credit system, maintains that it has primary tax jurisdiction over domestic taxable income. The foreign tax credit limitation was structured to prevent so-called “cross crediting,” under which high taxes on operating income could be used to offset U.S. tax on lightly-taxed investment income. For many years, the foreign tax credit limitation was applied separately with regard to eight different categories, or baskets, of in- come designed to prevent the absorption of excess foreign tax credits by low-tax foreign-source income. In substance, this eviscerated the benefit of the
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