Tax Desk Book

Global Practice Guide

Tax Desk Book

A Global Practice Guide prepared by the Lex Mundi Tax Group

This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series at: www.lexmundi.com/GlobalPracticeGuides.

Lex Mundi is the world’s leading network of independent law firms with in-depth experience in 100+ countries. Through close collaboration, our member firms are able to offer their clients preferred access to more than 21,000 lawyers worldwide – a global resource of unmatched breadth and depth.

Lex Mundi – the law firms that know your markets.

www.lexmundi.com

About This Guide

This global practice guide covers key issues in tax formats regarding the types of taxes imposed in each listed jurisdiction, allowed deductions, tax rates and withholdings, residency rules, tax compliance and tax treaties, among other topics.

The descriptions set forth below are intended only as a general overview of the law. No summary can be complete, and the following is not intended to constitute legal advice as to any specific case or factual circumstance. Readers requiring legal advice on any of the specific case or circumstance should consult with counsel admitted in the relevant jurisdiction.

Table of Contents

About This Guide ...... 1 Argentina ...... 3 Australia ...... 14 Bolivia ...... 29 Brazil ...... 34 Colombia ...... 44 Cyprus ...... 64 Dominican Republic ...... 70 Estonia ...... 83 Finland ...... 90 Greece ...... 107 Guatemala ...... 125 Iceland ...... 131 Indonesia ...... 136 Ireland ...... 146 Israel ...... 160 Latvia ...... 172 Lebanon ...... 179 Lithuania ...... 184 Malaysia ...... 195 Malta ...... 206 Nicaragua ...... 215 Pakistan ...... 224 Peru ...... 236 www.lexmundi.com Page 1 © 2012 Lex Mundi Poland ...... 246 Romania ...... 264 Slovak Republic ...... 276 South Africa ...... 283 Spain ...... 303 Sweden ...... 323 Switzerland ...... 332 Thailand ...... 340 Trinidad and Tobago ...... 368 Turkey ...... 375 USA, Arkansas ...... 391 USA, Kansas ...... 398 USA, Mississippi ...... 407 USA, Nebraska ...... 412 USA, Nevada ...... 426 USA, Puerto Rico ...... 432 USA, Utah ...... 446 Venezuela ...... 454

Tax Desk Book

Argentina Prepared by Lex Mundi member firm Marval O’Farrel & Mairal

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

Direct Taxes

I) Income Tax: Income Tax is payable upon the net income obtained during a given fiscal year. As a general rule, income is allocated to the fiscal year in which it accrues. Argentine residents are taxed upon their worldwide income and foreign residents are tax upon the Argentine source income. In principle, all ordinary and necessary expenses incurred in earning taxable income are tax deductible (i.e.: interest, salaries, taxes, etc.). Expenses, as income, are generally allocated to the fiscal year in which they accrue.

Losses incurred during any fiscal year may be carried forward and set off against taxable income obtained during the following five fiscal years.

Also, to determine Argentine income tax liability, transactions must be valued in Argentine currency. Consequently, fluctuations in foreign exchange rates may generate foreign exchange gains or losses.

II) Pressumed Minimum Income Tax: This tax applies to all assets of Argentine companies and other entities such as Argentine trusts (“fideicomisos”) organized under Law No. 24,441, common investment funds and Argentine permanent establishments of foreign entities.

The tax only applies if the total value of the assets exceeds A$ 200,000 at the end of the entity’s financial year. In this case, the total value of the assets will be taxed at the rate of 1%.

Normal corporate income tax is allowed as a payment on account of this tax’s liability. Notwithstanding this, if in a given fiscal year, the taxpayer has to pay this tax (i. e. because the payment on account is not sufficient), this tax could be used, under certain circumstances, as a payment on account of future income tax liability in the following 10 fiscal years.

III) Personal Assets Tax: The Personal Assets Tax Law No. 23,966, as amended, provides that all individuals domiciled in Argentina are subject to a tax upon their worldwide assets. Individuals not domiciled in Argentina are only liable for this tax upon their assets located in Argentina. Shares, negotiable obligations and other securities are only deemed to be located in Argentina when issued by an entity domiciled in Argentina.

In general, the tax on personal assets only applies when the value of the total assets owned by the taxpayer as of December 31 of each relevant fiscal year exceeds A$305,000.

IV) Other direct taxes: there are pther taxes applicable on assets, such as the tax on inmovable property levied by the Provinces.

Indirect Taxes

Under certain circumstances, services rendered outside Argentina which are effectively used or exploited in Argentina, are deemed rendered in Argentina and are therefore subject to VAT.

VAT is paid at each stage of the production or distribution of goods or services upon the value added during each of the stages. Thus, this tax doe

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

The taxable base for residents is made up of income derived from all sources, foreign and domestic, less deductions for costs incurred, which are necessary for earning such income and gains.

There are allowed deductions that are not necessary for generating taxable income, such as interest arising from loans used to acquire real estate property (devoted to living of the taxpayer) secured by mortgages. This deduction is only available to individuals.

Afterwards, if the result is a gain, losses from previous years are deducted. However, losses from foreign source are not deductible from gains from Argentine source, whereas losses from Argentine source can be deducted from income from foreign source. Losses can be carried forward for five years. There are other specific losses that are only deductible from gains arising from the same kind of activity or transaction.

Individuals can make further deductions that are not related to the generation of taxable income. Such deductions are allowed, for instance, when the taxpayer has a son, and, also, to determine a minimum income not subject to tax.

On the other hand, foreign residents are taxed by way of withholding upon the income from Argentine source. The taxable base, upon which a withholding rate of 35% is applied, is determined by precentages of pressumed net income, which vary according to the type of income.

Exceptionally, income for Argentine residents is also determined by way of presumptions.

3. What revenues are included?

In the case of individuals, in principle, only the income that is obtained in a habitual manner is subject to tax.

In the case of legal entities, in principle, all earnings are subject to income tax, save where an exemption applies, a treaty establishes that Argentina has no power to tax, or other exceptional rule applies.

4. What deductions are allowed?

In principle, all expenses are deductible provided that they are necessary to obtain taxable income or to keep or maintain its source. However, there are certain rules that specify which deductions are disallowed or under which circumstances expenses that are normally allowed become disallowed. Moreover, there are "expenses" that although they have no connection with the earning of income, its www.lexmundi.com Page 4 © 2012 Lex Mundi deduction is specifically allowed by Income Tax Law. An example of such deductions is the one arising from gifts granted to non profit organizations, provided that the requirements established in Income Tax Law are fulfilled.

As stated previously, expenses are deductible as long as they are necessary to obtain taxable income or to keep or maintain its source. Where expenses are related to both taxable and non taxable income, they must be allocated to taxable or non taxable income, either by direct attribution or following a pro-rata rule. Interest has a special rule regarding allocation to taxable or non taxable income.

5. What are the major expenses that are not deductible?

Some of the expenses that are not deductible are the following: i) Depreciation of trademarks and similar assets; ii) losses arising from ilegal activities; iii) gifts granted in favor of non profit organizations that do not comply with the requirements established by Income Tax Law; iv) fees in consideration of technical assistance services paid abroad in excess of the limits established by Income Tax Regulatory Decree. Same prohibition applies to fees paid to off shore directors. Moreover, royalties paid in consideration of technical assistance that falls under the scope of the Technology Transfer Law, are entirely not deductible if the contract is not registered before a government office; v) the Income Tax; vi) the royalties paid in consideration of the license of trademarks, in excess of the limits established by Income Tax Regulatory Decree; etc.

6. What are the applicable federal rates?

Income Tax: 35% for corporations. Individuals are taxed by rates that go from 9% to 35%.

VAT: 21% (general rate). There is also a 10.5% and a 27% rate for certain transactions.

Presumed Minimum Income: 1%.

Personal Assets Tax: 05.% to 1.25% for individuals domiciled in Argentina. Individuals domiciled abroad are taxed at a 1.25% rate.

Tax on Debits and Credits (financial transactions): 0.6% or 1.2% (in cases in which there has been a substitution for the use of a checking account).

7. What are the applicable state and/ or other local rates?

Where Turnover tax is concerned, the rates varies according to each jurisdiction and type of activity. However, usually, agricultural, cattle breeding and mining activities are taxed at a 1%, industrial activities, trade or services in general, at a 3% rate and 5% on financial activities.

The Stamp Tax general rates also vary according to each jurisdiction. They ussually range from 0.8% to 1%.

Municipal taxes ("tasas") vary according to the municipality.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

There is no separate rate for capital gains. Reorganizations are either subject to the general Income Tax rules, or are tax free, when they comply with the requirements provided in Income Tax Law. www.lexmundi.com Page 5 © 2012 Lex Mundi 9. How are operating losses handled?

Operating losses can be carried forward for five years and can be deducted from the income of any of such fiscal years, with the exeptions explained previously.

10. How are capital losses handled?

Same as 15.

Territorial Rules

11. What are the residence rules?

Very briefly, the residence rules are the following:

Individuals:

i) of Argentine nationality that have not lost their resident status;

ii) of foreign nationality who have obtained permanent residence in Argentina;

iii) of foreign nationality who have not obtained permanent residence in Argentina, and have lived in Argentina with temporary authorizations in accordance with applicable regulations on immigration for twelve months. However, if they can prove that they have no intention of staying in the country, in principle, they wil not be considered residents, even if they have stay in the country for more than 12 months.

iv) Under certain circumstances, foreign individuals that live in Argentina due to labour reasons will not be considered residents (not taxed upon foreign source), even if they have lived in Argentina for 12 months, provided they do not stay in Argentina for more than five years.

There are also rules regarding the loss of resident status and double residence.

Legal entities incorporated (or other entities treated for tax purposes as corporations) in Argentina and permanent establishments located in Argentina are considered to be Argentine residents.

12. Is worldwide income taxed?

It is for Argentine residents.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Yes there are.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

In principle, dividends distributed by local companies are not subject to tax, except if the profits distributed have not been taxed at the corporate level. In such a case, only the profits that have not www.lexmundi.com Page 6 © 2012 Lex Mundi been taxed at the corporate level are subject to withholding. The withholding tax rate is 35% (acording to Income Tax Law).

15. What are the rates on royalties for withholding taxes?

Withholding rates for royalties can vary according to the origin of the income. For instance, royalties paid in consideration for services that qualify as transfer of technology can be subject to a witholding rate of 21% or 31.5% (subject to compliance with registration requirements). Royalties paid inconsideration of trademark license can be subject to a witholding rate of 28% or 31.5%.

Tax treaties provide ceiling on these withholding rates, that in many cases are of 10%.

Please see answer to question 24.

16. What are the rates on interest for withholding taxes?

Interest is subject to a 15.05% or 35% withholding rates. Tax treaties provide ceiling on these withholding rates, that in many cases are of 10%, and in some exceptional cases are reduced to 0%.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

In principle, any income subject to Income Tax, deemed by the ITL to arise from an Argentine source, obtained by a non-resident individual or a foreign legal entity without a permanent establishment in Argentina, is subject to tax by way of withholding upon payment of the income. Payment is defined to comprise many different situations that do not qualify as payment from a strictly legal point of view. Whenever the local payer assumes the obligation to pay the tax for the non-resident recipient, the net amount payable must be grossed-up.

The applicable withholding rates vary according to the type of income. Please see answeer to question 24.

18. Please list any other rates on withholding taxes that we should be aware of.

Wiithholding rates (plus grossing up) established by Income Tax Law:

i) amounts paid pursuant to technical assistance agreements, engineering or consulting services that the authorities consider unavailable in Argentina, provided such agreements are registered in compliance with the Transfer of Technology Law: 21% (26.58%);

ii) amounts paid pursuant to agreements registered in compliance with the Transfer of Technology Law and not included among those mentioned in (i) above: 28% (38.89%);

iii) copyright royalties paid pursuant to agreements which comply with the requirements of the Copyright Law: 12.25% (13.96%);

iv) interest on loans obtained abroad: 35% (53.85%). If the lender is a bank or financial institution incorporated or located in a jurisdiction not deemed to be a low tax jurisdiction or in a jurisdiction that has entered into exchange of information agreements with Argentina and, besides, is a jurisdiction where bank secrecy, secrecy pertaining to stock exchange transactions or of other kind cannot be alleged in accordance with its local provisions upon a request by the respective tax authority (i.e. financial entities under the supervision of the relevant Central Bank or equivalent agency): 15.05% (17.72%);

v) payments due to work on a temporary basis in Argentina for a period not exceeding six months: 24.5% (32.45%);

vii) rental payments on real estate: 21% (26.58%);

viii) proceeds from the sale of any type of property: 17.5% (21.21%); and

ix) other income not specifically mentioned above: 31.5% (45.99%).

In cases (vii) and (viii), and with the authorization of the tax authority, the foreign beneficiary may elect to pay the tax at the rate of 35% on net income, which is calculated by deducting the expenses incurred in obtaining the taxable income from the gross amount.

Tax Returns and Compliance

19. What is the taxable reporting period?

Income and Presumed Minimum Income Tax: one year. Value Added Tax: one month. Personal Assets Tax: one year. Turonover Tax: monthly and a final tax return yearly. Stamp Tax: upon taxable execution of public or private instruments. Debits and Credits Tax: withheld by Banks mostly. Does not require filing of tax return and is collected, mainly, by way of withholding.

20. What are the due dates for the filing of tax returns?

Income Tax, Personal Assets Tax and Presumed Minimum Income: around May of the following year.

Value Added Tax: filing is done on a monthly basis and is usually due after the 15th of the following month.

Turonover Tax: around the 15th of the following month.

21. What are the key compliance requirements?

There are several compliance requirements. Among the key information obligations are the ones regarding international operations and transfer pricing study.

The information requirements related to international operations with unrelated parties is applicable to all legal entities involved in exports and exports. The information has to be submitted either on a yearly basis or each semester. The information is, briefly, the following: i) identifying information of the non resident, such as name, activity, etc; ii) description of the transactions, their amount, currency, etc; iii) if the product is traded in international markets, details of such markets and sources of the information of the price of the transaction; iv) banking operations related to the imports and exports; v) in some cases, working papers related with the export operations have to be filed.

If the transaction is entered with a realted party or with an entity resident in a tax haven, which has to be determined according to the list of Section 21.7 of Income Tax Regulatory Decree, two reports have to be filed, one related to the first semester and the other related to the whole fiscal year.

The second report should be filed together with a transfer pricing report and a copy of the accounting records of the fiscal year and of the previous two fiscal years.

www.lexmundi.com Page 8 © 2012 Lex Mundi Other compliance requirements that are important are: i) withholding of Income Tax and social security taxes arising from wages; ii) filing due to withholding upon payments made to domestic and local residents.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

There are not other substantial requirements.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Yes. The most important are VAT and Turnover Tax. Another tax that could qualify as indirect is the Internal Tax, but it has a very limited scope. It is applicable mostly upon the sale of certain products, such as cigarettes, alcoholic beverages, etc.

24. How does it operate? Is it a VAT or a sales tax?

VAT

VAT is paid at each stage of the production or distribution of goods or services upon the value added during each of the stages. Thus, this tax does not have a cumulative effect.

The tax is levied on the difference between the so-called "tax debit" and the "tax credit".

The "tax debit" is the tax corresponding to sales made or services rendered by the taxpayer. It is obtained by applying the tax rate to the price of such sales or services.

The "tax credit" is the tax indicated in the invoices of the suppliers of goods or services contracted by the taxpayer.

The difference between the "tax debit" and the “tax credit", if positive, constitutes the amount to be paid to the tax authority. The current general rate is 21%. Sales and imports of capital goods, and interest payment to foreign financial institutions, among others, may be subject to a 10.5% tax rate.

Since exports of goods are subject to VAT at a 0% rate, exporters may utilize the VAT charged to them as a "fiscal credit", if such VAT is actually connected to any stage of the production or sale of the exported goods.

Turnover Tax

Turnover tax is a local tax levied on gross income. The tax is levied on the amount of gross income resulting from business activities carried on within the respective provincial jurisdictions, save some exceptions, such as, commonly, exports and sale of fixed assets.

The provinces have entered into an agreement ("Multilateral Agreement") to avoid the double taxation of activities performed in more than one jurisdiction. Under this agreement, gross income is allocated between the different local jurisdictions applying a formula based on the place where income is obtained and expenses incurred.

25. How is the taxable base determined?

VAT: The tax is levied on the difference between the so-called "tax debit" and the "tax credit".

www.lexmundi.com Page 9 © 2012 Lex Mundi The "tax debit" is the tax corresponding to sales made or services rendered by the taxpayer. It is obtained by applying the tax rate to the price of such sales or services, less discounts granted at the moment of the sale or the time when the services has to invoiced.

The "tax credit" is the tax indicated in the invoices of the suppliers of goods or services contracted by the taxpayer.

The difference between the "tax debit" and the “tax credit", if positive, constitutes the amount to be paid to the tax authority. If negative, it can be carried forward to the following monthly periods and deducted from the difference of Tax Debits and Tax Credits arising from any such periods.

The current general rate is 21%. Sales and imports of capital goods, and interest payment to foreign financial institutions, among others, may be subject to a 10.5% tax rate.

Turnover Tax: gross income, save some exceptions, such as income arising from exports, sale of fixed assets.

26. What are the applicable rates?

VAT: the general rate is 21%. There are excepcional rates of 10.5% and 27%.

Turnover Tax: each one of the provinces and the City of Buenos Aires apply different tax rates; however, most provinces apply a 1% rate on agricultural, cattle breeding and mining activities, 3% on industrial activities, 3% on trade or services in general, and 5% on financial activities.

27. Are there any exemptions?

Yes. Both VAT and Turnover tax law provide for many exemptions. In the case of Turnover Tax, each jurisdiction establishes different exemptions, although many of them coincide.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

Yes.

This tax is levied upon debits and credits in bank accounts and upon other transactions which, due to their special nature and characteristics, are similar or could be used in substitution for a checking account, such as payments on behalf of or in the name of third parties, procedures for the collection of securities (“valores”) or documents, drafts and transfers of funds made by any means, when these transactions are performed by entities regulated by the Financial Entities Law No. 21,526.

Transfers and deliveries of funds also fall within the scope of this tax, regardless of the person or entity that performs them, when those transactions are made through organised systems of payment in substitution for checking accounts.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Yes.

30. How do they operate?

Pursuant to Argentine labour law, employers and employees have certain obligations to make social security contributions for family allowances, medical services, pensions and unemployment benefits. In addition, pursuant to many collective bargaining agreements, union dues of 1% to 2.5% of salaries may be withheld from employee salary payments for employees who are covered by those agreements.

Furthermore, the employer will also be required to withhold amounts due in respect of income tax payable by the employee.

31. How is the taxable base determined?

Withholdings and contributions are calculated as a percentage of the individual employee’s salary, which must be deposited in the relevant accounts which the Argentine Tax Administration (AFIP, “Administración Federal de Ingresos Públicos” ) maintains in most banks in Argentina.

The taxable base is the employee’s gross remuneration. In case of employee’s social security payments, the base to calculate them is capped at 8,711 pesos. Employer’s contributions have no cap, and therefore must be calculated over the whole employee’s remuneration.

32. What are the applicable rates?

Employer contribution: 23 or 27%. Employee withholding: 17%.

33. Are there any exemptions?

There are exemptions for directors that also qualify as employees and for expatriates, under certain circumstances.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

There is a tax on personal wealth called Personal Assets Tax. It is applicable to all individuals domiciled in Argentina upon their worldwide assets. Individuals not domiciled in Argentina are only liable for this tax upon their assets located in Argentina. Shares, negotiable obligations and other securities are only deemed to be located in Argentina when issued by an entity domiciled in Argentina.

In general, the tax on personal assets only applies when the value of the total assets owned by the taxpayer as of December 31 of each relevant fiscal year exceeds A$305,000. Depending on the value of the total assets, tax rates vary from 0.5% up to 1.25%. Individuals domiciled abroad are subject to a fixed tax rate of 1.25%.

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

37. If so, please indicate if there are any of the following: anti-deferral regimes; transfer pricing provisions; tax avoidance measures like legislated General Anti-Avoidance Rules, etc.; controlled foreign companies regulations; thin capitalization rules

I) Transfer Pricing Porvisions

Transfer pricing practices are considered to take place when an Argentine company enters into business transactions with: (i) a related company located abroad, or (ii) a non-related company located in a low tax jurisdiction, and the prices agreed upon in such transactions do not reflect normal market practices (i.e. are not at arm’s length).

Pursuant to the transfer pricing provisions, any of these transactions are deemed not to be at arm's length, unless evidence to the contrary is provided. The Argentine taxpayer is only able to deduct payments made to a related company located abroad or to an unrelated company located in a low tax jurisdiction, to the extent that it can establish that the price paid is one that would have been paid in an arm's length transaction. If the taxpayer cannot prove the foregoing, the tax authorities may make transfer pricing adjustments to the income and expenses allocated between the parties.

In order to establish that the terms of the transaction are arm’s length, the Argentine taxpayer must submit special reports containing detailed information and supporting documentation related to the transactions.

The ITL allows the taxpayer to prove arm’s length compliance through different methods (i.e. comparing prices, margins, levels of profit, etc.) in line with OECD guidelines. As a general rule, taxpayers are required to use the method that best fits each transaction.

However, in the export of commodities (i. e. cereals, oil seeds, hydrocarbons or other goods with a known price in transparent markets), the ITL sets forth that the Argentine-source income must be assessed by applying the quotation value of the goods in the transparent market on the day the goods are loaded unless it can be proved to the contrary.

II) Thin Capitalization Rules

These rules apply if: i) the creditor controls the debtor (in terms of Section 15.1 of ITL); ii) the creditor has its tax residence abroad; iii) the interest is one upon which the applicable withholding rate is not 35% (established in point 2, Subsection c, Section 93 of ITL); iv) interest arising from debt exceeds twice the net worth. The considered debt is only the one that arises from financial debts not including the debt that comes from the acquisition of assets or from leases or rendering of services related with the business.

III) CFC Rules

Where a stock company is located in a low-tax jurisdiction, the Shareholder must include the taxable income derived from passive investment obtained by the company, regardless of whether such passive income has been distributed as a dividend, plus all passive income obtained by entities organized by the first tier company in a low-tax jurisdiction. The rule is applicable if the passive income exceeds 50% of the income resulting from commercial or industrial activities. Such passive incomes will be directly attributed to the Shareholder, even if such income has not been distri www.lexmundi.com Page 12 © 2012 Lex Mundi 38. List the countries in which there are tax treaties. This could impact the withholding taxes on various distributions and to the extent possible, please itemize them below. Please include the impact upon withholding on compensation, interest, dividends or other distributions for each country listed.

Argentina is part of different tax treaties currently in force with the following countries: Australia, Belgium, Bolivia, Brazil, Canada, Chile, Denmark, Finland, France, Germany, Italy, Norway, Spain, Sweden, Switzerland, The Netherlands and The United Kingdom. These treaties are based, other than those with South American countries, upon the OECD model and particularly seek to avoid double taxation.

The following table sets out the maximum rates at which interest, dividends and royalties may be taxed in Argentina when the recipient is a resident of one of the countries listed below and the rest of the requirements under the relevant treaty are met. The other countries with which Argentina has entered into tax treaties but which are not mentioned in the table below do not set specific limits on taxes but establish (to avoid double taxation) which country has jurisdiction to impose taxes in certain circumstances:

Country Interest Dividends Royalties Australia 12% 15% 15% Austria* 12.5% 15% 15% Belgium 12% 15% 15% Canada 12.5% 15% 15% Denmark 12% 15% 15% Finland 15% 15% 15% France 20% 15% 18% Germany 15% 15% 15% Italy 20% 15% 18% Norway 12.5% 15% 15% Spain 12.5% 15% 15% Sweden 12.5% 15% 15% Switzerland 12% 15% 15% The Netherlands 12% 15% 15% The United Kingdom 12% 15% 15%

Contact Information

Nicolás Rossi Marval O’Farrel & Mairal [email protected] Av. Leandro N. Alem 928, 7th floor Buenos Aires, C1001AAQ Argentina

Tel 54.11.4310.0100 Fax 54.11.4310.0200 http://www.marval.com.ar

Tax Desk Book

Australia Prepared by Lex Mundi member firm Clayton Utz

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

Australia is a federation with three levels of government. The Federal government is the principal revenue raiser, while the State and Territory governments are significantly dependent upon transfers of revenue from the Federal government. Finally, local governments raise revenue within their respective localities to fund the maintenance of community facilities.

The Federal government's tax base encompasses both direct and indirect taxes. Taxation of income provides the principle tax base (around 70 per cent of total tax revenues). The laws governing the taxation of income are found in the Income Tax Assessment Act (Cth) 1936 (the 1936 Act) and the Income Tax Assessment Act (Cth) 1997 (the 1997 Act). Australia introduced a goods and services tax (GST) on 1 July 2000. GST is a broad based consumption tax similar to GST/VAT in other jurisdictions. The basic rules in relation to GST are contained in A New Tax System (Goods and Services Tax) Act 1999.

Customs and excise duties are levied on various goods.

The Federal Government also taxes employers on fringe benefits provided to employees (under the Fringe Benefits Tax Assessment Act (Cth) 1986).

Other taxes include a petroleum resource rent tax.

State and Territory government taxes that may impact investment and business activities in Australia include: land tax, payroll tax, stamp duty, business franchise licence fees and certain indirect taxes on petrol, alcohol and tobacco. State and Territory governments do not tax income. States also operate workers' compensation schemes which include imposing a levy on employers. Uniformity in laws between the States and Territories may not be assumed, and special revenue incentives may be offered by a State to encourage a particular business activity.

Australian governments do not require social security or pension contributions. However, employers must make superannuation contributions for employees at a prescribed minimum level or incur a tax if they fail to do so. Superannuation arrangements are generally managed by the private sector in compliance with Federal government laws. The Federal government also imposes a 1.5 percent "Medicare" levy on the taxable income of resident individuals to help fund Australia's public health system (there is an additional 1 per cent levy surcharge if an individual's income exceeds a certain threshold and the individual does not have private patient hospital insurance).

Australian governments no longer impose death duties, inheritance taxes or gift duties.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

2. How is the taxable base determined?

Individuals: Income and deductions are determined separately, and then allowable deductions are subtracted from assessable income to arrive at "taxable income". The gross amount of tax payable is calculated by multiplying taxable income by the applicable tax rate (or rates). Specific receipts which are assessable income to the individual include: salaries and wages, share benefits granted in relation to employment, rents and royalties, gross-up amount of dividends, interest, shares in partnership or trust net income, and net taxable capital gains. Specific expenditures which are deductible to the individual include: expenses of carrying on a business, employee's expenses, property and investment income expenses, depreciation and gifts to certain charities and similar entities.

As a general principle, expenditure for personal rather than commercial use is not deductible. Specifically, expenditure relating to non-business travel, personal clothing, leisure, hobbies, child- minding, gambling and fines, is not deductible. In general, non-cash "fringe benefits" provided by employers to employees are not taxable to the employee, but are subject to a fringe benefits tax imposed on the employer.

Income derived by individuals is exempt if it falls under one of the following categories:  fringe benefits (employees are exempt from tax in relation to the receipt of benefits of this nature);  pensions of various descriptions (either wholly or partially); and  maintenance payments (unless the individual who made the payment did so by the disposal of an income-producing asset or by diverting income which would otherwise be taxable in the hands of the payer).

There are also a number of specific exemptions, mainly in relation to social security benefits. Companies:

Income and deductions are determined separately, and then allowable deductions are subtracted from assessable income to arrive at "taxable income". The gross amount of tax payable is calculated by multiplying taxable income by the applicable tax rate (or rates).

Under the consolidations regime, a consolidated group of entities is treated as a single entity for income tax purposes (whereby the head company is the relevant taxpayer). In determining the income and deductions of the head company, any intra-group transactions are ignored.

Offsets are amounts which may be deducted directly from tax payable. Offsets that may be applied against the tax payable include those for foreign taxes.

3. What revenues are included?

The income tax base includes statutory and ordinary income and therefore includes "income according to ordinary concepts and usages", with the addition of net capital gains. Income according to ordinary concepts includes three concepts; income from personal services, income from property and income from carrying on a business. There are various categories of exempt income which are specifically excluded from assessable income, although these amounts may be relevant for other purposes, such as for the determination of the applicable rate of tax. In determining the tax base, a distinction is drawn between revenue gains and capital gains. Generally, this exercise in characterisation will depend upon factors such as the regularity of the receipt, whether the receipt is in exchange for a right or asset which might be expected to produce revenue in the future, the ambit of the taxpayer's usual business operations and whether the taxpayer had an intention to generate profit. Ultimately, the question is decided in the light of precedent and all the circumstances. If the gain is a capital receipt, it may be subject to special treatment under the "capital gains tax" provisions www.lexmundi.com Page 15 © 2012 Lex Mundi in the 1997 Act (refer Parts 3-1, 3-3 and 3-5). In general, capital gains are only included in the tax base if they are realised on the disposal of an asset acquired (or deemed to have been acquired) after 19 September 1985. The amount of the capital gain to be included in the taxpayer's assessable income is calculated as the difference between the proceeds on disposal of the asset and the "cost base" of the asset. The cost base will generally include the acquisition consideration, incidental costs, capital and non-deductible non-capital costs of ownership, capital expenditures to preserve or increase value and capital expenditures to install, move, establish or defend title to or right over the asset. Where a taxpayer has held an asset for more than twelve months a discount may be available to the amount of the capital gain. For individuals and trustees this discount is 50 per cent and for superannuation funds it is 33 1/3 per cent. The discounted gain is then included in the calculation of the net capital gain. Capital losses must be offset against capital gains before the discount is applied.

However, companies do not enjoy discount capital gains. Net capital losses may not be offset against revenue gains, but may be carried forward and offset against future net capital gains.

In Australia, there is movement towards accruals-based taxation of certain financial arrangements, particularly those in which the receipt of any gain is deferred. The Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 (sometimes referred to as "TOFA" legislation) is currently awaiting Royal Assent. This Bill relates to the final stages of reforms of the taxation of financial arrangements. The Bill sets forth various timing methods, applicable to the taxation of financial arrangements including accruals, realisation, fair value, reliance on financial reports and retranslation. These changes are intended to remove the distinction between revenue and capital. They also intend to treat gains and losses from financial arrangements as assessable and deductible over the term of the arrangement on an accruals or realisation basis, unless an election is made to use an alternative timing method. The rules also seek to conform the taxation of hedging instruments with the character and tax timing applicable to the relevant underlying item.

4. What deductions are allowed?

The deductions available may be categorised as either general or specific. General deductions represent losses and outgoings to the extent they are incurred in the course of earning assessable income, or in the course of carrying on a business for the purpose of earning assessable income. Losses and outgoings that are of a capital, private or domestic nature, or relate to the earning of exempt income are not deductible. Factors relevant to the issue of whether expenditure is of a capital nature include:  the character of the advantage sought (and in this its lasting qualities may play a part);  the manner in which it is to be used, relied upon or enjoyed (and in this and under the former head recurrence may play a part); and  the means adopted to obtain it (that is by providing a periodic reward or by making a final provision or payment).

Specific deductible allowances apply to certain types of expenditure such as certain building expenditure, research and development expenditure, mining expenditure, environmental expenditure and expenditure incurred on the development or purchase of certain industrial property rights. Deductible expenditure need not be incurred in the same year in which it gives rise to assessable income.

Furthermore, there is no requirement that expenditure be related to particular items of assessable income, provided that the expenditure satisfies the required connection with income production and is related or properly referable to a particular accounting period. Deductions in relation to a prepaid benefit may be apportioned over the period during which the benefit accrues. Existing tax timing rules will be significantly altered by the proposed new code relating to financial arrangements (ie, TOFA).

In general, expenditure which is capital in nature or which is related to a private or domestic purpose is not deductible. The distinction between a capital and revenue expense is somewhat difficult. However, it can be said generally that capital expenditure represents that which relates to establishing, replacing or enlarging the profit yielding structure, while expenditure of a revenue nature relates to the continual flow of working expenses which are paid continually from the returns of the business.

More specifically, major corporate expenses which are non-deductible include certain forms of entertainment, certain interest payments (see "Thin Capitalisation", below) and expenses relating to exempt income.

6. What are the applicable federal rates?

Individuals:

Resident individuals are taxed on a progressive scale according to the following rates (current for the 2008/2009 year):  Taxable income $0-$6,000: Tax payable is Nil  Taxable income $6,001-$34,000: Tax payable is Nil plus 15c for each $1 over $6,000  -Taxable income $34,001-$80,000: Tax payable is $4,200 plus 30c for each $1 over $34,000  -Taxable income $80,001-$180,000: Tax payable is $18,000 plus 45c for each $1 over $8,0000  -Taxable income over $180,001: Tax payable is $58,000 plus 45c for each $1 over $180,000.

A Medicare levy is also payable at the rate of 1.5% of taxable income, subject to relief for low income earners. An additional 1% levy surcharge, known as the "Medicare Levy Surcharge" may be imposed on certain high income earners. These are high income taxpayers without adequate private patient hospital insurance. The surcharge is levied on the taxpayer's taxable income and reportable fringe benefits. A single taxpayer with no dependants is liable to the surcharge if the taxpayer's taxable income and reportable fringe benefits for the year total more than $70,000. A taxpayer who is a member of a couple is liable to the surcharge if the combined taxable income and reportable fringe benefits of the couple is $140,000 or more.

Tax offsets reduce the tax payable. Tax offsets based on taxable income levels apply to:

• individuals on low incomes below $30,000 in 2008/09; • individuals who receive certain Australian government allowances and payments; and • senior Australians.

Other tax offsets apply to people with dependants, those living in remote areas and those who receive particular types of income or incur particular expenses.

Non-residents are also taxed on a progressive scale. The rates are the same as for residents except there is no tax-free threshold and the first $30,000 of taxable income is taxed at a rate of 29 per cent. Non-residents are not subject to the Medicare levy.

Companies:

Company tax is levied by the Federal government at a flat rate of 30 per cent.

Trusts taxed as companies:

Trustees of public trading trusts are taxed at the flat corporate rate of 30 percent. Distributions to beneficiaries are treated as dividends and are subject to the imputation regime.

7. What are the applicable state and/ or other local rates?

Stamp duty:

Stamp duty is imposed by all the States. Historically, stamp duty has been a tax on instruments. However, as part of a re-write of the stamp duty legislation by many of the States over the past few years, stamp duty is now generally payable where there is "dutiable property" and a "dutiable transaction". The rate of stamp duty varies between the States and according to the transaction involved. Instruments which have not been stamped are inadmissible as evidence in the courts of the relevant jurisdiction.

Payroll tax:

Payroll tax is levied on employers with total annual Australian wage bills that exceed various thresholds which are set by each State. There are significant differences between the States in this regard, particularly in relation to the applicable rates and thresholds. For example, the rates vary between 4.75% and 6.85%, while the exemption thresholds vary between $504,000 and $1,500,000 of the total wages paid by an employer.

Land tax:

Land tax is calculated annually on a progressive scale by reference to the value of the land and is imposed by all the States and the Australian Capital Territory. The tax is imposed on the owner of the land at a particular given time (although in the Australian Capital Territory, land tax is also imposed on lessees). Methods of valuation differ between the States. The owner's principal place of residence is exempt in most States. Land used for primary production in certain circumstances is similarly exempt. Rates generally range from 0.09 per cent to 3.70 per cent.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Capital gains are only included in the tax base if they are realised on the disposal of an asset acquired (or deemed to have been acquired) after 19 September 1985. The amount of the capital gain to be included in the taxpayer's assessable income is calculated as the difference between the proceeds on disposal of the asset and the "cost base" of the asset. The cost base will generally include the acquisition consideration, incidental costs, capital and non-deductible non-capital costs of ownership, capital expenditures to preserve or increase value and capital expenditures to install, move, establish or defend title to or right over the asset. As capital gains tax is not a separate tax (rather it is a component of income tax), the rate of tax payable on a capital gain for an individual will depend on the individual's other income. It should be noted that where a taxpayer has held an asset for more than twelve months, a discount may be available to the amount of the capital gain. For individuals and trustees, this discount is 50% and for superannuation funds, the discount is 33 1/3 per cent. The discounted capital gain is then included in the calculation of the new capital gain. Capital losses must be offset against capital gains before the discount is applied. Companies are not eligible for a discount capital gains rate. Accordingly, the applicable rate is the company tax rate of 30%).

Where roll-over relief applies, an asset will be treated as if it had not been disposed of for capital gains tax purposes (but not for income tax or stamp duty purposes), in relation to the transfer for which the relief is available. Roll-overs may be automatic or elective, and are classified as either replacement asset roll-overs or same asset roll-overs. Typically, the relief is a form of tax deferral. The ability to qualify for roll-over relief if particularly important when reorganising a company structure. There are several different forms of roll-over relief, including interposed company roll-

www.lexmundi.com Page 18 © 2012 Lex Mundi overs, scrip-for scrip rollovers, shareholder to company roll-overs, individual to trust roll-overs, partnership to company roll-overs and trust to company roll-overs.

There are demerger relief provisions to allow certain restructures to result in a deferral of capital gains tax at both the investor and former company shareholder levels where companies spin-off from corporate groups.

9. How are operating losses handled?

Operating losses incurred by a company may be carried forward indefinitely. Operating losses must be offset against both revenue and net capital gains. If there is a change in the majority underlying ownership of a company then any carried forward losses will be lost, unless the company satisfies the applicable recoupment tests, including the continuation of the same business as it carried on before the change in ownership.

10. How are capital losses handled?

Net capital losses incurred by a company may be carried forward indefinitely. However, net capital losses may only be offset against future capital gains.

Territorial Rules

11. What are the residence rules?

Individuals: An individual will be treated as resident in Australia if:  the individual resides in Australia (ie, is a resident according to ordinary concepts);  the individual's domicile (ie, permanent place of abode) is within Australia;  the individual is present in Australia (continuously or intermittently) during more than one half of the year of income (unless the individual's usual place of abode is outside Australia and the individual has no intention to take up residence in Australia); or  the individual is a member of particular government superannuation scheme, or a spouse, or a child under 16 is such a member.

Companies:

The Act applies several tests to determine whether or not a company is to be treated as a resident of Australia for domestic tax purposes. A company will be considered resident in Australia if:  it is incorporated in Australia; OR  it carries on business in Australia and either has its central management and control located in Australia, or has its voting power controlled by shareholders who are residents of Australia.

A company may be resident both in Australia and in another country (i.e. a "dual-resident" company). In such circumstances various anti-avoidance provisions prevent the company from claiming the benefit of certain expenditure both in Australia and in the other country. Furthermore, a dual resident company will not be treated as resident in Australia for the purposes of certain specific anti-avoidance provisions and cannot be the head company, or a subsidiary member of a consolidated group.

12. Is worldwide income taxed?

Individuals: A resident individual is subject to tax on their worldwide income, while a non-resident individual is only subject to Australian tax on income derived from a source in Australia. A "temporary resident" (being a person who holds a relevant temporary visa and who is not (and whose spouse is not) a resident within the meaning of the Social Security Act 1991) is exempt from tax on foreign source income (except certain employment income) derived during the period in which they are a temporary resident. A temporary resident is also exempt from capital gains tax in many instances. www.lexmundi.com Page 19 © 2012 Lex Mundi Interest paid by a temporary resident is not subject to withholding tax. Australian residents are generally exempt from taxation on income from a period (of at least 91 continuous days) of foreign employment (including foreign employment in respect of an approved overseas project), provided that the income was not exempt from tax in the source country. Foreign income that is exempt for the reasons outlined above is still taken into account in calculating the tax payable on other income derived by the taxpayer (referred to as the "exemption with progression" method). In this regard, tax on the non-exempt, foreign sourced income is calculated by applying a notional average rate. Foreign tax offsets are allowed in a similar manner as they are for corporate taxpayers. The foreign income tax offset rules apply to income years starting on or after 1 July 2008 (see discussion at question 19 below).

If an individual is a non-resident, their assessable income will include only income which has an Australian source and capital gains on assets which are considered to be "taxable Australian property". Generally, "taxable Australian property" includes real property situated in Australia, indirect interests in Australian real property, options and rights to acquire Australian real property, and mining, quarrying and prospecting rights in respect of minerals situated in Australia.

Companies: Where a company is resident in Australia, its assessable income will include the gross income derived from all sources, whether domestic or international (i.e. a resident company is taxed on its worldwide income). On the other hand, if a company is a non-resident, its assessable income in Australia will include only income which has an Australian source and capital gains made on assets which are considered "taxable Australian property".

Some capital gains may be protected under the alienation of property articles in some of Australia's double tax treaties. Alternatively, in many cases, capital gains may fall within the business profits articles of Australia's double tax treaties (such that where there is no permanent establishment in the source country, the source country will have no right to tax the capital gain).

Absent treaty protection, royalties are deemed to be sourced in Australia if they are paid as an expense of an Australian business. Furthermore, profit from the sale of imported goods in Australia is deemed to be sourced in Australia, even if the contract of sale, delivery and payment occurs outside Australia.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

For income years up until 30 June 2008, foreign tax credits were allowed in respect of foreign taxes paid.

Under the former credit system, a credit was allowed for both the direct and indirect foreign tax paid, up to the amount of the Australian income tax payable on the foreign income concerned, provided the foreign tax paid was similar in nature to the Australian income tax.

From 1 July 2008, the foreign income tax offset rules were introduced. Broadly, an "offset" is an amount which may be deducted directly from tax payable. The foreign income tax offset rules operate in a similar manner to the former credit rules. That is, a taxpayer is entitled to qualify for an offset if they have paid foreign income tax on an amount included in their assessable income and the amount of the offset is limited to the amount of Australian income tax that would have been payable on the relevant income. No foreign income tax offset can arise however, if a taxpayer is refunded an amount of previously paid foreign income tax or if a taxpayer receives a benefit calculated by reference to a previously paid foreign income tax.

Most of Australia's double tax treaties contain articles which provide for a tax credit for foreign tax paid on foreign income.

14. What are the rates on dividends for withholding taxes?

In general, dividends are subject to withholding tax when they are paid by a domestic company to a non-resident shareholder. If the company has already paid company tax on the income being distributed, a "franking" credit may be attached to the dividends and to this extent they are exempt from dividend withholding tax. To the extent that dividends are "unfranked", they are subject to a withholding tax at the rate of 30 percent. Australia's double tax treaties usually reduce this rate to 15 per cent.

The unfranked part of a franked distribution made by an Australian company that the company is entitled to declare to be "conduit foreign income" will not be assessable to a non-resident and will not be subject to dividend withholding tax. The declaration must be made on the company's distribution statement on or before the day the distribution is made. The amount that an Australian company is permitted to declare as conduit foreign income is generally the entity's foreign source income with certain adjustments relating to non-assessable income and capital gains. Special rules also apply to prevent the duplication of benefits, such as where an amount qualifies as conduit foreign income but also for certain deductions available for non-portfolio dividends.

15. What are the rates on royalties for withholding taxes?

Withholding tax is payable on royalties paid or credited to non-residents at the rate of 30 per cent of the gross royalty. Double tax treaties generally reduce this rate to 10 per cent and in certain cases to 5 per cent. Royalty withholding tax is payable when a royalty is paid by a resident to a non-resident (provided that the royalty is an expense of the resident's business activities in Australia), or when a royalty is paid by a non-resident carrying on business in Australia at or through a permanent establishment to another non-resident. Withholding tax is also payable where a royalty is paid by either a resident, or by the Australian permanent establishment of a non-resident to an overseas permanent establishment of an Australian resident.

16. What are the rates on interest for withholding taxes?

Interest derived by a non-resident may be subject to interest withholding tax when it is paid by a resident (provided the interest is an expense of the resident's business activities in Australia), or by a non-resident who incurred the interest liability in the course of carrying on a business in Australia at or through a permanent establishment. Interest withholding tax may also be payable on interest derived by an overseas permanent establishment of a resident, when the interest is paid by either another resident or by an Australian permanent establishment of a non-resident. An amount is required to be withheld at the rate of 10 per cent on the gross amount of interest incurred. This rate is generally the same under the Australia's double tax treaties.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

While there are no specific provisions, apart from those explained above, which impose withholding tax on profits derived by foreign companies, each Australian resident (including a bank) holding money for non-residents is deemed to be the agent of that non-resident. As such, residents may be required by the Australian Taxation Office (ATO) to withhold sufficient money to cover the tax liability of the non-resident. In relation to some forms of income (such as that derived from natural resources or employment) agents will be required to withhold such money as a matter of course.

18. Please list any other rates on withholding taxes that we should be aware of.

N/A

19. What is the taxable reporting period?

Taxation is imposed in relation to an income year from 1 July to 30 June. An application may be made to the ATO for a "substituted accounting period" in certain circumstances, for example when the income year of a foreign parent company is determined on a different basis. The income tax is administered primarily on a self-assessment basis combined with extensive auditing by the ATO.

20. What are the due dates for the filing of tax returns?

Individuals: Generally, individuals are required to lodge their income tax returns by 31 October of each year (or later, if lodgement occurs through a Registered Tax Agent). If the individual's year end is some date other than 30 June (ie. if they have a substituted accounting period), lodgement must occur within four months of the substituted year end date.

Companies: Companies that are not part of a consolidated group and head companies of consolidated groups are both required to lodge their income tax return according to certain lodgement categories. Near the end of each financial year, the ATO issues a legislative instrument calling for the lodging of annual income tax returns. The table below sets forth a very general guide to lodgement dates. The table does not include special lodgement dates for certain taxpayers, such as those with a substituted accounting period or with outstanding returns due.  Companies with turnover of $10million or more: 15 January;  Companies with returns 2 or more years outstanding: 31 October;  All other companies: 28 February.

Lodgement may be made on the next applicable business day if the lodgement due date is otherwise a weekend or a public holiday.

Partnerships: Although a partnership is not subject to tax as a separate entity, partnerships are still required to lodge an annual return specifying the net income of the partnership. The filing dates for partnerships are the same as those for individuals. As such, returns are generally required to be lodged by 31 October.

Trusts: The trustee of a trust must prepare and lodge an income tax return in each income year, whether or not all the income of the trust has been distributed to the beneficiaries. There are no special lodgement procedures of particular importance which differ from those relating to individuals. As such, returns are generally required to be lodged by 31 October.

21. What are the key compliance requirements?

Location of lodgement: Returns may be filed with the local ATO branch (for individuals, partnerships and trusts) or the ATO branch which services the general area in which the taxpayer's principal place of business or administration is located. Individuals can also lodge their returns with the ATO online via "e-tax".

Consolidated returns: Under Australia's consolidation regime, qualifying groups of entities that make a consolidation election are treated as single entities for income tax purposes and intra-group transactions are ignored. Wholly owned groups of resident entities may elect to form a consolidated group - a "one in all in" rule applies to group members. The head company of a consolidated group is primarily responsible for the entire group's tax liability and for lodging a single return on behalf of the group.

www.lexmundi.com Page 22 © 2012 Lex Mundi Non-residents: Non-residents (including companies) should lodge in the region where the principal Australian records are kept. If the returns are being lodged by a Registered Tax Agent, the place of lodgement will depend upon that particular tax agent's arrangements with the ATO.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Individuals: The return must be filed on the standard "Form I". In contrast with the treatment of company income, individuals are assessed on income in the same year as the income is derived. Individuals are required to lodge a return if their taxable income exceeds the tax- free threshold, or where tax has been automatically deducted at source from wages or other earnings during the course of the financial year. Years in which losses have been incurred also require a return to be lodged. Individuals who carry on business in Australia must lodge returns which include details as to their business income. Non-residents are required to lodge returns for those financial years in which they derived any amount of assessable income from an Australian source.

Companies: Resident companies and non-resident companies which have earned income from Australian sources are required to file or lodge Australian income tax returns. Agents of companies, including non-resident companies, must also lodge returns disclosing the income earned in the agent's representative capacity. The head company of a consolidated group is primarily responsible for the entire group's tax liability and for lodging a single return on behalf of the group. Returns for companies are completed on a standard "Form C" and require the disclosure of income, including net capital gains or losses, credits, loss transfers, rebates and other information deemed necessary in the calculation of "taxable income" and "tax payable".

Partnerships: A partnership must lodge an annual return (a "Form P") specifying the annual net income of the partnership. The partnership itself is not liable to pay tax on such income. The return must set out a complete statement of the net income or loss of the partnership and the proportion allocated to each partner. Each partner must then include their portion of the net income or loss from the partnership in their personal return. Limited partnerships (other than certain limited partnerships involved in the venture capital industry and foreign hybrid partnerships) are not recognised as partnerships for Australian tax purposes and are treated as companies. The net income of a partnership is determined in accordance with the general income and deduction provisions of the Act. A partnership is generally unable to qualify for special allowances available only to companies. Franking credits, foreign tax credits and trust distributions generally flow through a partnership to the individual partners.

Trusts: The trustee of a trust must prepare and lodge an annual income tax return in each income year, whether or not all of the income of the trust has been distributed to the beneficiaries. A return on the standard "Form T" must generally be lodged.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Australia's indirect taxes include the goods and services tax (GST) (discussed in further detail below), stamp duty, the luxury car tax and the wine equalisation tax.

Stamp duty: Stamp duty is imposed by all the States. Historically, stamp duty has been a tax on instruments, however, as part of a re-write of the stamp duty legislation by many of the States over the past few years, stamp duty is now generally payable where there is "dutiable property" and a "dutiable transaction". The rate of stamp duty varies between the States and according to the type of

Luxury car tax (LCT): Supplies and importations of cars that are above the LCT threshold will be subject to LCT at a rate of 25% on the portion of the GST-inclusive price of the car above the LCT threshold.

Wine equalisation tax (WET): WET is levied at a rate of 29% on certain dealings in wine and wine products and is payable by wine manufacturers, wine wholesalers, and wine importers.

24. How does it operate? Is it a VAT or a sales tax?

The GST is an indirect, broad-based consumption tax similar to GST and VAT systems in many jurisdictions throughout the world. It applies to "any supply whatsoever" and hence not only applies to supplies of goods and services, as commonly understood, but also to the supply of real property and the creation of rights.

GST is payable on the majority of goods imported into Australia, although an entity may be able to claim an input tax credit for the importation. Exports from Australia in certain circumstances may be GST- free. The GST legislation also enables certain agents who are resident in Australia to assume the GST liabilities and the input tax credit entitlements of their principals who are not resident in Australia. This may significantly reduce the compliance burden for the non-resident. However, even where these rules are applicable, the non-resident will nevertheless be required to register in Australia for GST purposes.

25. How is the taxable base determined?

GST is payable by an entity (defined to include individuals, companies, partnerships and trusts) if the entity makes a “taxable supply”. In order for a supply to be taxable, the supply must be:

• made for consideration; • made by an entity that is registered or required to be registered for GST purposes; • made in the course or furtherance of an enterprise being carried on by that entity; and • connected with Australia.

26. What are the applicable rates?

The GST payable on a taxable supply will be calculated as 10% of the value of the consideration that the entity receives for making the supply (excluding GST). Entities that are registered for GST purposes may generally claim input tax credits for acquisitions they make in carrying on their enterprise. However, where an acquisition made by an entity that is registered or required to be registered relates to that entity making "input taxed" supplies (for example, "financial supplies"), the entity may be restricted in its ability to claim input tax credits for that acquisition.

Generally, an entity will be required to be registered for GST purposes if that entity is carrying on an enterprise and has a "GST turnover" of $75,000 or more per year or $150,000 in the case of a nonprofit body. Entities that are below these thresholds and are carrying on an enterprise may elect to be registered.

Once registered for GST, an entity must pay GST to the ATO on all taxable supplies that it makes and can claim input tax credits arising from creditable acquisitions that it makes. Entities that are registered for GST are required to complete and lodge a GST return with the ATO either monthly, quarterly or in some cases annually. Entities are required to lodge GST returns monthly either if their GST turnover is A$20 million or greater or if the entity's enterprise will be carried on in Australia for a period of less than three months. Entities with a monthly tax period are required to lodge their GST www.lexmundi.com Page 24 © 2012 Lex Mundi return by the 21st day of the month following the end of the tax period. Entities with a quarterly tax period are required to lodge their GST return by the 28th day of the month following the end of the tax period (except the December quarter return which is due on 28 February). Where an entity's net GST amount is positive (i.e. GST payable on supplies exceeds input tax credits for acquisitions) an entity will be required to pay this amount to the ATO when lodging its return. Where an entity's net GST amount is negative, it may be entitled to a refund from the ATO.

27. Are there any exemptions?

A supply will not be a taxable supply to the extent that it is a "GST-free" supply (known as zero rated supplies in other jurisdictions) or an "input taxed" supply (similar to exempt supplies in other jurisdictions). Examples of GST-free supplies include exports, health and education. Examples of input taxed supplies include financial supplies and the sale of residential premises.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

30. How do they operate?

N/A

31. How is the taxable base determined?

N/A

32. What are the applicable rates?

N/A

33. Are there any exemptions?

N/A

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

N/A

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

General Anti-Avoidance Rules: Part IVA includes a general anti-avoidance section which may nullify a tax benefit and impose severe penalties where the taxpayer has structured their affairs with the dominant purpose of avoiding or reducing their tax liability.

Specific Anti-Avoidance Rules: Controlled Foreign Company provisions, Transferor Trusts and Foreign Investment Funds Accrual taxation regimes apply to controlled foreign companies ("CFCs"), transferor trusts (i.e. trusts to which property or services have been transferred by an Australian resident) and foreign investment funds ("FIFs"). Generally, a company is a CFC if it is (i) a non- resident company and (ii) either (A) a group of five or fewer Australian residents hold 50% or more of the interests in the company, (B) there is a single Australian resident whose direct and indirect interest in the company is not less than 40% and the company is not controlled by a group of entities that does not include the Australian resident or any of its associates, or (C) the company is in fact controlled by a group of five or fewer Australian residents (either alone or with their associates). Depending on which country the CFC is resident in, a proportion of certain "tainted" income of the CFC is attributable to the Australian resident shareholders at the time that income is derived by the CFC, instead of at the time the income is repatriated to the Australian shareholders. The "tainted income" of a CFC generally includes income likely to be manipulated through tax planning such as interest, royalties, dividends and payments from related parties. Concessions are available for CFCs that are resident in certain listed countries, such as Canada, New Zealand, France, the UK, Germany, the US and Japan. If an Australian resident transfers property or provides services to a non-resident trust, the transferor trust rules attribute to that Australian resident a portion of the income of the transferor trust. The amount of income so attributable depends on the country in which the trust is resident and other factors but generally the whole of the trust's notional income may be taxed to the transferor. Where there are multiple transferors to a single trust, the Commissioner has discretion to reduce the amount of income attributable to each transferor. Certain de minimis exceptions apply to the transferor trust rules and the income that has been assessed in the hands of the transferor is not subject to further taxation when distributed to a beneficiary. The FIF measures apply to an Australian resident who holds an interest in a foreign company or trust and operate to attribute to that resident a share of the foreign entity's income. There are a number of significant exceptions to the FIF rules, including exemptions for entities directly engaged in an active business, interests in certain US entities and certain insurance businesses. Dividends or trust distributions out of income which has previously been

38. List the countries in which there are tax treaties. This could impact the withholding taxes on various distributions and to the extent possible, please itemize them below. Please include the impact upon withholding on compensation, interest, dividends or other distributions for each country listed.

Australia has entered into a number of double tax treaties with other countries. Additionally, Australia is also in the process of negotiating information exchange agreements to help combat offshore tax evasion. Australia currently has information exchange agreements with Bermuda, Antigua & Barbuda, and the Netherlands Antilles. The table below lists countries with which Australia has signed a tax treaty and sets out the source country limits applicable to dividends, interest and royalties. Please refer to the applicable treaty for alterations of the rates below in certain circumstances.

Country Dividend Interest Royalty Argentina 10-15% 12% 10-15% Austria 15% 10% 10% Belgium 15% 10% 10% Canada 5-15% 10% 10% China (excluding Hong Kong and Macau) 15% 10% 10% Czech Republic 5-15% 10% 10% Denmark 15% 10% 10% Fiji 20% 10% 15% Finland 5-15% 0-10% 5% France 5-15% 10% 5% Germany 15% 10% 10% Hungary 15% 10% 10% India 15% 15% 10-15% Indonesia 15% 10% 10-15% Ireland 15% 10% 10% Italy 15% 10% 10% Japan 10% 10% 5% Kiribati 20% 10% 15% Korea 15% 15% 15% Malaysia 15% 15% 15% Malta 15% 15% 10% Mexico 15% 10-15% 10% Netherlands 15% 10% 10% New Zealand 15% 10% 10% Norway 15% 10% 5% Papua New Guinea 15-20% 10% 10% Philippines 15-25% 10-15% 15-25% Poland 15% 10% 10% Romania 5-15% 10% 10% Russia 5-15% 10% 10% Singapore 15% 10% 10% Slovak Republic 15% 10% 10% South Africa 5-15% 10% 5% Spain 15% 10% 10% Sri Lanka 15% 10% 10% Sweden 15% 10% 10% Switzerland 15% 10% 10% Taipei 10-15% 10% 12.5% Thailand 15-20% 10-25% 15% United Kingdom 0-15% 0-10% 5% United States 0-30% 0-10% 5% Vietnam 10-15% 10% 10%

Contact Information:

Carynne Geeves Clayton Utz [email protected] Level 15 1 Bligh Street Sydney, New South Wales 2000 Australia

Tel 61.2.9353.4000 Fax 61.2.8220.6700 http://www.claytonutz.com

Tax Desk Book

Bolivia Prepared by Lex Mundi member firm C.R. & F. Rojas – Abogados

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

VAT 13% levied on sale of goods, contracts, services and imports.

COMPLEMENTARY TAX TO THE VAT 13% levied on rents, any exploitation of real estate, interest, salaries or any other remuneration to employees, fees of board members and comptrolllers.

PROFIT TAX 25% levied on net profits of legal entities.

ANY INCOME REMITTED ABROAD 12.5%.

TAX ON REAL ESTATE AND VEHICLES accoding to a scale.

TRANSACTION TAX 3% levied on the gross income of any individual or legal entity.

DONATIONS 20%.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

The taxable base for the profit tax is on net profits.

3. What revenues are included?

The revenues that are included are the ones related to the purpose of the legal entity.

4. What deductions are allowed?

The deductions that are allowed are those ones related to the activities of the legal entity.

5. What are the major expenses that are not deductible?

As above mentioned.

6. What are the applicable federal rates?

There are no federal taxes.

There are no state or other local taxes, except the Municipal taxes that are levied on vehicles and real estate.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

No capital gains.

9. How are operating losses handled?

They are tax deductible.

10. How are capital losses handled?

Capital losses remaind in the equity side of the balance sheet until the amount supersedes the paid-in capital in more than 50%. Thereafter, the paid-in capital has to be increased and if not the legal entity must be liquidated.

Territorial Rules

11. What are the residence rules?

The tax system is based on source income.

12. Is worldwide income taxed?

No.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

No.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

12.5%

15. What are the rates on royalties for withholding taxes?

12.5%

16. What are the rates on interest for withholding taxes?

12.5%

17. What are the rates of withholding tax on profits realized by a foreign corporation?

12.5%

18. Please list any other rates on withholding taxes that we should be aware of.

None.

Tax Returns and Compliance

19. What is the taxable reporting period?

December 31st., March 31st. or September 30th.

20. What are the due dates for the filing of tax returns?

Monthly

21. What are the key compliance requirements?

None

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

None

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

None

24. How does it operate? Is it a VAT or a sales tax?

There is a VAT thas it has to be included in the price of all Invoices.

25. How is the taxable base determined?

Fixed rate of 13%

26. What are the applicable rates?

13%

27. Are there any exemptions?

Any sale of shares or capital quotas are tax excempted. Non profit legal enties do not pay the profit taxl

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

None

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

The following percentages are paid by employers and employees form the payroll: Employers pay:  1.71% to Pension Funds  10% to Social Security  2% to living quarters  12 % to Pension Funds

Employees pay 12.21% from the payroll for the Pension Funds.

30. How do they operate?

As above mentioned

31. How is the taxable base determined?

As mentioned in numeral 35.

32. What are the applicable rates?

As above metioned.

33. Are there any exemptions?

None

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Inheritance tax is 1% plus 3% of the Transaction Tax. Gift Tax 20%.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

United Kingdom, Spain, France, Germany, Sweden, Argentina, Venezuela, Colombia, Ecuador and Peru.

Contact Information

Fernando Rojas C.R. & F. Rojas – Abogados [email protected] Calle Federico Zuazo 1598 Edif. Park Inn - Piso 11 - P.O. Box 662 La Paz, Bolivia

Tel 591.2.231.3737 Fax 591.2.211.2775 http://www.rojas-lawfirm.com

Tax Desk Book

Brazil Prepared by Lex Mundi member firm Demarest e Almeida

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

The Brazilian tax system is primarily governed by the Federal Constitution of 1988 and by the National Tax Code (Law 5,172) which was issued in 1966. This basic legislation contains all general provisions, definitions, competences, procedures and limitations concerning to tax administration and assessment. The National Tax Code is of universal application and must be observed by all federal, state and municipal tax authorities within the country.

The Federal Constitution determines the taxes which each member of the Federation has the competence to impose and also set forth which are the main principles of taxation to be followed by the legislators in all levels.

The federal taxes are described by Federal Constitution on Section 153 and 154, being the main ones those below:

(i) Import tax (II) (ii) Export tax (IE) (iii) Income tax (IR) (iv) Tax on Manufactured Products (IPI) (v) Financial Transactions Tax (IOF) (vi) Rural and land tax (ITR) (vii) Contribution Tax for Social Integration Program (PIS) (viii) Social Contribution Tax on Business Entities' Profits (CSLL) (ix) Social Contribution Tax for Social Welfare (COFINS)

State and Federal District taxes described in Section 155 of the Federal Constitution are the following:

(i) Value-added Sales and Transportation Tax (ICMS) (ii) Inheritance and Donations Transfer Tax (ITCMD) (iii) Vehicles Ownership Tax (IPVA)

Finally, the Brazilian legislation provides for Municipal taxes which are determined by Section 156 of the Federal Constitution:

(i) Service Tax (ISS) (ii) Real Estate Tax (IPTU) (iii) Property Transfer Tax (ITBI)

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

Business entities - There are three methods for the calculation of the Corporate Income Tax (IRPJ), namely: (i) real profit system; (ii) presumed profit system; and (iii) arbitrated profit system. In the real profit system, the taxable basis is the net profit reported on the balance sheet, adjusted by additions and exclusions authorized by the fiscal rules (Sections 219 and 247 of RIR/99).

In the presumed profit system, the taxable basis is presumed at a pre-established percentage of the gross revenues, plus other income (financial income, capital gains etc.).

Finally, the arbitrated profit system is only applicable when a taxpayer fails to comply with the rules for keeping records or computing taxable income. The taxable income basis would be arbitrated based on the company's activity presumed percentage of profits.

Individuals - Brazil adopts the universal income taxation rule, which means that all income and capital gains earned by the individual are subject to the individual income tax (IRPF), regardless of the denomination, location, legal status, means of earning or nationality of the paying source or goods yielding the income or revenue.

3. What revenues are included?

Business entities - As a general rule, all revenues accrued by a legal entity must be included and recognized in accrual basis.

Individuals - Taxable revenue is the gross amount received by the individual less the deductions allowable (Section 8 of Law n 9.250/95).

4. What deductions are allowed?

Business entities - If there is no specific rule, deduction of expenses under the real profit system should follow the general rule of Section 299 of RIR/99, which establishes that expenses are tax deductible if they are regular in the company’s activities and necessary in its due course of business. Deduction of an expense should follow a case-by-case analysis.

Individuals - The main deductions allowable are the following:

(i) Social Security Contribution Tax (INSS);

(ii) R$ 144,20 (for the 2009 calendar year) per month for each dependent: (a) son and stepson under twenty one years old (twenty four if he or she is in the University, or any age when he or she is unable to work); (b) grandson, great-grandson, brother under twenty one years old with no support of their parents; (c) spouse; (d) common-law spouse; (e) person under twenty one years old under the guardianship of the individual; (f) parents, grandparents, great-grandparents with no income; (g) unfits under the guardianship of the individual (Law n. 9.250/95, Section 35 and Law 10.451/02, Section 2)

(iii) child maintenance in compliance with a court decision (Law n. 9.250/95, Section 4);

(iv) medical care and dental expenses (Law n 9.250/95, Section 8º, II, "a");

(v) educational expenses at an individual annual limit of R$ 2.708,94 (for the 2009 calendar year).

5. What are the major expenses that are not deductible?

Business entities - Companies may not deduct the expenses expressly prohibited by legislation (e.g. promotional gifts), as well as those that are not necessary for the activity of the company or to keep its revenue source.

Individuals - Individuals may only deduct expenses expressly authorized by the legislation.

6. What are the applicable federal rates?

Business entities - Corporate income tax is levied at a rate of 15% on each month's taxable profit (Section 541 of RIR/99). An additional of 10% is levied on the portion of real or determined profit exceeding R$ 20,000 monthly (Section 542 of RIR/99). Social Contribution Tax on Profits is due at a 9% rate.

Individuals - For income tax to be calculated in the 2010 Annual Tax Return (related to income received during the 2009 calendar year), the following progressive rates are applicable monthly:

Tax Basis (R$) Rate (%) Deduction (R$) Up to 1.434,59 - - From 1.434,60 to 2.150,00 7,5 107,59 From 2.150,01 to 2.866,70 15 268,84 From 2.866,71 to 3.582,00 22,5 483,84 Over 3.582,00 27,5 662,94

7. What are the applicable state and/ or other local rates?

There are no state and/or other local rates.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Business entities - The taxable base of capital gains consists of the positive difference between the price obtained on the sale of the asset and its purchase cost. (Sections 418, §1º and 425 of RIR/99). There is no specific rate for capital gains obtained by corporations, which are included in the companies’ profits and taxed accordingly by the Corporate Income Tax and by the Social Contribution Tax on Profits.

Individuals - According to the Brazilian legislation, capital gains (as such the difference between the sales price and the cost of acquisition of the asset or right) are subject to income tax at a 15% rate to be calculated and paid by the taxpayer himself/herself (i.e., not withheld by a third party).

9. How are operating losses handled?

Business entities - Tax losses may offset only up to 30% of the profits accrued by corporations as from the following years (Section 510 of RIR/99).

Individuals - As a general rule, individuals are not allowable to handle losses. However, when the individual is exercising a rural activity, considered as cattle breeding, agriculture, vegetal and/or animal extraction, and any other animal cultures, he/she is allowable to recognize losses on these activities and offset them against taxable income for the following periods (Section 65 do RIR/99).

10. How are capital losses handled?

Business entities - Capital gains and losses on business-related assets are treated as ordinary business income and are subject to corporate income tax at normal rates (Section 418 do RIR/99).

Individuals - Individuals may not handle capital losses.

Territorial Rules

11. What are the residence rules?

Business entities - A corporation shall be considered as a resident in Brazil if its headquarters are located within the country (Section 147 of RIR/99 and Section 127 of CTN).

Individuals - The individual becomes a Brazilian tax resident:

a) upon his/her entrance in Brazil carrying a permanent visa; or

b) upon his/her entrance in Brazil carrying a temporary visa, but with employment bond in Brazil; or

If the individual enters Brazil under a temporary visa but with no employment bond in Brazil, he/she will be considered a Brazilian resident after a period of 183 days (consecutive or not) of permanence in the country during a period of twelve months.

Note: the individual will become a resident of Brazil for tax purposes as of the date that he/she obtains a permanent visa or establishes an employment bond in Brazil before his/her arrival.

12. Is worldwide income taxed?

Business entities - As from Law n. 9.249/95, profits, earnings and capital gains made by branches, subsidiaries or affiliates of Brazilian companies operating abroad are subject to the taxation in Brazil. On the other hand, the income tax paid abroad on such profits, earnings and capital gains may offset the income tax due in Brazil (Sections 394 and 395 of RIR/99 / Law nº 9.249/95, Sections 25 and 26).

However, the losses of such branches, subsidiaries and affiliates are not taken into consideration for purposes of calculating the Brazilian income tax, and may only offset future profits of the same subsidiary or of other branches in the same country (Section 394, §8º of RIR/99).

Individuals - Individuals who are residents of or domiciled in Brazil are taxed on a cash basis, on their worldwide income.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Business entities - In the absence of a Double Taxation Treaty, the foreign tax credit for income tax paid in a given country may only offset Brazilian income tax on the income received from that country, limited to the amount of the Brazilian tax on such income (Section 395 of RIR/99).

Individuals - The income tax paid abroad may offset the income tax due in Brazil, either at the time of the monthly payments or at the Annual Tax Return, provided that Brazil has a treaty to avoid double taxation or a reciprocity treatment of foreign tax credits with the country where the source of the income is located. The tax offset, however, may not exceed the difference between the Brazilian tax calculated including the income obtained abroad and excluding such income.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Dividends are not subject to withholding income tax (Section 692 and 693 of RIR/99).

15. What are the rates on royalties for withholding taxes?

Royalties are subject to withholding income tax at a 15% rate (Section 710 of RIR/99).

16. What are the rates on interest for withholding taxes?

Interest is subject to withholding income tax at a 15% rate (Section 702 of RIR/99).

17. What are the rates of withholding tax on profits realized by a foreign corporation?

Profits realized by a foreign corporation are not subject to withholding tax in Brazil (Section 694 of RIR/99).

18. Please list any other rates on withholding taxes that we should be aware of.

Capital gains on sale or transfer of shareholdings are taxed at normal rates. In case of sale or transfer of shareholdings to foreign shareholders, the capital gain is subject to withholding income tax at a 15% rate – this rule and rates also apply if even if both the buyer and the seller are nonresidents of Brazil and the asset is located in Brazil.

Payments relating to services in general are subject to the withholding income tax at a 25% rate. However, if the service agreement involves the rendering of technical services, or yet of technical, scientific or management assistance, the withholding income tax rate is reduced from 25% to 15% (except if the beneficiary is domiciled in a so-called low tax jurisdiction).

In respect of technical services, technical or management assistance and similar services, however, the payment is also triggers the levy of the so-called CIDE tax at a 10% rate. Unlike withholding income tax, CIDE is an ordinary burden of the counterparty domiciled in Brazil (it is therefore not deducted from the amount to be remitted abroad).

Normative Ruling 252/02 defines a technical service as "work, project or initiative whose execution relies on specialized technical knowledge, rendered by independent professionals or by artists or artisans". That definition for tax purposes is very controversial, which means that a case by case analysis is necessary in order to confirm their nature in view of the effective activities that will be performed.

Please note that if the beneficiary of the interest, service or capital gain remittances is resident in a low tax jurisdiction (i.e., a country or jurisdiction that does not tax income or which income tax is equal or lower than 20%) the withholding income tax will be levied at a 25% rate. That rule does not apply to remittance of dividends.

Tax Returns and Compliance

19. What is the taxable reporting period?

The taxable reporting period is the calendar year (from January 1st to December 31st).

Business entities - Each year, the last business day of June.

Individuals - Each year, the last business day of April.

21. What are the key compliance requirements?

Tax returns shall be filed over the internet. For that purpose the taxpayer must download a software with the tax forms and another one for electronic transfer ("RECEITANET"), both of which are freely available at www.receita.fazenda.gov.br.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

In order to transmit the tax returns, companies are required to obtain a digital certification issued by the Federal Income Office.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

(i) Tax on Manufactured Products – IPI (ii) Value-added Sales and Transportation Tax (ICMS) (iii) Service Tax (ISS)

24. How does it operate? Is it a VAT or a sales tax?

IPI is a federal excise tax levied on the importation of assets/goods or inputs, and during the manufacturing chain of assets/goods, working in a way similar to a VAT tax, since it allows a tax credit for the receiver of the goods and a tax debt for remitter of the goods. The taxpayer collects the outstanding balance on a monthly basis or carries forward the credits to the following month.

ICMS is a sales tax levied on importation of assets/goods, as well as on all operations during the chain of commercialization of the goods and services of transportation and telecommunication. ICMS works similarly to a VAT tax, as it allows debts and credits.

ISS is a service tax levied on the services listed by the Federal Government.

25. How is the taxable base determined?

IPI - The taxable basis is the effective value of the sale transaction subject to some adjustments provided for in the applicable regulation. In certain operations with no value the IPI Regulation establishes the basis for calculation of the tax.

ICMS - The taxable basis is the effective value of the transaction subject to some adjustments. Unconditional discounts may be excluded from the taxable basis. Like the IPI, in certain operations with no value the ICMS Regulation establishes the basis for calculation of the tax. The ICMS value is included in its basis for calculation.

ISS - The basis for calculation is the gross value charged by the services, exception made to civil construction in which the deduction of the subcontracted services is allowable.

26. What are the applicable rates?

IPI - The "ad valorem" rates may range from 0% to 30% (average), and vary according to the tax classification of the goods in the IPI Schedule based on the Harmonized System. Some specific products like beverages have a special taxation basis of fixed amounts ascertained by the tax authorities per product.

ICMS - The intrastate rates are 18% for some states like São Paulo and Rio de Janeiro and 17% for the others. The interstate rates are 12% or 7% depending on the origin and destination of the goods in the several regions of the national territory. On import operations the applicable rate is the intrastate rate. For some luxury and sumptuary articles the average rate is 25%.

ISS - rates vary from 2% to 5%.

27. Are there any exemptions?

IPI and ICMS - the regulations list several cases of tax exemption and tax suspension.

ISS - each municipality lists some cases of tax exemption.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

The IOF is a tax on credit transactions, foreign exchange transactions, insurance transactions, transactions with securities, and transactions with gold as a financial asset. The IOF rates range from 0% to 25% and there are circumstances of exemption or non-levy of the respective tax, according to the objectives of the monetary, foreign exchange and fiscal policies. The calculation basis of this tax varies depending on the transaction.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

In order to finance the social security, the Federal Government collects the following social contribution taxes:

- Contribution Tax for the Social Integration Program (PIS) - Contribution Tax for the Social Investment Fund (COFINS)

30. How do they operate?

There is more than one system to calculate PIS and COFINS taxes. The most common ones are the cumulative and the non-cumulative systems.

Cumulative System - this system usually applies to legal entities that are subject to the presumed profit system. These taxes are levied on all the company’s revenues, including, for instance, exchange variation income and also financial income. Few exceptions apply, such as cancelled sales and revenues from the sale of fixed assets.

Non-Cumulative System - This system usually applies to legal entities that are subject to the real profit system. These taxes are levied on all the company’s revenues. Few exceptions apply, such as cancelled sales and revenues from the sale of fixed assets – in this system, exchange variation income and financial income are exempt of the PIS/COFINS levy.

www.lexmundi.com Page 40 © 2012 Lex Mundi Differently from the cumulative system, legal entities in this system are allowable to take credits of PIS and COFINS on certain expenses and costs necessaries to develop their own activities within determined conditions.

31. How is the taxable base determined?

PIS and COFINS are due by a legal entity domiciled in Brazil and basically its basis of calculation encompasses the gross revenue accrued by this legal entity.

32. What are the applicable rates?

Cumulative System - PIS is levied at a 0.65% and COFINS at a 3% rate.

Non-Cumulative System - PIS is levied at a 1.65% and COFINS at a 7.6% rate.

33. Are there any exemptions?

There are some exemptions concerning the PIS and COFINS taxes. The most relevant ones are (i) the exemption of exchange variation and financial revenues for companies in the non-cumulative system and (ii) the exemption for revenues from sales or services to beneficiaries domiciled abroad, provided that the payment represents the entry of currency (applicable to both systems).

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

The Tax on Donation and on Inheritances (ITCMD) is levied on the transfer of personal assets or rights resulting from legal or testamentary inheritance and donations. Rates vary from 1% to 8% of the fair market value of the transferred asset or right.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Transfer pricing - Law 9,430/96 introduced transfer pricing rules in Brazil, establishing reference prices for goods, services and rights imported and exported by Brazilian companies from and to related parties, for purposes of assessing Corporate Income Tax and Social Contribution Tax on Profits.

The rules basically provide that, on the one hand, amounts paid by Brazilian companies in their imports from related parties which exceed certain parameters are not deductible for Corporate Income Tax and Social Contribution Tax on Profits purposes; on the other hand, if Brazilian www.lexmundi.com Page 41 © 2012 Lex Mundi companies charge for their exports to related parties less than certain other parameters, the difference between the amount charged and the minimum allowed will be considered presumptive income for Corporate Income Tax and Social Contribution Tax on Profits purposes.

In brief, the following parties are considered related to a Brazilian party for transfer pricing purposes: parties with corporate connections, exclusive distributors and/or agents, parties domiciled in a low-tax jurisdiction and operations considered to be under a privileged regime.

General Anti-Avoidance Rule - In general, a taxpayer is allowed the right to choose, among several possible operations, the operation that seems to it the most adequate or subject to the lower tax burden. The set of operations for this purpose is usually viewed as a legitimate tax planning provided that no artificial situations that might be characterized as tax evasion are created.

The Brazilian tax system does not adopt the economic interpretation of certain transaction. In other words, for tax purposes, the economic substance of certain transaction should not prevail on the formal aspect of such transaction. This is so because the Brazilian Tax Law is governed by the principle of strict lawfulness and by the closed vagueness doctrine, according to which it is necessary that not only the elements that shape taxation are clearly described in law but also that the authority in charge of applying the law sticks to the strict terms of the legislation, whereas such person should not adopt an economic interpretation of the facts.

On the other hand, the tax legislation has been seeking to broaden the powers given to the authority that applies the law. From a legal standpoint, the latest and most evident attempt to this effect was the amendment to article 116 of the Brazilian Tax Code (CTN) made by Supplementary Law 104/01, which introduced the concept of dissimulation: “The administrative authority may disregard acts or juristic acts performed for the purposes of dissimulating the occurrence of the fact that generated the tax or the nature of the elements that make up the tax obligation, subject to the procedures to be established in ordinary law.”

Notwithstanding the introduction of this new concept in the text of the CTN, no ordinary laws have yet been enacted to regulate it.

Brazil has concluded about twenty eight double taxation conventions with the following countries: South Africa, Argentina, Austria, Belgium, Canada, Chile, China, Korea, Denmark, Ecuador, Spain, Philippines, Finland, France, Netherland, Hungary, India, Israel, Italy, Japan, Luxembourg, Mexico, Norway, Sweden, Portugal, Czech Republic and Slovakia, and Ukraine.

Each treaty should be analyzed to determine the proper method of eliminating double taxation of income (tax credit or exemption).

Luiz Felipe Ferraz Demarest e Almeida [email protected] Av. Pedroso de Moraes, 1201 Centro Cultural Ohtake Sao Paulo, 05419-001 Brazil

Tel 55.11.3356.1800 Fax 55.11.3356.1700 http://www.demarest.com.br

Tax Desk Book

Colombia Prepared by Lex Mundi member firm Brigard & Urrutia Abogados

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

The Colombian Tax Regime establishes national and local taxes. The main national taxes are: (a) income and capital gains tax; (b) value added tax (VAT); (c) equity tax, (d) stamp tax; and (e) bank debit tax. On the other hand, the main local taxes are: (a) the tax on industrial and commercial activities; (b) billboard tax; (c) real estate tax and; (d) registry tax.

On the following lines, we will provide a brief outline of each one of said Colombian taxes.

National Levied Taxes

a) Income tax

Income tax is a national tax levied on the basis of ordinary and extraordinary income obtained during a taxable year.

Although considered a single tax, income tax has two components: i) income tax and ii) capital gains tax. While income tax is levied on the basis of ordinary income, capital gains tax is levied on occasional income obtained by taxpayers. They are both included in an annual income tax return and subject to the same 33% rate, but each is determined separately, so that ordinary costs, deductions and net operating losses are applied exclusively to ordinary income, and occasional costs, deductions and losses are applied to occasional income.

Additionally, please note that Colombian Tax Law provides a Minimum Presumptive Income System. Said system is an alternative method to calculate income tax, under which the tax base shall not be less than the 3% of the taxpayer’s net worth as of December 31st of the immediately prior fiscal year. This system supposes a minimum profitability likely to be taxed. As a consequence, this system is not based on actual income earned by the taxpayer. On the contrary, it is a legal presumption whose result is given by the statutory parameters.

b) Sales tax (VAT)

VAT is a national tax levied on the sale of tangible movable goods and the provision of services within Colombian territory, as well as on the import of tangible movable goods, unless expressly excluded from said tax.

Being a tax over added value, it allows taxpayers to credit input VAT against output VAT, provided that the former was levied on goods and services used in the production or manufacture of taxable goods and services.

c) Equity tax

www.lexmundi.com Page 44 © 2012 Lex Mundi For fiscal year 2011, corporate and individual income taxpayers who are compelled to file income tax return and whose net assets (assets minus liabilities) as of January 1st, 2011 add up to COP $3,000,000,000 (approximately US$ 1,578,9471) are required to also pay the equity tax.

Additionally, the Government through a Legislative Decree issued during a State of Economic, Social and Ecological Emergency, imposed a surtax of 25% for such taxpayers.

Likewise, the Government created a special equity tax for taxpayers with net assets below the amounts established in the current law. Like the current equity tax, the special equity tax was triggered once and only once as of January 1st, 2011 and to the taxpayers who as of January 1st met the requirements set in the law.

The following table summarizes the thresholds and the applicable rates:

Tax base (Net assets) Rate

4.8% (+25% surtax) Net assets above USD 2,770,082

Net assets between USD 1,662,049 and USD 2,770,081 2.4% (+25% surtax)

Net assets between USD 1,108,033 and USD 1,662,048 1.4%

Net assets between USD 554,015 and USD 1,108,032 1%

The tax base of this tax is constituted by the value of the taxpayer’s net assets possessed as of January 1st, 2011, excluding the net value of shares held in Colombian companies, as well as the first COP $319,215,000 (approximately USD 168,008) of the value of the taxpayer’s house of residence (in the case of individuals). The date of accrual of the tax is January 1st, 2011 (just one time).

Equity tax is neither creditable nor deductible from income tax and it may not be offset against any other taxes due and payable. Nonetheless, the law authorizes taxpayers to charge this tax against the asset revaluation account, without affecting the income statement of the year.

d) Stamp tax

Stamp tax is a documentary and immediate national tax, accrued on public instruments or public documents that create, modify or extinguish monetary obligations to be performed in Colombia. Since 2010, the stamp tax rate is 0%. .

e) Debit tax - Tax on financial transactions

The financial transactions tax is a permanent tax, payable instantaneously at the time of any financial transaction through a saving or checking bank accounts, cashier’s checks or deposit account in the Central Bank (“Banco de la República”) or through any accounting entries that involve or imply the payment of obligations. The tax is payable on the amount of the financial transaction.

The tax rate is 0.4% of the total amount of the financial transaction. From 2014 to 2017 the applicable rate will progressively be reduced. In 2018 this tax will be permanently repealed.

From 2013 to 2018, 50% of the total tax paid is deductible for income tax purposes, regardless of whether the transactions have a causal nexus with the income producing activity of the taxpayer. For years 2011 and 2012 the 25% of the GMF paid is deductible for income tax purposes.

This financial transactions tax is collected through a withholding mechanism, and the withholding agents are either the Central Bank (“Banco de la República”), any of other financial entities subject to oversight of the Finance Superintendence (“Superintendencia Financiera”) or the Cooperatives Superintendence (“Superintendencia de Economía Solidaria”) where the respective checking account, savings account, deposit account or collective portfolio are held, or where the accounting transactions that imply the transfer or disposal of resources are booked.

It should be noted that the law establishes a series of financial operations and transactions that are exempted from this tax.

Local Levied Taxes

a) Industry and commerce tax

The industry and commerce tax is a sub-national (municipal) level or local tax that is imposed on revenue generated from the exercise of industrial, commercial or service activities that are carried out directly or indirectly by individuals, legal entities or unincorporated entities in any of the Colombian municipal jurisdictions.

The tax base of this tax is constituted by the gross income generated by the taxpayer, minus any permitted deductions, exclusions, and certain other values.

The rate of this tax is defined by each municipality within the limits set forth by law. Currently, the rates are as follows: from 0.2% to 1% (notwithstanding, in some municipal areas may be found higher rates).

b) Supplementary Billboard Tax.

The Supplementary billboard tax is sub-national (municipal) or local tax, assessed in addition to the industry and commerce tax. This specific tax is triggered by the placement of billboards in public spaces. This tax is imposed on any persons or companies engaged in industrial, commercial and service activities in the municipal jurisdictions that use the public space to advertise their business through billboards.

The tax base is the industry and commerce tax liability. The applicable rate changes depending on the jurisdiction –the rate shall not be higher than 15%-.

c) Real Estate Tax

The real estate tax is imposed on real property located in urban, suburban or rural areas, whether or not constructed land. Therefore, the property tax payers are the owners or holders of the real property.

The real estate tax base is the estate’s official appraisal. Nonetheless in zones such as the Capital District of Bogota, the tax base is the value of the property as appraised by the taxpayer directly.

The applicable rate depends on the nature of the property, namely whether it is rural, urban or suburban, and varies between 0.4% and 3.3%, taking into account the economic use of each property.

This tax is 100% deductible for income tax purposes, as long as there is a direct relation with the income producing activity of the taxpayer.

d) Registry Tax

The registry tax is levied on any acts, contracts or business set forth in documents that require a registration with the Chamber of Commerce and the Public Registry Office (“Oficina de Registro e Instrumentos Públicos”).

The tax base is the value referenced in the document that describes the act, agreement or judicial contract. In the case of documents that do not have a stated value, the tax base is given by the nature of such documents.

- Acts, agreements, or judicial contracts with a stated value subject to registration with the Offices of Public, between 0.5% and 1%. - Acts, agreements, or judicial contracts with a stated value subject to registration with the Chambers of Commerce will trigger a tax rate between 0.3% and 0.7%. - Acts, agreements, or judicial contracts without a stated value that are subject to registration either with the Office of Public Instruments or Chambers of Commerce will trigger a tax rate between two and four minimum daily wages.

Some examples of documents without a determined value include: naming acts, name changes, statutory bylaws addendums (not including increase of capital and mergers), liquidation of companies, etc.

Examples of acts with determined value include the following: company incorporation, increase of social capital and increase of the subscribed capital, transfer of quotas, sale of commercial establishments, liquidation of companies, etc.

When acts, agreements, or judicial contracts must be registered both with the Public Registry Office and the Chambers of Commerce, the tax must be paid only once at the Public Registry Office.

When a document is subject to registry tax, stamp tax will not be triggered.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

In principle, the regular system includes all ordinary and extraordinary income earned during the fiscal year. From such income, it is necessary to subtract refunds, discounts and reductions in order to determine the net revenue. From the net revenue it is necessary to subtract the items not deemed to be income and the corresponding costs. The gross income is then reduced by the allowed deductions. This will finally show the net income which is also the taxable base.

Regular System Calculation

Gross Revenue Less: refunds, discounts and reductions Net Revenue Less: items not considered as income

Net Taxable Revenue Less: costs Gross Income Less: allowed deductions Net Income Less: exempt income Net Taxable Income Times: applicable rate Basic Income tax Less: tax discounts Net Income Tax

3. What revenues are included?

For tax purposes, income is any kind of resource which increases the taxpayer’s wealth. National legal entities and Colombian residents are subject to this tax on their worldwide source ordinary and extraordinary income. On the contrary, foreign legal entities and its branches are taxed solely on their Colombian source ordinary and extraordinary income. As long as foreign individuals are concerned, they are taxed on their worldwide source income only after starting their fifth (5th) year of residency (whether continuous or interrupted) in Colombia.

For said purposes please note the following:

National Sourced Income

- Revenues derived from the exploitation of tangible and intangible goods within the Colombian territory. - Revenues derived from the provision of services within the Colombian territory. Likewise, payments derived from the provision of technical services, technical assistance services and consulting services from abroad, is also national source income when the beneficiary is a Colombian resident - Revenues derived from the transfer of goods located in Colombia when the transfer of title takes place. - Revenues derived from cross-border interest and lease payments when the debtor is a Colombian resident.

Income that is Not Deemed National Sourced

- Revenues derived from technical services regarding the repair or maintenance of goods, rendered outside Colombia - Revenues derived from the sale of securities, bonds and other debt instruments issued by a Colombian party and traded abroad. - Revenues derived from interest payments done by Financial Cooperatives (“Cooperativas Financieras”), Finance Companies (“Compañías de Financiamiento”), and by the Colombian Foreign Trade Bank (“Banco de Comercio Exterior de Colombia – BANCOLDEX”) and other financial entities incorporated under Colombian law.

Exempted Income

Applicable tax law establishes some revenues that may constitute tax-exempt income, among others, the following:

- Publishing companies whose purpose is to edit books, magazines, brochures or collectable collections with scientific or cultural contents (tax-exempted until 2030). www.lexmundi.com Page 48 © 2012 Lex Mundi - The payment of capital, interest payments, commissions and other items related to foreign public debt and other transactions of a similar nature are exempted from all national taxes as long as they are paid to foreign non-resident parties. - The sale of energy generated from (i) wind-sourced, (ii) bio-mass, or (iii) agricultural residues by generating companies are tax-exempted for a term of 15 years, as long as the company sells the energy by itself, and issues and trades certificates of reduction of greenhouse effect gases. - Income derived from the cultivation of slow-growth plantations such as cacao, rubber, palm oil, citric and other fruits as determined by the Ministry of Agriculture and Rural Development (“Ministerio de Agricultura y Desarrollo Rural”). In order to take advantage of this tax exemption, the plantation owner must sow the relevant seeds between 2003 and 2014. This tax benefit can be applied for a term of 10 years, beginning upon starting of the sowing or producing. - The provision of waterway transportation services with vessels and floating platforms of low depth are also income tax-exempted for a period of 15 years as of 20032. Low depth vessels and floating platforms shall have a draft of less than 4.5 feet. - Hotel services rendered in new hotels built between January 1st, 2003 and December 31st, 2017 are eligible for tax exemptions for a term of 30 years from the date of initiation of services at such newly constructed hotel facility. - Hotel services rendered in remodeled or expanded hotels between January 1st, 2003 and December 31st, 2017 are also tax exempted for a term of 30 years and exclusively in proportion to the value of such remodeling or expansion. - Ecotourism services are exempted for a period of 20 years as of 2003. - Investments in new forest plantations, sawmill and wood trees. New pharmaceutical and software created in Colombia and protected by Colombian intellectual property legislation, with an important content of national scientific and technological investigation, for a term of 10 years as of January 1st, 2003 until December 31st, 2012.

4. What deductions are allowed?

Costs consist of charges related to the acquisition or production of goods or the provision of services. Such costs, if accrued during the corresponding fiscal year, can be deducted for income tax purposes as long as they are (i) directly related to the income generating activity, (ii) necessary, and (iii) proportional to the performed activities. Permitted deductions shall be paid in cash or through payments in kind, except costs that are incurred in advance. Costs incurred by taxpayers whose account books are based on the accrual system are deemed to be realized whenever the obligation to pay arises, even if such payment has not yet been made.

Expenses are any outlays incurred in connection with the administration, sales process, investigation and financing transactions undertaken by a taxpayer. Tax law allows deductions of expenses for income tax purposes as long as they are (i) directly related to the producing activity, (ii) necessary, and (iii) proportional to the performed activities.

As of 2014, incurred expenses and costs paid in cash, and not through the financial system (i.e. banking transfers, credit cards, and debit cards, among others), will not be deductible for income tax purposes. However, other methods of extinguishing contractual obligations such as payments in kind, compensations, and others, will continue to be deductible for income tax purposes.

Some examples of permitted deductions include:

Wages and Payroll Taxes

2 The provision of waterway transportation with boats and barges that load with a draft which cannot exceed 4.5 feet, until January 1st, 2018.

www.lexmundi.com Page 49 © 2012 Lex Mundi Wages paid to employees can be deducted from income for tax purposes as long as the employer/taxpayer has duly paid the corresponding payroll taxes (“Aportes Parafiscales”) (i.e. ICBF, SENA, family subsidy, and welfare services) and has performed the corresponding withholding tax. All of these social contributions are also deductible for income tax purposes.

Paid Taxes

- The 100% of the industry and trade tax and any real estate taxes paid during the corresponding fiscal year are deductible for income tax purposes.

- From 2013 until 2018, 50% of the debit tax will be deductible for income tax purposes (please see the section describing Financial transactions Tax – GMF). During fiscal years 2011 and 2012, the 25% of the debit tax will be deductible for income tax purposes.

Interest Payments

Interest payments on loan agreements entered into with any financial institutions subject to oversight by the Finance Superintendence (“Superintendencia Financiera”) are fully deductible.

On the other hand, interest payments made to individuals or other legal entities are deductible solely in the fraction that does not exceed the maximum rate authorized by the corresponding authorities to bank institutions during the corresponding tax year.

Cross Border Payments

Cross border payments can be deducted for income tax purposes as long as they are directly related to the producing activity of the taxpayer, and the corresponding withholding tax (if any) has been withheld.

Nevertheless, the withholding tax is not necessary when the income is derived from certain types of payments, as follows:

- Commission payments to foreign commission agents related to the purchase or sale of merchandise, raw materials and other types of goods, provided that such commission does not exceed a specified percentage of the transaction, as fixed by the Ministry of Treasury (“Ministerio de Hacienda y Crédito Público”) for the corresponding tax year. - In case of payments stated in Section 25 of the Colombian Tax Code, which not generate Colombian source income. - For payments for acquisition of any kind of tangible good. - Capitalized costs and expenses aimed to be amortized according to the Accounting rules. - Those payments incurred by virtue of the compliance with a legal obligation.

Charitable Donations

Charitable donations to certain entities expressly authorized by Colombian law are deductible for income tax purposes during the fiscal year or period in which the donation took place, and as long as all the legal requirements related thereto are duly fulfilled.

Scientific and Technological Investments

Taxpayers that invest directly or indirectly in projects qualified as scientific, technological or technological innovation are allowed to deduct 175% (before 125%) of such investment expense for income tax purposes. This deduction shall not exceed the 40% (before 20%) of the taxpayer’s net income, determined before subtracting such investment.

www.lexmundi.com Page 50 © 2012 Lex Mundi According to Act 1450, 2011, the excess may be carrying forward to subsequent fiscal years. The deduction can be transferred to partners or shareholders of the entity which took the benefit.

Likewise, the funds perceived by the recipient of these investments, while meeting the requirements established by law, shall be deemed as non-taxable income or capital gain.

Investments in Environmental Control and Improvement

Taxpayers (entities) that invest directly in environmental control and improvement projects are allowed to deduct such investments during the corresponding tax year. This deduction shall not exceed the 20% of the legal entity’s tax base, determined before subtracting such investment.

Amortization of Investments

Amortization consists of distributing the cost of intangible assets over their useful life or any other period of time fixed pursuant to certain valid criteria. Under the current tax regime, investments which are carried out to achieve the enterprise’s goals can be amortized, (however, such enterprise may not amortize costs stemming from real estate investments or fixed amortizable assets).

Preliminary expenses of installation, organization and activities development incurred for purposes of achieving the enterprise’s aims, and that can be depreciated, shall be registered as assets for their amortization in a period exceeding at least 1 year or fiscal period and shall be treated as deferred charges.

These investments have to be amortized in a period that shall not be less than 5 years, unless the amortization has to occur in a shorter time period because of the nature or type of the business.

Depreciation

Reasonable values for the depreciation caused by the assets weakening, normal deterioration or obsolescence can be deducted for income tax purposes, taking into consideration the installments or necessary sums to amortize 100% of the assets’ cost during its useful life, as follows:

Type of asset Useful life Computers and vehicles 5 years Machinery and equipment 10 years Real estate (i.e. pipeline buildings) 20 years

Difference in Foreign Exchange Payments

Payments in foreign currencies are estimated for the purchase price in Colombian pesos. Therefore, when there are liabilities or assets in a foreign currency, their value shall be adjusted according the applicable exchange rate (“Tasa de Cambio Representativa del Mercado –TRM–”) and any difference in exchange rate shall be taxed or deducted, depending on the circumstances

5. What are the major expenses that are not deductible?

 Taxes (other than industry and commerce tax, property tax and debit tax).  Provisions (other than bad debt provisions).  Estimated expenses.  Expenses that must be subject to withholding taxes but were not.

The general income and capital gains tax rate is 33%. Nevertheless, legal entities qualified as “Goods and Services Industrial Users” located in free trade zones within Colombia enjoy a reduced income tax rate of 15%. In addition, certain companies, considered as small companies due to the size of their assets and the number of employees3, and which start their activities as of 2011, will enjoy special progressive income tax rates, as follows: 0% for the first two years; 8.25% for the third year; 16.50% for the fourth year; and 24.75% for the fifth year. Subsequent to the completion of the fifth year, small companies that are beneficiaries of this special progressive system will become subject to the general income tax rate of 33%.

7. What are the applicable state and/ or other local rates?

In order to answer this question please refer to Point No. 1, Subchapter “Local Levied Taxes”

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

As a complement to the income tax, capital gains taxes are imposed on earnings that are obtained from certain operations expressly defined by law.

Capital gains cannot be affected by ordinary costs and deductions taken by the taxpayer; in addition, capital losses cannot be taken into account for purposes of computing the ordinary taxable income of the taxpayer.

Among the most significant operations subject to the capital gains tax are the following:

- Gains (the excess of the sale price over the tax basis of the asset) derived from the sale of fixed assets of the taxpayer owned for a period of at least 2 years.

- Gains derived from the liquidation of any type of corporation on the excess of the invested capital, when the gains or earnings do not correspond to income, reserves or earnings distributable as non- taxable dividends, as long as the company has completed at the moment of its liquidation two or more years of existence.

- Gains derived from inheritances, legacies, donations, as well as those received in the manner of spousal forced shares.

- Gains derived from lotteries, raffles, and others similar activities

For entities, whether national or foreign, the capital gains tax rate is 33%.

Additionally, please bear in mind that pursuant to Colombian tax law, mergers and spin-offs are non- recognition events. Therefore, no income is deemed to be obtained by legal entities involved in reorganization processes through mergers and spin-offs / split-offs.

3 For purposes of enjoying the progressive system for Income Tax, Act 1429, 2010 considers as small new companies those which start their activities as of 2011 and have no more than 50 employees and a sum of assets that does not exceed of COP$2,600,000,000 (approx. US $1,3Million).

www.lexmundi.com Page 52 © 2012 Lex Mundi The foregoing rule only applies to companies directly involved in reorganization processes (mergers, spin-offs). If any income is derived from the merger for the shareholders of the companies involved, said income will be taxed.

9. How are operating losses handled?

As of 2007, Colombian law permits the carry-forward of fiscal losses to subsequent tax periods. There is no time limitation in order to carry forward such fiscal losses, notwithstanding the Minimum Presumptive Income System (as described above). Carry-forward losses may not be transferred to a legal entity’s equity holders.

In the event of a merger or spin-off transaction, the purchaser or the new company may carry-forward the fiscal losses of the merged or spun-off company with certain limitations.

10. How are capital losses handled?

Capital losses can only be applied against capital gains, following the same period and limitation rules set forth for net operating losses (see answer provided in question 1.a) ).

Territorial Rules

11. What are the residence rules?

Resident status is acquired after six (6) continuous or discontinuous months in Colombia. Tax resident status shall be verified on a yearly basis.

12. Is worldwide income taxed?

Please refer to answer provided to question Three above.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Colombian law establishes as tax credits certain items that can be deducted from income as determined by the taxpayer. Among others, it is available for the following types of tax credits:

- Credit on income tax paid abroad for national taxpayers and foreign individuals starting their 5th year of residence in Colombia with regard to foreign sourced income. - Credit on income received by any companies for the cultivation of trees in reforestation areas. - Credit on income tax over VAT accrued on the import of heavy machinery for primary industries.

Tax credits cannot exceed the Colombian income tax due. The income tax after credits cannot be lower than 75% of the tax determined by the minimum presumptive income system over the net-worth, before any tax discount.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Colombian tax law provides for an imputation system aimed to avoid double taxation of corporate profits. Pursuant to this system, dividends paid out of profits that have been taxed at the level of the company are not subject to withholding taxes or further taxation when distributed to the shareholder. On the other hand, if dividends are paid out of non-taxed profits, such dividends will be subject to

15. What are the rates on royalties for withholding taxes?

Royalty payments are subject to withholding tax at 33%.

Royalty payments for software license (use) are subject to withholding tax at 26.4%

Please note that Tax Treaties could provide a more favorable tax treatment for royalty payments establishing a 10% withholding tax.

16. What are the rates on interest for withholding taxes?

- Local loans: 7%

- Foreign loans: Until fiscal year 2010, interests payments derived from foreign indebtedness transactions, granted from abroad, and international leasing agreements were not subject to income tax in Colombia provided some conditions were met (in practice, most foreign indebtedness could enjoy this special tax treatment). However, the 2010 Tax Reform Act introduced new rules in this regard:

a) First of all, foreign loan agreements entered into before or on December 31, 2010 and eligible for the prior tax treatment applicable until 2010 are still deemed as non-Colombian sourced income, therefore not subject to income tax.

b) On the other hand, the new tax treatment applicable to interests payments derived from foreign indebtedness are deemed as Colombian sourced income, subject to income tax in Colombia. As a consequence, interests payments derived from loan agreements entered into as of January 1, 2011 will be subject to a 33% or a 14% withholding tax. The withholding rate will depend on the loan agreement’s term; a) interest payments derived from foreign indebtedness agreements with a term equal or superior to one year are subject to withholding tax at a 14% rate; b) on the contrary, interest payments derived from loan agreements with a term lower than a year are subject to a 33% rate.

c) It is important to remark that with regard to interests payments derived from international leasing agreements entered into as of January 1, 2011, are deemed as Colombian sourced income subject, in any case (i.e. no matter the agreement’s term), to a 14% tax withholding. Notwithstanding, the 2010 Tax Reform established a reduced 1% withholding tax rate on all the interests payments derived from any kind of aircraft leasing.

In spite of the new regulation, please note that other interests payments derived from foreign indebtedness are still not subject to income tax as we mentioned in answer to question No. 3 (Revenues not deemed as national source income).

In addition, bear in mind that foreign indebtedness with Double Taxation Treaty’s jurisdictions (i.e. Spain, Chile, Switzerland and Canada) - may be eligible for treaty benefits (withholding tax rates may be reduced to 0%, 5% or 10%).

17. What are the rates of withholding tax on profits realized by a foreign corporation?

As mentioned above, nonresident aliens are subject to income tax in Colombia only with respect to their Colombian source income. As a general rule, any Colombian source income derived by a nonresident alien will be subject to withholding tax at the 33% corporate income tax rate. Alternative rates (10% and 14%) may also apply to specific types of services (payments for technical assistance www.lexmundi.com Page 54 © 2012 Lex Mundi services, technical services and consulting services are subject to 10% withholding tax irrespective that services are rendered in Colombia or from abroad).

Whenever the law does not provide for a specific withholding tax rate, a 14% default withholding tax applies. In such cases, the nonresident alien will be obliged to file an income tax return for the corresponding fiscal year.

Also, please note that currently Colombian tax law provides for an imputation system on dividend payments according to which withholding taxes only apply on dividend distributions paid out of non- taxed profits.

18. Please list any other rates on withholding taxes that we should be aware of.

Tax Returns and Compliance

Withholding tax Concept Limitations to deductibility

Payments for royalties for any type 33% Not limited of intangible* Payments for royalties for software 26,4% Not limited use*

Technical assistance services 10% Not limited

rendered in Colombia or abroad*

Technical services, except 10% Not limited equipment repair and maintenance (rendered abroad)* Technical services (rendered in 10% Not limited Colombia)* Consulting services rendered in 10% Not limited Colombia or abroad. Commissions for the purchase or 0% Not limited sale of goods abroad, limited to a threshold set forth by the Law. Services rendered in Colombia other 33% Not limited than those mentioned above.

(e.g. back office, interests, fees, rents, etc.).

Services rendered abroad other than -0- Limited to 15% of the net taxable

those mentioned above income of the taxpayer before

computing all the costs and (e.g. back office, interests, fees, expenses abroad without rents, etc.). Colombian income tax withholding Costs and expenses incurred -0- Not deductible abroad, not related to the taxpayer’s activity in Colombia.

19. What is the taxable reporting period?

Income tax is determined annually. The fiscal year ends at the same time of the calendar year (December 31st).

Income tax: Specific dates are determined on a year by year basis. Nonetheless, due dates are generally between March and May.

21. What are the key compliance requirements?

Tax returns must be signed by the legal representative and the statutory auditor (when required to have one).

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Also please note that Taxpayer must be registered before the Tax Authority.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

 VAT (national tax).  Industry and commerce tax (local tax).  Debit tax (national tax).

24. How does it operate? Is it a VAT or a sales tax?

This is a national tax which taxes (i) the sale of tangible goods which are not fixed assets and have not been expressly excluded by tax law, (ii) the provision of services within Colombian territory (some exceptions apply), (iii) the import of tangible personal property that has not been expressly excluded by tax law, and (iv) the sale and operation of games of chance excluding lotteries.

In Colombia, this tax is structured as a value added tax, therefore the taxpayer is allowed to credit against the VAT paid on goods and services acquired and used in the production of income against the VAT generated on the sale of goods or the provision of services from VAT-taxable operations. Certain limitations to this credit tax may apply.

Entities/individuals which are responsible to the tax authorities for the collection and payment of the VAT are those who undertake any of the activities subject to the VAT. However, the economic burden of the VAT is levied upon the final consumer. In this sense, the following people, among others, are responsible for the collection and payment of the VAT:

- With regard to sales of goods, the merchants or businesses, regardless of whether they are distributors or manufacturers. - The providers of services not excluded from the tax. - Importers.

When the responsible of this tax is a foreign non-domiciled entity then the Colombian entity should act as a VAT withholding agent obliged to collect and pay such VAT through filing tax withholding returns.

25. How is the taxable base determined?

With respect to the sale of tangible goods (not fixed assets) and in the provision of services, the tax base is generally determined by the total value of the relevant transaction. Additionally, there are some special tax bases for certain goods and services.

26. What are the applicable rates?

The general VAT rate is 16%, and it is applicable to most types of transactions. However, there are some special VAT rates that vary from 1.6% to 35%.

27. Are there any exemptions?

Zero Rated and Exempt Transactions

VAT-Zero Rated Goods

- National or imported equipment and materials aimed for the construction, installation, assembly and operation of environmental monitoring and control systems. - Imports of raw materials and supplies under the so-called Vallejo Plan (which is a special import and export program described in further detail in the Chapter on Foreign Trade), under which these materials and supplies are incorporated into products for subsequent export. - Temporary imports of heavy machinery and equipment for basic industries provided that the types of machinery and equipment are not produced in Colombia. It is understood that basic industries are mining, hydrocarbons, heavy chemistry, iron and steel industry, metallurgy, extraction of natural resources, generation and transmission of electrical energy, and obtaining, purifying and conducting hydrogen oxide. - Imports of machinery and equipment produced outside the country for recycling and processing of wastes. - Ordinary imports by highly exporting users, so-called “ALTEX” (further described in the Chapter on Foreign Trade), of industrial equipment not produced in the country and aimed to raw materials transformation, for an indefinite period of time. - The sale of fixed assets. - The equipment and elements imported by research and development and other educational institutions officially acknowledged.

Exempt Services - Public and private, national and international freight transportation. - Public transportation of passengers in the national territory by water or land. - National air transportation of passengers where there is no authorized land transportation. - Transportation of gas and hydrocarbons. - Interest payments and other financial income from credit operations and financial leasing. - Medical, dental, hospital, clinical and lab services for human health. - Utilities including energy, water, sewerage, road maintenance and street cleaning, garbage collection and gas. - Internet access services for homes in low-income urban zones 1, 2 and 3.

Exempt Imports

VAT exempt imports are expressly listed in the law. The types of imports that do not trigger the VAT are those where there is no clearance through customs (i.e. short term importations), importation of heavy machinery for basic industries, importations to special customs areas, among others.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

Indeed. Please refer to answer No. 1.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Yes. Please refer to point 30. below.

30. How do they operate?

With the approval of Law 100 of 1993, the General Social Security System (the “SGSS”, its acronym in Spanish) was created, comprising the General Pensions System (the “SGP”, its acronym in Spanish), the General Health Social Security System (the “SGSSS”, its acronym in Spanish) and the General Professional Risks System (the “SGRP”, its acronym in Spanish). Pursuant to said Law, every employer must affiliate its employees to the SGP, the SGSSS and the SGRP, discount from the employee’s salary the amounts established by law and pay a percentage of the employee’s salary in order to complete the contribution, according to the parameters listed in the charts “Contribution vs. Salary” and “Contribution Employee-Employer” ahead.

1. Contribution vs. Salary

System Employee % of Salary Employer % of Salary SGP 4% 12% SGSS 4% 8.5% SGRP* - Between 0.348% and 8.7%

* The percentage of the contributions to the SGRP varies in accordance with the assured risk.

2. Payroll fees

Employers are required by law to make some additional payments, calculated as percentages of the total value of the company’s payroll. Said payments must be made to a Family Compensation Bureau (Caja de Compensación Familiar “CCF”), to the National Apprenticeship Service (Servicio Nacional de Aprendizaje “SENA”) and to the Colombian Institute of Family Welfare (Instituto Colombiano de Bienestar Familiar “CBF”), according to the parameters listed in the following chart.

CCF: 4% SENA: 2% ICBF: 3% TOTAL: 9%

31. How is the taxable base determined?

Please refer to point 30 above.

32. What are the applicable rates?

Please refer to point 30 above.

33. Are there any exemptions?

No answer provided.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Inheritances and gifts are taxed as capital gains (occasional income), at 33%. They are reported in the taxpayer's income tax return. For further information, please refer to points 1 and 8, here above.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes. Please refer to point No. 4.

Colombian law does not provide for thin capitalization rules or CFC rules. However, it does provide for transfer pricing rules, tax havens rules (although a tax haven list is yet to be issued).

In general terms, taxpayers who engage in transactions with affiliates or other related parties residing abroad are subject to the transfer pricing regime. Accordingly, taxpayers subject to the transfer pricing regime must conduct such related party transactions on commercial standards (including prices and profit margins), which should be established in comparable transactions with independent third parties. In essence, their operations and business transactions with related parties must be conducted on an arm’s length basis.

Colombian law on transfer pricing matters is based on the guidelines set forth by the Organization for Economic Co-operation and Development (OECD) and became effective in 2004.

Therefore, taxpayers who carry out operations with foreign related parties that exceed the amounts established by law4 related to gross assets and gross revenue are required to file annually an Informative Return about every operation carried out with foreign related parties. Additionally, they must prepare and submit an annual informative report to the National Customs and Tax Authority –

4 For a taxpayer to have the obligation of compliance with formal transfer pricing rules, it must: (i) have or possess gross assets worth at least 100,000 Tax Units -UVT- (approximately USD 1,400,000) or have obtained gross income during the previous year in excess of 61.000 Tax Units –UVT (approximately USD 807,000).

www.lexmundi.com Page 59 © 2012 Lex Mundi DIAN, and provide supporting documentation of every operation undertaken5 in order to prove the correct application of the transfer pricing regime. Support documentation must be safely kept for a period of 5 years starting from January 1st of the fiscal year following its preparation.

Given the case in which the operations with related parties abroad, affect the balance sheet of the taxpayer, who fulfills the criteria in order to be bound to the transfer pricing legal regime, the preparation and filing of the support documentation of such operations will not be required, nonetheless, such information must be included in the annual informative report.

It is important to bear in mind that non-compliance with the transfer pricing regime is punishable by law. Types of non-compliance giving rise to potential sanctions with respect to the transfer pricing regime may include the following: (i) Untimely filing of support documentation, (ii) errors in the support documentation, (iii) filing information different from that requested by the National Customs and Tax Authority – DIAN, (iv) filing information which does not allow the verification of the transfer pricing, and (v) not providing information regarding transactions with foreign related parties.

In addition, the tax authorities may impose sanctions related to non-compliance with respect to the annual informative return, including: (i) non-timely filing of the annual informative return, (ii) amendments to the informative return, or (iii) not filing the informative return within the time period established by the DIAN. On the other hand, upcoming 2012 Tax Reform should be reviewed, regarding indirect sales, since it is aiming to establish a “substance over form rule”.

Jurisdiction TT with Colombia BIT with Colombia Spain Enforceable Enforceable Chile Enforceable Enforceable Andean Community Enforceable Enforceable Switzerland Enforceable Enforceable Canada Signed Enforceable South Korea Signed Signed Mexico Signed Enforceable India Signed Signed France Negotiated Belgium Negotiated Negotiated Check Republic Signed United States Being negotiated Signed Japan Being negotiated Being negotiated Germany Being negotiated Holland Being negotiated Panama Being negotiated

5 Only the operations exceeding the equivalent amount of 10.000 Tax Units –UVT (approximately USD 133,000).

www.lexmundi.com Page 60 © 2012 Lex Mundi Type of Spain Chile Canada Switzerland Andean income Community of Nations Income derived Income Income Income derived Income from the sale of derived from derived from from the sale of derived from shares in the sale of the sale of shares in the sale of Capital Colombian shares in shares in Colombian shares in Gains companies Colombian Colombian companies Colombian should not be companies companies should not be companies taxed in should not should not taxed in should be Colombia unless be taxed in be taxed in Colombia unless taxed 50% of the value Colombia Colombia 50% of the exclusively in of the Colombian unless 50% unless 50% value of the the State corporation is of the value of the value Colombian where the represented in of the of the corporation is shares were real estate Colombian Colombian represented in issued. located in corporation corporation real estate Colombia is is located in represented represented Colombia in real estate in real estate located in located in Colombia. Colombia.

They may be They may be subject to subject to taxation if taxation if the seller the seller possessed, possessed, directly or directly or indirectly, indirectly, during the during the previous 12 previous 12 months of months of the sale of the sale of the shares, the shares, shares from shares from the the Colombian Colombian corporation corporation which which represent represent 20% or more 25% or more of the capital of the capital of the of the Colombian Colombian corporation. corporation.

www.lexmundi.com Page 61 © 2012 Lex Mundi Type of Spain Chile Canada Switzerland Andean income Community of Nations In the case of In the case In the case In the case of Pursuant to dividends paid of dividends of dividends dividends paid sections 48 out from profits paid out from paid out from out from profits and 49 of the which were not profits which profits which which were not Colombian taxed at the were not were not taxed at the Tax Code corporate level, taxed at the taxed at the corporate level, dividends Dividends the applicable corporate corporate the applicable paid out from tax withholding level, the level, the tax withholding profits are rate would be 0% applicable applicable rate would be only taxed in in Colombia if the tax tax 0% in Colombia Colombia. shareholder is a withholding withholding if the Spanish resident, rate would rate would shareholder is a who owns at be 0% in be 5% in Swiss resident, least 20% of the Colombia if Colombia if who owns at shares of the the the least 20% of the Colombian shareholder shareholder shares of the corporation and is a Chilean is a Colombian such profits are resident, Canadian corporation. reinvested in who owns at resident, Colombia in the least 25% of who owns at same activity for the shares of least 10% of a period no the the shares of longer than 3 Colombian the years. corporation Colombian and such company. profits are reinvested in Colombia in the same activity for a period no longer than 3 years. The maximum The The The maximum Interests rate at which maximum maximum rate at which may only be interests may be rate at which rate at which interests may be taxed in the taxed in interests interests taxed in member Colombia is 10% may be may be Colombia is State in as long as these taxed in taxed in 10% as long as whose Interests are paid from Colombia is Colombia is these are paid territory is Colombia to a 5% if the 10%. from Colombia accounted Spanish resident. effective to a Swiss for and its The rate beneficiary is resident. The payment abovementioned a Bank or a abovementioned registered. may be reduced Chilean rate may be to 0% if, insurance reduced to 0% following the corporation. if, following the same rules, the In every same rules, the interests are paid other case, interests are to banks due to the paid to banks loans or to a applicable due to loans or Spanish rate is 14%. to a Swiss

Royalty Royalty Royalty Royalty Royalty payments made payments payments payments made payments by a Colombian made by a made by a by a Colombian made by a entity to a Colombian Colombian entity to a Swiss Colombian Spanish entity entity to a entity to a entity are taxed entity to a are taxed both in Chilean Canadian both in member Royalties Colombia and entity are entity are Colombia and State entity, Spain. taxed both in taxed both in Spain. are subject Colombia Colombia to taxation However, the and Chile. and Canada. However, the only in maximum maximum Colombia. applicable rate to However, However, the applicable rate these payments the maximum to these in Colombia is maximum applicable payments in 10%. applicable rate to these Colombia is rate to these payments in 10%. payments in Colombia is Colombia is 10% 10%

Contact Information

Jose Andres Romero Brigard & Urrutia Abogados [email protected] Calle 70 A # 4 - 41 Bogota, Colombia

Tel 57.1.346.20.11 Fax 57.1.310.06.09 http://www.bu.com.co

Tax Desk Book

Cyprus Prepared by Lex Mundi member firm Dr. K. Chrysostomides & Co. LLC

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

Direct Taxes - Personal Income Tax - Corporation Tax - Special Contribution for Defence - Capital Gains Tax - Immovable Property Tax - Stamp Duty

Indirect Tax - Value Added Tax

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

Tax is imposed on net income (income less allowable expenses).

3. What revenues are included?

Personal Income Tax - Employment income - Self-employed income - Rents - Pensions

Corporation Tax - Revenue - Royalties - Commissions - Income from other activities

4. What deductions are allowed?

Personal Income Tax - Donations to approved charity organisations - Subscriptions to professional bodies - Trade Union Contributions - Social Insurance Fund www.lexmundi.com Page 64 © 2012 Lex Mundi - Provident Fund - Approved medical fund - Rental income

Corporation Tax - Donations to approved charities - Employer's contributions to social insurance fund - Enterainment expenses for business purposes

** Please note that dividends received, proceeds from the sale of shares and certain categories of interest received are exempt from personal income tax and corporation tax.

5. What are the major expenses that are not deductible?

Corporation Tax - Unrealised exchange differences - General provision for bad debts - Interest disallowed - Gifts and non-approved donations - Entertainment expenses over a certain limit - Fines - Expenses on private motor vehicles

6. What are the applicable federal rates?

Personal Income Tax - Nil up to Euro 19.500 - 20% up to 28.000 - 25% up to 36.300 - 30% over 36.300

Corporation tax - 10% flat rate

7. What are the applicable state and/ or other local rates?

As above.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Capital gains tax is set at 20%. Certain accounting profits from re-organisations are exempt from Capital Gains Tax.

9. How are operating losses handled?

The tax loss incurred during a tax year, which cannot be set off against other income, is carried foward and set off against future profits with no time restriction.

10. How are capital losses handled?

Capital losses can be carried forward and set off against future profits of the same kind.

11. What are the residence rules?

An individual residing in Cyprus for over 183 days in a year is liable to pay tax in Cyprus on his worldwide income. If less than 183 days, he is liable to pay tax only on income earned in Cyprus.

A company is considered to be a Cyprus tax resident when (i) it is incorporated in Cyprus and (ii) its effective management and control is taking place in Cyprus.

12. Is worldwide income taxed?

Please see above.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Cyprus has nearly 50 Double Tax Treaties which regulate this, but generally Cyprus gives a credit in the event that tax has already been paid on that source of income.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Cyprus imposes no withholding tax on dividends.

15. What are the rates on royalties for withholding taxes?

Cyprus imposes no withholding tax on royalties.

16. What are the rates on interest for withholding taxes?

Cyprus imposes no withholding tax on interest.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

The foreign corporation will be taxed at 10% only on income earned in Cyprus.

18. Please list any other rates on withholding taxes that we should be aware of.

N/A

Tax Returns and Compliance

19. What is the taxable reporting period?

For companies and individuals it is the calendar year: January 1 - December 31.

20. What are the due dates for the filing of tax returns?

For individuals it is the 30th April following the year of assessment.

For companies it is 12 months following the year of assessment. Also companies need to file provisional corporation tax returns on 1 August, 31 September, 31 December of the year of assessment when the company must estimate its final income and pay tax. www.lexmundi.com Page 66 © 2012 Lex Mundi

21. What are the key compliance requirements?

As above.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

N/A

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Value Added Tax.

24. How does it operate? Is it a VAT or a sales tax?

Only VAT.

25. How is the taxable base determined?

VAT is charged on the provisions of goods or services in Cyprus, as well as on the acquisition of goods from the EU and the importation of goods into Cyprus.

26. What are the applicable rates?

Standard rate is 15%. There are also reduced rates at 0%, 5% and 8%.

27. Are there any exemptions?

 Letting of immovable property  Most banking, financial and insurance services  Most hospital, medical and dental care services  Certain cultural, educational and sports activities  Supplies of real estate  Governmental postal services  Lottery tickets  Management services provided to mutual funds

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

N/A

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

30. How do they operate?

Employer must pay contributions for the employees. Employees and self employed must also pay contributions.

31. How is the taxable base determined?

Gross salary or gross income.

32. What are the applicable rates?

Social Security Contributions - For employees it is 6,3% by employee and 6,3% by employer. - For self employeed it is 11,6%.

Social cohesion fund - 2% Redundancy fund - 1,2% Industrial training fund - 0,5%

33. Are there any exemptions?

No exemptions.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

N/A

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

No answer provided.

Cyprus has Double Tax Treaties with nearly 50 countries with various provisions. Countries are as follows:

Armenia, Austria, Belarus, Belgium, Bulgaria, Canada, China, Czech Republic, Denmark, Egypt, France, Germany, Greece, Hungary, India, Ireland, Italy, Kuwait, Kyrgyzstan, Lebanon, Malta, Mauritius, Moldova, Montenegro, Norway, Poland, Romania, Russia, San Marino, Serbia, Seychelles, Singapore, Slovakia, Slovenia, South Africa, Sweden, Syria, Tadzhilistan, Thailand, Ukraine, UK, USA.

Contact Information

George Ioannou Dr. K. Chrysostomides & Co. LLC [email protected] 1, Lampousas Street P.O. Box 22119 Nicosia, 1095 Cyprus

Tel 357.22.777000 Fax 357.22.779939 http://www.chrysostomides.com.cy

Tax Desk Book

Dominican Republic Prepared by Lex Mundi member firm Pellerano & Herrera

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

The Dominican Republic has a territorial tax regime and taxes are applied on Dominican Source Income. The main taxes applied in the Dominican Republic are the following:

(i) Income Tax for business entities and individuals.

The corporate income tax for business entities is of 25% rate of the net taxable income. Net taxable income is defined as the all Dominican Source Income received by the business entities for their operations less the allowed deductions set forth in the Dominican Tax Code.

The income tax for individuals levies the income received by the work rendered by employees, as well as the income obtained by those individuals who exercise a profession or liberal work, perform commercial activities or financial investments that are obtained abroad.

The Dominican Tax Code sets forth the income tax rate brackets for individuals as follows, (Amounts are adjusted annually by inflation:)  Income up to RD$330,301.00 are exempted. (This exemption only applies to individuals that are on a subordinate basis (employees);  Income from RD$330,301.01. to RD$495,450.00, 15% of the surplus of RD$330,301.01;  Income from RD$495,450.01 to RD$688,125.00 shall pay RD$24,772.00 plus 20% of the surplus of RD$495,450.01; and  Income from RD$688,125.01 and beyond, shall pay RD$63,307.00 plus 25% of the surplus of RD$688,125.01.

(ii) Assets Tax for business entities and Real Property Tax for individuals.

An assets tax of 1% is levied annually on all assets included in the tax payer´s general ledger, not adjusted by inflation, after applying all deductions for depreciation, amortization, reserves for bad debts, investments in shares made in other companies, land located in rural areas, properties affixed to rural production plants and the advance taxes.

However, the liquidated amount with regards to this tax shall be considered to be a tax credit against the Income Tax corresponding to the same fiscal year. In the event that the amount liquidated for this tax equals or exceeds the Income Tax to be paid, the business entity shall be exempted from the payment of the Assets Tax. In the event that the assets tax exceeds the income tax to be paid, then the assets tax must be paid.

A real property tax annually is levied annually on all homes, improvements or commercial establishments owned by individuals whose value exceeds RD$5,000,000.00 and this amount is annually adjusted by inflation. This tax rate for this tax is of 1% over the difference between the value of the real property and the amount that exceeds RD$5,000,000.00.

The ITBIS levies all transfers and importation of industrialized goods and services. The taxable rate is of 16% over the value of the good transferred or imported and the services rendered.

The ITBIS paid for (a) the importation of goods or (b) services rendered by a supplier can be offset

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

The taxable base is determined upon the taxable income. Taxable income is gross income reduced by deductions. The concept of “Gross Income” includes, without being limited to, the following: a) Compensation for services, including fees, commissions and similar payments; b) Those derived from businesses or from the exercise of a profession or similar activity; c) Profits derived from the commerce of goods, whether said business is exercised as a regular or occasional activity, as well as any other profit; d) Interests of any kind; e) Rentals or leases; f) Revenue received from the transfer of trademarks, patent rights and other similar concepts; and g) Pensions and annuities.

3. What revenues are included?

Income from Dominican Sources which include but are not limited to the following: a) Those which arise from capital, goods or rights located, placed or economically utilized in the Dominican Republic; b) Those obtained through the carrying out in the country of commercial, industrial, farming and ranching, mining or other similar activities c) Those which arise from personal work, the exercise of a profession or trade; d) Those which arise from salaries, payments and any kind of compensation that the State pays to its official representatives abroad or to other persons charged with duties outside of the country; e) Those which arise from the exploitation of any kind of industrial property, or from “know how”; f) Those which arise from the lending of technical assistance services, whether they are lent from outside or inside the country; g) Those which arise from loans, in general; h) Those which arise from interest on bonds issued by legal entities domiciled in the country and those which arise from loans guaranteed totally or partially by real property located in the Dominican Republic; and i) Those which arise from renting and leasing.

4. What deductions are allowed?

In order to assess the net taxable income, the expenses incurred in to obtain, maintain and conserve it must be subtracted from the gross income. Deductible expenses include: a) Interests on debts and expenses incurred through their constitution, renewal or cancellation, provided that they are directly related to the business and are involved in the acquisition, maintenance and/or operations of goods producing taxed income b) Taxes and rates levied on goods that produce taxed income, except for Income Tax and its surcharges, as well as the taxes, rates and rights incurred in acquiring, maintaining and www.lexmundi.com Page 71 © 2012 Lex Mundi conserving capital assets, contributions to public works that benefit private property and other taxes levied on capital income, except when the same are calculated as part of the cost of transferring the asset in question c) Insurance Premiums d) Extraordinary damages suffered by goods that produce profits as a result of accidental causes, force majeure or offenses by third parties shall be considered losses, but these must be reduced up to the amount of the value received by the taxpayer because of insurance or indemnification e) Depreciation. Amortization for wear and tear, depletion or old age, as well as for losses from justifiable disuse of the property utilized in the business entities operations. Depreciable assets include: Category 1. Buildings and their structural components at 5% per year Category 2. Automobiles and light trucks for common usage; office equipment and furniture; computers, information systems and data processing equipment at 25% per year Category 3. Any other depreciable assets at 15% per year f) Depletion. In the case of exploitation of a mineral deposit, including any gas or petroleum well, all the costs concerning exploration and development, as well as the interest attributable to it, must be added to the capital account g) Amortization of Intangible Assets. The depletion of the monetary cost of each intangible asset whose life has a defined limit, must reflect the life of said assets and the method of recovery in a straight line h) Non Collectible Accounts i) Donations to Institutions of Public Good j) Investigation and Experimentation Expenses k) Losses suffered by enterprises in their economic activities shall be deductible from profits obtained in the periods immediately following the losses, without exceeding 5 years l) Contributions to Pension and Retirement Plans m) Individual Taxpayers

5. What are the major expenses that are not deductible?

a) Personal expenses of the owner, partner or representative b) Withdrawals or Salaries. Sums withdrawn by the owner, partner or shareholder against profits, or as a wage, payment, reward or similar compensation, unless there is an effective rendering of services and its amount corresponds to its nature c) Losses from Illicit Operations d) The Income Tax, its Surcharges, Fines and Interest e) Expenses without Receipts. In this regard, a special tax receipt must be obtained from the tax authorities that will allow the expenses to be deductible f) Payments of persons or entities that act from abroad. Payments or salaries paid to members of board of directors, councils and other directive or administrative entities that act abroad, in case it is not demonstrated that the enterprise for the country effectively has obtained through said entities income from Dominican Sources g) Profits set aside, from a period, to increase capital or the reserves of enterprises h) Gratuities, bonuses or other similar concepts paid to employees and workers as extraordinary compensations, when the payment is made outside of the presentation term for the Income Tax Returns. In this case the deduction may be done in the fiscal year in which they are effectively paid i) The deductions made to inventory, whether they are reserves or not, allocated in order to protect against price fluctuations or possible contingencies j) The amounts destined for the acquisition of goods or permanent improvements and other expenses related to its operations, such as judicial costs, taxes, registration and transcriptions, and others that will be considered to be part of the acquisition cost of said good

www.lexmundi.com Page 72 © 2012 Lex Mundi k) Payments made by a business entity to its shareholders as fixed profits or relative fixed profits from preferred stock, but will be rather considered as dividends subject to the applicable withholding

6. What are the applicable federal rates?

No federal rates apply.

7. What are the applicable state and/ or other local rates?

For business entities, the applicable income tax rate is of 25% over the net taxable income. For individuals, The Dominican Tax Code sets forth the income tax rate brackets for individuals as follows (amounts are adjusted annually by inflation): (a) Income up to RD$330,301.00 are exempted. (This exemption only applies to individuals that are on a subordinate basis (employees) (b) Income from RD$330,301.01. to RD$495,450.00, 15% of the surplus of RD$330,301.01 (c) Income from RD$495,450.01 to RD$688,125.00 shall pay RD$24,772.00 plus 20% of the surplus of RD$495,450.01; and (d) Income from RD$688,125.01 and beyond, shall pay RD$63,307.00 plus 25% of the surplus of RD$688,125.01

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

In order to asses a capital gain subject to tax, the acquisition or production cost adjusted for inflation shall be deducted from the price or value of the transfer of the respective good. For purposes of the Dominican Tax Code, a capital gain means the gain from the sale, exchange or other method of disposal of a capital asset. The capital gain rate is of 25% over the gain received from the sale of a capital asset. In the event of business re-organizations in general, the results that may arise as a consequence of the reorganization shall not be affected by any tax, including capital gains tax.

9. How are operating losses handled?

Operating losses can only be offset against operating gains for a period not greater than 5 years. Operating losses must be made at a maximum rate of 20% per year of the total amount of losses. The 20% not deducted in a fiscal year cannot be deducted in future years, nor will it generate any reimbursement by the Dominican State. The operating losses can only be offset when filing the income tax return for the corresponding fiscal year.

The percentage rate per year allowed to be deducted by business entities for operations losses are: First Year - 20% Second Year - 20% Third Year - 20% Fourth Year - 20% of 80% of the net taxable income Fifth Year - 20% of 70% of the net taxable income

Losses sustained by absorbed entities resulting from a merger procedure cannot be used by the absorbing entity.

10. How are capital losses handled?

Capital losses sustained from the sale, exchange or other method of disposal of a capital asset can only be offset against capital gains obtained in the following periods.

Territorial Rules

11. What are the residence rules?

For tax purposes, those persons who remain in the country for more than 182 days during the fiscal period, whether continuously or not are considered to be residents of the Dominican Republic.

Any individual or legal entity residing in the Dominican Republic, as well as undivided inheritances of taxpayers domiciled in the country shall pay the tax on their Dominican income sources, and from sources outside of the Dominican Republic arising from investments and financial gains.

Individual persons, whether nationals or foreigners, who become residents of the Dominican Republic shall only be taxed on their income from foreign sources after the third year or taxable period starting on that which they become residents.

12. Is worldwide income taxed?

No; a territorial regime applies, with the exception of income arising from investment and financial gains abroad.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Taxpayers residing or domiciled in the Dominican Republic may credit against the tax assessed on their taxable income in each fiscal period: a) Taxes on income effectively paid abroad on income from foreign sources taxed by the Dominican Tax Code, up to an amount not exceeding that which corresponds to what would have been paid on this same income in accordance with the tax on Dominican income b) Amounts that have been withheld during the same fiscal period on the income received or credited on account, as payment on account of the income taxes established in the Dominican Tax Code c) Advance payments on income taxes effectively paid, corresponding to the same fiscal period d) Favorable balances of the income taxes established in the Dominican Tax Code, arising from excess payments or payments not owed for other reasons, in the manner established in the Dominican Tax Code Regulations e) Amounts withheld and remitted to the Revenue Agency as withholdings upon the distribution of cash dividends, not off-setted by advance payments of the enterprise, constituting a reimbursable credit of the tax to be paid to the one doing the withholding

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

The rate of withholding tax on dividends is 25%.

15. What are the rates on royalties for withholding taxes?

The rate of withholding tax on royalties is 25%.

16. What are the rates on interest for withholding taxes?

The withholding tax rate on interest paid to accredited financial institutions located abroad is of 10% on the amount of interest paid. For non-accredited financial institutions, the withholding tax for interest is of 25%. www.lexmundi.com Page 74 © 2012 Lex Mundi

17. What are the rates of withholding tax on profits realized by a foreign corporation?

The withholding tax rate on profits realized by a foreign corporation is of 25% of its net taxable income if it becomes domiciled and resident in the Dominican Republic. However, the repatriation of the profits obtained by the foreign company branch in the Dominican Republic to its parent company, after paying the appropriate 25% income tax, is not subject to any withholding tax.

18. Please list any other rates on withholding taxes that we should be aware of.

The corporations and the sole owned businesses shall act as withholding agents when they pay or credit into accounts of other individuals, as well as any other entities not exempted from tax, except for other corporations. The withholding set forth herein shall be made in the percentages of the gross income indicated below: a) 10% on the amounts paid or credited in respect of tax or lease of any kind of personal or real property, to be construed as payment on account b) 10% on fees, commissions and other payments for rendering services in general, by individuals, not provided under a dependency relationship, which provisions requires the direct intervention of a human resource, as a payment on account c) 15% on the prizes or profits obtained in lotteries, lotos, lotto quiz, electronic games, bingos, horse racing, gambling places, casinos and any other type of prize offered through promotional or advertising campaigns as a definitive payment d) 5% on payments made by the state and its dependencies including state owned enterprises and non centralized and autonomous organizations, to individuals for the acquisition of goods and services in general, not provided in a subordination relationship, as a payment on account e) 10% for any type of income not contemplated in these provisions, as an advance payment on account. When payments are made in this respect, they shall be considered as payment on account applicable to a presumable net income as indicated below: i) Payments to cover services to transport cargo or passengers, based on a presumed net income of 20% of the gross value paid, which in this case the withholding will be 2% of said amount ii) Payments to cover non-hired personal services. Non personal services are considered as, but not limited to: fumigation, cleaning, electrical or mechanical repairs, as well as masonry, wood work, painting and plumbing services, based on a presumed net income of 20% of the gross services paid; therefore the withholding shall result in 2% of such amount iii) Payments to contractors, engineers, construction manager and similar workers, for buildings or constructions of civil works, such as roads, motorways, aqueducts, sewage an others, based on a presumed net income of 20% of the gross paid value, and therefore the withholding shall be 2% of such amount iv) In the event of transfer of movable assets subject to registration, 10% shall apply on the basis of a presumed net income of 20% of the gross amount of the asset being sold and therefore the withholding shall be 2% of such amount v) Interests of any nature paid in the country by sole owned businesses and corporations in general that are not regulated financial entities, provided that the beneficiary is not a corporation, are subject to 10% over the interest paid. However, if the interests are paid or accredited abroad, the withholding will be of 25%, notwithstanding that the beneficiary located abroad is not an accredited financial institution

19. What is the taxable reporting period?

For business entities income tax, the taxable reporting period is of 120 days after the end of their fiscal year. A business entity can choose four (4) different fiscal years: March 31st, June 30th, September 30th or December 31st.

With the exemption of employees, individuals must report annually an income tax return within 90 days after the closing of the fiscal year and shall be paid by no later than March 31st of each year. Individuals that are in a transitory condition in the country and obtain Dominican source income must report, before exiting the country, in addition to the annual income tax return, a tax return related to the Dominican source income obtained and not declared until the date of their departure.

20. What are the due dates for the filing of tax returns?

a) Income Tax Returns and Assets Tax for Business Entities: 120 days after the closing of the fiscal year; b) Income Tax for Individuals: 90 days after the closing of the fiscal year; c) Withholdings Declaration to Income Tax: the first ten (10) days of the subsequent month; d) Final tax declaration for the closing of business, Reorganizations or Liquidation: sixty (60) days after the facts; e) ITBIS tax declaration: the first twenty (20) days of the subsequent month; f) Excise Tax: The first twenty (20) days of the subsequent month; g) Advance Tax Declaration: the fifteenth (15th) day of the subsequent month; h) Annual Withholding Agent Tax Declaration: the fifteenth (15th) day of March of the subsequent year; i) Tax Return Declaration for Real Property Tax: The first sixty (60) days of the year and payable in two (2) equal installments; the first, by March 11 and the remaining balance by September 11; and j) Tax on bank transfers and checks: Friday of each week.

21. What are the key compliance requirements?

All business entities must present, in addition to their income tax returns, an annual balance sheet, the profit-and-loss statement; and all other complementary statements as required by the tax authorities, and the forms issued by the tax authorities. All financial statements must be reported annually by the business entities and accompanied with a favorable auditor’s report issued by an independent Authorized Public Accountant, or duly accredited firm.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

All taxpayers must annually remit a report on all tax receipts that have been canceled in a fiscal period, specifying the reasons for their cancellation. In addition, all taxpayers must annually remit a report on all transactions made that will complement the monthly reported expenses, but that for being payments to service providers located abroad, such transactions are not sustained in an authorized tax receipts such as: payment of interests for loans, royalties, publicity and similar payments.

23. Are there any indirect taxes in your jurisdiction?

Yes; there is a tax on the transfer of industrialized goods and services (ITBIS).

24. How does it operate? Is it a VAT or a sales tax?

It is a Value Added Tax which levies the following: a) the transfer of industrialized goods; b) the imports of industrialized goods; and c) the provision of taxed services.

The Dominican Republic uses the invoice method of collection. Each seller charges ITBIS rate on his output and passes the buyer a special invoice that indicates the amount of tax charged. Buyers who are subject to pay ITBIS on the importation of goods and to local suppliers for the acquisition of goods or services burdened by this tax, use these invoices to obtain a credit (reduction) towards their own VAT liability. The difference in tax shown on invoices passed and invoices received is then paid to the government. In the event of negative liability, a refund is claimed to the tax authorities.

25. How is the taxable base determined?

The taxable base is determined by: a) Transferred Goods: The net price of a transfer plus the additional services granted by the seller, such as: transportation, packaging, freight and interest on financing, whether or not invoiced separately, less granted bonuses and discounts. b) Imports: The result from applying customs duties, all taxes on imports, or caused by them to the fixed value. c) Services: The total value of the services rendered, excluding the legal tip.

26. What are the applicable rates?

The ITBIS rate is of 16% of the value of each taxable transfer and/or rendered service made in the same period.

27. Are there any exemptions?

The goods exempted from this tax are the following: a) Living Animals; b) Fresh, frozen or dehydrated meat; c) Fresh, frozen or dehydrated chicken meat; d) Fresh, frozen or dehydrated fish; e) Dried, evaporated, condensed, powdered and pasteurized milk, eggs, and honey; f) Fresh, frozen, dried and canned fruits and vegetables from the farming and ranching sector; g) Coffee; h) Cereals, flour in general; i) Corn and wheat; j) Bread, flour in general, vegetables, chocolate for domestic consumption and cocoa; k) Petroleum and its derivatives; l) Medicine for human and animal use; m) Fertilizers, manure, seeds and animal feed; n) Fungicides, herbicides and insecticides; o) Books, newspapers and magazines; p) Education materials and related products; q) Other products.

www.lexmundi.com Page 77 © 2012 Lex Mundi The services exempted from this tax are the following: a) Educational Services b) Health Services c) Financial Services, including insurances d) Pension and retirement plans e) Land and Cargo Services f) Electricity, water and waste collection services g) Home Rent Services h) Personal care services

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

A tax of RD$1.50 per each RD$1,000.00 on the values paid by checks or wire transfers. Payments made to public entities such as the Social Security Treasury, the Tax Administration and the General Customs Department are exempted from the payment of this tax.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

The parafiscal contributions in the Dominican Republic are the following: (a) Social Security Contributions: (i) Occupational Hazard Insurance; (ii) the Family Health Insurance; and (iii) As for the Old Age, Disability and Survival Benefits insurance. (b) Contributions to the Technical Professional Training Institute (INFOTEP); (c) Fringe Benefits: (i) Christmas Salary; (ii) Profits Sharing Bonus; and (iii) Vacation Compensation.

30. How do they operate?

The Social Security Contributions are established under Law 87-01 which is based on joint contributions made by employers and employees. All companies operating in the Dominican Republic are subject to the payment of a monthly quota to INFOTEP. The fringe benefits operate in the following manner: a) Christmas Salary. The employer is obliged to pay the worker during the month of December, the twelfth part of the ordinary salary earned by the worker during the calendar year. b) Profit Sharing Bonus. It is mandatory for every company to grant a participation equivalent to ten percent (10%) of the net annual profits or benefits to all of its indefinite-time-period workers. c) Vacation compensation: After having completed one year of continuous work, workers acquire the right to vacation of fourteen (14) working days, with the enjoyment of salary as per a specific scale.

31. How is the taxable base determined?

The taxable base for social security contributions is the wages earned by the employee.

The taxable base for contributions to INFOTEP is the personnel salary, as well as the annual bonuses paid to the employees, in the event that there are any.

The taxable base of the fringe benefits is the ordinary or base salary, not including overtime.

32. What are the applicable rates?

(A) The Occupational Hazard Insurance. This insurance will be financed with an average contribution of 1.2% of the applicable wages, totally covered by the employer. The total contribution from the employer will have two components: i) A fixed base rate of 1% to be applied evenly to all employers; and ii) A variable rate of up to 0.6% established in agreement with the field of activity and risk factor of each enterprises. In both cases, said percentages shall be applied on the bases of the applicable wages.

Maximum contribution in this insurance is of 10 minimum wages.

(B) For the Family Health Insurance. Financing of the insurance under Law 87-01 will be conducted gradually from joint contributions of employees and employers as follows:

Employees’ contribution 2009: 3.01% 2010 – 2012: 3.04%

Employers’ contribution 2009: 7.02% 2010 – 2012: 7.09%

The maximum wage contributing shall be the equivalent of 10 minimum wages.

(C) As for the Old Age, Disability and Survival Benefits Insurance, financing shall be handled gradually from joint contributions of employees and employers as follows:

Employees’ contribution 2009: 2.72% 2010: 2.87%

Employers’ contribution 2009: 6.75% 2010: 7.10%

The contributions made to INFOTEP must equal 1% of the personnel salary, as well as 0.50% of the annual bonuses paid to the employees, in the event that there are any.

The tax rates applicable to the fringe benefits are the following: i) Christmas Salary: 1/12 of the ordinary salary earned by the worker during the calendar year. ii) Profit Sharing Bonus: A participation of up to 10% of the net annual profits or benefits to all of its indefinite-time-period workers, in the following manner: - 0 to 1 year: monthly salary x Number of months/12x1.5 - 1 to 3 years: equivalent to 45 days of ordinary salary - More than 3 years: equivalent to 60 days of ordinary salary iii) Vacation Compensation. After having completed one year of continuous work, workers acquire the right to vacation of 14 working days, with enjoyment of salary, as per the following scale: - 14 days of ordinary salary for continuous work from 1 to 5 years - 18 days of ordinary salary, for continuous work no less than 5 years

If the Agreement terminates before completing the year of services, it must be compensated or indemnified according to the special scale: 5 months - 6 days 6 months - 7 days 7 months - 8 days 8 months - 9 days www.lexmundi.com Page 79 © 2012 Lex Mundi 9 months - 10 days 10 months - 11 days 11 months - 12 days

Minimum wages are established by the National Salary Committee. On its last resolution it issued wages for the private sector, as follows: a) RD$7,360.00 when employers’ total assets equals or exceeds RD$4,000,000.00 b) RD$5,060.00 when employers’ total assets equals or exceeds RD$2,000,000.00 but are lower than RD$4,000,000.00 c) RD$4,485.00 when employers’ total assets do not exceed RD$2,000,000.00

33. Are there any exemptions?

Exemptions to the payment of the salary of Profit-Sharing Bonus are: 1) Agricultural, agro-industrial, industrial, forestry, and mining companies during the first three (3) years of operations, except by agreement to the contrary; 2) Agricultural companies whose capital does not exceed one million pesos (RD$1,000,000.00) which is approximately US$28,000.00, 3) Industrial free zone companies.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Inheritance Tax The inheritance tax is triggered upon the death of the deceased. The asset of the deceased estate is levied with a 3% rate, after making the appropriate deductions for (a) debts acquired by the deceased that is established under a public or private document; (b) taxes and rights pending to be paid by the deceased; (c) the expenses of the last decease pending to be paid when the death occurred; (d) all funeral debts and expenses; (e) the mortgages when the real property that serves as security is within the territory of the Dominican Republic; (f) the amounts due to employees for severance in the event of death of their employers; (g) the expenses for stamp taxes and inventories.

The taxable base for the inheritance tax is: a) all of the real and personal property located in the country; and b) all personal property, whichever is their nature or situation, when the deceased is a Dominican resident or has had its last domicile in the country. The inheritance tax will be levied on (i) all assets of the succession, when the transmission is made to a universal successor; (ii) Over the portions of each successor when they concur to the succession as universal successor; and (iii) over the legacy made by a will of the deceased.

Donations tax The donations tax is triggered upon the making the donation to a particular party. The rate for donations is of 25% over the value of the donation. The taxable base is the value of the donation.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

The main incentive laws are the following: a) Free Zones Entities under Law 8-90 b) Tourism Development Law 158-01 c) Law 28-01 for Border Development d) Renewable Energy Law 57-07 e) Law 56-07 that declares as a national priority the textile, tailoring, accessories, leather, fabrication of leather footwear industries. The Dominican Republic has transfer pricing rules applicable to transactions with related companies. The general principle is that when legal acts between a local enterprise of foreign capital and a natural person or legal entity domiciled abroad that directly or indirectly controls it shall be considered to be, in principle, made between independent parties when their provisions adhere to normal market practices between independent entities.

In order to establish the transfer pricing for related entities, the Dominican source income of branches and other forms of permanent establishments of foreign entities that operate in the country will be determined over the basis of the real results obtained for their operations in the country.

When the accounting elements of such enterprises do not reveal the real results that were obtained by their operations in the country, the tax authorities may determine the taxable income applying to the gross income received by the permanent establishment in the country, the proportion that exists between the total revenue of the controlling entity and the gross income of the establishment in the country. The tax authorities may also set the taxable income with the proportion that exists between the total revenue of the controlling entity, the proportion that exists between the total revenue of the controlling entity and the total assets of the latter.

When the prices that the branch or permanent establishment collects to its parent company or to other branch or related entity of the parent company do not relate to the values that for similar operations it is collected to independent entities, the Tax Administration may challenge the same. Such payments must be necessary to maintain and preserve the income of a permanent establishment in the country.

The tax authorities may challenge as an unnecessary expense to produce and maintain taxable income, the excess determined by the amount due and paid by interests, commissions, and any other payment, that results from credit or financial operations made with the parent or entity related to the same.

The only country that has a double taxation treaty with the Dominican Republic is Canada. The withholding taxes for this Treaty are the following: (a) Distribution of Dividends (18%); (b) Payment of Royalties (18%); and (c) Payment of Interests (18%).

Finally, with the United States of America, the Dominican Republic has a Taxation Information Exchange Treaty.

Norman De Castro Pellerano & Herrera [email protected] Av. John F. Kennedy #10 Santo Domingo, Dominican Republic

Tel 1.809.541.5200 Fax 1.809.567.0773 http://www.phlaw.com

Tax Desk Book

Estonia Prepared by Lex Mundi member firm LAWIN

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

The Estonian tax system comprises direct and indirect taxes.

Direct taxes are personal and corporate income tax, social tax, unemployment insurance payment, land tax, heavy goods vehicle tax, customs duties.

Indirect taxes are value added tax, excise duties, gambling tax.

Also there are some local taxes which are imposed by rural municipalities or city councils. These taxer are for example boat tax, advertisement tax etc.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

Income tax is imposed on the income of a taxpayer from which the deductions allowed pursuant to law have been made.

3. What revenues are included?

Income tax is charged on income derived by a resident natural person during a period of taxation from all sources of income in Estonia and outside Estonia.

Corporate income tax is charged on profit distributions such as dividends and implicit distributions (i.e., fringe benefits, gifts and donations, as well as expenditures and payments not related to the business activities of the company).

4. What deductions are allowed?

For resident natural person: basic exemption per year, increased basic exemption in case of child, in event of pension, in event of compensation for accidetn at work or occupational disease, maintenance support, housing loan interest, training expenses, gifts, donations and trade union entrance and membership fees, insurance premiums and acquisition of pension funds, mandatory social security contributions.

The deductions are altogether limited to 50 000 kroons per taxpayer during a period of taxation, and to not more than 50 per cent of the taxpayer's income of the same period of taxation, after the deductions relating to enterprise have been made.

5. What are the major expenses that are not deductible?

The following shall not be deducted from business income:  income tax, except for income tax paid on fringe benefits;  fines and penalty payments imposed on the basis of law and interest paid on the basis of the Taxation Act  the cost of property seized from the taxpayer;  the environmental charge paid at an increased rate pursuant to the Environmental Charges Act, and compensation paid for damage caused to the environment or a third party by pollution or through violation of requirements prescribed by law;  expenses incurred in the provision of benefits not subject to income tax pursuant to Income Tax Act;  the cost of gifts or donations;  any loss from the transfer, at a price lower than the market price, of property to a person associated with the taxpayer, unless income tax has been paid on such loss;  any loss from the transfer, at a price higher than the market price, of property purchased from a person associated with the taxpayer;  gratuities and bribes;  payments and contributions paid in Estonia or a foreign state if the objective of payment was to guarantee pension, health, maternity, unemployment, accident at work or occupational disease insurance to the person.

6. What are the applicable federal rates?

N/A

7. What are the applicable state and/ or other local rates?

The income tax rate is 21% in 2009. Corporate income tax rate is 21/79 in 2009.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Tax rate for resident natural person is 21%.

9. How are operating losses handled?

According to Estonian corporate income tax system there are no need for special rules on handling operating losses.

10. How are capital losses handled?

According to Estonian corporate income tax system there are no need for special rules on handling capital losses.

11. What are the residence rules?

A natural person is a resident if his or her place of residence is in Estonia or if he or she stays in Estonia for at least 183 days over the course of a period of 12 consecutive calendar months. A person shall be deemed to be a resident as of the date of his or her arrival in Estonia.

A legal person is a resident if it is established pursuant to Estonian law.

12. Is worldwide income taxed?

Resident natural person pays income tax on his worldwide income.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

It is possible to deduct taxes paid abroad.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Estonia has no withholding taxes on dividends since January 1, 2009.

15. What are the rates on royalties for withholding taxes?

10%. A tax treaty in many cases prescribes for lower rates of a withholding income tax (generally 5%).

16. What are the rates on interest for withholding taxes?

21%. Income tax is charged on interest received by a non-resident from the Estonian state, a local government or a resident, or from non-resident through or on account of its permanent establishment registered in Estonia, if it significantly exceeds the amount of interest payable on the similar debt obligation under the market conditions during the period of occurrence of the debt obligation and payment of the interest. In that case income tax is charged on the difference between the interest received and the interest payable according to market conditions on the similar debt obligations

17. What are the rates of withholding tax on profits realized by a foreign corporation?

21%. Applicable only if non-resident has no permanent establishment in Estonia and there are no tax treaties between Estonia and the non-resident residentiual state.

18. Please list any other rates on withholding taxes that we should be aware of.

No answer provided.

Tax Returns and Compliance

19. What is the taxable reporting period?

20. What are the due dates for the filing of tax returns?

Resident natural persons. The declaration has to be submitted by 31th of March following the taxable period.

Resident legal persons. Resident legal persons are required to submit a tax return regarding the expenses and payments concerning the previous calendar month to the regional structural unit of the Tax and Customs Board by the tenth day of the calendar month following the period of taxation.

21. What are the key compliance requirements?

Declaration must be submitted accordingly to forms. It is also possible to submit declaration electronically via e-tax board.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

No answer provided.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

VAT, excise duties, gambling tax.

24. How does it operate? Is it a VAT or a sales tax?

VAT is applied as tax on added value. Estonian VAT rules are based on EU VAT Directive.

25. How is the taxable base determined?

The following shall be subject to value added tax:  supply created in Estonia, except supply which is exempt from tax;  import of goods into Estonia except imports exempt from tax;  provision of services the place of supply of which is not Estonia, except supply exempt from tax;  supply of goods or services specified in VAT Act if the taxable person has added value added tax to the taxable value of such goods or services;  intra-Community acquisitions of goods, except intra-Community acquisitions of good which are exempt from tax.

26. What are the applicable rates?

General rate is 18%. Reduced rate is 9% and 0% is also applicable in certain cases.

27. Are there any exemptions?

Value added tax shall not be imposed on the supply of certain goods and services of a social nature provided in VAT Act. For instance real estate, financial services etc.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Estonia has social tax, mandatory funded pensions payment and an unemployment insurance premium.

30. How do they operate?

Social tax rate is 33% Employers pay the social tax in full. Unemployment insurance is withheld by the employer at a rate of 0,6% of the gross salary of the employee.

In addition to this, employers pay the unemployment insurance premium at a rate of 0.3% of the sum of gross salaries monthly.

A funded pension payment is withheld at a rate of 2% for the persons under the obligation, which is envisaged by the funded pensions act. (In addition to the 2% withheld, the state adds 4% of the gross salary of a person under obligation at the expense of the social tax paid for that person.)

31. How is the taxable base determined?

Social tax shall be paid: 1) on wages and other remuneration paid to employees in money; 2) on wages and other remuneration paid to public servants. 3) on remuneration paid to members of the management or controlling bodies of legal persons and to the trustee in bankruptcy and members of the bankruptcy committee in the bankruptcy proceedings of a natural person; 4) on the business income of sole proprietors after deductions relating to enterprise and permitted in the Income Tax Act have been made; 5) on remuneration paid to natural persons on the basis of contracts for services, authorisation agreements or contracts under the law of obligations entered into for the provision of other services, including remuneration paid on the basis of contracts provided for in subsection 13 (2) of the Sport Act in the cases provided for in clause 9 (1) 2) of this Act; 6) on fringe benefits within the meaning of the Income Tax Act, expressed in monetary terms, and on income tax payable on fringe benefits; 7) on benefits paid pursuant to the Unemployment Insurance Act; 8) on remuneration which is not specified in clauses 1)-4) and 6) of this subsection and which is paid pursuant to an Act or other legislation for the performance of work.

Contribution to mandatory pension fund shall be made on remuneration determined in Social Tax Act i.e salary, remuneration to management bodies of legal persons etc.

32. What are the applicable rates?

See sec.30

33. Are there any exemptions?

Generally, all the payments incurred in employment are taxed with some exemptions as for example remuneration of legal person management bodies is not taxed with unemployment insurance premium.

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

N/A

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

N/A

Estonia has tax treaties in force with 44 states:  USA  Armenia  Aserbaijan  Austria  Belgium  Bulgaria  Georgia  China  Spain  Netherlands  Croatia  Ireland  Island  Italy  Canada  Kazakhstan  Greece  Lithuania  Luxembourg  Latvia  Malta  Moldova  Norway

www.lexmundi.com Page 88 © 2012 Lex Mundi  Poland  Portugal  France  Sweden  Romania  Deutchland  Singapore  Slovak  Slovenia  Finland  Great Britain  Switzerland  Denmark  Czehc Republic  Turkey  Ukraine  Hungary  Belarus

The treaties are based on OECD model tax convention. All the abovementioned tax rules are based on OECDs model convention.

Contact Information:

Marilin Mihkelson LAWIN [email protected] Niguliste 4 Tallinn, 10130 Estonia

Tel 372.630.6460 Fax 372.630.6463 http://www.lawin.com

Tax Desk Book

Finland Prepared by Lex Mundi member firm Roschier, Attorneys Ltd.

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

General According to the Finnish constitution, the right of taxation lies with the State, the municipalities and the local communities of the Evangelical Lutheran and Orthodox Churches. The Finnish tax legislation is modeled along the lines of the tax legislation in the Nordic countries.

The Finnish tax system underwent a major reform concerning corporate taxation as of the beginning of 2005. The most fundamental changes of the reform included a tax exemption of capital gains on the disposal of certain shares by corporate entities and the abolishment of the imputation tax credit system.

The main part of taxation in Finland is derived from two categories, i.e. taxes on income, profits and capital gains on one hand, and taxes on goods and services, on the other. Further major sources of tax revenue are the municipal income tax and social security contributions paid by employers and payments to the pension funds of pension insurance companies.

Direct Taxes The direct taxes imposed broadly consist of the following: State income taxes; Communal tax; Church tax; Corporate income tax; Tax withheld at source; and Social security contributions.

State income taxes are levied on the earned income and capital income of individuals and the estates of deceased persons. The tax on earned income is levied on a progressive scale determined annually.

The main corporate tax imposed on companies is the national corporate income tax. As of 1 January 2005, Finnish corporate income taxation is based on a modified classical double taxation system. All resident companies, cooperatives and resident branches of non-resident companies are subject to corporate income tax.

Certain entities, such as the Bank of Finland, the University of Helsinki, the Finnish Broadcasting company and the Nordic Investment Bank, are not taxable persons.

Indirect taxes As of 1 June 1994, Finland adopted the value added tax, which replaced the partly cumulative turnover tax. VAT is levied at all stages of the production and distribution chain on the basis of the value added to the goods and services at each stage. The VAT system has been harmonised with the EC rules. Other indirect taxes are, for example, excise duties and transfer taxes.

Group taxation In a group of companies, each company is taxed separately. The concept of consolidated income tax return is unknown in Finnish tax law, although a group of companies for company law purposes is required to prepare a consolidated balance sheet. The same result may, however, be achieved under www.lexmundi.com Page 90 © 2012 Lex Mundi the group contributions regime. In certain very strictly regulated situations, a Finnish group can under the Finnish Group Contribution Act reduce its total tax cost through having profit-receiving companies pay group contributions to loss-making companies. Group contributions, subject to these strict conditions, are deductible expenses for the paying company and part of the taxable income of the receiving company.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

Individuals The income is divided into earned income and capital income. Earned income is defined as any income other than capital income. In the tax computation the gross employment income less deductions constitute the taxable earned income. In the total tax levied on income from employment also municipal income tax, church tax and sickness insurance premium are included. Capital income (if taxable) is calculated separately, including capital gains, interest income, rental income and less capital losses and interest paid.

The Income Tax Act defines the following items of income, inter alia, as exempt income: certain pension schemes and welfare benefits; amounts received as maintenance for a child; major awards which are annually named on an application in advance; inheritances and gifts (taxed separately under the Inheritance and Gift Tax Act); certain scholarships; salary or wages derived by a resident individual from employment abroad lasting for a continuous period of at least six months; certain remunerations paid by international organizations; special subsidy paid to immigrants; customary and reasonable staff discounts on goods and services.

Business entities (companies) The tax computation is based on the company's profit and loss account. The taxable income is the profit shown in the profit and loss account adjusted as accepted or required by the tax laws, i.e. the amount of net taxable income is calculated by deducting expenses and depreciations from gross income. Losses can be carried forward from the previous ten years.

A company can have taxable income from a maximum of three different sources. All business income is treated as a single source. In case a company makes investments in property which does not directly benefit its business, the income from these investments may be treated as "personal income". The profits and losses generated by such investments cannot be offset against business losses or income, but only against personal losses or income. The agricultural income source includes income from agriculture and forestry. The taxable income is determined separately for each income source, and the profit is taxed separately for each source at a flat rate of 26 per cent (in 2009).

3. What revenues are included?

Individuals Taxable personal income of a resident employee includes, inter alia, wages and salaries, employee stock options, earned income dividends, pensions and annuities, certain insurance compensation, scholarships and awards and car benefits. Capital income comprises dividends not taxed as earned income, interest, capital gains, rent and other return on capital.

Dividends For individual shareholders 70 per cent of dividend from publicly listed companies is taxed as capital income at a rate of 28 per cent and 30 per cent is tax exempt. For non-quoted companies, dividends in an amount corresponding to a 9 per cent annual yield representing the shareholder's part on the www.lexmundi.com Page 91 © 2012 Lex Mundi net worth of the company is tax exempt. However, the maximum annual amount of such wholly tax exempt dividends (from all sources together) is EUR 90 000 per individual. If the amount of dividends exceeds the EUR 90 000 limit but not the 9 per cent limit, 70 per cent of the exceeding part is taxed as capital income (flat rate of 28 per cent) and 30 per cent is tax-exempt income. If the amount of dividends exceeds the 9 per cent limit, 70 per cent of the exceed-ing part of the dividends is taxed as earned income (progressive taxation), 30 per cent being tax exempt income. Dividends received from a non-resident company are, with certain exceptions, taxed in the same way as a domestic dividend.

Companies In general, all income derived by companies is taxable on an accrual basis. Dividends and capital gains on certain shares are exempted under certain conditions (participation exemption).

Dividends In general, dividends received by a Finnish resident corporate shareholder are tax-exempt income. However, if the shares on which the dividend is paid belong to the investment assets, 75 per cent of the dividend constitutes taxable income (there are exceptions). If the distributor is a quoted company and the recipient is a non-quoted company, 75 per cent of the dividend constitutes taxable income. As an exception, the dividend is tax exempt if the quoted distributor is resident in Finland or another EU Member State and the recipient is a non-quoted company, which owns at least 10 per cent of the share capital of the distributor. If the distributor is resident outside the EU the dividend is 100 per cent taxable income. However, if the distributor is resident in a tax treaty country, 75 per cent of the dividend generally constitutes taxable income.

4. What deductions are allowed?

Individuals The taxpayer is allowed to deduct from earned income all expenses incurred in acquiring or maintaining such income ("natural deductions"). The following items, inter alia, are considered to be natural deductions: wages and salaries, pensions paid to former employees; membership fees paid to employers' organizations or trade unions; payments to unemployment funds; certain travelling expenses from the place of residence to the place of employment; expenses for professional literature and research equipment; expenses incurred in scientific or artistic work; and municipal tax on real property relating to the taxpayer's acquisition of income.

A taxpayer is allowed to deduct from his capital income, inter alia, expenses incurred in earning or maintaining such income. Capital gains or losses are calculated by deducting the original purchase price of the asset as well as sales related expenses from the sales price. However, taxpayers may also elect to apply an acquisition cost presumption instead of the actual acquisition cost. The acquisition cost presumption is normally 20 per cent, but 40 per cent of the sales price in case the sold assets have been held for at least ten years. If the acquisition cost presumption is used, no other expenses can be deducted in addition.

Business entities (companies) As a main rule, deductions are allowed for all costs and expenses incurred by the business during the tax year for the purpose of earning, securing, or maintaining the taxpayer's income. An exception is losses, including liquidation losses, relating to disposals of shares eligible for the participation exemption on capital gains.

To be tax deductible, an item must be included in the profit and loss account of the entity. Deductible items include: salaries and wages, interest expenses, royalty payments, donations within certain limits and 50 per cent of entertainment expenses.

Expenses incurred in acquiring fixed assets (excluding e.g. shares and land areas) are deducted by depreciation. In general, a company may depreciate, using the declining-balance method, up to 25 per cent of the total net book values of the company's entire stock of machinery and equipment. The maximum depreciation rates permitted for different types of building and other construction in a www.lexmundi.com Page 92 © 2012 Lex Mundi particular tax year are 4,7 or 20 per cent, depending on the purpose for which it is used and the type of the building or the construction.

5. What are the major expenses that are not deductible?

Individuals Generally all expenses, which cannot be regarded as expenses for acquiring and maintaining taxable income, are non-deductible. Such non-deductible expenses would be, inter alia, the costs of accommodation, food and clothing expenses and expenses for entertainment and leisure time.

Business entities (companies) Non-deductible expenses include: expenses not necessary for earning income; income taxes; a loss arising in connection with a merger, fines and similar penalties, capital losses under certain circumstances and 50 per cent of entertainment expenses.

Payments to affiliates of amounts above normal cost may be disallowed.

6. What are the applicable federal rates?

Individuals Income from capital is subject to the national income tax rate at a flat rate of 28 per cent. Earned income is subject to the national income tax at progressive rates, according to the following rates (tax year 2009):

For taxable income of EUR 13,100-21,700 the tax on the lower amount amounts to EUR 8 and the tax rate on excess is 7 per cent. For income of EUR 21,700-35,300 the tax on the lower amount is EUR 610 and the tax rate on excess 18 per cent. For income of EUR 35,300-64,500 the tax on the lower amount is EUR 3,058 and the rate on excess 22 per cent. And, for income from EUR 64,500 and upwards the tax on the lower amount is EUR 9,482 and the tax rate on excess is 30,5 per cent.

Business entities (companies) Business income is subject to the corporate income tax at a 26 per cent rate (tax year 2008). Income from capital is also subject to the corporate income tax rate at a 26 per cent rate (tax year 2008).

7. What are the applicable state and/ or other local rates?

Earned income is subject to the municipal income tax at proportional rates. The rates vary among municipalities from approximately 16 per cent to 21 per cent (tax year 2009).

The real estate tax rate that applies to buildings used for residential purposes varies between 0.22 per cent and 0.5 per cent. The rate applicable to other kinds of real estate property ranges between 0.5 per cent and 1 per cent. A special rate between 1 per cent and 3 per cent can be applied to certain unbuilt real estate property within city zoning areas. The tax rates are stated as they were at the beginning of 2009.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Individuals In general, there are no tax consequences to shareholders of companies involved in a merger or demerger, as long as the merger or demerger qualifies for tax-free treatment under the Finnish Business Income Tax Act. An exchange of shares in a merger or demerger for shares of the acquiring company or companies is not regarded as a disposal for capital gains tax purposes. Capital gains taxation is deferred until the shares acquired in the exchange are alienated.

Capital gains received by a resident company on the sale of shares in a company (other than a real estate company or a venture capital company) are exempt if the following conditions are met:  the shares belong to the vendor company's fixed assets;  the vendor company has owned at least 10 per cent of the share capital in the company directly and continuously for at least one year during a period that ended no more than one year prior to the sale; and  the company whose shares are sold is resident in Finland or another EU Member State, or in a country with which Finland has a tax treaty.

The EC merger Directive has been implemented in Finland. Mergers, demergers, transfer of assets and exchange of shares qualify for special tax treatment under the Finnish Business Income Tax Act.

In a qualifying merger, the assets and liabilities of the merged company are treated for tax purposes in the same manner by the acquiring company. Taxation is deferred until the assets are sold or assigned by the acquiring company.

The current law provides for two kinds of tax-neutral demergers, i.e. the complete demerger and the partial demerger. The tax treatment and the tax deferral for demergers are the same as for mergers.

Qualifying transfers of assets and exchanges of shares have no direct income tax consequences.

9. How are operating losses handled?

Individuals Losses in earned income: Income is divided into three sources of income: business income, agricultural income and other source of income (salaries, wages, pensions etc.). If any of these sources shows a loss, this loss is carried forward for ten years and set off against income from the same source. Losses are deducted in the order in which they are incurred. However, losses from business profits or agricultural income sources can be deducted from capital income of the same tax year if the taxpayer or, in the case of spouses, both spouses so demand.

Losses in capital income: In case of losses in capital income, generally 28 per cent of the loss can be deducted from tax levied on earned income. The maximum deduction is EUR 1,400 for an individual with no children, EUR 1,800 for an individual with one child and EUR 2,200 for an individual with two or more children.

Business entities (companies) If the combined business operations of a company yield a net loss, this loss may be carried forward for tax purposes and set off against future business profits. The loss can be carried forward for up to ten tax years. The set-offs must follow the order in which the losses occurred. Losses from one income sources cannot be set off against income from another.

If more than 50 per cent of the shares in a company are sold in a loss year or thereafter, the right to carry forward the loss is lost. The tax office may, however, permit such carry-forward if it is deemed necessary for the continuation of the company's activities. Indirect ownership changes may also have an impact on loss carry-forwards. If more than 50 per cent of the shares of a com-pany that owns at least 20 per cent of the loss-making company change ownership, all the shares of the loss-making company owned by the other company are deemed, for the purpose of loss carry-forward, to have changed ownership. For mergers, the acquiring company is entitled to deduct from its taxable income losses carried forward by the merged company, provided that the combined holdings of the acquiring company and its shareholders have, since the beginning of the loss year, exceeded 50 per cent of the shares in the merged company. There are no provisions for the carry-back of losses. Consequently, when a company is liquidated, unabsorbed losses are lost. www.lexmundi.com Page 94 © 2012 Lex Mundi

10. How are capital losses handled?

Individuals Capital losses may be set off against taxable capital gains arising in the same year and the following three years.

Business entities (companies) Losses suffered on the disposal of business assets are considered to be part of ordinary lo

Territorial Rules

11. What are the residence rules?

According to domestic law, Finland covers the mainland and the province of Åland. For national income tax purposes, the province of Åland is part of Finland, but it has the right to levy its own provincial and municipal taxes. Double tax treaties may restrict the authority of the Finnish state to tax foreign source income of an individual or a corporate entity deemed as a resident of Finland pursuant to Finnish domestic tax law.

Individuals Generally, an individual is deemed to be a resident of Finland if the individual resides constantly in Finland for more than six consecutive months or if the permanent home and dwelling of the individual are in Finland. In addition, citizens of Finland who have moved abroad are regarded as residents for Finnish tax purposes until three years has passed after the end of the year of the emigration, even though the individual does not reside in Finland over six months or the permanent home and dwelling are not located in Finland, if such individuals are not able to show that they do not have any substantial ties to Finland during the tax year in question.

Business entities (companies) There are no specific rules in Finnish legislation on the residence of companies for tax purposes. In practice, companies are considered to be resident in Finland if they are established under Finnish law and registered in the Finnish trade register. Generally, foreign companies are not deemed to be resident in Finland even if they are effectively managed from Finland, unless they are regarded as having a permanent establishment in Finland.

12. Is worldwide income taxed?

The worldwide income of a Finnish resident individual or company is subject to taxation in Finland. Non-residents are taxed only on Finnish source income.

CFC legislation According to the Finnish CFC Act, a Finnish resident individual or company who is a shareholder of a non-resident corporate entity which is controlled by Finnish residents, is taxed on the income of the non-resident entity regardless of whether such income is distributed by the CFC to its shareholder if: - the shareholder owns at least 25 per cent of the capital of the non-resident entity or is entitled to at least 25 per cent of the yield of the entity's assets; and - the effective rate of tax in the entity's state of residence is less than three fifths of the Finnish corporate income tax rate, i.e. 15.6 per cent (3/5 x 26 per cent).

A non-resident entity is deemed to be controlled by Finnish residents if one or more residents directly or indirectly own, at least 50 per cent of the entity’s capital or its total voting power, or are entitled to at least 50 per cent of the yield of the entity's assets.

www.lexmundi.com Page 95 © 2012 Lex Mundi In computing the income based on which it is determined whether the effective rate of tax is less than three fifths of the Finnish tax rate, dividends received by the CFC from another CFC are not taken into account, provided the dividends are distributed from profits that, during the five previous years, have been included in the tax base in determining the effective rate of tax for the purpose of the Finnish CFC Act.

As an exception, CFC rules are not applicable to income that originates mainly from e.g. industrial production or shipping activities carried out by the CFC in the relevant jurisdiction.

Also, the CFC rules are not applicable to a company resident in a country with which Finland has a tax treaty, provided the tax treaty is applicable to the income; the company resident in that state is subject to tax not substantially lower than Finnish corporate tax (tax rate not lower than 75 per cent of the Finnish tax rate according to legislative history); and the company resident in that state is not entitled to specific tax benefits (benefits not available under the general tax rules, such as the participation exemption) in its country of residence. Further, there are some specific provisions related to entities resident in the European Economic Area.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

For resident taxpayers, relief from double taxation is available under the Act on Elimination of International Double Taxation. The principles of this act also apply where international double taxation is relieved through the application of a tax treaty, unless otherwise stipulated in the treaty.

Foreign source income is included in the company's income, and tax is computed normally on the income. Double taxation is eliminated by crediting the tax paid on the foreign income in the source country. Only taxes paid to a foreign state (e.g. federal taxes in the US) can be credited, unless otherwise provided by an applicable tax treaty. The allowable credit is determined sepa-rately for each country and each source of income. In the case of an individual, the allowable credit is computed per income type (earned income or capital income).

The credit is limited to the amount of tax payable in Finland on the foreign-source income. Unused credit may be utilized and credited in the following tax year from income derived from the same country and source (or, for individuals, income type). The deduction is allowed only to the extent that the maximum allowable credit during this following year exceeds the amount of for-eign taxes which are deductible in this same year.

The foreign tax credit must be requested before the final tax assessment is carried out. The taxpayer has to show the amount of foreign tax and that it has been paid. If, on the date of the final tax assessment, the resident taxpayer has not yet paid the foreign tax, a correction of the final assessment can be applied for. In case the taxpayer cannot present all necessary information but has in other respects shown that the conditions for granting a tax credit exists, the credit can be granted up to a reasonable amount.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Dividends paid by a resident company to a non-resident shareholder are subject to a withholding tax of 28 per cent (or, if certain criteria are fulfilled 19,5 per cent), unless an applicable tax treaty provides for a lower rate or an exemption. If dividends are paid by a resident company to a non-resident shareholder having a permanent establishment in Finland from shares that are attribut-able to the permanent establishment, they are included in the taxable profits of the permanent establishment.

www.lexmundi.com Page 96 © 2012 Lex Mundi Dividends may also be exempt from withholding tax on the basis of the EC Parent-Subsidiary Directive. Under the domestic law implementing the Directive, outbound dividends are exempt from withholding tax if the recipient is a qualifying company under the Directive and owns directly at least 10 per cent of the capital of the paying company or such a company's permanent establishment situated in another Member State.

15. What are the rates on royalties for withholding taxes?

Royalties derived directly by a non-resident from Finnish sources are subject to withholding of 28 per cent, unless an applicable tax treaty provides for a lower rate or an exemption. If royalties are derived through a Finnish permanent establishment of a non-resident company they are included in the taxable profits of the permanent establishment.

Under the domestic law implementing the EC Interest and Royalties Directive, royalty payments are exempt from withholding tax, provided that the recipient is an associated company of the paying company and is resident in another Member State or such a company's permanent establishment situated in another Member State. The companies in question must have a legal form listed in the Annex to the Directive and be subject to corporate income tax.

16. What are the rates on interest for withholding taxes?

Interest income derived directly by a non-resident from Finnish sources is exempt from tax under domestic law if the interest is paid in respect of: bonds, debentures and other such debts; deposits on bank accounts; accounts originating from international trade; or debt which is not regarded as comparable to equity. In all other cases, the rate is 28 per cent, unless otherwise stipulated by a tax treaty. In practice, debt is very seldom regarded as comparable to equity.

If interest is derived through a Finnish permanent establishment of a non-resident company it is included in the taxable profits of the permanent establishment.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

Profits of a permanent establishment of a non-resident company are taxed at the standard corporate income tax rate of 26 per cent (in 2009). In general, a non-resident corporation is liable to pay income tax only on income attributable to Finland. The tax treatment of a permanent establishment is, in principle, the same as that of a Finnish limited liability company. There are no spe-cific rules in Finnish tax law governing the computation of the profits of a permanent establishment. In general, all income derived from Finnish activities and all costs are allocated to the Finnish branch of the non- resident company. All income which belongs to the Finnish permanent establishment, whether derived from or outside Finland, must be allocated to the Finnish branch.

Finland applies a definition of permanent establishment similar to the definition in the OECD Model Convention in most of its tax treaties. In Finnish tax practice, enterprises have been deemed to have a permanent establishment in some cases where the enterprises have not had business premises at their disposal in Finland, but have had personnel working for them in Finland.

18. Please list any other rates on withholding taxes that we should be aware of.

The tax treaty classification of an investment fund distribution is somewhat unclear. The income should normally be treated under the "other income" article of the tax treaties.

A non-resident individual (e.g. one who is occasionally working in Finland), is taxed on Finnish source income only. Non-residents are taxed at flat tax rates in accordance with the Non-resident's Tax Act according to which e.g. salaries paid to non-residents are subject to a withholding tax of 35 per cent, unless a lower rate is provided by an applicable tax treaty.

www.lexmundi.com Page 97 © 2012 Lex Mundi Finnish customers, clients or service recipients may under certain circumstances have an obligation to withhold tax (13 per cent or 35 per cent) at source on the payment of the foreign enter-prise's invoice, if the work has been carried out in Finland. This obligation concerns mainly situations where foreign companies pursues their main business activities outside Finland, while only performing small-scale, periodic and short assignments in Finland.

Tax Returns and Compliance

19. What is the taxable reporting period?

Individuals The reporting period for individuals is the calendar year.

Business entities (companies) Companies file their tax return on an accounting period basis. Accounting periods ending during the same calendar year comprise a single tax year, however.

20. What are the due dates for the filing of tax returns?

Individuals Individuals must file their pre-completed form by 8 or 15 May in the year following the year the income was received (i.e. the tax year), the tax year for individuals being the calendar year. An extension can be granted by the local tax office. If the taxpayer for some reason has not received a pre-completed form, the due date is 15 May. Special rules apply for private entrepreneurs.

Business entities (companies) Companies must file their tax returns within 4 months from the end of their accounting period. An extension can be applied for from the local tax office.

21. What are the key compliance requirements?

Individuals If the individual has nothing to add to or correct in the pre-completed form, he/she does not have to file anything with the tax authorities. The assessment is completed by the end of October of the year following the year in which the income was generated.

Individual taxpayers can make supplementary advance payments during the first 9 months of the year following the year when the income was received, in order to avoid paying unnecessary interest.

Business entities (companies) Most company taxes are collected during the tax year through advance payments. The pre- assessment of taxes on business income is carried out by the tax office. If no advance taxes have been applied for or imposed by the tax authorities, the taxes for the financial year should be paid within four months from the end of the accounting period in which case no interest will be charged. Also, if the company has paid advance taxes but based on e.g. its tax calculation the actual tax will exceed the advance taxes, the company may pay a supplementary advance tax by the same date without any interest.

Withholding taxes from wages, salaries etc. are paid monthly to the tax office on a self-assessment basis.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Individuals www.lexmundi.com Page 98 © 2012 Lex Mundi Individuals must file an annual tax return reporting their worldwide income and net wealth. Spouses file separate tax returns. Non-residents generally do not file a tax return. However, a tax return must be filed if income received by a non-resident is other than salary, pension, dividend, interest or royalty.

Business entities (companies) A company is obligated to maintain accounting records in Finland for at least 6 years after the end of the calendar year in which the accounting year ended. This time period corrresponds to the maximum period for additional assessments levied by the tax authorities.

Whenever payments are made to non-residents, an annual information return should be submitted to the tax authorities. Examples of such payments are wages, pensions, dividend, interest royalties and a yield share in an investment fund. The annual information return is submitted by the end of January following the year during which the tax at source was withheld.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

With effect from 1 June 1994, Finland adopted the value added tax, replacing the partly cumulative turnover tax.

Since Finland became a member of the European Union as of 1 January 1995, the VAT system has been harmonised with the EC rules. Finland is subject to the EU regulations and policy concerning importation of goods from outside the European Union. The level of various customs duties is determined by the European Union.

Excise duties are levied in Finland on various commodities, such as tobacco, alcohol, beer, soft drinks, electricity and fuels.

Among other indirect taxes the insurance premiums can be mentioned. These are, in general, subject to an insurance premium tax of 22 per cent of the premium if the property is located in Finland. Automobiles - other than trucks, buses and certain other types of commercial vehicles - and motorcycles are subject to a car tax.

24. How does it operate? Is it a VAT or a sales tax?

The Finnish VAT is a general multi-stage, non-cumulative tax on consumption. VAT is levied at all stages of the production and distribution chain on the basis of the value added to the goods and services. The supplier of goods and services is required to account for tax on all supplies made by him to his customers (output tax). However, the supplier can deduct the tax charged on the supplies made by his suppliers (input tax) from the tax to be paid. VAT is thus paid on the value added at each stage. It is the ultimate consumer who bears the total tax.

The VAT is a general tax imposed on the sale of goods and services, on imports, on intra-Community acquisitions of goods and on removals of goods from warehouses. Any individual and legal person who sells goods or services in the course of their business is liable to tax. A company carrying on such business in Finland is subject to Finnish VAT. Liability to VAT does not arise if the yearly turnover of the company does not exceed EUR 8,500. However, also in this case the en-trepreneur can voluntarily register for VAT purposes. A company which is VAT registered and carries on taxable business activities is generally entitled to input VAT deductions.

The normal tax period for VAT is one calendar month. The tax payable is the difference between output taxes on supplies and input tax deductions attributed to each tax period. The VAT liable person submits a monthly tax return to the Regional Tax Office. The VAT liable person pays the tax, www.lexmundi.com Page 99 © 2012 Lex Mundi without prompting, no later than on the 15th of the second month following the month in which the taxable transaction took place. A monthly tax return must be submitted even if there is no tax payable concerning the tax period.

25. How is the taxable base determined?

VAT is levied on the sales price of taxable goods and services, excluding the amount of VAT itself. The taxable amount includes all surcharges. The entrepreneur may deduct, for example, bad debts and discounts.

For imported goods, VAT is levied on the value of goods for customs duty purposes, including customs duty and any other national tax or charge other than VAT, including transport costs, regardless of whether the importer is a registered entrepreneur and whether the goods are intended for resale or merely intended for private use. Consequently, the taxable amount includes, for example, packing, freight, loading and insurance expenses, regardless of whether these costs are included in the total price or are charged separately. The taxable amount of a standard computer program includes both the value of the program and the hard copy.

The taxable amount of goods which have been outside the European Union for repairs, completion or processing, is the value added abroad, including transport costs.

For goods taken from the entrepreneur's taxable business for private use or which are taken to be used for purposes that do not allow VAT deduction ("own consumption"), the taxable amount is the lower of the purchase price and the market value. In the case of self-manufactured goods, however, the tax will be accounted for on the direct and indirect manufacturing costs. Similar principles apply to the self-supply of services.

26. What are the applicable rates?

The standard VAT rate is 22 per cent.

A reduced rate of 8 per cent applies e.g. to the supply of: passenger transport services; hotel services, presentation of motion pictures; entrance fees to music and dance performances, sports events, amusement parks and art exhibitions; television license fees received by the National Broadcasting Company; services relating to physical exercise; medicines and some qualifying pharmaceutical products; and books.

As a temporary measure, the 8 per cent will also apply from 1 January 2007 until 31 December 2010 to services of hairdressers and small repair shops.

A reduced rate of 17 per cent applies to the supply and import of foodstuff and animal feed, while food served in restaurants is subject to the 22 per cent standard rate.

27. Are there any exemptions?

There are a large number of exemptions from VAT of which only some are discussed below.

There are two main categories of VAT exemption: those which preclude the deduction of input VAT by the entrepreneur carrying out the exempt transaction and those which do not result in the right to deduct the input VAT.

Output VAT is not charged on transactions involving goods and services that are exempt from VAT, and input VAT related to such supplies cannot be claimed. Inter alia, the following goods and services are, in general, exempt without input tax deduction: the grant and transfer of the right to use immovable property or a dwelling; health care and medical treatment; social welfare services; educational services; financial and banking services; insurance services; cultural, sports and en- www.lexmundi.com Page 100 © 2012 Lex Mundi tertainment events, if organized by non-profit organizations; author's honoraria and fees for an artist's or sportsman's public performances, as well as copyrights; and investment gold.

The supply of the following, inter alia, is exempt with input tax deduction: subscriptions to newspapers and periodicals for at least a month; printing work of membership publications (newsletters) published by nonprofit organizations, if at least four issues are published annually; vessels (excluding those used for sport and pleasure) over 10 m in length and goods installed in these vessels, as well as the chartering of such vessels; and exportation of goods and services.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

Capital duty There are no capital duties in Finland

Transfer taxes Subject to certain exceptions, a property transfer tax is payable by the transferee (purchaser) on the deeds for the transfer of real estate property. If movable property is transferred together with real estate property, a transfer tax is imposed on the total purchase price, unless the transfer document indicates the part of the purchase price which relates to the movable property. The rate of this tax is 4 per cent of the transfer price.

The transfer of shares and other securities is subject to a transfer tax of 1.6 per cent of the sales price, however transfers of Finnish shares quoted in a qualifying stock exchange against fixed cash consideration are exempted from transfer tax provided that a qualifying securities broker is brokering in the transaction. Even though the parties may have agreed which party pays the tax to the tax office, the tax may be collected from the purchaser. Only if the purchaser is a non-resident is the seller responsible for collecting the transfer tax from the purchaser and for paying it to the tax office. No transfer tax is normally due if shares of a foreign company are sold or if both the seller and the purchaser are non-residents. Transfer tax is, however, always payable on transfers between non- residents if the transferred shares are shares in a Finnish housing or real estate company.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Social security contributions There are certain mandatory social security contributions, such as the mandatory health insurance premium, the pension insurance premium and the unemployment insurance premium.

Church tax Individuals who are members of either the Evangelical Lutheran Church or the Orthodox Church pay church tax.

30. How do they operate?

Social security contributions The premiums are, in general, mandatory and is payable by all individuals. The health insurance premiums are included in the individual's advance payroll withholding tax rates. The health insurance premium is divided into two parts: a medical treatment charge and the daily allowance payment. The pension insurance premium and the unemployment insurance premium is withheld from the gross salary of all employees by the employer and paid to private insurance companies.

Church tax

www.lexmundi.com Page 101 © 2012 Lex Mundi Local communities levy the church tax on the earned income of individuals. Church tax is imposed at flat rates, which are set annually in advance for the following year in each community.

31. How is the taxable base determined?

Social security contributions The medical treatment charge is based on earned income for municipal taxation purposes. The daily allowance payments are based on salaries and wages. The pension and unemployment insurance premiums are based on salaries. The daily allowance payments and the pension and unemployment premiums are deductible from the individual's earned income.

Church tax The church tax is levied on the same taxable income as determined for communal tax purposes.

32. What are the applicable rates?

Social security contributions The medical treatment is charged at a rate of 1.28 per cent (in 2009) and the daily allowance payment at a rate of 0.70 per cent (in 2009).

The pension insurance premium for persons under the age of 53 is 4.3 per cent and for persons at the age of 53 or above 5.4 per cent (in 2009).

The rate of the unemployment insurance premium is 0.20 per cent (in 2009).

Church tax The church tax rate is set locally, and varies between 1-2 per cent (in 2008).

33. Are there any exemptions?

Certain persons are not covered by the pension insurance premiums, such as independent entrepreneurs and sailors. There are also certain exceptions for pension insurance premiums in connection with the termination of employment contracts, as well as employment abroad.

For unemployment insurance premiums there are some exceptions related to partners in limited and unlimited partnerships.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Inheritance and gift tax The rate and the amount of inheritance tax payable depend on the relationship between the beneficiary (correspondingly the donee) and the deceased (correspondingly the donor). Tax category I rates cover spouse, child including the child of a surviving spouse, adopted child, father, mother, adoptive parents and a direct heir of a child or an adopted child or in some cases the fiancé(e). The tax category II rates apply to other relatives and all non related persons.

Inheritance tax In general, inheritance tax is levied on the following property received as an inheritance or a bequest: www.lexmundi.com Page 102 © 2012 Lex Mundi  any property, if the deceased or the person who receives the property as an inheritance or a bequest was resident in Finland at the time of death;  real property situated in Finland and shares or other rights in a corporate body where more than 50 per cent of the total gross assets of that corporate body consist of real property situated in Finland.

The beneficiaries in the first category are taxed according to the following. For taxable shares of EUR 20,000-40,000 the tax on the lower amount amounts to EUR 100 and the tax rate on excess is 7 per cent. For taxable shares of EUR 40,000-60,000 the tax on the lower amount is EUR 1,500 and the tax rate on excess 10 per cent. And, for taxable shares from EUR 60,000 and up-wards the tax on the lower amount is EUR 3,500 and the tax rate on excess is 13 per cent.

The beneficiaries in the second category are taxed according to the following. For taxable shares of EUR 20,000-40,000 the tax on the lower amount amounts to EUR 100 and the tax rate on excess is 20 per cent. For taxable shares of EUR 40,000-60,000 the tax on the lower amount is EUR 4,100 and the tax rate on excess 26 per cent. And, for taxable shares from EUR 60,000 and upwards the tax on the lower amount is EUR 9,300 and the tax rate on excess is 32 per cent.

Gift tax In general, gift tax is levied on the following property received as a gift:  any property, if the donor or the beneficiary was resident in Finland at the time when the gift was made;  real property situated in Finland and shares or other rights in a corporate body where more than 50 per cent of the total gross assets of that corporate body consist of real property situated in Finland.

The donees in the first category are taxed according to the following. For gifts of EUR 4,000-17,000 the tax on the lower amount amounts to EUR 100 and the tax rate on excess is 7 per cent. For gifts of EUR 17,000-50,000 the tax on the lower amount is EUR 1,010 and the tax rate on excess 10 per cent. And, for gifts from EUR 50,000 and upwards the tax on the lower amount is EUR 4,310 and the tax rate on excess is 13 per cent.

The donees in the second category are taxed according to the following. For gifts of EUR 4,000- 17,000 the tax on the lower amount amounts to EUR 100 and the tax rate on excess is 20 per cent. For gifts of EUR 17,000-50,000 the tax on the l

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Tax incentives In certain areas in Finland, classified as developing areas, small and medium-sized enterprises are entitled to accelerated depreciations taken at maximum statutory rates increased by 50 per cent for the tax year during which the investment was made and during the following 2 tax years. The incentive is available for investments and extensions made from 1998 through 2008 and is applied to, inter alia, production and tourism but not to e.g. building and repairing ships, refining of agricultural products and manufacture of car parts and steel.

General anti-avoidance rules The principle of substance over form is applied in Finland. If a transaction is given a legal form which does not correspond to its actual character or there is no business reason for the transaction, the transaction may be considered void for tax purposes and taxed as if the real form was used. For other legal purposes, the transaction in its original form may still be valid.

If a company has paid to its shareholder more than the amount that would have been reasonable when paid to third parties, tax is assessed on the amount which is deemed to be in excess of the reasonable amount. The income is called a veiled dividend and is taxed heavily. Also distributions of funds by acquiring or redeeming own shares or by decreasing the reserve or the premium fund may constitute a veiled dividend.

Transfer Pricing provisions An adjustment is possible under the Tax Procedure Act if the taxpayer has not complied with the arm’s length principle. Profits of a Finnish company can be adjusted in relation to both cross-border and domestic transactions.

New provisions requiring transfer pricing documentation between resident and non-resident companies were introduced for tax years starting on or after 1 January 2007. Transactions between Finnish entities need not be documented, but these transactions may still be subject to transfer pricing adjustments. The law generally applies to foreign-owned subsidiaries and branches in Finland and Finnish groups that have 250 employees or more and a turnover exceeding EUR 50 million, or total assets greater than EUR 43 million. Small and medium sized enterprises are generally exempt from the documentation requirements if they fulfill the independence criteria set by the European Commission (2003/361/EC).

The documentation includes: 1) a description of the business activities; 2) a description of associated enterprises; 3) information on controlled transactions; 4) a functional analysis; 5) a comparability analysis; 6) a description of the selected transfer pricing method. The information in items 1) to 3) is not required if the total amount of the transactions between the taxpayer and the other party does not exceed EUR 500,000.

PLEASE NOTE: THERE ARE NUMEROUS EXCEPTIONS TO THE RATES STATED BELOW. THE IMPACT OF THE EC PARENT-SUBSIDIARY DIRECTIVE AND THE EC INTEREST AND ROYALTIES DIRECTIVE IS NOT TAKEN INTO ACCOUNT. INTER-EST IS IN GENERAL EXEMPT FROM WITHHOLDING TAX UNDER DOMESTIC LAW.

RATES (PORTFOLIO DIVIDENDS/DIRECT INVESTMENT DIVIDENDS - INVESTMENT FUND PROFIT SHARE - ROYALTIES):

Arab Emirates (28/28-28-28) Argentina (15/10-28-15) Armenia (15/5-0-10) Australia (15/5-28-5) Austria (10/0-0-5) Azerbeidzhan (10/5-28-5) Barbados (15/5-28-5) Belgium (15/0-0-5) Bosnia Herzegovina (15/5-0-10) www.lexmundi.com Page 104 © 2012 Lex Mundi Brazil (28/28-28-28) Bulgaria (10/0-0-5) Canada (15/5-28-10) China (10/10-28-10) Croatia (15/5-0-10) Czech (15/0-0-10) Denmark; See Nordic Countries Egypt (10/10-28-25) Estonia (15/0-28-10) France (0/0-0-0) Georgia (10/5 or 0-0-0) Germany (15/0-See dividend article-5) Greece (13/0-0-10) Hungary (15/0-0-5) Iceland; See Nordic Countries India (15/15-28-20) Indonesia (15/10-28-15) Ireland (0/0-0-0) Israel (15/5-0-10) Isle of Man Italy (15/0-0-5) Japan (15/10-0-10) Kirgistan (15/5-0-5) Korea (15/10-0-10) Latvia (15/0-28-10) Lithuania (15/0-28-10) Luxembourg (15/0-0-5) Macedonia (15/0-0-0) Malaysia (15/5-28-5) Malta (15/0-0-0) Mexico (0/0-28-10) Morocco (15/15-0-10) Netherlands (15/0-0-0) New Zealand (15/15-28-10) Nordic Countries (15/0-0-0) Norway; See Nordic Countries Pakistan (20/12-28-10) Philippines (28/15-28-25) Poland (15/0-0-10) Portugal (15/0-0-10) Romania (5/0-0-5) Russia (12/5-0-0) Serbia and Montenegro (15/5-0-10) Singapore (10/5-28-5) Slovakia (15/0-0-10) Slovenia (15/0-0-5) South Africa (15/5-0-0) Spain (15/0-0-5) Sri Lanka (15/15-0-10) Sweden; See Nordic Countries Switzerland (10/0-0-0) Tanzania (20/20-0-20) Thailand (28/20-28-15) Turkey (20/15-28-10) Ukraine (15/5-0-10) United Kingdom (0/0-0-0) www.lexmundi.com Page 105 © 2012 Lex Mundi United States (15/5-0-0) Uzbekistan (15/5-0-10) Vietnam (15/10 or 5-28-10) Zambia (15/5-28-15)

Contact Information

Vesa Rasinaho Roschier, Attorneys Ltd. [email protected] Keskuskatu 7 A Helsinki, 00100 Finland

Tel 358.20.506.6000 Fax 358.20.506.6100 http://www.roschier.com

Tax Desk Book

Greece Prepared by Lex Mundi member firm Zepos and Yannopoulos

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

The Greek tax framework includes a high variety of taxes. On the basis of certain criteria as determined in theory, taxes are classified into specific categories. Depending on the criterion used, taxes are classified to (i) direct and indirect, (ii) progressive, flat and fixed, (iii) objective and subjective, (iv) special taxes and taxes ad valorem and (v) taxes on income, on capital and on expenditure.

Direct and indirect: Direct taxes are those related to the tax capacity of the taxpayer in the sense of his ability/status to be subject to taxation. In the context of direct taxes, the same person constitutes the taxpayer (person subject to tax) and the tax bearer (person paying the tax). Indirect taxes are imposed regardless of the tax capacity of the taxpayer. As regards indirect taxes, the taxpayer is a different person to the tax bearer.

Progressive, flat and fixed: Progressive taxes operate by dividing the taxable income in brackets/tranches. A specific tax rate applies to each bracket. The higher the

bracket (e.g. higher amount of income) the higher is the applicable tax rate. Flat taxes are those that are levied on the basis of a fixed rate, irrespective of the volume or the value of the taxable amount, e.g. corporate income tax rate. Fixed taxes are those set forth by tax legislation in monetary values (Euros 1, 2 etc). In practice, fixed taxes are rather restricted and are usually imposed upon issuance of administrative permits and certificates.

Objective and subjective: Objective taxes are those imposed on the transaction, where the personal status of the taxpayer is irrelevant (taxes imposed upon the transfer of shares, parts, quotas). To the contrary the imposition of subjective taxes is connected to the personal status of the taxpayer (the taxpayer is considered to be the object of taxation). In practice, no subjective taxes exist.

Special taxes and taxes ad valorem: The taxable base of taxes is usually determined by virtue of a numerical or physical amount or in monetary values. Special taxes are the taxes, the taxable base of which is determined per number of units, per weight, per surface, per size (e.g. engine of a car/cc). Taxes ad valorem are those calculated on the bass of monetary values (either on an actual or a deemed basis), such as the purchase value, the property value etc.

Taxes on income, on capital and on expenditure: Income taxes are imposed on the realization of income that constitutes the fee or the business profit or the gain from the exploitation of capital. Income taxes in Greece are the individual income tax, the corporate income tax and the special taxation of ships and vessels. Taxes on capital (or property) are levied upon acquisition (one off taxation) or on holding (systematic taxation) of capital/property. The most important taxes on capital imposed upon the acquisition of property are inheritance, gift and parental gifts taxes. Such taxes are also imposed upon acquisition or real estate property.

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

Individuals: Income realised by an individual taxpayer is classified to one of the six income categories set forth in the Income Tax Code (ITC). The classification of income depends on its source. In particular, the six categories include: income derived from (i) immovable property, (ii) securities, (iii) business activities in commerce and industry or any other trade, (iv) agricultural activities, (v) employment or pension and (vi) professions (free lancers) and any other (not named) sources. The taxable income is determined following deduction from the gross income of each category of tax deductible expenses, as set out in the ITC and in certain decisions issued by the Ministry of Finance on an annual basis. For certain categories of income, specific tax deductible expenses are provided for in the ITC (e.g. income from immovable property). Following deduction of the tax deductible expenses, the net income from each category is aggregated. There are also general types of expenses provided for in the ITC that are deducted from the aggregated amount of income. ITC requires that certain expenses, indicating a certain live status, should be justified by respective amount of income (e.g. ownership of certain cars, yachts, airplanes or helicopters, swimming pools). In the event that the aggregate amount of income does not suffice to substantiate the expenditures declared by a taxpayer, the excess amount is considered to constitute, under specific requirements, imputed income for the taxpayer and thus is also subject to income taxation. Income tax is imposed on the aggregate net income from all categories following deduction of all the tax deductible expenses.

Business entities: Gross income derived by a business entity from any of the abovementioned categories of income is aggregated. The taxable base is determined following deduction from such aggregated amount of the tax deductible expenses, as the latter are provided for in the ITC and in specific Decisions issued by the Ministry of Finance. It is to be noted that in the field of construction business in particular, the taxable income of certain business entities (such as partnerships maintaining books and records of category b’ of the Greek Code of Books and Records) is computed in an imputed manner by applying specific coefficients set forth in the ITC on their gross profits.

3. What revenues are included?

The ITC does not set out a definition of the term income. For this reason, such term is interpreted in line with the principles laid down in the Greek Civil Code. According to the latter, the features of the notion income include (a) a source of revenue that is (or could be) constantly exploited and (b) its periodicity. Legislation and jurisprudence follow mainly this approach upon qualification of certain revenue as income. To be noted that the ITC provides explicitly for certain revenues that constitute deemed income even though such characterization is not in line to the abovementioned principles.

4. What deductions are allowed?

The characterization of a specific expense as tax deductible presupposes that such expense qualifies as such under certain general principles, such as the productivity of the expense in the sense of its contribution in the realization of income, its proper substantiation and record in the taxpayer’s fiscal books and other. The ITC sets out lists of tax deductible expenses, which are different for individuals and business entities. In addition, the Ministry of Finance has, by virtue of an explicit legal authorization to this effect, issued decisions enumerating categories of expenses acknowledged in the past as tax deductible or as not tax deductible either by the said Ministry or by the administrative Courts. Following applications by taxpayers or tax auditing authorities, such decisions are updated on an annual basis by the Ministry of Finance by means of new decisions, which either introduce new type of expenses or amend previous decisions. Although such enumeration is not exhaustive, tax auditors are bound to recognize such expenses as tax deductible.

www.lexmundi.com Page 108 © 2012 Lex Mundi With respect to individuals, only few deductions from income are provided for in the ITC ( i.e. obligatory contributions to social security funds). However, on the other hand, various tax reliefs are provided for in the ITC, indicatively: (i) 20% of monetary donations to certain public, educational, medical or religious institutions as well as to charities; (ii) 20% of premiums paid for life or medical insurance policies, (iii) 20% of expenses of medical care (which cannot exceed EUR 6,000).

With respect to business entities, tax eligible deductions include (i) fees or remuneration paid to directors; (ii) salaries paid to employees; (iii) rentals; (iv) interest on loans (subject however to thin capitalization and specific anti avoidance rules) and (v) provisions for bad debts. Branches of foreign companies may also deduct part of their head office expenses, as related to their local operation. It is to be noted that special rules apply to expenses relating to the generation of income from immovable property.

5. What are the major expenses that are not deductible?

As mentioned in section 10, both the ITC and the decisions issued every year by the Ministry of Finance include type of expenses that are not tax deductible from the revenues of business entities. Indicatively, with respect to business entities certain expenses that are not allowed to be deducted for tax purposes are: (i) penal clauses, penalties and monetary fines suffered by a business enterprise; (ii) traveling expenses incurred for business promotion purposes or expenses related to the entertainment of clients (subject to certain exceptions); (iii) amounts paid to employees or third parties voluntarily; (iv) expenses incurred in connection with amounts paid to entities registered in non cooperative jurisdictions, i.e. non EU member countries which have not concluded a mutual administrative assistance treaty on tax matters with Greece and at least 12 other countries.

As regards individuals, it is noted that certain expenses, such as utility bills, are not tax deductible, whereas other expenses, such as rentals of residential leases, interest on loans for the acquisition of residential leases, medical expenses, insurance premiums, are considered as tax deductible, under specific strict requirements, only up to certain thresholds and not in their totality.

6. What are the applicable federal rates?

N/A

7. What are the applicable state and/ or other local rates?

Individuals are taxed on the basis of a progressive tax scale applicable on their aggregate net income from all schedules which is as follows (applicable for income earned in the calendar year 2010):

Bracket Tax rate Tax on Total Total of of Bracket income tax income bracket (EUR) (EUR) (EUR) (EUR) (%) 12,000 0 0 12,000 0

4,000 18 720 16,000 720

6,000 24 1,440 22,000 2,160

4,000 26 1,040 26,000 3,200

6,000 32 1,920 32,000 5,120

20,000 38 7,600 60,000 15,600

40,000 40 16,000 100,000 31,600

Excess 45

The tax-free bracket of EUR 12,000 is granted to taxpayers provided that they file sufficient receipts of expenses concerning purchase of goods and services. As regards income amounting to EUR 12,000, the minimum value of receipts which should be filed with the tax authorities is 10% of such income. As regards the amount of income exceeding EUR 12,000, the minimum value of receipts which should be filed with the tax authorities is 30% of such income. In case of annual income lower than EUR 6,000, the filing of receipts is not required to qualify for the tax-free bracket. Should the value of the receipts filed by the taxpayer be less than the aforementioned percentages, the difference is subject to 10% income tax.

Moreover, the amount of the first bracket is increased by EUR1,500 in favor of taxpayers having one child, EUR3,000 for two children, EUR11,500 for three children; an additional tax-free amount of EUR2,000 is granted for the fourth child and each child beyond that.

The corporate income tax (CIT) rate for corporations (e.g. Anonimi Eteria, which is an equivalent to a French SA, branches of foreign corporations, joint ventures) is 24% or 40%. The applicable CIT rate of 24% applies to non distributed profits and will be gradually reduced by 1% per annum as from accounting year 2011 up to 2014, so as in 2014 the applicable CIT rate will be 20%. Distributed profits are taxed at a 40% CIT rate regarding corporations, whereas the 24% tax already paid is credited against the amount of tax on the distribution. Partnerships are subject to income taxation at the rate of 25%. Exceptionally, the profits of general and limited partnerships and civil law hereditary societies, wherein persons under age participate, that correspond to their individual partners are taxed at 20%. Branches of foreign partnerships are taxed similarly with Greek partnerships.

Furthermore, part of the partnerships’ profits is taxed at the level of their general individual partners without any restriction in connection to the number of partnerships in which each general partner participates. Namely, 50% of the profits corresponding to their participation are taxed on the basis of the tax rates applicable to individuals irrespective of whether the general partners are Greek tax residents or not.

Finally, income from immovable property realized by both corporations and partnerships is subject to an additional 3% income tax on the respective gross income, whereas the relevant income realized by individuals is 1.5%.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

No special rules apply with respect to capital gains taxation in the event of business re-organizations, unless the re-structuring is performed by means of tax incentives laws, which result to a tax neutral merger, demerger, etc. In case such laws do not apply, capital gains are in principle taxed at the ordinary corporate income tax rates applicable to business entities, although a tax prepayment is www.lexmundi.com Page 110 © 2012 Lex Mundi provided for in the ITC, which is made prior to the transfer of the assets involved.

9. How are operating losses handled?

Tax losses may be carried forward to be offset against profits realized by a business entity for a five year period following their occurrence, provided that the taxpayer has been keeping accurate books. Tax losses incurred outside Greece however can only be offset with taxable profits generated outside Greece. A loss carry forward is available to individuals only with respect to income from a freelance profession.

10. How are capital losses handled?

Capital losses incurred in a specific accounting year may be off set for tax purposes from the gross profits of the corporate taxpayer within the same year in a lump sum. It is to be noted that capital losses incurred upon the sale of shares are set off against gains arising from the sale of shares listed in a stock exchange. Furthermore, capital losses from the demolition of buildings are not tax deductible.

Territorial Rules

11. What are the residence rules?

With respect to individuals, Greek tax residence is acquired through physical presence in a place and intent of the individual to have this place as the centre of his/her social, economic or professional activity.

With respect to business entities, Greece applies the central administration doctrine. The Greek Civil Code provides that the central administration of a business entity is the place of its effective management. In view of the above, Greece recognizes a company as existing only if the company is incorporated in the country where its central administration is located. Thus, a company is deemed to be resident in Greece on the condition that it has its place of effective management in Greek territory and is subject in addition to all provisions of Greek law including those for its incorporation, function and dissolution. Notwithstanding the above, the tax residency of a company incorporated under Greek corporate law is in practice not questioned for tax purposes, irrespective from the place of its effective management.

12. Is worldwide income taxed?

Individuals and business entities resident in Greece are subject to income taxation on their worldwide income. Foreign individuals and business entities not resident in Greece are subject to Greek income taxation only with respect to their Greek-source income (e.g. income from immovable property). Business entities maintaining a permanent establishment in Greece are subject to corporate income taxation for the income attributed to such permanent establishment. It is to be noted that according to the relevant provisions of the ITC, a permanent establishment may be either physical (e.g. office, branch) or deemed (e.g. in case of participation in a Greek partnership).

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Greece applies in principle the foreign tax credit method for unilateral relief of double (juridical or economical) taxation. The ITC explicitly provides for a foreign tax credit (FTC) with respect to taxes paid abroad on foreign source income, up to the amount of the domestic income tax corresponding to such income (ordinary FTC). It is to be noted that Greece applies the FTC method on a per country basis. A FTC is available under the ITC also with respect to foreign dividend income under the requirements that apply under the Council Directive 90/435/EEC (Parent - Subsidiary Directive). www.lexmundi.com Page 111 © 2012 Lex Mundi Withholding Taxes

14. What are the rates on dividends for withholding taxes?

A final withholding tax used to apply to dividend distributions performed by Greek AEs at a 10% rate with exhaustion of the respective income tax liability of the recipient, subject to applicable DTC provisions or EU legislation. However, such withholding tax has been abolished for distributions of dividends deriving from financial statements drafted as of December 31, 2010 and onwards.

15. What are the rates on royalties for withholding taxes?

Royalties paid to resident taxpayers are not subject to withholding tax (although the Ministry of Finance has adopted a contradictory view in certain instances). In principle, a withholding tax at the rate of 25% is imposed on the gross amount of royalties paid to foreign business entities not maintaining a permanent establishment in Greece or to foreign individuals that are not engaged in business activities in Greece. The imposition of such withholding tax is subject to applicable DTC provisions or EU legislation.

16. What are the rates on interest for withholding taxes?

A 10% withholding tax is levied on interest payments made in relation to government bonds, bonds issued by resident and foreign companies (including banks and insurance companies) and bank deposits. A 20% withholding tax is levied on any other interest payments, except when made by Greek individuals outside Greece or if made to foreign business entities which do not maintain a permanent establishment in Greece, in which case they are subject to a 40% withholding tax. The imposition of the aforesaid withholding tax is subject to applicable DTC provisions or EU legislation.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

Subject to DTC provisions, foreign corporations are subject to corporate income taxation at the standard tax rates applicable to Greek corporations for profits derived from a Greek source and for profits attributed to a permanent establishment they maintain in Greece, in which case such profits are further remitted to the head office free from any withholding tax. Nevertheless, certain profits of foreign corporations may be subject to a final withholding tax at the rate of 25%, such as fees with respect to technical assistance, studies, intellectual property, lease and repair of machinery, supervision and coordination of technical works performed in Greece, etc.

18. Please list any other rates on withholding taxes that we should be aware of.

With respect to employment income, the employer is responsible for withholding the income tax corresponding to income from salaries, wages and other forms of remuneration (overtime, bonuses, allowances and redundancy payments) for full and part time employees. The tax is withheld at the progressive tax rates applicable to employees/pensioners and is computed on the annual net employment income as determined following deduction of the corresponding social security contributions.

With respect to payments made to free lancers a 20% tax shall be withheld upon payment of their fee.

With respect to payments made to contractors of technical works, a 1% tax is withheld upon each payment.

The transfer of listed shares (either on a Greek or foreign stock exchange) is currently subject to a 0.15% transaction tax. Such tax will be abolished as from January 1st, 2011. In particular, with respect to listed shares purchased following that date that are further transferred, a 20% or 10% capital gain tax will be imposed if the acquired shares are further transferred within a period of 3 or 12 months from their acquisition. www.lexmundi.com Page 112 © 2012 Lex Mundi

There are also taxes imposed in the form of prepayments against the final income tax liability of the taxpayer, which, even though they do not constitute withholding taxes, are similar to the features of withholding taxes. In particular, any capital gains realised upon the transfer of parts/quotas in companies having the legal form of an EPE or a partnership is subject to prepayment at the rate of 20% on the higher amount between the minimum transfer value of the transferred parts/quotas, as determined by means of a formula set forth in the ITC and the transfer price agreed. The 20% prepayment applies also to any capital gains realised upon the transfer of business as a going concern. In case of sale of non-listed shares, a 5% tax is levied prior to the sale, which is calculated on the higher amount between the minimum transfer value of the transferred shares, as determined by means of a formula set forth in the ITC and the transfer price agreed.

Tax Returns and Compliance

19. What is the taxable reporting period?

The taxable period for individuals and business entities is set as a twelve month period, which constitutes the accounting year. With respect to individuals and business entities maintaining books of a’ and b’ category of the Code of Books and Records, the accounting year coincides with the calendar year. With respect to business entities maintaining double entry books (c’ category of the Code of Books and Records), the accounting year ends in principle on December 31st or June 30th.

Certain exceptions are provided from the above rule, as in the case of a Greek (first of second tier) subsidiary company of a foreign parent company or of a permanent establishment of a foreign company, in which case the Greek subsidiary or permanent establishment may opt for ending their respective accounting year on the date the accounting year of the foreign parent of Head Office ends respectively.

As regards, the first and last year of operation of a business entity, the accounting period may be less than twelve months, whereas for business entities maintaining double entry books the first accounting year may be up to twenty four months.

20. What are the due dates for the filing of tax returns?

An income tax return for the preceding accounting year is filled with the tax authorities on an annual basis. With respect to individuals, the relevant deadline is determined by reference to the type of income earned (e.g. salaried individuals should file their tax return by May). With respect to business entities, the relevant deadline depends on the legal form of the business entity and on the category of books it maintains. In particular, business entities having the legal form, among others, of an AE, an EPE or foreign companies maintaining a permanent establishment in Greece, are under the obligation to file a tax return within four months and 10 days from the end of the relevant accounting year. Partnerships and joint ventures maintaining double entry books should file a tax return within 3½ months from the end of the accounting year. Non for profit entities and foundations should file a tax return up to March 10th of each year or until April 15th in case they derive certain types of income from immovable property. Non filing or filling of late or inaccurate tax returns with the competent tax authorities triggers the imposition of additional taxes and, under certain circumstances, penalties.

Different rules and procedures apply with respect to tax returns filled with the tax authorities on other type of taxes (e.g. indirect taxes, taxes on capital), such as VAT tax returns, real estate property tax returns, revaluation of real estate property tax returns, salary withholding tax returns, etc.

21. What are the key compliance requirements?

In general, booking and documentation of revenues generated and expenses incurred by persons engaged in business activities must be in full compliance with the Code of Books and Records, a www.lexmundi.com Page 113 © 2012 Lex Mundi highly technical and bureaucratic piece of legislation. The Code of Books and Records sets forth various rules and compliance requirements applicable to private individuals and business entities that pursue a commercial, industrial, agricultural, free lance or other business activity. Such rules govern, among others, the proper procedure of issuance of fiscal records and book keeping. In many instances, the lack of compliance with the complex provisions of such Code enable the tax audit to disallow expenses as inappropriately recorded or supported or even to disregard the books of an enterprise and recalculate its net profits in an imputed manner. In addition, failure to comply with such rules may trigger the imposition of penalties, the range of which varies depending on the importance of the infringement. As of December 1, 2012 however the Code of Books and Records shall be abolished in its current form, whereas a number of its provisions will be inserted to the ITC or distinct bills.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Taxpayers are obliged to fill in different income tax returns with respect to income they derive from different categories of income, e.g. a different income tax return is filled in with respect to income from employment and for income for business income. In this context, taxpayers are under the obligation to fill in special forms declaring the immovable property they hold each fiscal year. In addition, any withholding tax obligation presupposes the filing with the tax authorities of an independent special tax return by the person effecting the payment.

Individuals and business entities are obliged upon filing of their annual income tax returns to effect advance payments corresponding to the amount of income tax of the following accounting year. The amount of advance payment equals 55% (for individuals) and 80% (for business entities, whereas 100% for banks) of the income tax due, as assessed by virtue of the respective tax return for the accounting year that came to an end (previous year). The applicable rate of advance payment is reduced by half for newly established business entities with respect to the first three accounting years from commence of their business activities.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

1. Import duties and taxes

Greece is a Member of the European Union and European Customs Union. In this respect, Greek law on import duties has conformed to the framework laid down by EU legislation (i.e. Regulations 2913/1992 and 2454/1993, Directives 2003/96/EC, 2008/118/EC, etc.).

Further, Greece is a member of the WTO and has signed all Annexes of the Marrakesh Agreement which establishes the World Trade Organisation.

2. Value Added Tax

VAT was introduced in Greece with effect as of 1.1.1987. Greek VAT legislation transposes into domestic law the provisions of currently applicable Directive 2006/112/EC.

VAT is applicable in principle on (i) the supply of goods or services effected for consideration within Greece by a taxable person acting as such; (ii) the importation of goods from third countries outside the EU and (iii) the intra-community acquisition of goods (i.e. purchases of goods from other EU Member States) within Greece by a taxable person acting as such.

www.lexmundi.com Page 114 © 2012 Lex Mundi As of January 1st, 2006, VAT is also applicable on the supply before first occupation of buildings or parts of buildings and the land on which they stand, provided that the relevant building license has been issued on or after January 1st, 2006.

A taxable person for VAT purposes is in principle any person who independently carries out economic activity (excluding employed and other persons bound to an employer by a contract of employment). The Greek State, municipalities and other legal persons governed by public law become taxable persons when they carry out specific transactions enumerated in the law as well as when they engage in activities in relation to which their treatment as non taxable persons would lead to significant distortions of competition.

3. Stamp Duty

There is a number of transactions which are subject to stamp duty. In such case the stamp duty is imposed either by virtue of the contracts which are concluded and executed within Greece for these transactions or the accounting entries in the books of the contracting parties reflecting such transactions (when no wirtten contract exists). The transactions that fall within the scope of VAT are by default outside the scope of stam duty (with very few exceptions). It should be noted that over the past years, the transactions on which stamp duty is levied have become significantly fewer.

Contracts executed abroad are subject to stamp duty only to the extent they concern movable or immovable property located in Greece or obligations executable in Greece. When does the latter occur is a highly debatable matter with the Greek tax authorities.

4. Insurance Premium Tax

Insurance companies are subject to insurance premium tax. More specifically, every insurance contract referring to risks or insurance obligations lying in Greece, shall be subject to premium tax on the relevant insurance premium, irrespective of such contract’s governing law.

Premium tax is also levied on insurance premiums payable to foreign insurance companies operating in Greece under the freedom to provide services. In such case such foreign insurance companies are under the obligation to appoint a jointly liable fiscal representative in Greece.

24. How does it operate? Is it a VAT or a sales tax?

1. Import duties and taxes

The Common Customs Tariff (CCT) applies to imports of goods that enter the Greek territory from a third country. Goods qualifying as Community Goods (namely, goods in respect of which Customs duties and relevant taxes have been settled) are placed into free circulation and are not further subject to customs duties when they enter Greece.

2. Value Added Tax

A taxable person carrying out taxable supplies of goods and services is in principle liable to charge and pay the VAT due to the State in relation to such supplies (output VAT). In certain cross-border transactions where goods and services are supplied to a Greek taxable person, the latter is liable to account for the Greek VAT due for such transactions. Taxable persons are entitled to deduct input VAT incurred upon purchase of goods and services to the extent that such taxable persons carry out taxable transactions which allow the deduction of input VAT. The VAT deducted is set off against the output VAT and the remaining balance if debit is paid to the State. and if credit it can be asked for refund.

On the other hand, if the remaining balance is credit then the taxable person (i) can claim under conditions a refund of such credit balance immediately or (ii) if the conditions for immediate refund www.lexmundi.com Page 115 © 2012 Lex Mundi are not fulfilled, the taxable person has the obligation to carry forward the credit balance over the next three years prior to asking for a refund, in order for such balance to be setoff against output VAT to be charged in these years (unless it can be evidenced that setoff against output VAT cannot be made and therefore a refund can be asked earlier).

EU taxable persons effecting taxable transactions in Greece for which they are liable to charge the Greek VAT due, they can either directly register in Greece for VAT purposes or alternatively appoint a fiscal representative. Non EU entities required to register in Greece are obliged to appoint a fiscal representative. In both cases the fiscal representative is solely liable towards Greek tax authorities for the fulfillment of the VAT obligations of the foreign principal

3. Stamp Duty

Please refer to question 23 above.

4. Premium Tax

Please refer to question 23 above.

25. How is the taxable base determined?

1. Import duties and taxes

The taxable base for the application of the customs duties upon importation of goods in Greece is determined by the competent customs authorities. Such authorities value goods pursuant to the rules of the WTO Customs Valuation Agreement, which have also been incorporated into the Community Customs Code (CCC).

2. Value Added Tax

The taxable base is in principle the consideration obtained in respect of the supply of goods or services. Furthermore, the taxable base shall include any taxes, duties, levies and charges, as well as incidental expenses (such as commission, packing, transport and insurance costs) paid by the customer. There are however certain variances to the above rule, depending on the type of the transaction.

3. Stamp Duty

Stamp duty is calculated on the value of the transactions that are subject to stamp duty as this value is reflected either in the relevant contract which has been concluded or the relevant entries in the accounting books, as the case may be.

4. Premium Tax

Premium tax is calculated on the relevant insurance premium.

26. What are the applicable rates?

1. Import duties and taxes

The tariffs applicable are those set out in the Common Customs Tariff (CCT) in force throughout the Customs Union. The Tariff forms a combination of the Combined Nomenclature (or classification of goods) and the duty rates which apply to each class of goods (TARIC Code). The Tariff, in addition, contains all other Community legislation that has an effect on the level of customs duties payable on a particular import; that is normally the case where a preferential regime agreement is in place

2. Value Added Tax

The standard VAT rate is 23%. A reduced rate of 11% is applicable to supplies of specific goods and services which are enumerated in the law. Such supplies include, inter alia, food and pharmaceutical products, the supply of water, electricity and natural gas, accommodation and transport of persons. Greek VAT legislation provides also for a super reduced rate of 5.5% which is applicable to specific types of books and printed materials as well as theater tickets.

Under conditions, the above rates are reduced by 30% (i.e. 16%, 8% and 4% respectively) when they apply to transactions effected in the Aegean islands.

3. Stamp Duty

The general rule (with certain exemptions) is that for business transactions the rate is 2.4% on their value, while for non-business transactions the rate is 3.6%.

4. Premium Tax

Applicable tax rates range from 4% to 20%, depending on the type of risk against which the insurance policy has been set out.

27. Are there any exemptions?

1. Import duties and taxes

Entry of products duty-free into the Greek territory is allowed, to the extent those are intended to be put under one of the customs regimes, such as inward-processing or re-exportation, provided for by the Community Customs Code. Storage of products in free zones such as in Piraeus and Thessaloniki, while in transit, is also allowed. Energy products (including petroleum products), alcohol and alcoholic products and manufactured tobacco in particular, may also be stored in “Customs Warehouses” until they are re-exported or, in certain cases, sold locally (however, import duties are due in the latter case).

2. Value Added Tax

Certain transactions are treated for VAT purposes as zero rated meaning that they are not subject to VAT in Greece, whereas they allow at the same time the recovery of the input VAT incurred for these transactions. Intra-community supplies (i.e. sales of goods to other EU Member States) and exports to third countries outside the EU constitute among others zero rated transactions.

There are also transactions (such as educational services, medical care and financial services) which are exempt from VAT without however entitling the person effecting them to recover the input VAT incurred for these transactions.

3. Stamp Duty

Apart from the transactions that are subject to VAT, there is no general exemption from stamp duty provided by the respective legislation. In this respect, a number of exemptions are provided on an ad hoc basis.

4. Premium Tax

www.lexmundi.com Page 117 © 2012 Lex Mundi A number of exemptions apply, depending on the type of insurance provided, such as life insurance contracts whose term exceeds 10 years, or the insurance contracts of transport companies that are related to the insurance of boats and goods that are imported in Greece or exported to third countries.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

1% tax applies on capital accumulation, i.e. on the share capital accumulated upon establishment, conversion or merger of a company, capital increase or capital contribution. The said transactions, when effected by AEs (i.e. the equivalent of corporations or companies limited by shares), are also subject to a duty of 0.1% payable in favor of the Greek Competition Committee. Furthermore, capital accumulation tax is imposed upon provision by non EU entities of fixed or working capital to their Greek branches, as well as upon the transfer of the seat of a foreign company in Greece from a third country.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

State social security institutions are financed through compulsory contributions from the insured individuals (and their employer(s), in case of employment relationships) and a variety of other social charges. All employees and self-employed persons in Greece are, in principle, covered by a social security institution. Under the law insurance is obligatory for persons falling within the scope of each social security organization (and the eventual auxiliary fund), as a result of their employment or self- employed activity. Failure to pay social security contributions may lead to administrative and criminal sanctions, whereas a social security clearance certificate is usually demanded in order to proceed to various administrative steps, e.g. authentication of tax documents by the Tax authorities. Following a recent reform, the existing social security institutions were merged forming a more limited number of social security organizations, but without limiting the number of applicable schemes.

30. How do they operate?

The calculation of social security contributions depends on the competent social security institution:

(a) In principle, social insurance contributions for employees insured with IKA-ETAM (the main social security institution for employees) are calculated on the basis of their salary, according to rates prescribed by law and are split between the employer (approx. 2/3) and the employee (1/3). Employers are obliged to withhold the relevant employee contributions from the salary and pay them together with their own (employer’s) contributions to IKA-ETAM.

The employer is also obliged to submit to the competent IKA-ETAM branch a periodic “analytical periodic statement”, which includes all relevant data with regard to the employees’ particulars, emoluments and calculation of contributions.

(b) On the other hand, the social security contributions for the self-employed are usually set as a sum, which is calculated on a yearly basis pursuant to a formula set out in the law. Arrangements for payment of such contributions vary depending on the competent social security institution e.g. these can be paid annually (e.g. Department for Lawyers of the Unified Fund of Independently employed- ETAA) or in bi-monthly instalments (e.g. Organization for the Insurance of Liberal Professions OAEE)

Of course, given the large number of existing schemes, even in the framework of the same social security institution, the above give only a general overview of the applicable provisions.

31. How is the taxable base determined?

The taxable base for Contributions to IKA-ETAM is the employee’s salary. Pursuant to the law the salary is defined as all kinds of emoluments, whether in money or in kind, regular or irregular. Such base for calculation is further defined in the relevant regulations of IKA-ETAM.

On the other hand, the social security contributions for the self-employed are usually set as a sum, which is calculated on a yearly basis pursuant to a formula set out in the law and, therefore, no stricto sensu taxable base exists. For each category of self-employed workers the law sets specific sums which vary according to a scale of fourteen “insurance categories”. Every self-employed worker is obliged to pay the sum that corresponds to the first “insurance category”, and is calculated according to the formula provided by law. He/she can choose a higher “insurance category” and pay the corresponding higher social security contributions which lead to higher benefits.

32. What are the applicable rates?

The rates for IKA-ETAM contributions vary pursuant to the type of occupation (regular or unhealthy and hazardous) and the applicability of certain special contributions (e.g. contributions for occupational hazard). Indicatively, we set out below two examples for employees insured with IKA- ETAM for main and auxiliary insurance i.e. one of a “regular” employee and the other of an employee falling into the category of “unhealthy and hazardous” occupations, both calculated without the contribution for “occupational hazard”:

(a) “Regular” employee: Insured Employer Total 16.00% 28.06% 44.06%

(b) Employee in a “hazardous and unhealthy” occupation Insured Employer Total 19,45% 30.21% 49.66%

As mentioned above (under section 37) there are no specific rates for the calculation of contributions for self-employed workers.

33. Are there any exemptions?

In principle, the scope of application of social security provisions covers all employees and self- employed persons working in Greece. However, there are some exemptions with regard to certain very limited categories of foreigners working in Greece. Furthermore, persons elected to corporate offices without having a parallel employment relationship with their company do not normally fall within the scope of social security.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

A. Introduction

www.lexmundi.com Page 119 © 2012 Lex Mundi The applicable tax rates for both inheritance and gift taxation are determined by reference to the degree of kinship between the decedent/donor and the heir/beneficiary. Kinship is classified into the following categories.

(i) Category A: spouse, parents, children and grandchildren, including children recognized by the father either voluntarily or judicially.

(ii) Category B: other descendants and ascendants, siblings (including step siblings), other relatives of third degree (nephews/nieces and uncles/aunts), foster parents, children from previous marriage of the spouse, sons or daughters-in-law and ascendants-in-law.

(iii) Category C: all others.

B. Inheritance Tax

The main factors that determine the Greek inheritance tax liability are (a) the location of the estate (b) the tax residence of the decedent and (c) the nationality of the decedent. Both movable and immovable property situated in Greece is subject to Greek inheritance tax. Should the estate belong to an individual who was a Greek tax resident or a Greek national at the time of his death, his movable and immovable property situated in Greece and movable property located outside Greece are subject to Greek inheritance tax. It should be noted that real estate property located outside Greece is not subject to Greek inheritance tax.

Furthermore, no inheritance tax is imposed upon the transfer of assets, to the deceased’s spouse or underage children, provided that the value of such inheritance does not exceed the amount of EUR 400,000, per beneficiary.

C. Gift Tax

The main factors that determine the Greek gift tax liability are (a) the location of the estate, (b) the tax residence of the beneficiary and (c) the nationality of the donor. Both movable and immovable property situated in Greece is subject to gift tax. In addition, Greek gift tax liability may arise in the following events: (a) a Greek national donates movable property located outside Greece and (b) a Greek tax resident receives movable property located outside Greece. It is to be noted that gift tax burdens the beneficiary of the gift.

D. Inheritance and Gift Tax Rates

Transfers of any assets by reason of inheritance and transfers of assets, other than cash, by reason of gift are taxed according to the applicable tax scales. More specifically, the applicable tax scales have as follows:

Category A

Bracket of Tax rate of Tax on bracket Total value of Total tax inheritance/ bracket (%) inheritance/ gift gift 150,000 0 0 150,000 0 150,000 1 1,500 300,000 1,500 300,000 5 15,000 600,000 16,500 Excess 10

Bracket of Tax rate of Tax on bracket Total value of Total tax inheritance/ bracket (%) inheritance/ gift gift 30,000 0 0 30,000 0 70,000 5 3,500 100,000 3,500 200,000 10 20,000 300,000 23,500 Excess 20

Category C

Bracket of Tax rate of Tax on bracket Total value of Total tax inheritance/g bracket (%) inheritance/gift ift 6,000 0 0 6,000 0 66,000 20 13,200 72,000 13,200 195,000 30 58,500 267,000 71,700 Excess 40

As regards the transfer of cash by reason of gift, a 10% flat tax is applicable for transfers to relatives of Category A, a 20% flat tax is applicable for transfers to relatives of Category B and a 40% flat tax is applicable with respect to transfers to third parties.

The inheritance/gift tax liability is depicted in the following table:

Transaction Category A Category B Category C

Inheritance of 0-10% 0-20% 0-40% assets Gift of assets, 0-10% 0-20% 0-40% other than cash Gift of cash 10% 20% 40%

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

The ITC includes a provision setting forth transfer pricing rules, which are in line with the arm’s length principle. In brief, failure to comply with the arm’s length principle may result in (i) the readjustment of

www.lexmundi.com Page 121 © 2012 Lex Mundi the taxable profits of the enterprise under-invoicing its associated enterprises, or being over-invoiced on an intra-group basis (ii) the assessment of relevant taxes (i.e. income taxes and VAT) and penalties, corresponding to the amount of transfer pricing readjustment, and (iii) the levy of a independent fine calculated at a 20% rate over the amount of transfer pricing readjustment.

Moreover, rules on transfer are in place in Greece since 2008 for market regulation purposes. Such rules are based on the provisions of the EU Code of Conduct on transfer pricing documentation for associated enterprises, adopted by the Council of the European Union in 2006, along with the OECD Transfer Pricing Guidelings for Multinational Enterprises and Tax Administrations. In this context, domestic enterprises, including branches of foreign enterprises, engaged in transactions with associated enterprises, should comply with the arm’s length principle and are further obliged to report intra group transactions and to comply with specific transfer pricing documentation requirements, including the preparation of a detailed transfer pricing study. Apart from the documentation obligations applicable for market regulation purposes, new transfer pricing documentation rules have also been recently introduced to the ITC.

Furthermore, thin capitalization rules apply to intra group transactions. In particular, interest from loans or credits paid to associated enterprises is only deductible for corporate income tax purposes as long as the debt-equity ratio does not exceed on average per accounting year a ration of 3:1. Certain exemptions apply, e.g. for leasing companies and credit institutions operating in Greece.

With the exception of abovementioned transfer pricing and thin capitalization rules, Greece has not incorporated any General Anti avoidance rules or CFC regulations or group taxation rules. In addition, no thin capitalization rules apply in Greece.

The table below illustrates the tax rates applicable on interest, dividend and royalty payments made by a Greek tax resident to recipients/beneficial owners resident in another Contracting State under the Double Taxation Conventions that are currently in effect (Greece has also entered into DTCs also with Azerbaijan, Bosnia & Herzegovina, Canada, Morocco, Qatar, Saudi Arabia, Serbia, Tunisia and United Arab Emirates, which have not yet been put into effect). Such rates are based on the domestic withholding tax rates that apply on interest, dividend and royalties (please refer to sections 14 to 16) as adjusted in line with the limitations set out in the respective DTC provisions listed in the following table.

Countries Interest Royalties & IT Dividends Related Services Albania 5% 5% 5% Armenia 10% 5% 10% Austria 8% 7% 5% or 15% Belgium 5% or 10% 5% 5% or 15% Bulgaria 10% 10% 10% or 40% China 10% 10% 5% or 10% Croatia 10% 10% 5% or 10% Cyprus 10% 0% 25% Denmark 8% 5% 18% or 38% Egypt 15% 15% 10% Estonia 10% 5% or 10% 5% or 15% Finland 10% 10% 13% or 40% www.lexmundi.com Page 122 © 2012 Lex Mundi Countries Interest Royalties & IT Dividends Related Services France 12% or 10% 5% 40% Georgia 8% 5% 8% Germany 10% 0% 25% Hungary 10% 10% 40% Iceland 8% 10% 5% or 15% India Domestic tax Domestic tax 40% legislation legislation Ireland 5% 5% 5% or 15% Israel 10% 10% 40% Italy 10% 5% 15% Korea 8% 10% 5% or 15% Kuweit 5% 15% 5% Latvia 10% 5% or 10% 5% or 10% Lithuania 10% 5% or 10% 5% or 15% Luxembourg 8% 5% or 7% 7,5% or 38% Malta 8% 8% 5% or 10 Mexico 10% 10% 10% Moldova 10% 8% 5% or 15% Morroco 10% 10% 5% or 10% Norway 10% 10% 20% or 40% Poland 10% 10% 40% Portugal 15% 10% 15% Romania 10% 7% or 5% 20% or 40% Russia 7% 7% 5% or 10% Slovakia 10% 10% 40% Slovenia 10% 10% 10% South Africa 8% 7% or 5% 5% or 15% Spain 8% 6% 5% or 10% Sweden 10% 5% 40% Switzerland 10% 5% 5% / 15% or 35% The Czech 10% 10% 40% Republic The 10% or 8% 7% or 5% 5% / 15% or 35% Netherlands Turkey 12% 10% 15% U.S.A. 0% 0% 10% Ukraine 10% 10% 5% or 10% United Kingdom 0% 0% 40% Uzbekistan 10% 8% 8%

George M. Venieris Zepos and Yannopoulos [email protected] 75 Katehaki & Kifissias Ave. Athens, 115 25 Greece

Tel 30.210.6967000 Fax 30.210.6994640 http://www.zeya.com

Tax Desk Book

Guatemala Prepared by Lex Mundi member firm Mayora & Mayora, S.C.

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

The tax system of Guatemala has only two levels of taxation: the national and the municipal levels. The former includes, principally, the Income Tax and the Value Added Tax (VAT), although depending on the kind of products involved (such as gasoline and other fuels, alcoholic beverages, and cigarettes) there are excise taxes. Real property taxes are shared by the national and municipal governments and are determined on the basis of the value of both the land and the buildings and other immovable infrastructures built on it.

Regards customs duties it is important to mention that Guatemala's free trade agreements with Mexico, and with the United States, the Dominican Republic and the rest of Central America, has substantially diminished the effective average import duty rate. Nowadays, the Central American countries are conducting negotiations with the European Union in order to enter into an agreement of association, including customary free trade provisions.

The Tax Administration in Guatemala (the Superintendencia de Administración Tributaria), has markedly and continuously, during the last five years, improved the systems and levels of tax collection. Although tax evasion remains a problematic issue, perhaps the most noticeable differences are that domestic taxes have become subject to more effective controls and mid to large business firms basically pay their taxes trough on line services provided by the Tax Administration in conjunction with several commercial banks.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

The general statutory corporate income tax rate is a flat rate of 5% on gross income (including exempt income); alternatively, there is the 31% corporate income tax rate on net income. This is equally applicable to local branches of foreign corporations.

3. What revenues are included?

All rents and profits produced in the territory of Guatemala.

4. What deductions are allowed?

There are no deductions applicable to the 5% Regime; for the 31% Regime, as a general rule, all costs and expenses related with and necessary in order to generate taxable income, are considered deductible expenses. Where the tax payer generates taxable and non taxable income, it is necessary to apportion (practically on a direct basis) the costs and expenses incurred to generate the part of the www.lexmundi.com Page 125 © 2012 Lex Mundi income that is taxable. Some costs and expenses are limited to quantitative ceilings; e.g., royalties, unrecovered debts, interest payments.

5. What are the major expenses that are not deductible?

Refer to question 4 above.

6. What are the applicable federal rates?

Not applicable.

7. What are the applicable state and/ or other local rates?

Refer to question 6 above.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

In case of transfer and incorporation of goods as well as in case of mergers that increase the capital of entities or individuals, the depreciation or amortization is calculated over the buying price or over the price of acquisition of the good subject to depreciation by the payer, and in the case of merger the depreciation or amortization is calculated over the settle that is not subject to depreciation of the goods of the absorbed entity.

9. How are operating losses handled?

Not applicable.

10. How are capital losses handled?

Not applicable.

Territorial Rules

11. What are the residence rules?

As stated in the introduction, the overriding principle remains that of territoriality, such that only Guatemalan source income, as defined by the Income Tax Act is subject to taxation.

12. Is worldwide income taxed?

No.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Not appicable. There are no Double Taxation Treaties and no possibility of deducting taxes paid abroad, or any others.

14. What are the rates on dividends for withholding taxes?

Dividends payments are subject to a 31% witholding tax, however Guatemalan law does not provide for the withholding of income tax on dividends or profits remitted abroad to foreign companies or foreign shareholders, provided that income tax has been paid in Guatemala by the local company at corporate level.

15. What are the rates on royalties for withholding taxes?

Royalty payments (for any kind of intellectual property license, transfer or technology or non- registered know-how) are subject to a 31% withholding tax.

16. What are the rates on interest for withholding taxes?

Interest payments are subject to a 10% witholding tax rate; when interest are paid to a non-domiciled first order bank or financial institution, the proceeds from the loan are sold to the Guatemalan banking system and used to generate taxable income, there is no withholding obligation.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

Payments made to non-resident alien entities for technical, administrative, scientific, financial or economical Sevices are subject to a 31% withholding tax. Please refer also to question number 14.

18. Please list any other rates on withholding taxes that we should be aware of.

Other payments not specifically characterized, to non-resident alien entities or individuals are subject to a 31% withholding obligation.

Tax Returns and Compliance

19. What is the taxable reporting period?

The fiscal year runs from January 1st to December 31st, with an annual filing deadline of three monts after closing of the corresponding tax year.

20. What are the due dates for the filing of tax returns?

Tax payers under the 5% regime must file returns on a monthly basis, with a consolidated yearly return, as mentioned in the above question. Taxpayers under the 31% regime are required to file quarterly interim returns, in addition to the yearly one.

21. What are the key compliance requirements?

An essential key compliance requirement is to be duly recorded before the Tax Administration in Guatemala and to have the corresponding Tax Identification Number and address. After accomplishing these requirements, the corresponding form must be fulfilled and presented before the Tax Administration in Guatemala.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

No.

23. Are there any indirect taxes in your jurisdiction?

The principal indirect taxes in our jurisdiction are:

a. Value Added Tax; b. Import Duties; c. Tax for transferring Crude Oil and other derived products.

24. How does it operate? Is it a VAT or a sales tax?

As any other indirect taxes, these taxes tax the use of goods and services, and they are transferred through every link of the productive chain. It is a VAT.

25. How is the taxable base determined?

The taxable base determined for the principal indirect taxes are:

a. Value Added Tax: For sales: price (-) discounts (+) readjustments and financial charges. For imports: CIF Value (+) duty rights. For leases: rent (+) additional charges if any; b. Import Duties: CIF Value of the merchandise at the Duty Office when arriving to the country; c. Tax for transferring Crude Oil and other derived products: the taxable base is established along with the American gallon of 3.785 lts, at room temperature.

26. What are the applicable rates?

The applicable rates for the principal indirect taxes are:

a. Value Added Tax: a sole rate of 12% over the taxable base. b. Import Duties: The Central American Duty System is currently in forced, these establishes a specific rate for every kind of product; c. Tax for transferring Crude Oil and other derived products: there are specific rates for every specific product.

27. Are there any exemptions?

Some of the existent exemptions to the payment of the Value Added Tax are the following:  importation of goods made by cooperatives, federations and/or confederations legally recorded and constituted; international organisms according with the international treaties signed within the government of Guatemala and those organisms.  the constitution of Trustees, and the devolution of the goods from the trustee to the trustor.  the transferation of property of goods and real states in the following cases:  mergers; heritage, legacies and donations in cases of death; contributions of goods and real states made to entities.  some importations of goods and assets as defined in article 2 of the Value Added Tax Act;

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

No answer provided.

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

a. Social Security System: The Guatemalan Social Security Institute manages and operates the Social Security System and the National Health System. These systems provide services and benefits related to illness treatment, disability and pensions system, old age, and maternity, death insurance.

b. Labor Risk Insurance: This mandatory insurance is covered under the state owned monopoly of the Guatemalan Social Security Institute, and covers all the labor force.

30. How do they operate?

Social Security contributions are applicable to employer and employees. The contributions are based on the monthly salaries with a 12.67% for the employer and a 4.83% for the employee.

31. How is the taxable base determined?

Refer to question 30 above.

32. What are the applicable rates?

Refer to question 30 above.

33. Are there any exemptions?

No, exemptions are made.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Inheritance taxes and gift taxes must be paid, among others, when the inheritance or the free transfers of goods or real states is made within the country, also when the goods or real states object of the inheritance or free transfer are located within the country; inheritance and free transfers when the probate procedure is initiated or held inside the country.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Neither of the listed exist.

There are no tax treaties.

Contact Information

María Villeda Wohlers Mayora & Mayora, S.C. [email protected] 15 Calle 1-04 Zona 10, Edificio Céntrica Plaza 3 Nivel, Oficina 301 Guatemala City, 01010 Guatemala

Tel 502.222.368.68 Fax 502.236.625.40 http://www.mayora-mayora.com

Tax Desk Book

Iceland Prepared by Lex Mundi member firm LOGOS legal services

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

In Iceland there are both direct taxes and indirect taxes. The main direct taxes are personal income tax. For the income year the personal income tax is levied at a 24,10% plus a 13,10% municipality tax, the monthly withholding tax on salary income is therefore 37,20%. The company tax is 15% and 23,5% for partnerships. The capital gain tax is 10% for individuals. The main indirect taxes are VAT which is levied at 7% for grocery etc. and 24,5% for services and so on. Please note from July 1st, a 8% high income tax will be levied on salary income. It is forseen that a substansial tax rise will occur in Iceland before the end of the year 2009.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

The taxable base for companies and partnerships in business operations is determined as net operation profit after all operational expenses have been deducted. Regarding individuals all salary remuneration is included, i.e. direct payment, fringe benefits, such as car allowance, free housing etc. Car allowance can be deducted. From the salary remuneration up to 8 % payment into a pension fund in accordance to a pension fund can be deducted. Furthermore for indviduals a monthly deduction in the amount of ISK. 42.205 is applicable.

3. What revenues are included?

All revenues are applicablable by individuals, exept inheritance if the inheritance tax of 5% has been submitted to the state Treasury, all operational revenues are included by corporations and partnerships.

4. What deductions are allowed?

By individuals up 8% payments into a pension fund in accordance with a pension scheme is deductable, to some extent car usage for employer is deductable from car payments. From companies all operationals expenses in connection with maintaining or obtaining revenue or keeping revenue are allowed, amortisation, development cost and machinery if the machinery is not worth more than 280.000 ISK., if the value exceed ISK. 280.000,- then no deduction is allowed since this must be amortisezed and be put on the asset sheet in the balance sheet.

5. What are the major expenses that are not deductible?

By companies and partnerships, all fines are no deductible, expensive machinery, personal cost etc.

6. What are the applicable federal rates?

Individuals for 2009 24.10% plus 13,10% municipality tax = 37,20. Companies 15% Partnerships 23,5%

7. What are the applicable state and/ or other local rates?

Municipality tax of 13,10% for individuals. Companies social security contribution tax 5,34%.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

The capital gain tax is 10%. Individuals can not posthpone or calculate loss agains capital gains except within the same year from the same origins, i.e. shares against shares. Effectively companies does not pay captial gain tax. The base for calculing of Capital gains is the difference between the initial purchase price + cost of selling etc. and the sales price. A company can re-invest its capital gains by investing in shares in another company. There is no capital gains on demerger nor amalgamation. In case of merger individuals might have to pay 10% capital gain tax.

9. How are operating losses handled?

Operating losses are deductable if the losses are in tight connection to the business operations.

10. How are capital losses handled?

Capital losses can be deducted from capital gains by companies.

Territorial Rules

11. What are the residence rules?

184 days in each 12 month period ( the calender year) if overriden then the indivudal bears full and unlimited tax liability in Iceland. Companies are treated as residence if incoproated, operated and the place of actual managment is in Iceland.

12. Is worldwide income taxed?

Yes if full resident in Iceland.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

There is a possible to deduct tax paid abroad in case there is no DTA, then the tax payment must be proved by valid documents from correct authotirites.

14. What are the rates on dividends for withholding taxes?

10% by individuals and 15% by companies in case of no DTA. In case of DTA 10-15% by individuals and 0-10% by companies.

15. What are the rates on royalties for withholding taxes?

15% by companies and 24,10% by individuals if no DTA in case of DTA the withholding tax is 0-10%.

16. What are the rates on interest for withholding taxes?

0% for individuals and 15% for companies

17. What are the rates of withholding tax on profits realized by a foreign corporation?

If the company has a PE in Iceland then net profits are taxed at a 15% tax rate.

18. Please list any other rates on withholding taxes that we should be aware of.

N/A

Tax Returns and Compliance

19. What is the taxable reporting period?

For individuals by the end of March each year (calender year) for companies September 20th each year (calender year).

20. What are the due dates for the filing of tax returns?

April 4th, for Individuals and September 30th, for companeis.

21. What are the key compliance requirements?

Tax return and annual balance sheet and annual report for companies. And VAT report if there is operations.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

N/A

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Yes, VAT and custom.

24. How does it operate? Is it a VAT or a sales tax?

VAT is levied on sale.

25. How is the taxable base determined?

The tax base is the difference between the Input VAT and the Output VAT.

26. What are the applicable rates?

7%, 14% and 24,5%.

27. Are there any exemptions?

Yes if sold outside of Iceland, export of fish etc.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

There are stamp duty on shares, bonds and securities and transfer of real estate, 0,4% to 1,5%.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

yes Employer pays a 5,34% social security contribution. Industry is levied a 0,08% industrial charge. Pension fund contribution.

30. How do they operate?

Employer must pay a 5,34% social security contribution of the total remuneration of his employee, i.e. brutto salary remuneration. The 0,08% industrial charge is levied on the income.

31. How is the taxable base determined?

Social security contribution and pension fund contribution is based on the brutto salary remuneration of each employee.

32. What are the applicable rates?

5,34% social security contritbution and 0,08% Industrial charge and 11% pension fund contribution

33. Are there any exemptions?

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

We have inheritance tax levied at a 5% rate of net wealth of the estate. We do not have Wealt Tax

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

We have a new CFC legislation in Iceland and a general anti avoidance rule.

USA, Greecem Belgium, UK, Estonia, Nordic Countries (Norway, Finnland, Denmark, Sweden), France, Greenland, Holland, India, Ireland, Italy, Canada, China, Korea, Lettland, Lithuania, Luxembourg, Malta, Mexico, Portugal, Poland, Russia, Slovakia, Spain, Swiss, Czech Republic, Ukraine, Hungary, Vietnam, Germany and Romania.

Contact Information:

Ólafur Kristinsson LOGOS legal services [email protected] Efstaleiti 5 Reykjavik, IS-103 Iceland

Tel 354.540.0300 Fax 354.540.0301 http://www.logos.is

Tax Desk Book

Indonesia Prepared by Lex Mundi member firm Ali Budiardjo, Nugroho, Reksodiputro

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

There are 2 (two) basic categories of taxes in Indonesia. Those are: (a) National taxes (covering value added tax, luxury goods sales tax, land and building tax and Income tax); (b) Regional Taxes (covering developments tax, motor vehicle tax, and other minor taxes); and

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

In general, taxpayers may deduct from gross income all expenses to the extent they are incurred in obtaining, collecting and securing taxable income. In other words, the resident taxpayers and permanent establishment are taxed on a net basis. (as elaborated more on question No. 14).

However, there are certain incomes that are subject to final tax which is imposed to the gross basis. They include the following:  deposit interest or other saving, interest from bond or state bond, interest on deposit which is paid by cooperative to its members;  lottery;  income from share transaction and other security, derivative transaction traded in stock exchange and selling transaction of shares or transfer of capital participation;  transfer of assets in the form of land and/or building, construction service, real estate, rental of land/or building;  other specified income.

3. What revenues are included?

Based on Law No. 7 of 1983 which lastly amended by Law No. 36 of 2008 concerning Income Tax (“Income Tax Law”), an income tax object shall be income, namely any increase in economic capability received or accrued by a Taxpayer, in whatsoever name or form and originating from within or outside Indonesia, which can be used for consumption or to increase the wealth of the taxpayer concerned and includes the following:  consideration or other remuneration received or accrued in connection with work or services including salary, wage, allowance, honorarium, commission, bonus, gratuity, pension or compensation in other forms, except where stipulated otherwise;  lottery prizes of gifts from work or other activities, and awards;  profit from business;  gains from the sale or transfer of property, including

www.lexmundi.com Page 136 © 2012 Lex Mundi  gains from the transfer of property to a corporation, partnership and other body in exchange for shares or capital participation;  gains accrued by a corporation, partnership or other body through the transfer of property to shareholders, partners or members;  gains from liquidation, merger, consolidation, expansion, separation or take over of a business;  gains from the transfer of property in the form of gift, aid or donation, except when given to blood relatives within one degree of direct lineage, or to religious, educational or other social bodies or to small business including cooperatives as determined by the Minister of Finance, provided there is no business, work ownership or control relationship between the parties concerned;  refunds of tax payments already deducted as expense;  interest, including premiums, discounts and compensation form loan repayment guarantees;  dividends, in whatsoever name and form, including dividends paid by an insurance company to policyholder and the distribution of surplus by a cooperative;  royalties;  rent and other income related to the utilization of property;  annuities received or accrued;  gains from the debt haircut, except up to certain amount as determined by Government Regulation;  gains from revaluation of property;  insurance premiums;  contribution received or accrued by an association from its members who consist of Taxpayers engaged in business or independent work;  an increase in net wealth from income which has not been taxed.

However, not every increase in economic capability generated by a taxpayer is taxable pursuant to Article 4.3 of Income Tax Law.

4. What deductions are allowed?

The allowable deductions, which are stated in article 6 of Income Tax Law, for tax purpose are as follows:  costs to purchase materials, costs connected with work or services, including wages, salaries, honoraria, bonuses, gratuities and allowances given in the form of money, interest, rent, or royalties, travel costs, waste processing costs, insurance premiums, administrative costs and taxes other than income tax;  depreciation and amortization expenses to expenditure on the acquisition, erection, improvement, or alteration of respectively building, equipment or other tangible assets and intangible assets used in carrying on a business that have a useful life for more than one year;  contributions to a pension fund which has been approved by the Minister of Finance;  loss arising from disposal of assets used to earn taxable income;  loss arising from fluctuations in foreign exchanges rates;  costs related to research and development of a company conducted in Indonesia;  costs of scholarships, apprenticeships and training;  a credit which is obviously can not be collected (bad debt);  certain types of donations and social infrastructures expenses;  non taxable income threshold for individual taxpayers;

The amount of such non-taxable income threshold (personal allowances) that is stipulated in article 7 of Income Tax Law, is as follows:  IDR 15.84 million for the taxpayer himself;  IDR 1.32 million additional allowance for a married taxpayer; www.lexmundi.com Page 137 © 2012 Lex Mundi  IDR 1.32 million additional allowance for each dependent limited to a maximum of three dependents;  IDR 15.84 million additional allowance for married taxpayer whose wife’s income is combined and joined with her husband’s income

5. What are the major expenses that are not deductible?

 Benefits-in-kind (BIKs) (e.g., free housing, 50% of the a. acquisition and maintenance costs of certain company provided cars), except food and drink provided to employees in the workplace, employee benefits required for job performance, such as protective clothing and uniforms, transportation costs to and from the place of work, accommodation for ship crews and the like, the cost of providing BIKs in remote areas, and 50% of the acquisition and maintenance costs of cellular phones;  Private expenses;  Non-business gifts and aid, except zakat (Islamic alms);  Reserves: However, certain types of reserve are claimable as deductible expenses: provision for doubtful accounts for banking and financing companies, insurance claims provision for insurance companies, deposit security provision for the Deposit Security Blanket Institution (LPS), reclamation provision for mining companies, forestation provision for forestry companies, and area closure and maintenance provision for industrial waste processing businesses;  Income tax payments  Tax penalties;  Profit distributions;  Employer contributions for life, health and accident insurance and contributions to unapproved pension funds, unless the contributions are treated as part of the taxable income of employees;  Expenses relating to income which is taxed at a final rate, e.g., interest on loans relating to time deposits;  Expenses relating to income which is exempt from tax, e.g., interest on loans used to buy shares where dividends to be received are not subject to income tax;  Salaries or compensation received by partnership or firmas members where their participation is not divided into shares.

6. What are the applicable federal rates?

Individuals who are resident are taxed on their worldwide income at the following national rates:

Taxable Income Band (in Rupiah) Tax rate 1,000,000 – 50,000,000 million 5% (five percent) 50,000,001 – 250,000,000 million 15% (fifteen percent) 250,000,001 – 500,000,000 million 25% (twenty five percent) 500,000,001 million – above 30% (thirty percent)

Further, the national rate for a corporate tax payer is 28% (twenty eight percent) for 2009 fiscal year and 25% for 2010 fiscal year and thereafter. A public company that satisfies a minimum listing requirement of 40% and other conditions shall be entitled to a tax discount of 5% of the standard rate.

7. What are the applicable state and/ or other local rates?

There are no provincial and/or other local rates for income tax

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

A. Capital Gain

Sales of a company’s assets (other than land and building) may result in capital gains or losses, calculated as the difference between the sales proceeds and the tax written-down value of the assets concerned. Capital gains are assessable whilst a capital loss is tax-deductible only if the asset concerned is used in the running of the business, i.e., for obtaining, collecting, and securing assessable income.

Generally, capital gains are imposed with the general tax rate mentioned above. However, there are some special tax treatments as described below.

i. Transfer of Shares of Indonesian Company by non-resident: the rate 5% of the transaction value ii. Land and/or Building: 5% of the taxable value of the land and/building. iii. Revaluations of fixed assets and its penalty: the highest corporate income tax rate minus 10 percent iv. Listed Shares: 0.1% of the gross transaction value. Founder shareowners have the option of paying final income tax at 0.5% of the company share value within a month after trading has begun in the shares on an Indonesian stock exchange. v. Luxurious Goods: 5% of the transaction value vi. Shares of SPV abroad having shares in Indonesian company: 5% of transaction value

9. How are operating losses handled?

Under article 6.2 of Income Tax Law, tax losses may be credited against income for five years beginning with the first year after such loss occurs.

10. How are capital losses handled?

Losses due to a sale or disposition of property which, according to its initial purpose, was not intended to be sold or disposed and which was owned and used for a business or held for earning, collecting and securing income, may be deducted from gross in

Territorial Rules

11. What are the residence rules?

A resident individual taxpayer is any individual residing in Indonesia or present in Indonesia for more than 183 days within any twelve months period or any individual, who during a taxable year presents in Indonesia and intends to reside in Indonesia.

A corporate taxpayer may be regarded as resident if it is incorporated or seat (domicile) in Indonesia. However, Income Tax Law does not explicitly specify criteria determining the place of seat or domicile.

12. Is worldwide income taxed?

Resident taxpayers are taxed at the normal rate on taxable income (excluding non-taxable income and final tax income), being world wide gross income less allowable deductions. The foreign tax

Generally, non-resident taxpayer is not taxed for its worldwide income unless it has a permanent establishment in Indonesian and such income is effectively connected to such permanent establishment. A permanent establishment (“PE”) is an establishment that used by an individual not residing in Indonesia or present in Indonesia for not more than 183 days in any 12 months period, or by a body which is not established or domiciled in Indonesia, to conduct business or engage activities in Indonesia in the form of, inter alia:

 A place of management;  A branch office;  A representative office;  An office building;  A factory;  A workshop;  A place of mining and extraction of natural resources, and drilling in territory used for mining exploration;  A fishery, place of animal husbandry, farm, plantation or forest;  A construction, installation or assembly project;  The rendering services in whatsoever form by employees or other people, if conducted for more than 60 days in any 12 months;  An individual or a body acting as an agent other than an agent of independent status;  An agent or employee of an insurance company that is not established or domiciled in Indonesia and that receives insurance premiums or covers risks in Indonesia.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

A foreign tax credit is allowed for tax paid or due overseas on income accruing to an Indonesian resident taxpayer. Ordinary Foreign Tax Credit with limitation per country and proportional calculation principle is applicable for any resident taxpayer. Excessive foreign tax credit may not be carried back or forward. As such Indonesia has concluded some double tax treaties, this method of eliminating international double taxation may be modified by a treaty provision.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

15% (fifteen percent) of the gross amount if the dividends are paid to resident taxpayer other than an individual resident taxpayer;

10% (ten percent) of the gross amount if the dividends are paid to individual resident taxpayer;

20% (ten percent) of the gross amount if the dividends are paid to a non-resident taxpayer unless any applicable tax treaty requires a lower rate;

15. What are the rates on royalties for withholding taxes?

15% (fifteen percent) of the gross amount if the royalties are paid to a resident taxpayer

20% (ten percent) of the gross amount if the royalties are paid to a non-resident taxpayer unless any applicable tax treaty requires lower rate;

16. What are the rates on interest for withholding taxes?

15% (fifteen percent) of the gross amount if the interests are paid to a resident taxpayer

0% (nil) of the gross amount if the interests are paid to a resident taxpayer running banking and/or other financial services business.

20% (ten percent) of the gross amount if the interests are paid to a non-resident taxpayer unless any applicable tax treaty requires lower rate;

17. What are the rates of withholding tax on profits realized by a foreign corporation?

The Foreign Company which is categorized as PE (as stated in item 12 above) is subject to Income Tax rates as stated in item 6 above (namely subject to 28% (twenty eight percent) for 2009 fiscal year and 25% for 2010 fiscal year and onward)

The 20 percent branch profit tax (or a lower treaty rate) will be imposed on a PE’s after-tax earnings unless those profits are reinvested in Indonesia via a founding or cofounding shareholder in a newly established Indonesian company no later than the following fiscal year for a period of at least two years after the company starts its commercial production. If reinvested, a notification, along with the corporate tax return of the respective year of income, must be filed with the tax office.

If those conditions are not fulfilled, the branch profit tax will be payable from the year it is incurred. Under the decree, the final tax income earned by a PE in Indonesia is excluded from the taxation of the after-tax earnings.

If the foreign corporation does not have a permanent establishment in Indonesia, generally, 20% withholding tax may be imposed in accordance with article 26 of Income Tax Law. The detail of withholding tax on the payment for non-resident is described in section no. 18.

18. Please list any other rates on withholding taxes that we should be aware of.

Most of Indonesian income tax is collected through a system of withholding taxes. Where a particular income item is subject to withholding tax, the payer is generally held responsible for withholding or collecting the tax. These withholding taxes are commonly referred to using the relevant article of the Income Tax (PPh) Law. See separate sheet.

Tax Returns and Compliance

19. What is the taxable reporting period?

There are periodic and annual reporting requirements.

20. What are the due dates for the filing of tax returns?

Periodic tax return obligations

Type of tax Payment deadline Return filing deadline Article 21/26 Income Tax The 10th of the following month The 20th of the following month Article 23/26 Income Tax The 10th of the following month The 20th of the following month Article 25 Income Tax The 15th of the following month The 20th of the following month Article 22 Income Tax The 10th of the following month The 20th of the following month Article 4(2) Income Tax. The 10th of the following month The 20th of the following month VAT and LST – www.lexmundi.com Page 141 © 2012 Lex Mundi Taxable Enterprise The 15th of the following month The 20th of the following month VAT and LST – VAT Collector The 15th of the following month The 20th of the following month

Annual tax return obligations

Type of tax Tax payment deadline Tax return filing deadline Corporate Income Tax The end of the forth month after the book year end before filing the tax return Individual Income Tax The end of the third month after the book year end before filing the tax return Land and Building (L&B) Tax Six months after the receipt of a Tax Due Notification Letter (SPPT) from the DGT Office N/A Duties on the Acquisition of L&B Rights On the acquisition date N/A

21. What are the key compliance requirements?

The major tax obligations of a permanent establishment in Indonesia or resident taxpayer are as follows:  to register itself/himself as a taxpayer with the tax office;  to keep any documents relating to taxes for a certain number of years;  submitting reports on business activities to the tax office, and registering itself as a taxpayer with the tax office having jurisdiction over the domicile of taxpayer;  paying its periodical and annual tax payment obligations (comprising both its corporate income tax and the withholding tax payments it is withholding) to the state treasury;  submitting its periodic and annual tax returns (in respect of its annual corporate income tax and the income tax of its employees) to the tax office. Various supporting documents shall be attached to the tax returns including the tax payment slips, financial statements, withholding tax slips, etc;  withholding the income tax amounts for its certain expenditures.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

The following are the other major requirements that you should be aware of regarding tax return.

Late filing of a tax return or complete failure to file a tax return is subject to an administrative fine at the following amounts:

Type of tax return Rupiah VAT return. 500,000 Other periodic tax returns. 100,000 Individual income tax return. 100,000 Corporate income tax return. 1,000,000

Failure to file a tax return by the relevant deadline may lead the DGT to issue a warning letter to the taxpayer in question. The warning letter will typically require the taxpayer to file the tax return within 30 days of the warning letter date. Ignoring such a letter can prompt the DGT to issue an official tax assessment along with an administrative penalty of 50% of the assessed tax. A taxpayer may amend or correct a tax return within two years after the end of the relevant fiscal year if the tax authorities have not audited the tax return. A tax return may be amended after such two years only if the amendment would result in an increase in tax liability or would decrease tax losses. A penalty 2% interest per month will be imposed on such increase in tax liability, calculated from the filing due date of the tax return up to the date of payment resulting from amendment/correction of the tax return.

www.lexmundi.com Page 142 © 2012 Lex Mundi Whosoever because of negligence fails to file a tax return or files an incorrect or incomplete tax return or attaches incorrect information which may cause losses to the state revenue, shall be punished by imprisonment for no less than three months but a maximum year and a maximum fine equal to two times the amount of the unpaid or underpaid tax. Deliberate violation of the tax obligations may be subject to imprisontment and fines.

Individual Taxpayers conducting business activities or independent personal services, and entity Taxpayers in Indonesia shall be obliged to maintain bookkeeping. The bookkeeping or recording shall be conducted in good intention and shall reflect the real conditions or business activities. The bookkeeping or recording shall be conducted in Indonesia by using Latin alphabet, Arabic numeral, and Rupiah currency, and shall be written in Indonesian Language or in any foreign language approved by the Minister of Finance. The bookkeeping shall be maintained consistently in either accrual or cash basis. Any change in the method of bookkeeping and or book year shall secure approval from the Director General of Taxes. The bookkeeping shall at least consist of records of assets, liabilities, equity, income, and expenses as well as sales and purchases, so that the amounts of tax payable can be calculated.

Taxpayers may perform their bookkeeping in foreign languages and currencies after securing approval from the Minister of Finance. Books, records, and documents upon which the bookkeeping or recording is based and other documents shall be kept for 10 (ten) years in Indonesia, at the place of business activities or residences.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Yes

24. How does it operate? Is it a VAT or a sales tax?

The 10% Value Added Tax (“VAT”) for delivery of certain goods and/or services which do not fall under the list setting forth non-value added taxable goods and/or services in Indonesia shall be payable. Any export of goods is subject to 10% VAT.

The Sales Tax on Luxury Goods (“PPnBM”) on import and or delivery of such taxable luxury goods are at a rate from 10% up to 75% (depending on the type of goods).

25. How is the taxable base determined?

VAT for a particular taxable event is calculated by applying the VAT rate to the relevant tax base. In most cases, the tax base is the transaction value agreed between the parties concerned.

For certain events or situations, other criteria must be used as the tax base, including:  Market value for transactions between related parties, a. remaining inventories of taxable goods at a company’s dissolution, and sales of (non-inventory) assets originally not for sale;  Cost of sales for own-use or free gifts and internal deliveries of taxable goods (e.g., between branches, or from the head office to branches);  Auction price for deliveries of taxable goods to the intermediary trader of an auction officer;  10% of the selling price for used cars;.  5% of the total service charges, provisions, and discounts for factoring services;  Average selling price for video and audio recording products;  4% of total costs incurred or paid, exclusive of the acquisition price of land, for the self- construction of a building;  Retail selling prices for deliveries or imports of tobacco products; www.lexmundi.com Page 143 © 2012 Lex Mundi  10% of the actual billing for package shipment services

26. What are the applicable rates?

 VAT is 10% (ten percent)  VAT of export of taxable goods is 0% (zero percent)  Based on Government regulation, the VAT 10% shall be amended to be minimum 5% (five percent) and maximum 15% (fifteen percent)  PPn-BM is from 10% up to 75%

27. Are there any exemptions?

Yes, there are certain goods and/or services which are exempted from VAT which is stipulated by Government Regulation.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

No.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

We are not sure whether we understand correctly the parafiscal contribution. To the best of our knowledge, there is a worker’s social security program (Jamsostek) which provides compensation in the event of working accidents, deaths, and old age (55 years) as well as sickness or hospitalization.

30. How do they operate?

The contribution is collected and paid by the employer. Part of the contribution is borne by the employee and the other part is borne by the employer.

31. How is the taxable base determined?

The contribution amount is based on the amount of salary earned by the employees.

32. What are the applicable rates?

Calls for premium contributions for the following:

Areas covered as a percentage of regular salaries/wages ~ Borne by employers ~ Borne by employee Working accident protection 0.24-1.74% - Death insurance 0.3% - Old age saving 3.7% 2% Health care* 3% -

* Maximum Rp 60,000/month for a married employee and Rp 30,000 for a single employee

33. Are there any exemptions?

If the employer has less than 10 employees and pays salary less than IDR 1 million per month, the employer is not required to have its employees registered as participating in the program.

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

There is no specific regulations on such kind of taxes, however gifts may be subject to Income tax law at the normal rate set forth above. Under certain circumstances, the gifts may be exempted from income tax.

With respect to the gifts, the triggeringevent is business, work, ownership or control relationship between the grantor and recipient. The income tax rate is based on the normal rate as stated in item 6 above. The taxable base is the market value of the gift.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Import Duty Incentive for Capital Goods and Income Tax incentives are available Capital Investment meeting certain requirements. Indonesia has no general anti avoidance rules however there are some specific anti avoidance rules including transfer pricing, controlled foreign corporation companies, and thin capitalization rules.

There are 59 countries having entered into tax treaties with Indonesia. General impact of the treaties on Indonesia is that Indonesia may surrender some or entire its rights to tax income earned by non- resident taxpayers in Indonesia.

Contact Information:

F. Karyadi Ali Budiardjo, Nugroho, Reksodiputro [email protected] Graha Niaga, 24th Floor Jl. Jenderal Sudirman Kav. 58 E.G. Tehuteru Jakarta, 12190 [email protected] Indonesia

Tel 62.21.2505125 Fax 62.21.2505001 http://www.abnrlaw.com This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: www.lexmundi.com/GlobalPracticeGuides www.lexmundi.com Page 145 © 2012 Lex Mundi

Tax Desk Book

Ireland Prepared by Lex Mundi member firm Arthur Cox

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

Income Tax Ireland imposes income tax on individuals, businesses, partnerships and other un-incorporated business groupings currently at rates of 20% and 41%. Details on the scope, operation and calculation of income tax are set out in questions 8 to 12.

Corporation Tax All companies resident in Ireland and all non-resident companies which carry on a trade in Ireland through a branch or agency are generally liable to corporation tax. In the case of trading companies the rate of corporation tax on trading income is 12.5%. Non-trading income (for example, investment income) and income of certain trades (for example mining) is subject to corporation tax at a rate of 25%. Gains arising to companies are generally chargeable to corporation tax, however, the taxable amount is calculated in accordance with the capital gains tax rules and the effective rate of tax on gains is 25%. Where a company is not resident in Ireland, the extent of its Irish corporation tax liability is limited to trading income arising directly or indirectly through a branch or agency in Ireland, and any income from property owned or used by, or held by or for, a branch or agency in Ireland. Income received by a non-resident company which is not attributable to an Irish branch or agency (e.g. Irish rental income or deposit interest) is liable to Irish income tax.

Capital Gains Tax (CGT) Capital gains tax is chargeable on gains arising on the disposal of capital assets at a rate of 25%. A disposal occurs when the owner ceases to have ownership of the asset and in certain other circumstances.

An Irish resident or ordinarily resident and Irish domiciled person is subject to CGT on worldwide disposals of property. Irish resident or ordinarily resident but non-Irish domiciled persons are subject to CGT on disposals of Irish and UK assets and “foreign” assets, but only where the proceeds of the “foreign” disposals are remitted to Ireland. Non-Irish resident or ordinarily resident persons are subject to CGT on the disposal of specified Irish assets as outlined in question 14 below.

Irish resident companies are liable to corporation tax (rather than CGT) on their worldwide gains (calculated in accordance with the CGT rules and the effective rate of tax on gains is 25%) (other than development land gains which are subject to CGT). Non-resident companies are only liable to CGT on the disposal of certain specified assets (e.g. land, mineral/exploration rights situated in Ireland, unquoted shares deriving the greater part of their value from land/buildings or certain mineral rights situated in Ireland). Gains arising to a company on the disposal of shares in certain subsidiary undertakings are exempt from CGT provided certain conditions are met under the holding company regime / participation exemption.

Income Levy www.lexmundi.com Page 146 © 2012 Lex Mundi Ireland imposes an income levy on gross income in the case of individuals only at rates of between 2% and 6% depending on the level of income. The first €75,036 i

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

In Ireland the taxable base for income / profits is determined in accordance with the income tax rules. For companies the starting point is the net profit figure in the audited financial statements of the company. This figure is then adjusted to reflect changes required by law. The audited financial statements of an Irish corporate are generally computed in line with Irish Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Similarly, for unincorporated businesses the starting point in calculating the taxable base is to take the net profit as stated in the business accounts and make any adjustments required in accordance with the income tax rules.

3. What revenues are included?

Income from all sources is subject to Irish income tax or corporation tax on income in the case of companies. This normally includes all business profits, interest, rents, royalties and dividends (subject to the Irish holding company regime / participation exemption). Corporation tax is levied on total profits, that is, the income and gains of the company for the relevant accounting period. Income for these purposes includes business profits, interest, rents, royalties and generally dividends (subject to the holding company regime / participation exemption). The income / profits earned are taxed in line with the income tax rules and in the case of trading companies the rate of tax is 12.5%. Non-trading income (for example investment income) and income of certain trades (for example mining) is subject to tax at a rate of 25%. Capital gains arising to companies are chargeable to corporation tax rather than capital gains tax (except in the case of development land gains), however, the taxable amount is calculated in accordance with the capital gains tax rules and the effective rate of tax on gains is 25%. A company is tax resident in Ireland if it is Irish incorporated (subject to certain exceptions) or if it is centrally managed and controlled in Ireland. Where a company is not resident in Ireland, the extent of its Irish corporation tax liability is limited to trading income arising directly or indirectly through a branch or agency in Ireland, and any income from property owned or used by, or held by or for, a branch or agency in Ireland. Income received by a non-resident company which is not attributable to an Irish branch or agency (e.g. Irish rental income or deposit interest) is liable to Irish income tax.

Ireland has a holding company regime which exempts disposals by a company of shares in a subsidiary in which it holds at least 5% of the ordinary share capital from capital gains tax in certain circumstances.

4. What deductions are allowed?

In calculating trading profits, a taxpayer may deduct revenue expenses which are incurred wholly and exclusively for the purpose of the trade. Expenses in the nature of capital are not generally deductible against trading income.

In calculating a chargeable gain, the cost of acquisition of the asset, incidental costs of acquisition and enhancement expenditure (indexed for inflation up to 31 December 2002 only) together with incidental costs of disposal, losses and other expenses are deductible.

5. What are the major expenses that are not deductible?

Certain business expenses are specifically disallowed such as business entertainment expenses and expenditure on capital items. Depreciation of capital assets contained in the audited financial statements of a company or unincorporated business will normally not be an allowable expense. However, the tax payer is allowed to claim capital allowances in respect of certain capital expenditure such as expenditure on plant and equipment and industrial buildings. In addition, allowances are available for expenditure incurred on research and development activities and in acquiring patents.

6. What are the applicable federal rates?

The rates of income tax for individuals, business, partnerships and other unincorporated business groupings are 20% and 41%. The 20% rate applies to the first €36,400 in the case of an individual and, €45,400 in the case of a married couple with one income or €72,800 in the case of a married couple with both parties working. The balance of income is taxed at a rate of 41%. The rates of corporation tax on income are as follows: 12.5% in the case of trading income, an effective rate of 20% in the case of income from the dealing in residential development land (for accounting periods ending prior to 1 January 2009; 25% thereafter) and 25% on rental and investment income.

7. What are the applicable state and/ or other local rates?

There are no separate applicable state or local taxes in Ireland. However, local authorities charge businesses commercial rates for the provision of certain services to businesses operating within a particular district.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

There are a number of exemptions from capital gains tax including the Irish holding company regime / participation exemption outlined in question 7 above and there is specific relief available in the case of business reconstructions or amalgamations of companies or reorganisations within a group. There are also specific exemptions from capital gains tax in the case of a transfer of an unincorporated business to a company and transfers between spouses. Relief from capital gains tax for business reorganisations, amalgamations, demergers etc. are all available on a statutory basis in Ireland.

Stamp duty reliefs for business reconstructions, amalgamations etc. and transfers between associated companies are also available on a statutory basis in Ireland. The transfer of a business should generally not be subject to VAT where the buyer is VAT registered in Ireland.

9. How are operating losses handled?

Trading losses incurred may be offset in the year in which they arise in full against other trading income. Any losses not relieved in this way can be carried forward for offset in future years or carried back 12 months against profits of the same trade or profession. Where a trade ceases, terminal loss relief can be claimed in respect of losses incurred in the last 12 months of a trade of profession. These losses can be carried back against the profits from the same trade or profession within the previous 3 years prior to the discontinuance of the trade. Losses incurred in a non-trade or non- profession are generally offsetable only against other income arising from a similar source so, for instance, losses incurred in the business of renting properties, are only offsetable against other rental income. Such losses would not generally be available for offset against other profits or income of the company or trade or profession.

10. How are capital losses handled?

Losses incurred in the current year are generally offsetable against gains in the current year and any unallowed losses can be carried forward indefinitely. However, gains on development land may only be offset against losses on development land. Losses

Territorial Rules

11. What are the residence rules?

All companies incorporated in Ireland are automatically considered resident in Ireland unless considered resident in a country with which Ireland has a double taxation treaty under the terms of that treaty. The incorporation rule will not apply in the following circumstances where instead the company is resident in Ireland if its central management and control is located in Ireland:  the company or a related company (50%) carries on a trade in Ireland and either (i) the company is controlled by persons resident in an EU Member State or in a country with which Ireland has a double taxation treaty or (ii) the shares of the company or a related company are substantially and regularly traded on a recognised stock exchange in an EU Member State or in a country with which Ireland has a double taxation treaty; or  the company is regarded as resident in a country other than Ireland and not resident in Ireland under the terms of a double taxation treaty. An individual will be regarded as resident in Ireland if he is present in Ireland for a total of 183 days or more in the year of assessment or present for a total of 280 days or more in the year of assessment and the preceding year, although any year in which he is present in Ireland for 30 days or less is disregarded. For the tax year 2009 on an individual is regarded as present in Ireland for a day if he is present in Ireland at any time during that day.

An individual will be regarded as being ordinarily resident in Ireland for a year of assessment if he is resident in Ireland for each of the three years preceding the year of assessment.

Ireland also has the concept of domicile which is relevant to an individual’s liability to certain Irish taxes. An individual will be regarded as being domiciled in Ireland generally if his father (or mother in certain cases) is Irish domiciled or if he has acquired Irish domicile by choice through a combination of residence and intention to reside in Ireland indefinitely.

12. Is worldwide income taxed?

Irish resident companies are liable to corporation tax on worldwide income. Non-resident companies are liable to corporation tax on income arising directly or indirectly through an Irish branch or agency. Income received by a non-resident company which is not attributable to a branch or agency but which arises from an Irish source (e.g. rental income or deposit interest) may be liable to Irish tax subject to the provisions of any relevant double tax treaty. The scope of an individual’s liability to Irish income tax differs depending on whether or not he/she is resident, ordinarily resident and/or domiciled in Ireland.

An individual who is resident, ordinarily resident and domiciled in Ireland is liable to income tax on his worldwide income.

An individual who is resident and ordinarily resident but not domiciled in Ireland is liable to income tax on income arising in Ireland but on foreign income only to the extent that it is remitted to Ireland. However, this remittance basis does not apply to income from a foreign employment that is attributable to the performance of duties of that employment in Ireland. An individual who is resident but not ordinarily resident in Ireland and who is an Irish citizen is subject to the remittance basis as outlined above (i.e. Irish source income, foreign source income to the www.lexmundi.com Page 149 © 2012 Lex Mundi extent that it is remitted to Ireland, and income from a foreign employment attributable to the performance of duties of that employment in Ireland).

An individual who is not resident but who is ordinarily resident and domiciled in Ireland is taxable on the same basis as a resident (i.e. worldwide income) but excluding income from a trade or profession no part of which is carried on in Ireland, income from a foreign employment no part of which is carried on in Ireland, and other income of the individual which in any year does not exceed €3,810.

An individual who is not resident and not ordinarily resident in Ireland is, in general, liable to Irish income tax only on income arising in Ireland. In addition a non-resident individual is generally not entitled to personal tax credits and reliefs.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Credit relief for dividends – Ireland has a favourable system of credit relief in respect of non-Irish dividends subject to tax in Ireland at 25%, whereby credit may be obtained for any withholding tax suffered and for any underlying taxes paid by the foreign company out of which the dividend was paid, against tax suffered in Ireland on the receipt of the dividend. Relief is available where the provisions of a double taxation treaty apply and also on a unilateral basis where the dividends are received from a non-treaty jurisdiction, or where the treaty does not apply due to restrictive ownership requirements being in place for the granting of credit. Uniteral credit relief is available where the foreign dividend is received, by either an Irish resident company or an EU resident company where the dividend forms part of that company’s Irish branch profits, from a foreign company in which it owns directly or indirectly at least 5% of the ordinary share capital of the company. Where the foreign paying company has itself received dividends from a third company which has suffered foreign tax, the relief can extend to such tax if the recipient company and the foreign paying company each control at least 5% of the voting power of the third company.

The amount of available credit depends on the effective tax rate on the profits from which the dividend has been paid and there is flexibility to determine this. If there is an excess of foreign tax the excess may be pooled for offset against dividends from other jurisdictions which suffer no tax or less tax than the Irish effective rate, with the balance available for carry forward to utilise in subsequent years.

Where an election has been made to tax certain dividends at 12.5% (i.e. in respect of dividends repatriated from foreign trading income), the pooling of dividends applies separately to dividends taxed at the 12.5% rate and dividends taxed at the 25% rate. There is a restriction on the offset of surplus tax credits arising on a dividend taxed at 12.5% so that they are not available for offset against tax suffered on a 25% dividend. There is no restriction on the offset of surplus tax credits arising on dividends taxed at 25%, i.e. the excess can shelter 12.5% dividends.

Capital Acquisitions Tax (CAT) – Ireland has double taxation treaties in place covering inheritance and gift taxes with only the US and the UK. For all other jurisdictions, unilateral relief is granted where a gift or an inheritance of foreign property to or from an Irish resident or ordinarily resident disponer or beneficiary is reduced by foreign tax which is similar in nature to estate duty, gift tax or inheritance tax. The relief applies only in respect of tax imposed by a foreign country on property situated in that foreign country. The credit cannot be greater than the Irish CAT which would have been payable on the foreign property and can only be given where the same event gives rise to tax in both countries.

14. What are the rates on dividends for withholding taxes?

Dividends paid by an Irish resident company are generally subject to dividend withholding tax (DWT) at the standard rate of income tax (currently 20%) unless the shareholder qualifies for an exemption and all of the requisite documentation is in place prior to the payment of the dividend.

In addition to any relief which may be available under the terms of a double taxation treaty with Ireland, Ireland has a number of domestic exemptions from DWT. For example, an exemption from DWT is available for dividends paid to individuals who are resident for tax purposes in an EU Member State or in a country with which Ireland has a double taxation treaty, provided that the individual is neither resident nor ordinarily resident in Ireland. Several exemptions are also available in respect of dividends paid to companies. The main domestic exemptions for dividends paid to companies are as follows: 1.1 where the recipient company or person is resident in another EU Member State (other than Ireland) or in a country with which Ireland has a double taxation treaty and is not under the control of Irish residents;

1.2 where the recipient is a company that is not resident in a relevant territory but is controlled by a person or persons who are so resident (and who is/are not under the control of a person or persons who are not resident in a relevant territory); or

1.3 where the principal class of shares of the recipient company or its 75% parent company are substantially and regularly traded on a recognised stock exchange in a relevant territory. The above exemptions apply as a matter of Irish domestic law and irrespective of the provisions of a double tax treaty.

A further domestic exemption from DWT is available in respect of certain depositary arrangements in the United States in respect of listed shares of Irish resident companies where the persons beneficially entitled to the dividends are the holders of American depositary receipts and are registered with a US address.

15. What are the rates on royalties for withholding taxes?

Patent royalties are subject to a withholding obligation of 20% although many somestic exemptions are available. Copyright royalties are in general not subject to withholding tax. The requirement to deduct tax at source does not apply to a royalty payment to a corporate shareholder where:  the Irish company is a 51% subsidiary of the recipient provided that the recipient is resident in an EU Member State;  the provisions of Council Directive 2003/49/EC (Directive on Interest and Royalties) apply; or  the shareholder is resident for tax purposes in a jurisdiction with which Ireland has a double taxation agreement in force and that agreement provides for a 0% rate of withholding tax.

16. What are the rates on interest for withholding taxes?

Interest paid by an Irish resident company may be subject to withholding tax. In general, unless the circumstances falls within one of the many domestic exemptions from withholding tax or treaty relief is available, an Irish resident company must deduct withholding tax at 20% on payments of interest. The main domestic exemptions from withholding tax on interest paid by an Irish resident company are as follows:

 interest paid in the ordinary course of business of the payer where the recipient is a company that: www.lexmundi.com Page 151 © 2012 Lex Mundi  is tax resident in an EU Member State (other than Ireland), or in a territory with which Ireland has a double tax treaty; and  does not have an Irish branch or agency, with which the interest is connected;  interest paid on quoted Eurobonds, being securities that are issued by a company, carry a right to interest and are quoted on a recognised stock exchange, where: i. the person by or through whom the payment of interest is made is not in Ireland; or ii. the payment of interest is made by or through a person in Ireland and either: (A) the quoted Eurobond is held in a clearing system recognised by the Irish Revenue Commissioners (DTC, Euroclear and Clearstream, Luxembourg are, amongst others, so recognised), or (B) the person who is the beneficial owner of the quoted Eurobond and who is beneficially entitled to the interest is not resident in Ireland and has made a declaration to a relevant person (such as a paying agent located in Ireland) in the prescribed form.

Deposit Interest Retention Tax (“DIRT”) is charged on the payment of certain interest by specified institutions e.g. banks and building societies. DIRT is deducted at 25%, from interest paid either annually or at more frequent intervals or from the gross amount of interest paid or credited on specified accounts (Special Savings Accounts and Special Term Accounts). Any other interest paid or credited is liable to DIRT at 28%.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

If the foreign corporation is resident for tax purposes in Ireland, dividend withholding tax as outlined in question 20 will generally apply to any profits distributed by way of dividends. Non-resident companies which carry on a trade in Ireland through a branch or agency are generally liable to corporation tax on their Irish trading profits at a rate of 12.5% but are otherwise not subject to any withholding tax on the remittance of branch profits.

18. Please list any other rates on withholding taxes that we should be aware of.

Capital Gains Withholding Tax On the sale of certain assets the person by or through whom payment is made is obliged to withhold 15% of the sale proceeds and pay it over to the Revenue Commissioners. The requirement to deduct tax from the sale proceeds only applies where the consideration for the disposal exceeds €500,000, and relates to the sale of certain specified assets:  land in Ireland;  minerals in Ireland or any rights, interests or other assets in relation to mining, or minerals or the searching for minerals;  exploration or exploitation rights in a designated area;  shares in a company deriving their value or the greater part of their value, directly or indirectly from assets specified in paragraph (i), (ii) or (iii), other than shares quoted on a stock exchange;  unquoted shares acquired following a reorganisation of share capital, such shares being similar in nature to those described in (iv) above;  goodwill of a trade carried on in the Ireland. [Note: This only applies to a direct sale of goodwill and not to the sale of shares the value of which may be derived wholly or partly from goodwill.] Tax does not have to be withheld by the purchaser of an asset where the vendor has obtained a clearance certificate (CG50A) authorising the payments to be made in full. An Irish resident taxpayer making a disposal is entitled to such a clearance certificate as of right. A non-resident person will receive such a certificate only where he has satisfied the Revenue Commissioners that he has no liability to capital gains tax on the disposal, or satisfies the Revenue as to the amount of the liability and that tax will be paid by him.

Income tax at 20% must also be deducted from certain other payments including inter alia:  annuities and certain other annual payments;  rents on Irish property payable to non-residents (unless Irish resident agent appointed); and  payments for professional services rendered to or on behalf of specified State and semi-State bodies.

Principal contractors must deduct tax at 35% (relevant contracts tax) from payments made to sub- contractors in the construction, forestry and meat-processing industries unless the sub-contractor has requisite documentation.

Tax Returns and Compliance

19. What is the taxable reporting period?

Income tax: the taxable reporting period is the period 1 January to 31 December, save that a sole trader is generally allowed take their accounting period as the taxable period. Corporation tax: the relevant period is the company’s accounting period, save that each return can only cover a maximum of twelve months. If the accounting period exceeds twelve months, it will be necessary to make more than one return for that period.

Capital Gains tax: the taxable reporting period is the period from 1 January to 31 December, or for a company subject to CGT, its accounting period.

VAT: a taxable period is a period of two months beginning on the first day of January, March, May, July, September and November. Certain large traders are required to submit detailed INTRASTAT returns on a monthly basis whilst smaller traders may be allowed to submit VAT returns on an annual, bi-annual or tri-annual basis.

20. What are the due dates for the filing of tax returns?

For Income tax, a chargeable person must make a preliminary tax payment by 31 October in the tax year. The chargeable person must file a tax return and pay the balance of tax due by 31 October following the year of assessment.

For Corporation tax, a company must make a preliminary payment of 90% of their tax liability, or (where liability for preceding period is less than or equal to €200,000) 100% of that figure, by the 21st day of month preceding the end of accounting period. The company may make a top-up payment in the month following the end of the accounting period. It must pay the balance of tax due and file a return (CT1) within 8 months and 21 days of the end of the accounting period.

Capital Gains Tax, must be paid by 31 October in the year of assessment in respect of disposals arising in the period from 1 January to 30 September, and by 31 January of the following year of assessment in respect of disposals arising in the period 1 October to 31 December. A CGT return must be made by an individual by 31 following the year of assessment in which the disposal is made. For companies, the CGT return is due to be filed nine months after the end of the accounting period.

For Capital Acquisitions Tax, if a taxable gift or inheritance leads to a tax liability arising, or (after the benefit is taken into account) more than 80% of a group threshold being used, or agricultural or business relief is being claimed, a self-assessment return Form IT38 must be filed and tax paid within 4 months of the valuation date.

For VAT, every taxable person must generally file bi-monthly VAT returns by the 19th day of the month following the taxable period, and at the same time remit any tax due.

21. What are the key compliance requirements?

See question 20 above.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Specific minimum retention periods apply to certain documents under various tax heads. For example, a person (including a company) is obliged to keep certain records (including accounts) required to enable true tax returns to be made for the purposes of income tax, corporation tax and capital gains tax, for a period of six years. Where accounts are made up to show the profits or gains from any trade, profession or activity, or in relation to a source of income of any person, that person is further required to retain ‘linking documents’ (being documents drawn up in the making up of accounts and detailing calculations linking the records to the accounts). Such records must be kept on a continuous and consistent basis in written form or electronically.

For VAT purposes, the following must be held for a period of six years from the date of the latest transaction to which they relate:  bank statements  purchasing invoices  employees’ expense reports and invoices  sundry billing invoices  inter-company invoices  sales invoices  purchase orders and acknowledgements  credit notes and all supporting documentation (credit claimed, etc.)  import and customs declarations  monthly control statements  documents relating to exercising and terminating a landlord’s option to tax  a capital goods record  a joint option for taxation.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Stamp duty Stamp duty is charged on certain documents executed in Ireland or which relate to Irish situate property. The tax payable is either a fixed duty or, where the consideration payable exceeds a basic exemption amount, a percentage of the value of the transaction (for example, 1% on share transfers, 7% – 9% on residential property, 1% – 6% on other real property and up to 12% on the lease of residential property in certain circumstances). There are also a number of exemptions from stamp duty, for example, for intra group (90%) transfers and certain reconstructions and amalgamation transactions which may be available depending on the particular circumstances.

24. How does it operate? Is it a VAT or a sales tax?

VAT is an EU tax on consumption with each Member State allowed various exceptions and derogations from the EU Directives. Each Member State may also set its own rates within a given range. VAT is charged on certain imports and on goods and services supplied in Ireland in the course of business. In general, VAT is collected by VAT-registered traders on their supplies of goods www.lexmundi.com Page 154 © 2012 Lex Mundi and services effected within Ireland for consideration to their customers. Each such trader in the chain of supply from manufacturer through to retailer charges VAT on his or her sales and is entitled to deduct from this amount the VAT paid on his or her purchases and, so, generally, it is ultimately borne by the final consumer. The place of supply of certain services is subject to the “reverse charge” mechanism, with the recipient deemed to be the supplier and accountable person for the VAT in certain circumstances.

25. How is the taxable base determined?

The general rule is that VAT is chargeable on the total consideration for the supply or importation of VAT-able goods or services including all taxes, commissions, costs and charges, but excluding the VAT chargeable. The amount liable to VAT includes not only the direct charge for the goods or services but also expenses incurred by the supplier in the course of his business and charged by the supplier to the customer e.g. travel expenses. Expenses incurred as agent of a customer and recharged directly to the customer are not liable to VAT.

Supplies where the consideration does not consist of, or does not consist wholly of money are subject to VAT at their open market value. Certain supplies between connected persons may also have open market value substituted for the consideration paid.

26. What are the applicable rates?

0%: exports, intra-Community supplies of goods to VAT-registered persons in other EU Member States, certain food and drink, oral medicine, certain books, certain animal feeding stuffs, certain fertilisers, seeds and plants used to produce food, clothing and footwear appropriate to children under 11 years of age and supplies to VAT-registered persons who derive not less than 75% of their turnover from supplies of goods out of Ireland;

4.8%: livestock, live greyhounds, the hire of horses;

13.5%: certain fuels, building services, newspapers, magazines and periodicals, repair, cleaning and maintenance services generally, holiday accommodation, certain photographic supplies, restaurant services, provision of commercial sporting facilities and works of art, collectors’ items and antiques in certain circumstances.

21.5%: all other goods and services not specified as exempt or liable at other rate.

27. Are there any exemptions?

Exempt goods and services consist principally of financial, medical and educational activities as well as admissions to and promotion of certain live theatrical and musical performances. Exemption from VAT means that the persons engaged in the exempt activities are not liable for VAT on their receipts and are not entitled to a credit or deduction for VAT borne on their purchases.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

Encashment Tax: Bankers and paying agents in Ireland who collect foreign dividends belonging to others are obliged to deduct and account for income tax at the standard rate, currently 20%, when they cash the foreign dividend for their client. Stamp Duty on Financial Cards: Stamp duty is collected in arrears at a rate of €2.50 per year per ATM or debit card, or €5 for a combined ATM and debit card. Stamp duty is collected in arrears on 1 April, unless the account is closed during the year, on credit cards and charge cards at a rate of €30 per card.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Yes - Pay Related Social Insurance (PRSI) and Health Levy Contributions.

30. How do they operate?

Employers and employees are liable to make contributions in respect of insurable employments exercised in Ireland. Non-insurable employments include employment by family members, casual employment and employment under community schemes. PRSI and health levy contributions must be submitted by employers along with income tax deducted under the PAYE system within fourteen days of the end of the income tax month. Certain small businesses may remit on a quarterly basis.

Self-employed persons remit their contributions under the self-assessment system which applies for income tax. An employer who makes payments to a self-employed contributor must remit PRSI and health levy contributions at the self-employed rates to the Revenue.

31. How is the taxable base determined?

PRSI and health levy contributions are calculated on an employee’s total earnings including benefits in kind such as company cars. Self-employed persons must pay contributions in respect of the aggregate of their income from all sources (including investment income) subject to a limited number of deductions such as pension contributions and capital allowances.

32. What are the applicable rates?

An employee is liable to 8% on the first €75,036 of his earnings (consisting of employee PRSI contributions of 4% and a health levy of 4%). Earnings in excess of €75,036 are subject to a health contribution of 5%. The employer PRSI contribution is 10.75% on all of an employee’s reckonable earnings from that employer and is not subject to any cap. However, there is a lower rate applied where the employee’s earnings are €356 or lower per week. Self-employed individuals must make PRSI contributions of 3% and health contributions of 4% on all income up to €75,036. Income in excess of €75,036 is subject to a health contribution of 5% and PRSI of 3%

33. Are there any exemptions?

The first €127 per week of an employee’s income is usually exempt from employee PRSI as are any annual earnings over €75,036. There is a small income exemption from the health levy for those earning less than €26,000 p.a..

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

www.lexmundi.com Page 156 © 2012 Lex Mundi 35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Capital Acquisitions Tax (CAT) is a tax on both gifts and inheritances and applies at the rate of 25%. Gifts or inheritances of all property situated in Ireland are subject to CAT. Gifts or inheritances of non-Irish situated property, are generally liable to tax where either the disponer or the beneficiary is resident or ordinarily resident in Ireland. Non-domiciled individuals are deemed to be outside these charging provisions (except in the case of property situated in Ireland) unless they been resident in Ireland for five consecutive tax years preceding the year in which the benefit is taken, and are also resident in the year in which the benefit arises.

The taxable value of the benefit for the purposes of CAT is the market value of the benefit less any liabilities, costs and expenses properly payable out of the benefit and less the value of any consideration paid for the benefit. If the benefit is a gift then an annual Small Gift Exemption (currently €3,000) may be deducted from gifts from each different disponer. The CAT payable depends on the relationship between the disponer and the beneficiary as various thresholds apply below which no CAT is payable. It also depends on any prior benefits taken from any disponers in relation to whom the beneficiary bears the same relationship he does to the current disponer as these are aggregated. CAT is payable at 25% on the excess of the taxable value of the current benefit above the applicable threshold. Various reliefs which reduce the amount of CAT payable are available, for example reliefs on agricultural and business property and benefits transferred between spouses are exempt from CAT.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Anti-deferral regimes: Ireland has certain limited 8 year deemed disposal provisions which apply where an Irish resident invests in an Irish investment undertaking (authorised collective investment scheme) or in certain regulated collective investment schemes in EU Member States and countries with which Ireland has a double taxation treaty.

Transfer pricing provisions: Ireland has only very limited transfer-pricing legislation. There is a provision in Irish tax legislation which seeks to prevent transfer pricing between a resident and a non- resident person where the non-resident person controls the resident and the profits of the resident are either nil or less than the ordinary profits which might be expected to arise from that business. This is not a provision that is often invoked in practice. Anti-avoidance measures: Ireland has a general anti-avoidance provision which enables the Revenue Commissioners in Ireland to recharacterise any transaction (or part of a transaction) which gives rise to a tax advantage and which the Revenue believe was undertaken primarily to give rise to the tax advantage. It should be noted that the Revenue rarely invokes this provision. Whilst there is no requirement on taxpayers to voluntarily notify any scheme there is a facility for taxpayers to notify schemes that they believe may be at risk of being recharacterised. If the Revenue subsequently recharacterise the scheme the penalties that the taxpayer would suffer would be substantially mitigated as a result of the fact that the taxpayer had notified the Revenue of the scheme.

Controlled Foreign Companies (CFC) Legislation: Ireland has no CFC legislation and therefore an Irish company would not be subject to Irish corporation tax on the profits of any subsidiaries. In www.lexmundi.com Page 157 © 2012 Lex Mundi addition, the lack of CFC legislation reduces the burdens and costs of compliance which are associated with countries which operate CFC rules. Thin capitalisation rules: Ireland does not have thin capitalisation rules.

The table below lists countries with which Ireland has agreed a double taxation treaty and sets out the source country limits applicable to dividends, interest and royalties.

Maximum Source Country Tax Rates (% of gross payment)(for split rates, please consult the relevant article in the treaty)

Country Year Dividends Interest Royalties Australia 1984 15 10 10 AUSTRIA 1964 10 0 0/10 BELGIUM 1973 15 15 0 BULGARIA 2002 5/10 0/5 10 CANADA 2006 5/15 0/10 0/10 CHILE 2009 5/15 5/15 5/10 CHINA 2001 5/10 0/10 6/10 CROATIA 2004 5/10 0 10 Cyprus 1952 0 0 0/5 CZECH REP. 1997 5/15 0 10 DENMARK 1994 0/15 0 0 Estonia 1999 5/15 0/10 5/10 Finland 1990 0/15 0 0 FRANCE 1966 10/15 0 0 GEORGIA Not yet in force 0/5/10 0 0 GERMANY 1959 15 0 0 Greece 2005 5/15 5 5 HUNGARY 1997 5/15 0 0 Iceland 2005 5/15 0 0/10 INDIA 2002 10 0/10 10 Israel 1996 10 5/10 10 ITALY 1967 15 10 0 JAPAN 1974 10/15 10 10 KOREA REP. 1992 10/15 0 0 Latvia 1999 5/15 0/10 5/10 Lithuania 1999 5/15 0/10 5/10 LUXEMBOURG 1968 5/15 0 0 MACEDONIA 2010 0/5/10 0 0 Malaysia 2000 10 0/10 8 Malta 2010 5/15 0 5 MEXICO 1999 5/10 0/5/10 10 NETHERLANDS 1965 0/15 0 0 NEW ZEALAND 1989 15 10 10 NORWAY 2002 0/5/15 0 0 Pakistan 1968 10/no limit no limit 0 Poland 1996 0/15 0/10 10 PORTUGAL 1995 15 0/15 10 Romania 2001 3 0/3 0/3 RUSSIA 1996 10 0 0 www.lexmundi.com Page 158 © 2012 Lex Mundi SLOVAK REP. 2000 0/10 0 0/10 SLOVENIA 2003 5/15 0/5 5 South Africa 1998 0 0 0 Spain 1995 0/15 0 5/8/10 Sweden 1988 5/15 0 0 Switzerland 1965 10/15 0 0 Turkey Not yet in force 5/10/15 10/15 10 UK 1976 5/15 0 0 UNITED STATES 1998 5/15 0 0 VIETNAM 2009 5/10 0/10 5/10/15 ZAMBIA 1967 0 0 0

Negotiations for new agreements with Albania, Azerbaijan, Bosnia Herzegovina, Kuwait, Moldova, Serbia, and Thailand have been concluded and are expected to be signed shortly.

Negotiations for new agreements with Argentina, Armenia, Egypt, Morocco, Singapore, Tunisia, and Ukraine are at various stages.

It should be noted that many Irish domestic exemptions are available to countries which have concluded a double taxation treaty with Ireland, even though the treaty may not yet be in force.

Contact Information:

Jonathan Sheehan Arthur Cox [email protected] Earlsfort Centre Earlsfort Terrace Dublin, 2 Ireland

Tel 353.1.618.0000 Fax 353.1.618.0618 http://www.arthurcox.com

Tax Desk Book

Israel Prepared by Lex Mundi member firm S. Horowitz & Co

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

The main taxes applied in Israel today are as follows:

Direct taxes (taxes on income and gains): a. Income tax (individuals); b. Corporate tax; c. Capital gains tax; d. Land appreciation tax.

Indirect taxes (taxes on transactions): a. Value-added tax (VAT); b. Customs and duties; c. Purchase tax.

Property Taxes: a. Local municipal taxes (e.g., Arnona, water and sewage rates, road charges, etc.); b. Betterment levy.

Employment taxes: a. National insurance contributions; b. National health insurance tax.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

Generally, Israeli residents are obliged to pay income/corporate tax on their worldwide income which was produced or accrued from any of the fixed list of sources (e.g. business income, vocation or employment income, dividends, interest and linkage differentials, patents and copyrights, rent, etc.). Foreign residents are liable to pay income/corporate tax in Israel on income produced or accrued in Israel from the sources referred to above (unless such foreign resident is exempt from tax).

A Company’s income and costs are recorded, in most cases, on an accrual basis, in accordance with their financial reports.

In addition, the sale of capital asset is subject to capital gains tax. When calculating the sum of capital gains tax payable, certain basic principles need to be taken into consideration. In this context, an Israeli resident is liable to tax on a capital gain accrued or produced in Israel or abroad. A foreign resident is similarly liable to tax on a capital gain accrued or produced in Israel. The place where the www.lexmundi.com Page 160 © 2012 Lex Mundi capital gain was generated or accrued shall be deemed to be in Israel, in any of the following instances:

 the asset being sold is located in Israel;  the asset being sold is located abroad and, essentially, constitutes a direct or indirect right to an asset or to inventory or constitutes an indirect right to real estate or to an asset in a real estate company located in Israel (“the Property”), in respect of that part of the consideration that stems from the Property located in Israel;  the asset comprises a share or a right relating to a share in an Israeli resident body of persons;  the asset comprises a right in a foreign resident body of persons which constitutes essentially a direct or an indirect right to Property located in Israel, in respect of that part of the consideration that stems from the Property located in Israel.

3. What revenues are included?

The income/corporate tax base includes income which was produced or accrued from any of a fixed list of sources (e.g. business income, vocation or employment income, dividends, interest and linkage differentials, patents and copyrights, rent, etc.)

4. What deductions are allowed?

An assessee can deduct all types of expenses which were 'wholly and exclusively' incurred during the tax year and which relate to the production of income by such assessee, unless such deduction is limited or disallowed. Part of the permitted deductions is established by statute, for example: interest, depreciation, rent, repairs, bad debts, preparing accounts, R&D, etc.

Depreciation allowances are available, in general, for tangible assets and goodwill. In certain circumstances the assessee may be entitled to accelerated depreciation.

5. What are the major expenses that are not deductible?

The major expenses which are excluded from deductibility are: private expenses, capital withdrawn or a sum used as capital, the cost of improvements, any loss or expense which is recoverable under insurance or under a contract of indemnification, amounts paid as income tax (including interest and penalties accruing thereon), premiums paid by a company to insure the life of a “controlling member” (a person who holds, directly or indirectly, at least 10% of the issued share capital or the voting power of the company or the right to receive at least 10% of the company’s profits or the right to appoint a director in the company), expenses in respect of a benefit granted by an employer to his employees which cannot be attributed to a particular employee, or education expenses.

Capital expenditure will be taken into consideration on the date of sale of the asset (having regard to the calculation of the capital gain) and, until such date of sale, by way of depreciation.

6. What are the applicable federal rates?

In Israel only national tax is payable on income. The main direct tax rates for the 2009 tax year are as follows: (a) Income tax The relevant income tax rates for the 2009 tax year with respect to income derived from 'personal exertion' (generally, income earned by individuals, whether self-employed or salaried employees, constituting work income and certain other income) are as follows:

Taxable Income (NIS) Rate of tax Up to 55,080 10% From 55,081 to 97,920 15% www.lexmundi.com Page 161 © 2012 Lex Mundi From 97,921 to 147,000 23% From 147,001 to 211,200 30% From 211,201 to 454,680 34% More than 454,680 46%

(b) Corporate tax The rate of corporate tax payable for the 2009 tax year is 26%. Such rate may be reduced for certain periods of time with respect to investments and/or activities that are recognized under the Capital Investments Law. In addition, such rate – as well as the income tax rates (individuals) – is expected to be lower in the following tax years.

(c) Land appreciation tax Generally, the land appreciation tax rate on real capital gains (that is, the capital gain minus inflation) is:

20% (individuals) or 25% (corporations) for part of the capital gain that accrued after November 7, 2001.

The regular income/corporate tax rate that applies for income earned by an individual or a company (as applicable) on the date the asset is sold (i.e., up to 46% for individuals or 26% for corporations for sales made in the 2009 tax year) for part of the appreciation that accrued before November 7, 2001 (if any).

Determination of the real land appreciation tax prior to and after November 7, 2001 will be made using the linear method.

The tax rate on the inflationary amount is 10% with respect to that part of the inflationary amount which accrued until December 31, 1993 and zero-rated with respect to that part of the inflationary amount accruing after such date.

With respect to the sale of real estate assets which were acquired up until April 1, 1961, the tax rate regarding the nominal appreciation may be lower (usually, the tax rate applicable for entire gain may range between 12%-25%).

When calculating the land appreciation tax payable, certain basic principles must be considered (for example, type of asset, transferring party's identity, deductible expenses, tax exemptions and set-off of losses).

7. What are the applicable state and/ or other local rates?

N/A. See our answer above.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

In Israel, only national tax is imposed on capital gains. The tax rate on “real capital gains” (i.e., the capital gain less the inflationary amount) is, generally, 20% (individuals) or 25% (corporations) with respect to that part of the capital gain accruing after January 1, 2003 (however, see also below regarding individual's tax rate in case of a sale of certain types of assets); the applicable tax rate with respect to that part of the capital gain which accrued prior to January 1, 2003 is the marginal income tax rate (individuals) or the regular rate of corporate tax (corporations) applicable on the date of sale of the relevant asset. If an asset was purchased prior to January 1, 2003 and then sold after such date, the division (for the purposes of calculation of the tax liability) of the accrued capital gains will be made by way of the linear method.

www.lexmundi.com Page 162 © 2012 Lex Mundi The tax rate on the inflationary amount is 10% with respect to that part of the inflationary amount which accrued until December 31, 1993 and zero-rated with respect to that part of the inflationary amount accruing after such date.

The tax rate on capital gains from the sale of goodwill for acquisition where no consideration has been paid, is 25% (including that part of the capital gain which accrued prior to January 1, 2003).

In addition, the individual's capital gains tax rate may be either 15%, 20% or 25% in case of capital gains accrued on securities, while the tax rate depends, mainly, upon the type of security involved and/or the rate of holdings of means of control in the corporation

In the event of a sale of shares in an unlisted company that were purchased before 2003 by an individual, the seller may be entitled to an additional inflationary amount, based on such seller’s proportional share of retained earnings of the company. The tax rate on the real capital gain, equal to the seller’s share in the profits available for distribution (i.e., profits accumulated in the company during the period between the end of the tax year prior to the year in which the shares were acquired - but occurring not before January 1, 1996 - and the end of the tax year prior to the year in which they were sold, based on certain methods of calculation) which accrued until January 1, 2003, is 10% and the tax rate on the real capital gain equal to the seller’s share in the profits available for distribution accruing after January 1, 2003 is 20% or 25%.

Israeli income tax laws include several repr

9. How are operating losses handled?

In general, losses arising from a trade or business may be carried forward (but can not be carried backward) to be set-off against any other income of the assessee which was produced or accrued in the same tax year, or against business income (including capital gains income accrued within the business) indefinitely.

Other type of losses (i.e., a loss which had it been a profit would have been liable to tax as passive income, like income from interest, rent or royalties) may only be set-off against income accrued from the same type of source.

Likewise, the Israeli tax law includes several limitations regarding the set-off of losses incurred outside Israel.

10. How are capital losses handled?

Generally, capital losses can be carried forward to be set-off against capital gains only. In a case where the capital loss was incurred from the sale of an asset outside Israel, then the capital loss shall first be set-off against a capital gain from out

Territorial Rules

11. What are the residence rules?

The residence rules are, generally, as following:

Individual

An “Israeli resident” for taxation purposes is an individual whose life is centered in Israel. In order to determine the place where an individual’s life is centered, certain factors would need to be taken into account, such as the individual’s family, economic and social ties, including (“the Center of Life Test”):

 the place where he and his family reside;

 his permanent place of business or the place where he is employed;

 the place of his active and substantive economic interests; and

 the place where his activity in organizations and various institutions takes place.

In addition, it is assumed as a presumption that the individual’s life is centered in Israel in a tax year if: (a) he spent 183 days or more of that tax year in Israel; or (b) he spent thirty days or more in Israel within that tax year and the total period of his stay in Israel in the tax year and in the preceding two tax years amounted to 425 days or more (“the Stay Assumptions”). Such assumptions may be refuted both by the individual and by the Israeli tax authorities. However, certain types of individuals may not be classified as Israeli residents (e.g., students, foreign journalists, sportsmen, diplomatic representatives and sick persons), in certain circumstances even if a person is considered as having his center of life in Israel in a certain tax year due to the Center of Life Test and the Stay Assumptions.

Please note that even if a person is considered as having his center of life in Israel in a certain tax year due to one (or more) of the Stay Assumptions, such person can still try to rebut the assumption—through the application of the Center of Life Test—and prove that he should not be considered as an 'Israeli resident' for that tax year.

In addition, please also note that in the event that an individual is considered to be an 'Israeli resident' according to Israel internal tax law (i.e., with respect to the Center of Life Test and the Stay Assumptions) and is also considered a resident of another country due to such other country’s internal laws, then the provisions of the relevant Tax Treaty (if any) shall apply in order to determine the tax residency of such individual and to prevent the imposition of double taxes on that individual. In light of the fact that the relevant provisions of the Tax Treaties which Israel has signed and ratified

12. Is worldwide income taxed?

Israeli residents are obliged to pay income/corporate tax on their worldwide taxable income. Foreign residents are liable to pay Israeli income/corporate tax on income produced or accrued in Israel.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Generally, the Israeli tax law provides that foreign taxes paid on foreign income (i.e., taxes payable by an Israeli resident to tax authorities of a state other than Israel, on income produced or accrued in that state) shall – translated into new shekel amounts – be allowed as credits against Israel income/corporate tax payable by said Israeli resident. However, there are certain limitations in connection with entitlement to use these credits: for example, the amount of credit against corporate tax, to which an Israeli resident body of persons is entitled with respect to foreign income, shall not exceed the amount of Israeli corporate tax to which it is liable on that income (certain limitation also exists with respect to excess credit of individuals). In addition, the method of credit in Israel is based upon the classification of foreign income under a 'Baskets method' (i.e., the foreign income is classified by the different Israeli sources of income, and a foreign tax paid on foreign income from certain sources may be credited against Israeli tax paid on income from the same source).

14. What are the rates on dividends for withholding taxes?

A withholding tax rate of 20% or 25% will apply, subject to any equivalent provision in a double tax treaty which may reduce such rate. The withholding tax rate of 25% is applicable, mainly, for dividend receivers that are either corporations or individuals whom are substantial shareholders (defined as a person that holds, directly or indirectly, alone or with another person, at least 10% of any type of means of control in the company, on the date of receipt of the dividend or on any date falling within the 12 month period preceding payment of such dividend).

In the case of dividends paid by an 'Approved Enterprise' or a 'Beneficiary Enterprise'' (as such terms are defined for the Encouragement of Capital Investments Law purposes), the rate of withholding tax may be lower (e.g., 15% or 0%).

15. What are the rates on royalties for withholding taxes?

In most cases, a withholding tax of 25% (individuals) or 26% (for corporations however, this rate is applicable for the 2009 tax year and may be lower in the subsequent tax years) will apply on royalties.

16. What are the rates on interest for withholding taxes?

Various withholding tax rates have been fixed with respect to payments of interest income, which are dependent upon the residency status and type of person/entity receiving such interest income payments, the payor, etc. In most cases, a withholding tax of 20% (individuals) or 26% (corporations with respect to the 2009 tax year) will apply on interest. However, interest income payments to foreign resident individuals who are usually taxed at source at a rate of 25% unless the foreign resident individual has been exempted from tax (e.g., with respect to interest income on foreign currency deposits in specified conditions) or is entitled to a lower withholding tax rate under an approval given by the tax authorities. In addition, in certain circumstances the rate of withholding tax on interest income payable to individuals is the maximal income tax rate (e.g., 46% for 2009 tax year).

17. What are the rates of withholding tax on profits realized by a foreign corporation?

In most cases, a withholding tax of 26% will apply on income payments to foreign corporations (however, this rate is applicable for the 2009 tax year and may be lower in the subsequent tax years), unless the foreign resident corporation has been exempted from tax or that the tax authorities have permitted the income to be paid without deduction of tax (i.e., if it has been proven to their satisfaction that the tax already was paid or that it will be paid in some other manner).

18. Please list any other rates on withholding taxes that we should be aware of.

The general withholding tax rate for rendering of services or transfer of assets is 20% or 30% (unless a reduced tax rate or an exemption from withholding of tax was approved by the tax authorities in advance). The withholding tax rate for employment income is the full income tax applicable for such income. The general withholding tax rate for rental is 35%.

Tax Returns and Compliance

19. What is the taxable reporting period?

Israel's income tax year runs from January 1 to December 31.

20. What are the due dates for the filing of tax returns?

A company is generally required to file a tax return annually, not later than five months after the end of the tax year (i.e., until May 31 of the subsequent calendar year). If the company’s tax return is not based on a complete set of double entry accounts, then it shall deliver the return by not later than April 30 of each subsequent year.

If an individual is required to submit a tax return, then the date for submitting same must be no later than four months after the end of the relevant tax year (i.e., until April 30 of the ensuing year in which the income was generated). If an individual’s tax return is based on a complete set of double entry accounts or that he/she should submit an online independent return, and then such individual is required to submit the tax return by no later than May 31 of each subsequent year.

21. What are the key compliance requirements?

The tax return must include details of the profits which are taxable, specify each source of income and the amounts arising from the source, as well as the special rates of tax applicable to that income. The assessee must give details of asset disposals and any capital gains or losses arising. Details of asset acquisitions may be given for the purposes of calculating depreciation allowances.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Generally, every assessee is required to make advance payments (usually, the advance payment with respect to the relevant month constitutes 10% of the amount of tax for which the assessee is liable in the determining year and must be paid on the fifteenth day of each of the ten months falling from February to November in each tax year; however, another alternative to determine the scope of the advance payment is based on an agreed percentage of turnover). Other than its obligation to make a monthly advance payment to the tax authorities, the assessee is obliged to pay his/its tax upon the submission of the tax return or within fifteen days after delivery to the assessee of a notice of assessment from the Israeli tax authorities.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

There are some indirect taxes in Israel which apply, mainly, with respect to the sale of assets or rendering of services. The principal indirect taxes are:

• Value-added-tax (VAT); • Purchase tax and customs duties; • Acquisition tax (real estate).

24. How does it operate? Is it a VAT or a sales tax?

VAT

In general, the sale of an asset (real estate or goods, but excluding securities) or the rendering of a service in the course of a business (“transaction”) made or performed in Israel and the importation of goods are subject to Value Added Tax (“VAT”).

A foreign resident who engages in business or has a presence or activity in Israel is liable to pay VAT in Israel. In such a case, he is required, within thirty days after the commencement of his business activities in Israel, to appoint a representative, having a permanent place of residence in Israel, to act www.lexmundi.com Page 166 © 2012 Lex Mundi on behalf of such foreign resident for VAT purposes as well as for any and all income taxes payable by the foreign resident to the Israeli tax authorities.

Purchase Tax and Customs Duties

Other types of indirect taxes payable are purchase tax and customs duties. Purchase tax is imposed, generally, on the importation or sale of certain types of goods (e.g., motor vehicles).

Acquisition Tax Upon the sale of a real estate right, the purchaser shall be liable to pay real estate acquisition tax.

25. How is the taxable base determined?

For the purposes of most types of indirect taxes, the taxable base is, generally, the sale price.

26. What are the applicable rates?

The applicable rates are as following:

 VAT - the current rate of VAT in Israel is 15.5% of the value of the transaction. Such rate may be raised to 16.5% soon according to certain governmental proposal.  Purchase tax and customs duties - The respective rates of purchase tax and customs duties vary from one product to another.  Acquisition tax – the rate of acquisition tax is 0%-5% of the sale price for residential apartments and acquisition tax at the rate of 5% in respect of other real estate rights.

27. Are there any exemptions?

Different types of exemptions may be relevant for indirect taxes. The principal ones are:

 VAT - certain transactions are VAT-exempt or zero-rated [such as transactions between Israeli residents and foreign residents in specified conditions (for example, the export of tangible or intangible goods, the rendering of services to a foreign resident, etc.) and transactions involving the implementation of certain structural changes to a business and other restructuring activities].  Purchase tax and customs duties – the importation of certain types of products may be exempted from purchase tax and customs duties.  Acquisition tax – certain reprieves are available with respect to acquisition tax, such as if the purchaser is an immigrant or a disabled person (under certain conditions).

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

Generally, the answer is no. With respect to VAT however, please note that, in most cases, the transfer of a debt is not subject to VAT. Although a loan is considered a right and is included in the definition of “an asset” in the VAT Law, in practice, VAT is applicable only with respect to the interest included in the price and not on the principal of the loan. For example, VAT is not payable when the debt is transferred by means of a security or a merchantable document. There is no definition of "merchantable document" in the VAT Law, but it can basically include any document, where the transfer of which gives rise to the transfer of the rights attached to it (for example, a debenture or a promissory note).

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

There are two types of parafiscal contributions that apply in Israel:

a. National insurance contributions;

b. National health insurance tax.

30. How do they operate?

Generally, with respect to social security liability, every individual Israeli resident over the age of eighteen years is required to purchase National Insurance and National Health Insurance and, for such purposes, must make the necessary national insurance contributions and pay the national health tax duties.

The tests adopted by Israeli courts for the determination of residency for social security purposes are quite similar to those adopted for income tax purposes (i.e., the Center of Life Test which is based, generally, on the individual’s family, economic and social ties).

With respect to salaried employees, it should be noted that the employer has, in addition to withholding obligations for income tax liabilities, withholding obligations for employee social security liabilities, as well as for the employer’s own social security liability. However, certain salaried employees are required to pay the national insurance contribution themselves (i.e., instead of such contribution being withheld by their employer), including, inter alia, an employee whose employer is not an Israeli resident and where the employer’s place of residence is not Israel and the employer has no address in Israel to receive legal documents, or where the employer is an international organization entitled to immunity as a consequence of an international convention to which Israel is a party.

31. How is the taxable base determined?

National insurance contributions and health insurance taxes are calculated as a percentage of the individual’s taxable income.

52% of the above-mentioned contributions are tax deductible.

32. What are the applicable rates?

The national insurance duties and health insurance contributions rates applicable to employers and employees (the maximum monthly taxable income (cap) for both types of duties is NIS 38,415 for the 2009 tax year) are as following:

Share of the income that is up to 60% of the average wage ( NIS 4,757)

Employer Employee Total National insurance 3.45% 0.4% 3.85% Health insurance ----- 3.1% 3.1% 3.45% 3.5% 6.95% Share of the income that is above 60% of the average wage and up to the cap

33. Are there any exemptions?

Certain exemptions from social security duties are applicable, some of them depend upon the status of the individual (e.g., a soldier, a prisoner, a new immigrant or a housewife) and the balance depends upon the type of income (for example, capital gains and passive income are, in most cases, exempted from said taxes).

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

N/A

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Some other regimes that are also exist in Israel include the following:

Transfer Pricing

According to the Israeli transfer pricing regime, if in an international transaction there exists a 'special relationship' between the parties thereto (e.g., relations of control of one party to a transaction over the other or if both parties are controlled by the same entity) and the price for a particular asset, right, service or credit has been determined (or other conditions prescribed therefore) so that a profit is smaller than that which would have been earned had the price or conditions been fixed between parties having no such special relationship (fair market value), then a report of such transaction must be made in accordance with market conditions and taxes levied thereon accordingly. The said regime also deals with the manner for determining whether the price for a particular transaction is compatible with the market price.

Controlled-Foreign-Companies (CFC)

In general, if a controlled foreign company (“CFC”) has "unpaid profits", then its controlling member (i.e., an Israeli resident who, directly or indirectly, alone or together with another, holds at least 10% of one of the means of control in the CFC at the end of the tax year or on any day during the tax year and on any day in the subsequent tax year) shall be treated as if he had received his proportional share of the unpaid profits by way of a dividend (“Deemed Dividend”).

 its shares are not listed for trade on a stock exchange or, they are listed on such an exchange, but less than 30% of the rights therein are offered to the public;

 most of its income in the tax year comprises of passive income (i.e., income from dividends, royalties, interests, rentals and/or capital gains) or most of its profits derive from passive income;

 the tax rate applicable to its passive income in the foreign country does not exceed 20%;

 more than 50% of one or more of its means of control are directly or indirectly held by Israeli residents or more than 40% of one or more of its means of control are held by Israeli residents who, together with a relative of one or more of them, hold more than 50% of one or more of its means of control or in the case where an Israeli resident has the right to prevent the adoption of substantive management decisions, including decisions with regard to dividend distributions or winding-up.

Tax Avoidance Measures

Israeli tax laws include, inter alia, specific anti-tax avoidance provisions (e.g., rules applicable to CFCs) and a general anti-tax avoidance rule, according to which the tax authorities may disregard certain transactions or dispositions for tax purposes.

Israel has entered into tax treaties with more than forty countries, examples of which include: the United States of America, the United Kingdom, the Netherlands, Germany, France, Japan, China, Switzerland, Turkey and many other countries. Israel has also signed tax treaties with Brazil, Croatia, Luxembourg and Ukraine but such treaties have not yet been ratified.

The provisions of any tax treaty in force supersede the provisions of any legislation enacted in Israel with respect to the relevant taxation issue in question.

Certain provisions of the tax treaties include tax-sparing relief intended to protect the special tax incentives given by Israel to foreign investors.

In general, the various withholding tax rates on dividends, interest and royalties under the applicable tax treaties to which Israel is a party (some of such treaties were not entered into force yet but expected to do so soon), are as follows:

Country Dividend (%) Interest (%) Royalties (%) Non-treaty countries 25 25 25 Austria 25 15 10 Belarus 10 5/10 5/10 Belgium 15 15 10 Brazil 10/15 0/15 10/15 Bulgaria 7.5–12.5 5/10 7.5–12.5 Canada 15 15 15 People’s Republic of China 10 7/10 10 Croatia 5/10/15 5/10 5 Czech Republic 5/15 0/10 5 www.lexmundi.com Page 170 © 2012 Lex Mundi Denmark 5/15/25 25 10 Ethiopia 5/10/15 5/10 5 Finland 5/15/25 25 10 France 5/10/15 5/10 10 Germany 25 0/15 5/0 Greece 25 10 10 Hungary 15/5 0/25 0/25 India 10 0/10 10 Ireland 10 5/10 10 Italy 10/15 10 0/10 Jamaica 15/22.5 0/15 10 Japan 5/15 10 10 Latvia 5/10/15 5/10 5 Luxembourg 5/10/15 5/10 5 Mexico 5/10 0/10 10 Moldova 5/10 5 5 The Netherlands 5/10/15 10/15 5/10 Norway 5/15/25 25 10 The Philippines 10/15 10/0 Up to 15 Poland 5/10 5 5/10 Portugal 5/10/15 10 10 Romania 15 5/10 10 Russia 10 0/10 10 Singapore 5/10 7 5 Slovakia 5/10 2/5/10 5 Slovenia 5/10/15 5 5 South Africa 25 25 15/0 South Korea 5/10/15 0/7.5/10 2/5 Spain 10 5/10 5/7 Sweden 15/5 25 0 Switzerland 5/10/15 0/5/10 5 Thailand 10/15 10/15 5/15 Turkey 10 0/10 10 Ukraine 5/10/15 5/10 10 United Kingdom 15 15 0/15 United States of America 12.5/15/25 10/17.5 10/15 Uzbekistan 10 10 5/10

Contact Information:

Leor Nouman S. Horowitz & Co. [email protected] 31 Ahad Haam St. Tel Aviv, 65202 Ophir Kaplan Israel [email protected] Tel 972.3.567.0700 Fax 972.3.566.0974 http://www.s-horowitz.com

Tax Desk Book

Latvia Prepared by Lex Mundi member firm LAWIN

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

Latvia imposes both direct and indirect taxes including corporate income tax, personal income tax, real estate tax, VAT, excise tax, natural resource tax, customs tariffs, lottery and gambling tax, electroenergy tax and automobile and motorcycle tax.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

Taxable income is calculated based on the financial profit of the company as reflected in the annual accounts subject to statutory adjustments for tax purposes. The taxable base for individuals is all income from salary, wages or other employment benefits, income from business activity and other types of income.

3. What revenues are included?

Companies include all revenues included in the financial profit of the company as reflected in the annual accounts. Individuals include all revenues from salary, wages, business activity and other types of income.

4. What deductions are allowed?

Taxable income is calculated based on the financial profit of the company as reflected in the annual accounts subject to certain statutory adjustments. Financial profit/loss is decreased among others the following items to arrive at taxable income:

 tax depreciation expenses;  real estate tax, lottery and gambling tax, state fees for organizing goods or services lotteries;  certain EU or state subsidies paid for agriculture development;  bad debts (subject to certain restrictions);  certain income recorded in relation to the privatization of enterprises;  reductions in reserves which previously were included in taxable income;  the book value of computer equipment (including printers) donated to educational institutions for no consideration;  income from the sale of publicly traded securities;  premiums paid to Latvian or EU registered insurance companies and payments made into employee pension funds (subject to certain limitations.)

Financial profit is increased among other items by the following expenses in order to calculate taxable income:

 expenses incurred for the maintenance of the company's social infrastructure, i.e. housing, educational, sports, catering and health care institutions if their services are provided below market value or if they are not directly linked to the business of the company;  depreciation and amortization expenses as calculated for the financial accounts;  penalties, fines and late-payment interest;  uncompensated amounts arising from deficits and theft in companies with more than 50% state or municipal ownership;  payments to non-residents subject to withholding tax from which withholding tax was not charged;  40% of representation expenses;  acquisition costs of long-term investments, excluding non-capitalized interest paid on long- term debt and on repayable debt; certain reserves;  fines paid for the excessive exploitation of natural resources or excessive pollution;  interest expense in excess of set limitations;  expenses related to the acquisition and/or use of representative automobiles.

6. What are the applicable federal rates?

The corporate tax rate is 15%. Individuals are taxed at a rate of 23% except for business income which is taxed at a rate of 15%.

7. What are the applicable state and/ or other local rates?

There are no state or local income taxes.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Currently there is no capital gains tax on companies or individuals. Capital gains realized by companies are treated as ordinary income and taxed at a rate of 15%. Capital gains realized by individuals are taxed as ordinary income at either 23% or 15%. Gains are calculated as the difference between acquisition cost and disposal income. Certain limitations and/or exclusions may apply depending on the type of asset being disposed of.

As a general rule companies can carry out legal reorganizations (merger/demerger) as a tax neutral event. Any resulting taxable income from a reorganization is subject to the same tax rate as ordinary income.

9. How are operating losses handled?

Companies can carry forward tax losses for up to five years subject to certain restrictions. Individuals carrying on business activity can carry forward losses for a period of up to three years.

10. How are capital losses handled?

Capital losses are generally treated as ordinary losses. In certain cases losses incurred from the sale of fixed assets to a related party may not be used to reduce taxable income. Otherwise capital losses can be carried forward according to the same ru

11. What are the residence rules?

Companies registered in Latvia are tax resident in Latvia. Individuals are resident if their permanent residence is in Latvia or after spending more than 183 days during any 12 month period which begins or ends during the taxation period.

12. Is worldwide income taxed?

Latvian resident companies and individuals are taxed on their worldwide income.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

According to domestic law, taxable income can be reduced by the amount of tax paid in another jurisdiction up to the amount of Latvian tax that would be payable for the same income provided proof of payment of the tax is obtained.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Dividends paid to non-residents are subject to 10% withholding tax. No withholding tax is applicable in case the recipient is located in a European Union member state or the European Economic Area and is subject to corporate income or similar tax in its home jurisdiction.

15. What are the rates on royalties for withholding taxes?

Royalties paid to non-residents are subject to withholding tax at a rate of 15% for copyrights to literary and art works or 5% for all other types of intellectual property. Until 30 June 2009 the rate is reduced to 10%, from 1 July 2009 until 30 June 2013 the rate will be 5% and from 1 July 2013 no withholding tax will be applicable to payments made to a company located in the European Union or European Economic Area for copyrights to literary and art works.

16. What are the rates on interest for withholding taxes?

Withholding tax at a rate of 10% (5% for Latvian registered banks) is applicable to payments made to non-resident related parties. From 2013 no withholding tax will be applicable for interest payments made between related parties located in the European Union.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

There is no withholding tax applicable specifically to profits realized by a foreign corporation. According to domestic law payment of management or consulting fees to a non-resident are subject to 10% withholding tax and payments for use of property located in Latvia are subject to 5% withholding tax.

18. Please list any other rates on withholding taxes that we should be aware of.

Proceeds from the sale of real estate 2% Partnership distributions 15% Payments to statutory low tax zones 15%

19. What is the taxable reporting period?

Companies can use the calendar year or other consecutive 12 month period as the taxable reporting period. Individuals are required to report on a calendar year basis.

20. What are the due dates for the filing of tax returns?

Annual (corporate) income tax return within 4 months after the end of the financial year. Individuals are required to file income tax returns by 1 April.

21. What are the key compliance requirements?

Depending on the particular type of activities being carried on by a taxpayer additional monthly or annual tax returns may need to be filed. Accounting information and supporting documents shall be available in Latvia and in the Latvian language.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Companies and individuals carrying on business activity are required to make monthly or quarterly advance income tax payments based on tax liability from previous tax periods.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Yes.

24. How does it operate? Is it a VAT or a sales tax?

Value added tax is applied in Latvia.

25. How is the taxable base determined?

The market value of goods and services provided as stated in monetary form is the amount subject to tax.

26. What are the applicable rates?

VAT is charged at 0% 10% or 21%.

27. Are there any exemptions?

Yes. Various types of goods and services are exempt from VAT including certain financial services, insurance services, educational and scientific goods and services, medical services and cultural services.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

There are no debit or financial transaction taxes applicable in Latvia.

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Employers are required to make social insurance contributions.

30. How do they operate?

Social insurance contributions are paid by both the employer and employee. The employer withholds the employees part from salary and pays the employer's part.

31. How is the taxable base determined?

Salary, wages and benefits paid to employees are subject to social insurance contributions.

32. What are the applicable rates?

Social insurance contribution rates are set by the Cabinet of Ministers of Latvia on an annual basis. The rates differ depending on the status of a person subject to social insurance contributions. For the year 2008 the basic rate is set 33.09% divided accordingly into the employer’s share of 24.09% and the employee’s share of 9%. Other main rates that differ from the basic rate are: 30.2% for a self- employed, 27.81% for an individual performing business activity with regard to his or her real estate, 30.98% for a person employed by a non-resident of Latvia. The applicable rates may differ due to several circumstances set by the law, for instance, with regard to a person being of age that entitles him or her to receive old-age pension, long service pension or being disabled.

33. Are there any exemptions?

Exemptions may be applicable depending on the status of the employee and amount of salary to be paid.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

N/A

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

No answer provided.

Country Dividends % Interest % Royalties % Armenia 15/5 10 10 Belarus 10/10 10 10 Belgium 15/5 10 5/10 Bulgaria 5/10 5 7/5 Canada 15/5 10 10 China 10/5 10 10 Croatia 10/5 10 10 Czech Republic 15/5 10 10 Denmark 15/5 10 5/10 Estonia 15/5 10 5/10 Finland 15/5 10 5/10 France 15/5 10 10/5 Germany 15/5 10 5/10 Georgia 5/10 10 10 Greece 5/10 10 5/10 Hungary 5/10 10 5/10 Iceland 15/5 10 5/10 Ireland 15/5 10 5/10 Kazakhstan 15/5 10 10 Lithuania 15/0 0 0 Malta 10/5 10 10 Moldova 10/10 10 10 Netherlands 15/5 10 5/10 Norway 5/5 10 5/10 Poland 15/5 10 10 Portugal 10/10 10 10 Romania 10/10 10 10 Singapore 10/5 10 7.5 Slovak Republic 10/10 10 10 Slovenia 15/5 10 10 Spain 5/10 10 5/10 Sweden 15/5 10 5/10 Switzerland 15/5 10 5/10 Turkey 10/10 10 5/10 Ukraine 15/5 10 10 United Kingdom 15/5 10 5/10 USA 15/5 10 5/10 Uzbekistan 10/10 10 10

Zinta Jansons LAWIN [email protected] Elizabetes 15 Riga, LV-1010 Latvia

Tel 371.6781.4848 Fax 371.6781.4849 http://www.lawin.com

Tax Desk Book

Lebanon Prepared by Lex Mundi member firm Moghaizel Law Offices

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

There are direct and indirect taxes imposed in Lebanese jurisdiction. The direct taxes embrace income taxes and property taxes. Indirect taxes comprise municipality taxes, import and export taxes.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

There are two ways: 1) We deduct the expenses from the annual income and the remaining amount which is the net income is subject to the income tax.This is applicable to companies and banks. It is called "tax bases on the real profit". 2) The annual income multiplied by the "percentage of the fixed profit" leads to the net profit of the tax payer. Then the "family reduction" is deducted from the net profit. Following the deduction, the remaining amount is subject to the progressive tax percentage. It is called "tax based on fixed profit".

3. What revenues are included?

The annual net revenue

4. What deductions are allowed?

 the payment of salaries  general expenses  expenses for the purchase of goods  "The family reduction"

5. What are the major expenses that are not deductible?

 personal expenses  expenses for the refinement of the assets  personal fines  losses incurred by the tax payer owing to business outside Lebanon  taxes paid to foreign countries for an income gained in Lebanon

4% for a net profit ranging from 1 to 9 million LBP 7% for a net profit ranging from 9,000,001 to 24,000,000 LBP 12% for a net profit ranging from 24,000,001 to 54,000,000 LBP 16% for a net profit ranging from 54,000,001 to 104,000,000 LBP 21% for a net profit more than 104,000,000 LBP

7. What are the applicable state and/ or other local rates?

No answer provided.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

No answer provided.

9. How are operating losses handled?

The losses will be transferred to next year.

10. How are capital losses handled?

The losses will be transferred to next year.

Territorial Rules

11. What are the residence rules?

The profit are considered as gained in Lebanon when the activity and the business are carried out in Lebanon irrespective of the nationality and the residency if the tax payer.

12. Is worldwide income taxed?

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

No answer provided.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

15%

15. What are the rates on royalties for withholding taxes?

No answer provided.

16. What are the rates on interest for withholding taxes?

10%

17. What are the rates of withholding tax on profits realized by a foreign corporation?

15%

18. Please list any other rates on withholding taxes that we should be aware of.

No answer provided.

Tax Returns and Compliance

19. What is the taxable reporting period?

Regarding the taxes based on the real profit, the reporting period should be made before 1st April.

Regarding taxes based on fixed profit, it should be reported before 1st February.

20. What are the due dates for the filing of tax returns?

The due date for the filing of tax return is 1st April concerning the taxes based on real profit and 1st February concerning taxes bases on fixed profit.

21. What are the key compliance requirements?

No answer provided.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

No answer provided.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Yes there are indirect taxes such as municipality taxes, import and export taxes...

24. How does it operate? Is it a VAT or a sales tax?

Some are based on VAT and others are based on sales tax

25. How is the taxable base determined?

The paid operations and the paid services carried out in Lebanon are subject to taxes. the Tax is imposed on the money received for the rendering of the services

26. What are the applicable rates?

VAT is 10%

27. Are there any exemptions?

The state and the municipalities are exempted from the tax.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

There is social security.

It consists of 4 categories: 1) for the sickness and maternity 2) for occupational incidental damages 3) family indemnification 4) retirement indemnification

30. How do they operate?

The employer submit a statement to the social security of his employees and their salaries.

The employer deduct a percentage of his employee's salary and submit the amount deducted to the social security.

31. How is the taxable base determined?

The employer submit a statement to the social security of his employees and their salaries. The employer deduct a percentage of his employee's salary and submit the amount deducted to the social security.

32. What are the applicable rates?

The rates that the employer should deduct from his employee's salary are:  Regarding the sickness and maternity security, 7%  Regarding family indemnification, 6%  Regarding retirement indemnification, 8.5%

33. Are there any exemptions?

yes there are exemptions such as temporary employees, workers in municipalities, diplomats and consuls.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

www.lexmundi.com Page 182 © 2012 Lex Mundi 35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

inheritance taxes are triggered upon the death or the execution of a donation. the rates of the inheritance taxes varies between couples, kids,siblings,uncles and aunts.It depends also on the amount subject to the tax.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

France, Egypt, Emirates, Romania, Syria, Malta

Contact Information:

Dany Issa Moghaizel Law Offices [email protected] Ashrafieh 5585 Building Pierre Gemayel Avenue Beirut, 2066 7113 Lebanon

Tel 961.1.425222 Fax 961.1.424366 http://www.mlof.com

Tax Desk Book

Lithuania Prepared by Lex Mundi member firm LAWIN

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

As of 1 January 2009, the main taxes that are levied within the Republic of Lithuania are as follows:

I. Direct taxes (1) corporate income tax; (2) personal income tax; (3) real estate tax; (4) land tax; (5) State-owned land lease tax; (6) state natural resources tax; (7) oil and gas resources tax; (8) pollution tax; (9) inherited property tax; (10) compulsory health insurance contributions; (11) compulsory state social insurance contributions; (12) contributions to Guarantee Fund; (13) gambling tax; (14) sugar tax; (15) tax on extra quota of white sugar.

II. Indirect taxes (1) VAT; (2) excise tax; (3) customs duties.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

Corporate income tax

The tax base of corporate income tax for a Lithuanian taxable entity is all income received in Lithuania and abroad, the source of which is either in Lithuania or abroad, as well as so-called positive income received by a controlled foreign entity.

The tax base of corporate income tax for a foreign taxable entity is:  income received from the activities carried out through a permanent establishment in Lithuania; and www.lexmundi.com Page 184 © 2012 Lex Mundi  income received not through the permanent establishment, the source of which is in Lithuania, such as interest income (except for interest income from deposits and certain subordinated loans, as well as interest on government securities issued in international financial markets), income from a distributed profit (eg dividend), royalties and other similar income, income received from the sale or lease of an immovable asset which is located in Lithuania, income from artistic or sports activities performed in Lithuania, as well as annual bonuses paid to the members of supervisory board.

Personal income tax

All permanent residents are subject to the income tax on different types of income earned in Lithuania and abroad.

Non-residents are subject to income tax on:  all kinds of income received through a permanent base, which is defined as a form of individual activities, and  certain kinds of income not received through a permanent base in Lithuania, such as interest; income from the distributed corporate profit; rent payments for real estate situated in Lithuania; honoraria; employment-related income; income from sports or performance activities; and income derived from the sale of real estate situated in Lithuania or movables registered in Lithuania.

3. What revenues are included?

Legal entities

All income sourced in Lithuania and abroad, execept for non-taxable income, are included in the taxable income for corporate income tax purpose. A complete list of non-taxable income is provided in the Law on Profits Tax (e.g. insurance disbursements, reappraisal income, default interest and penalties (except if received from tax havens’ companies, etc.)).

Individuals

Different types of income earned in Lithuania and abroad are subject to taxation in Lithuania (e.g. employment related income, sale of assets, sale of securities, income from individual business activity, dividends, etc.). A complete list of non-taxable income is provided in the Law on Personal Income Tax. That is, personal income tax is not levied on certain allowances; pensions paid from the state social security fund, state and municipal budgets, private pension funds; certain kinds of interest; certain life insurance payments; charity; certain inheritance and donations; certain transfers of ownership below minimum values; and on various scholarships paid by the state, educational institutions or listed non-governmental organisations, etc.

4. What deductions are allowed?

Legal entities

Taxable profit is determined by deducting from the income:  non-taxable income, a complete list of which is provided in the law, such as insurance disbursements, reappraisal income, default interest and penalties (except if received from tax havens’ companies);  permitted limited deductions, a complete list of which is provided in the law, such as depreciation, repair costs of long-term assets, natural wear and tear, representation expenses; and  other permitted deductions defined as all costs actually incurred, which are usual for the activities of the company and necessary for earning the income or gaining other economic benefits. www.lexmundi.com Page 185 © 2012 Lex Mundi

Certain expenses, including, for example, default interest, long-term assets or securities reappraisal expenses or other expenses that are not related to earning income or to the usual activities of the company, are not deductible. Payments directed to tax haven territories are deductible only if such payments are made for tangible assets, the import of which is documented or if the company supplies proper evidence to the tax authorities showing that the payments are related to the usual activities of the payer and payee, the recipient owns assets necessary for such usual activities and there is a link between the payment and commercially reasonable business transaction.

Individuals

Taxable income is determined by subtracting the following from the total amount of all income received:  firstly, the non-taxable income is subtracted; then  the income derived from the activities under special business certificates is deducted. Such business certificates allow certain small business activities upon payment of a fixed amount of tax without further taxation of proceeds;  if the income is derived from individual business activities carried out without such special business certificate, the person, in certain cases, is allowed to deduct the expenses related to earning of such income;  if the income is derived from the sale of assets which are not used in business activities, the acquisition price of such assets and certain related expenses are also deductible; and finally  the non-taxable part of income is subtracted.  Certain other expenses of permanent residents may also be deducted by up to 25% of the taxable income. These inter alia include certain life insurance contributions, contributions to private pension funds, interest paid on residential mortgage, study fee.

5. What are the major expenses that are not deductible?

Legal entities

The following may not be deducted from income:  VAT and corporate income tax paid;  default interest and fines paid;  interest or other payments made in respect of defaulting on contractual obligations by related persons;  that part of deductions of limited amounts, which exceeds the amounts determined;  that part of costs incurred by related persons as a result of damaged or inadequately manufactured products, which exceeds income received from the sale of such products;  sponsorship and gifts, except for some cases specified in the law;  compensation for the damage caused by the entity;  dividends or otherwise distributed profits;  other costs unrelated to the earning of income, costs of exceptional nature and costs which are not treated as allowable deductions under the law;  costs resulting from the revaluation of assets and obligations performed in accordance with the procedure prescribed by legal acts, except for costs resulting from the revaluation of derivative financial instruments acquired to cover the risks;  allowable deductions attributed to non-taxable income and deductions of limited amounts;  some other costs.

6. What are the applicable federal rates?

Standard rate of the corporate income tax is 20%.

www.lexmundi.com Page 186 © 2012 Lex Mundi Standard rate of the personal income tax is 15%. Dividends are taxed at 20% personal income tax rate. Starting from 1 January 2009, any income, which is subject to personal income tax (e.g. dividends, capital gains derived from the sale of real estate) is subject to health insurance contributions. The following rates of health insurance contributions have been set:  employment related income is subject to 6% tax rate and to 3% of this income are paid by the employer (legal entity);  individuals receiving other types of income which are subject to personal income tax must pay health insurance contributions amounting to 6% of the income received;  individuals, engaged in individual business activity, members of partnership, the owners of private (personal) enterprises and individuals insuring themselves on their own account have to pay health insurance contributions amounting to 9% of their income. However, in some cases the ceiling for tax amount is established.

7. What are the applicable state and/ or other local rates?

No state and/ or other local rates are establsihed in Lithuania.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

No separate capital gains tax is establsihed in Lithuania. Capital gains generated by legal entities are included in calculation of taxable profit and are taxed at corpoarte income tax rate.

Capital gains generated by individuals are taxed at a standard rate of personal income tax rate (15%) and health insurance contrubutions (6%). However, certain tax exemptions apply.

9. How are operating losses handled?

Losses from the usual activities of taxable period may be carried forward for an indefinite amount of consecutive taxable periods. However, if the business activity wherefore the losses arose is suspended, the carrying forward of losses shall be discontinued, except the cases when the business activity is suspended through reasons independent of the entity.

10. How are capital losses handled?

Losses incurred as a result of trading in securities and (or) derivatives may be carried forward to the following taxable period, however such losses may be deducted only from the income received during the following taxable period as a result of trading

Territorial Rules

11. What are the residence rules?

Individuals are considered to be permanent residents if:  they have their permanent place of residence in Lithuania; or  a centre of their personal, social and economic interests lies in Lithuania rather than abroad;  they stay in Lithuania for more than 183 days during the tax year; or  they stay in Lithuania for more than 280 days in several consecutive tax years, provided they stay in Lithuania more than 90 days during any one of such consecutive tax years.

12. Is worldwide income taxed?

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Income received by a resident of Lithuania in a foreign country, which is a Member State of the EU or with which Lithuania has concluded a treaty for the avoidance of double taxation, except for interest, dividends and royalties received in the said country, shall not be subject to income tax in Lithuania where income tax or equivalent tax has been paid on such income in that foreign country. A resident of Lithuania may deduct the amount of income tax or equivalent tax paid in a foreign country on interest, dividends and royalties received in the said country, which is a Member State of the EU and with which a treaty for the avoidance of double taxation has been concluded and brought into effect, from the amount of income tax calculated. This provision shall apply only where documentary evidence is submitted concerning the income received during the relevant tax period in a foreign country and the amount of income tax or equivalent tax paid on such income.

A resident of Lithuania may deduct the amount of income tax or equivalent tax paid in a foreign country other than specified above on income received in that country during the relevant tax period from the amount of income tax calculated. This provision shall apply only where documents certified by the tax administrator of a foreign country have been submitted concerning the income received in that country during the relevant tax period and the amount of income tax or equivalent tax paid on that income. The said provision shall not apply for the purpose of calculating income tax in respect of the income received in a tax haven country.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Dividends paid by a Lithuanian entity to a legal entity (either Lithuanian or foreign entity) are subject to the withholding tax at a rate of 20%, unless the participation exemption can be applied. That is, the dividends paid to a legal entity are tax exempt if a legal entity holds continuously, at least for 12 months, including the date of distribution of dividends, shares carrying more than 10% of the total number of votes in the Lithuanian legal entity (the payer of dividends). The participation exemption cannot be applied in case certain corporate income tax reliefs were applied to taxable profit (or part thereof) of the payer of dividends (except for the cases when the payer of dividends is established in a free economic zone) or the recipient of dividends is established or otherwise organized in a tax haven country. It should be noted that dividends paid to foreign entities are subject to the provisions of applicable double taxation treaties. Individuals

Dividends received by tax residents of Lithuania are subject to (i) personal income tax (20%) and (ii) health insurance contributions (6%). Dividends received by non-tax residents of Lithuania are subject only to personal income tax (20%).

15. What are the rates on royalties for withholding taxes?

Royalties paid to a foreign entity are subject to 10% withholding tax. EC Interest & Royalty Directive has been implemented in the Lithuanian domestic tax law with a 6-year transitional period granted. That is, withholding tax of 10% on royalties will apply until 30 June 2011, and thereafter will be reduced to 0%.

It should be noted that the abovementioned reductions for qualifying payments of royalties apply, provided that (i) a Lithuanian tax resident payer and a non – resident recipient are associated parties for at least 2 years (i.e. the paying Lithuanian entity controls directly at least 25% of the shares in the receiving entity, or the receiving entity controls directly at least 25% of the shares in the paying www.lexmundi.com Page 188 © 2012 Lex Mundi Lithuanian entity, or any other entity of the EU Member State controls directly at least 25% of the shares in the receiving entity and also in the paying Lithuanian entity), and(ii) the recipient is resident for tax purposes in the EU Member State.

16. What are the rates on interest for withholding taxes?

Interest paid to a foreign entity are subject to 10% withholding tax. EC Interest & Royalty Directive has been implemented in the Lithuanian domestic tax law with a 6-year transitional period granted. That is, a 10% rate of the Lithuanian withholding tax on interest will apply until 30 June 2009; thereafter, the rate on qualifying interest payments is reduced to 5% until 30 June 2011, and to 0% thereafter.

It should be noted that the abovementioned reductions for qualifying payments of interest apply, provided that (i) a Lithuanian tax resident payer and a non – resident recipient are associated parties for at least 2 years (i.e. the paying Lithuanian entity controls directly at least 25% of the shares in the receiving entity, or the receiving entity controls directly at least 25% of the shares in the paying Lithuanian entity, or any other entity of the EU Member State controls directly at least 25% of the shares in the receiving entity and also in the paying Lithuanian entity), and (ii) the recipient is resident for tax purposes in the EU Member State.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

Profits realized by a foreign corporation through its permanent establishment in Lithuania are subject to corporate income tax at a rate of 20%.

18. Please list any other rates on withholding taxes that we should be aware of.

Income received by a foreign entity not through its permanent establishment, the source of which is in Lithuania, such income from the sale or lease of an immovable asset which is located in Lithuania, income from artistic or sports activities performed in Lithuania, as well as annual bonuses paid to the members of supervisory board are subject to withholding tax rate of 20%.

Tax Returns and Compliance

19. What is the taxable reporting period?

In general the taxable reporting period is a calendar year. However, depending on tax different reporting period are set (e.g. a month or a quarter).

20. What are the due dates for the filing of tax returns?

Due dates for filing of tax returns depends on the tax.

21. What are the key compliance requirements?

Tax returns have to be prepared in Lithuanian language using the monetary unit Litas.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Not applicable.

23. Are there any indirect taxes in your jurisdiction?

Indirect taxes estanlished in Lithuanian tax legislation are as follows: (1) VAT; (2) excise tax; (3) customs duties.

24. How does it operate? Is it a VAT or a sales tax?

Supply of goods or services effected by the taxable person during the course of its business within the territory of Lithuania for a consideration is subject to VAT in Lithuania (some exceptions apply). The importation of, as well as the acquisition of goods/services from other EU countries, are also subject to VAT.

The notion of ‘a good’ covers all tangible objects including numismatic money, as well as electricity, gas, heat and other kinds of energy. The supply of goods is not limited to traditional cases when ownership title or similar disposal rights are transferred, whether immediately or when the entire price is paid. It may also take the following forms:  establishment or assignment of rights in rem (servitude, long-term lease, surety, usufructus) with respect to immovable property;  consumption of goods for private needs;  creation of long-term tangible assets;  transfer of property due to winding up of a legal person in the course of its reorganisation, if purchase or import VAT on such asset has already been deducted by the wound up taxpayer;  return of a substantially improved building (construction), used on grounds other than its ownership, to its owner prior to the expiry of the term for deduction corrections, if purchase or import VAT on such object has already been deducted by the taxpayer having made the property improvements; and  transfer of any property as a contribution of a legal person if purchase or import VAT on such object has already been deducted by the transferor.  Any transaction regarding any civil rights’ object not qualified as a supply of goods is considered to be a supply of ‘services’.

25. How is the taxable base determined?

The taxable value of goods and services supplied is defined as the remuneration received by the supplier or service provider, including all taxes related to the transaction (VAT excluded), related expenses, such as packaging (subject to the absence of agreement regarding return of tare), transportation and the like, as well as any subsidies and subventions influencing a final price. If such remuneration is paid in the form of other goods or services, taxable value is the amount of remuneration as if received in cash.

26. What are the applicable rates?

Types of VAT tariffs as from 1 January 2009 are as follows :  ‘standard’ tax rate is 19%;  ‘preferential’ rate of 5% (valid until 30 June 2009);  ‘preferential’ rate of 9% (valid until 30 June 2009);  the so-called ‘zero’ tax rate, which applies inter alia, to the export of goods and supply of goods to VAT payers registered in other EU countries.

27. Are there any exemptions?

Certain goods and services are exempted from VAT, including, for example:  healthcare services rendered by authorised providers and related goods;  social services rendered by certain non-profit organisations and related goods;  educational and training services rendered by authorised providers;  certain cultural, sport and other services rendered by non-profit organisations;  post services rendered by the provider of universal posts services and television and radio services rendered by non-profit organisations;  insurance and financial services (granting of loans, issuance of guarantees, securities, currency and derivatives transactions etc);  lottery and gambling services; and  lease, sale or other transfer of real estate (with certain exemptions).

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

Debit or financial transactions taxes are not enforced in Lithuania.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Social insurance and health insurance contributions are established in the Lithuanian tax legislation.

30. How do they operate?

Social insurance contributions are imposed on employement related income, income received from individual activity, authorship income, income received from private enterprises.

Health insurance contributions are imposed on income, which is subject to personal income tax.

31. How is the taxable base determined?

Tax base of social insurance contributions depends on type of income and is determined follows:  gross amount of employement related income;  income received from individual activity minus personal income tax paid;  gross amount of authorship income;  income received from private enterprises minus corporate income tax paid.

Tax base of health insurance contributions is the the same tax base determined for personal income tax purpose.

32. What are the applicable rates?

The following rates of social insurance contributions are set for employement related income:  3% - employee’s contribution (should be withheld from the gross salary of employee and transferred to the Social Insurance Fund by the employer);  30.98% - employer‘s contribution (added on top of the gross amount of the salary).

Other rates of social insurance contributions depend on the type of income and varies from 1% to 28.5%.

www.lexmundi.com Page 191 © 2012 Lex Mundi The following rates of health insurance contributions are set:  employment related income is subject to 6% tax rate and to 3% of this income are paid by the employer (legal entity). That is, total contribution of 9% shall be withheld by the employer from the gross salary paid to employee;  individuals receiving other types of income which are subject to personal income tax must pay health insurance contributions amounting to 6% of the income received;  individuals, engaged in individual business activity, members of partnership, the owners of private (personal) enterprises and individuals insuring themselves on their own account have to pay health insurance contributions amounting to 9% of their income. In some cases the ceiling for tax amount is established.

33. Are there any exemptions?

There are some exemptions establsihed. For example, daily allowance paid for a business trip not exceeding the set limit are not subject to either social insurance or health insurance contributions.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Individual who inherited property / funds in Lithuania or in a foreign countries is subject to inheritance tax in Lithuania.

The applicable inheritance tax rate in Lithuania is the following:  5% on the taxable value of property / funds, if this value does not exceed LTL 500 000;  10% on the taxable value of property / funds, if this value exceeds LTL 500 000.

It should be noted that the property / funds inherited by the close relatives (parents, spouse, children, grand-children, grandparents, brothers, sisters) are tax-exempt, or if the value of taxable property / funds inherited does not exceed LTL 10 000, it is also tax-exempt.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

There are transfer pricing regulations, controlled foreign companies regulations and thin capitalization rules establsihed in the Lithuanian tax legislation.

No Country Dividends (%) Interest (%) Royalties(%) 1. Armenia 15 / 5* 10 10 2. Azerbaijan 10 / 5* 10 10 3. Austria 15 / 5* 10 10 / 5**** 4. Belarus 10 10 10 5. Belgium 15 / 5* 10 10 / 5**** 6. Bulgaria 10 / 0*** 10 10 7. Canada 15 / 5* 10 10 8. China, P. R. 10 / 5* 10 10 9. Croatia 15 / 5*** 10 10 10. Czech Republic 15 / 5* 10 10 11. Denmark 15 / 5* 10 10 / 5**** 12. Estonia 15 / 5** 10 10 13. Finland 15 / 5* 10 10 / 5**** 14. France 15 / 5*** 10 10 / 5**** 15. Georgia 15 / 5***** 10 10 / 5**** 16. Germany 15 / 5* 10 10 / 5**** 17. Greece 15 / 5* 10 10 / 5**** 18. Hungary 15 / 5* 10 10 / 5**** 19. Iceland 15 / 5* 10 10 / 5**** 20. Ireland 15 / 5* 10 10 / 5**** 21. Israel 15 / 5*** 10 10 / 5**** 22. Italy 15 / 5*** 10 10 / 5**** 23. Kazakhstan 15 / 5* 10 10 24. Korea 10 / 5* 10 10 / 5**** 25. Latvia 15 / 0* 0 0 26. Luxembourg 15 / 5* 10 10 / 5**** 27. Malta 15 / 5* 10 10 28. Moldova 10 10 10 29. Macedonia 10 / 0*** 10 10 30. Netherlands 15 / 5* 10 10 /5**** 31. Norway 15 / 5* 10 10 / 5**** 32. Poland 15 / 5* 10 10 33. Portugal 10 10 10 34. Romania 10 10 10 35. Russian Federation 10 / 5****** 10 10 / 5**** 36. Serbia 15 / 5* 10 10 37. Singapore 10 / 5** 10 7.5 38. Slovak Republic 10 10 10 39. Slovenia 15 / 5* 10 10 40. Spain 15 / 5* 10 10 / 5**** 41. Sweden 15 / 5* 10 10 /5**** 42. Switzerland 15 / 5* 10 10 / 5**** 43. Turkey 10 10 10 / 5**** 44. Ukraine 15 / 5* 10 10 45. United Kingdom 15 / 5* 10 10 / 5**** 46. USA 15 / 5*** 10 10 / 5**** 47. Uzbekistan 10 10 10

Gintaras Balcius LAWIN [email protected] Jogailos 9/1 Vilnius, LT-01116 Lithuania

Tel 370.5.268.18.88 Fax 370.5.212.55.91 http://www.lawin.com

Tax Desk Book

Malaysia Prepared by Lex Mundi member firm Skrine

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

The basic taxation system in Malaysia is territorial in nature. All income of companies and individuals accrued in, derived from or received in Malaysia from outside Malaysia, are liable to income tax. However, foreign sourced income received in Malaysia from outside Malaysia by resident companies (except those involved in the banking, insurance, air and sea transportation business), non-resident companies and non-resident individuals are exempted from income tax in Malaysia.

The Malaysian taxation system comprises of direct and indirect imposition of taxes. The forms of direct taxes are income tax, real property gains tax and petroleum income tax. Indirect taxes come in the form of excise duty, customs duties, sales tax, service tax, stamp duty and quit rent and assessments on realty. There is no capital gains tax in Malaysia apart from real property gains tax. However, effective from 1 April 2007, the Real Property Gains Tax (Exemption)(No. 2) Order 2007 exempts all persons from all provisions of the Real Property Gains Tax Act 1976 in respect of any disposal of property after 31 March 2007.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

Income tax is imposed on a “territorial” basis whereby residents of Malaysia are taxed on all income derived from Malaysia as well as income received in Malaysia from outside Malaysia. However, income arising from sources outside Malaysia and received in Malaysia by resident companies is exempt from income tax. Notwithstanding this, residents carrying on banking, insurance and air transportation businesses are taxed on a “worldwide” basis. With effect from the year of assessment 2004, a resident individual is also exempt from income tax on income received in Malaysia from sources outside Malaysia. Non-residents are taxed on Malaysian derived income only.

3. What revenues are included?

The Income Tax Act 1967 governs the taxation of income tax in Malaysia. Under the Income Tax Act 1967 the classes of income chargeable to income tax are as follows:

 gains or profits from an employment (salaries, remunerations, etc.);  gains and profits from a business which includes profession, vocation and trade and every manufacture, adventure or concern in the nature of trade;  dividends, interests or discounts;  rents, royalties or premiums;  pensions, annuities or other periodic payments; and  other gains or profits of an income nature not falling under any of the above. www.lexmundi.com Page 195 © 2012 Lex Mundi

4. What deductions are allowed?

Personal income tax deductions

The chargeable income of a resident individual is arrived at after making several deductions. These include the personal reliefs for self (a further deduction will be given if the taxpayer is a disabled person), spouse and unmarried children below 18 years of age; parents’ medical expenses; medical expenses on serious diseases including medical examinations for individual, spouse or child; expenditure for purchase of basic support equipment for the individual, spouse, child or parent who is disabled; and contributions to the Employees Provident Fund (EPF), life insurance premiums, and insurance premiums for education or medical benefits, etc.

In addition, expenses wholly and exclusively incurred in the production of an individual’s income qualify for deduction (section 33 of the Income Tax Act 1967). Examples are such as entertainment expenses, motor vehicle expenses and subscription to professional institutions.

Corporate income tax deductions

Generally, a deduction from a company’s assessable income is allowed for all outgoings and expenses wholly and exclusively incurred in the production of income (section 33 of the Income Tax Act 1967). It must also be in the nature of a revenue expenditure and not in the nature of a capital expenditure. Examples of business deductions include business operating expenses, donations to approved institutions, gratuities to employees, legal expenses, bad debts (in the year written off or incurred) and repairs to and replacement of assets.

5. What are the major expenses that are not deductible?

Section 39 of the Income Tax Act 1967 sets out all outgoings and losses which do not rank for deduction from assessable income. Examples include domestic or private expenses, expenses not wholly and exclusively incurred for the purpose of acquiring income, any capital withdrawn or any sum employed as capital or used in improvements, 50% of entertainment expenses (except in very limited circumstances) and leave passage.

6. What are the applicable federal rates?

Personal income tax rates

The rate of tax depends on the individual’s resident status, which is determined by the duration of his stay in the country as stipulated under section 7 of the Income Tax Act 1967. Generally, an individual residing in Malaysia for more than 182 days in a year has tax resident status. A resident individual is taxed on his chargeable income at a graduated rate from 0% to 27% after deducting tax reliefs. A non-resident individual is not eligible for any personal tax relief and is subject to 27% tax on the chargeable income accruing in or derived from Malaysia unless there are double tax treaties. Other sources of income received by a non-resident individual are subject to withholding tax.

Corporate income tax rates

A company, whether resident or not, is assessable on income accrued in or derived from Malaysia. A company is considered a resident in Malaysia if the control and management of its affairs are exercised in Malaysia. The corporate tax rate is 25% for the year of assessment 2009 and subsequent years of assessment. Resident companies with a paid up capital of RM2.5 million and below will be charged at a tax rate of 20% for the first RM500,000 of chargeable income and any subsequent chargeable income is taxed at 25%. For resident companies with paid up capital above RM2.5 million, the tax rate is 25%. Non-resident companies are taxed at the rate of 25% for business income and are subject to withholding tax for other types of income. Where the non-resident company www.lexmundi.com Page 196 © 2012 Lex Mundi is resident in a country which has a double tax treaty with Malaysia, the tax rates for specific sources of income may be reduced.

7. What are the applicable state and/ or other local rates?

Income tax is administered at the federal level. Therefore, there are no state and/or local income taxes.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

There is no capital gains tax in Malaysia.

9. How are operating losses handled?

Losses suffered in a business, profession or vocation may be set-off against income from other sources for that assessment year. Where there is insufficient income to absorb the losses, the unabsorbed losses can be carried forward indefinitely for set-off against future business income, not necessarily from the same business, until the entire loss has been utilised. However, with effect from the year of assessment 2006, the unabsorbed business losses will be subject to a continuity of ownership test. Companies will only be allowed to carry forward unabsorbed business losses if more than half of the shareholders of the company for that assessment year are the same as at the end of the basis period for the prior assessment year in which the loss was initially ascertained. The Ministry of Finance has issued guidelines to state that this rule restricting carry forward losses based on the continuity of ownership test will only apply to dormant companies.

10. How are capital losses handled?

For a loss to be deductible, it must arise from the carrying on of a trade, business, profession or vocation. The nature of the loss must also be such that, if it had been a profit, it would have been taxable. As such, losses incurred on capital account a

Territorial Rules

11. What are the residence rules?

Residence rules for individuals

The resident status of an individual for tax purposes is determined by his physical presence in Malaysia. Generally, an individual qualifies as a resident for the basis year for a particular assessment year if he is in Malaysia in the basis year for a period for a period or periods totalling 182 days or more.

Residence rules for companies

A company (regardless of where it was incorporated) is a resident for an assessment year if at any time during the basis year for an assessment year it is managed and controlled in Malaysia. Generally, a company is regarded as being managed and controlled in the place where its directors’ meetings are held.

12. Is worldwide income taxed?

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Tax credits are only available by way of tax relief under the provisions of Double Taxation Treaties.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

There is no withholding tax on dividends paid by Malaysian resident companies.

15. What are the rates on royalties for withholding taxes?

The rate of withholding tax which is based on the gross amount of royalty paid or credited is 10% of gross income. However, a double taxation treaty may provide for a reduced rate.

16. What are the rates on interest for withholding taxes?

The rate of withholding tax which is based on the gross amount of interest paid or credited is 15% of gross income. However, a double taxation treaty may provide for a reduced rate.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

The rate of withholding tax applicable will depend on the category of income received by the foreign corporation. For example, technical or management service fees are subject to a withholding tax of 10%.

18. Please list any other rates on withholding taxes that we should be aware of.

Withholding tax is applicable for contract payments to a non-resident contractor in respect of services under a contract performed in Malaysia. When the payer is paying or crediting the contract payment, he should deduct tax on the service portion at the rate of 10% of the contract payment to cover the tax liability of the non-resident contractor and 3% of the contract payment to ensure the tax liabilities of the employees of the non-resident contractor are settled.

Technical or management service fees for services performed in Malaysia are subject to a withholding tax of 10%.

Income from the rental of moveable properties is subject to a withholding tax rate of 10%.

Any other income received by a non-resident which is not specifically covered is subject to a withholding tax rate of 10%.

Tax Returns and Compliance

19. What is the taxable reporting period?

In respect of individuals, the taxable reporting period is the calendar year.

In respect of companies, the taxable reporting period is the accounting period.

20. What are the due dates for the filing of tax returns?

In respect of individuals without business income, the due date for filing of the tax return is 30 April in the year following the year of assessment.

In respect of individuals with business income, the due date for filing of the tax return is 30 June in the year following the year of assessment.

In respect of companies, the due date for filing of the tax return is within 7 months from the date following the close of its accounting period.

21. What are the key compliance requirements?

The official assessment system has been changed to the self assessment system whereby the burden of computing the taxpayer’s liability is shifted from the Inland Revenue Board (“IRB”) to the taxpayer. Accordingly, the taxpayer is expected to compute his tax liability based on the tax laws, guidelines and regulations issued by the IRB. The tax returns submitted will no longer be subject to a detailed review by the IRB.

The main objective of the self assessment system is to inculcate a practice of voluntary compliance by taxpayers and at the same time reduce the workload of the IRB so that they may focus on areas which have a high tax risk and a potentially significant loss in revenue.

Under the self assessment system, tax audits will be the IRB’s key enforcement tool in order to ensure that the tax returns submitted are correct and were prepared in accordance with the applicable rules and regulations. The tax audit is an examination of a taxpayer’s records to ensure that the income and tax liability declared to the IRB in the tax return are true, correct and comply with the tax laws and rulings.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

There are various other requirements under the self assessment system, such as the submission of estimates of tax payable by companies to the IRB. However, we do not propose to go into such detail for the purposes of this tax survey.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Indirect taxes in Malaysia consist of sales tax, service tax, customs duties, stamp duties, excise duties and local rates such as assessment and quit rent.

24. How does it operate? Is it a VAT or a sales tax?

The various indirect taxes operate in accordance with the applicable governing legislation.

25. How is the taxable base determined?

Sales tax

Sales tax is a one stage tax levied on taxable goods imported for local consumption and on taxable goods manufactured and sold locally. Manufacturers of taxable goods are required to be licensed under the Sales Tax Act 1972. www.lexmundi.com Page 199 © 2012 Lex Mundi Service tax

Service tax applies to taxable goods and services, including food and drinks; provision of rooms for lodging and premises for meetings; health services and the provision of accommodation and food by private hospitals, certain professional and consultancy services, provided by taxable persons. Any taxable person carrying on taxable services must apply for a licence under the Service Tax Act 1975.

Customs duties

Customs duties (include import duty and export duty) are imposed under the Customs Act 1967. Import duty is payable on imported goods at the time of clearance from Customs’ control. Export duty is generally imposed on depletable resources to discourage the export of such commodities.

Stamp duty

Stamp duty is imposed on certain instruments and documents under the Stamp Act 1949. In general, stamp duty is payable on instruments executed in Malaysia or if executed outside Malaysia, when brought into Malaysia.

Excise duties

Excise duties are levied on selected products manufactured in Malaysia for local consumption and selected imported goods. Manufacturers that manufacture goods subject to excise duties have to be duly registered with Customs for charging and remittance of excise duties to Customs. Excise duty is generally levied on alcoholic beverages, tobacco products, motor vehicles and playing cards.

Local rates

Local rates such as assessment and quit rent are imposed by state governments and local authorities on real property located within the jurisdiction of such authorities.

26. What are the applicable rates?

Sales tax

Sales tax is generally at 10% but certain non-essential foodstuffs and building materials are taxed at 5%.

Service tax

The rate of service tax is 5%.

Customs duties

The rates of customs duties vary based on the types of goods. The rates and exemption of customs duties are prescribed in subsidiary legislation made under the Customs Act 1967.

Stamp duty

The rate of stamp duty chargeable depends on the nature of the instrument involved and varies from a fixed charge, ad valorem or a certain percentage of the value of the subject matter of the transaction.

Excise duties

Local rates

Assessment rates are based on the annual value of properties and the percentage charged thereon may differ substantially between one location and another. Quit rent is calculated with reference to the area of the land and its charge depends on the location and usage of the land.

27. Are there any exemptions?

Sales tax

Manufacturers whose annual sales turnover does not exceed RM100,000 in the preceding year and is not expected to exceed RM100,000 during the next 12 months may apply for a certificate of exemption from licensing. Sales tax does not apply to the Joint Development Area, Labuan, Langkawi, Tioman, Free Zones and Licensed Manufacturing Warehouses.

Service tax

As of 1 January 2003, certain professional services provided by a company to companies within the same group are exempted from the current service tax of 5%. Generally, the imposition of service tax is subject to a specific threshold based on an annual turnover ranging from RM150,000 to RM300,000. With effect from 1 January 2008, the threshold of RM150,000 sales turnover within a period of 12 months or part thereof for professional, consultancy and management services is abolished. Service tax does not apply to Free Zones, Langkawi, Labuan, Tioman and the Joint Development Area.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

No.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

There is an Employees Social Security Fund which is governed by the Employees’ Social Security Act 1969.

There is also an Employees’ Provident Fund (EPF) which is governed by the Employees Provident Fund Act 1991.

30. How do they operate?

Employees Social Security Fund

The Social Security Organisation (SOCSO) administers the following schemes:

(i) Employment Injury Insurance Scheme; and (ii) Invalidity Pension Scheme.

The schemes are aimed at providing cash and medical benefits to employees in case of temporary or permanent disablement/invalidity, death and employment injury, including occupational diseases.

Employees’ Provident Fund

www.lexmundi.com Page 201 © 2012 Lex Mundi The EPF is a compulsory savings scheme established to provide a measure of security for old age retirement to its members. Both the employer and employee is required to contribute monthly a percentage of the employees’ wages to the EPF.

31. How is the taxable base determined?

Employees Social Security Fund

All industries with one or more employees are required to insure their employees whose wages do not exceed RM3,000 a month. Employees who have become liable to contribute continue to be entitled to be insured even if their salaries exceed RM3,000 per month.

Employees’ Provident Fund

Malaysian citizens and permanent residents are required to contribute to the EPF. Expatriates and foreign workers are not required to contribute to the EPF, although they may elect to do so.

32. What are the applicable rates?

Employees Social Security Fund

The rates of contribution are as follows:

(i) The first category (Employment Injury Insurance Scheme and Invalidity Pension Scheme) of contribution is about 2% to 2.5% of the employee's wages, shared by the employer and employee with the employer taking the larger share.

(ii) The second category (Employment Injury Insurance Scheme only) is solely by the employer for an employee who is not eligible for coverage under the Invalidity Pension Scheme and is about 1% of the employees' wages

Employees’ Provident Fund

In general, for employees (until the age of 55), the employer is required to contribute 12% and the employee is required to contribute 11% of the employee’s monthly wages.

33. Are there any exemptions?

No.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

N/A

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Transfer Pricing

The IRB has issued Transfer Pricing Guidelines which provide information to companies concerned with related party transactions on the methodologies acceptable to the IRB in respect of the determination of ‘arms length’ prices. In addition, there have been recent amendments to the Income Tax Act 1967 which empowers the Director General of the IRB to substitute the price on certain transactions where the Director General is of the opinion that the transactions were not entered into on an arms’ length basis and which also allows for companies to apply for Advance Pricing Arrangements (“APA”) to the Director General. APA is a mechanism to predetermine the prices of goods and services to be transacted in the future between a company and its related companies for a specified period.

Anti-Avoidance

Section 140 of the Income Tax Act 1967 is a general anti-avoidance provision whereby the Director General of IRB, where he has reason to believe that any transaction has the direct or indirect effect of:

(a) altering the incidence of tax which is payable or suffered by or which would otherwise have been payable or suffered by any person;

(b) relieving any person from any liability which has arisen or which would otherwise have arisen to pay tax or to make a return;

(c) evading or avoiding any duty or liability which is imposed or would otherwise have been imposed on any person by the Income Tax Act 1967; or

(d) hindering or preventing the operation of the Income Tax Act 1967 in any respect,

may, without prejudice to such validity as it may have in any other respect or for any other purpose, disregard or vary the transaction and make such adjustments as he thinks fit with a view to counteracting the whole or any part of any such direct or indirect effect of the transaction.

Thin capitalisation

In respect of thin capitalisation, under Section 140A of the Income Tax Act 1967, where the Director General, having regard to the circumstances of the case, is of the opinion that in the basis period for a year of assessment the value or aggregate of all financial assistance granted by a person to an associated person who is a resident, is excessive in relation to the fixed capital of such person, any interest, finance charge, other consideration payable for or losses suffered in respect of the financial assistance shall, to the extent to which it relates to the amount which is excessive, be disallowed as a deduction.

www.lexmundi.com Page 203 © 2012 Lex Mundi 38. List the countries in which there are tax treaties. This could impact the withholding taxes on various distributions and to the extent possible, please itemize them below. Please include the impact upon withholding on compensation, interest, dividends or other distributions for each country listed.

There are over 60 double taxation treaties signed between Malaysia and other countries. A table summary of the withholding tax rates are as follows:

No. Country Dividends (%) Interest(%) Royalties(%) Fees for Technical Services(%) 1 Albania NIL 10 10 10 2 Argentina NIL 15 10 10 3 Australia NIL 15 10 NIL 4 Austria NIL 15 10 10 5 Bahrain NIL 5 8 10 6 Bangladesh NIL 15 10 10 7 Belgium NIL 10 10 10 8 Bosnia and Herzegovina NIL 10 8 10 9 Canada NIL 15 10 10 10 Chile NIL 15 10 5 11 China NIL 10 10 10 12 Croatia NIL 10 10 10 13 Czech Republic NIL 12 10 10 14 Denmark NIL 15 10 10 15 Egypt NIL 15 10 10 16 Fiji NIL 15 10 10 17 Finland NIL 15 10 10 18 France NIL 15 10 10 19 Germany NIL 15 10 NIL 20 Hungary NIL 15 10 10 21 India NIL 10 10 10 22 Indonesia NIL 15 10 10 23 Iran NIL 15 10 10 24 Ireland NIL 10 8 10 25 Italy NIL 15 10 10 26 Japan NIL 10 10 10 27 Jordan NIL 15 10 10 28 Kazakhstan NIL 10 10 10 29 Kyrgyz NIL 10 10 10 30 Kuwait NIL 10 10 10 31 Lebanon NIL 10 8 10 32 Luxembourg NIL 10 8 8 33 Malta NIL 15 10 10 34 Mauritius NIL 15 10 10 35 Mongolia NIL 10 10 10 36 Morocco NIL 10 10 10 37 Myanmar NIL 10 10 10 38 Namibia NIL 10 5 5 39 Netherlands NIL 10 8 8 40 New Zealand NIL 15 10 10 41 Norway NIL 15 10 10 42 Pakistan NIL 15 10 10 43 Papua New Guinea NIL 15 10 10 44 Philippines NIL 15 10 10 www.lexmundi.com Page 204 © 2012 Lex Mundi 45 Poland NIL 15 10 10 46 Romania NIL 15 10 10 47 Russia NIL 15 10 10 48 Saudi Arabia NIL 5 8 8 49 Seychelles NIL 10 10 10 50 Singapore NIL 10 8 5 51 South Africa NIL 10 5 5 52 South Korea NIL 15 10 10 53 Spain NIL 10 7 5 54 Sri Lanka NIL 10 10 10 55 Sudan NIL 10 10 10 56 Syria NIL 10 10 10 57 Sweden NIL 10 8 8 58 Switzerland NIL 10 10 10 59 Thailand NIL 15 10 10 60 Turkey NIL 15 10 10 61 United Arab Emirates NIL 5 10 10 62 United Kingdom NIL 10 8 8 63 United States of America NIL 15 10 10 64 Uzbekistan NIL 10 10 10 65 Venezuela NIL 15 10 10 66 Vietnam NIL 10 10 10 67 Zimbabwe NIL 10 10 10

Source: The Inland Revenue Board’s website at http://www.hasil.org.my

Contact Information:

Chen Kah Leng Skrine [email protected] Unit.No. 50-8-1, 8th Floor, Wisma UOA Damansara 50, Jalan Dungun, Damansara Heights Kuala Lumpur, 50490 Malaysia

Tel 60.3.2081.3999 Fax 60.3.2094.3211 http://www.skrine.com

Tax Desk Book

Malta Prepared by Lex Mundi member firm Ganado & Associates

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

Income tax: Progressive rates of tax (maximum 35%) apply in respect of individuals whereas the standard corporate rate is of 35%. Tax is imposed on income (including capital gains derived on the transfer of certain capital assets) derived by a person after deductibility of allowable expenses. Double taxation relief on foreign source income is also available. Persons who are either resident or domiciled in Malta are only subject to tax on income arising in Malta and income remitted to Malta. In case of certain transfers of immovable property situated in Malta, a 12% full and final withholding tax is imposed on the higher of the consideration received or the fair market value.

VAT: As a general rule, VAT at the rate of 18% is chargeable on every supply of goods and or services that takes place in Malta for consideration by a taxable person acting as such. Certain supplies are exempt with or without credit. Furthermore, the supply of certain goods/services attracts a lower VAT rate of 5%. .

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

In case of trading profits of a company, the main basis should be the income as appearing on the financial statements, with some adjustments being made for certain accounting expenses which are disallowed for tax purposes. In case where the income is regarded to be of a "passive nature" rather than derived from an active trading activity, recourse may be made to the principle that one should not tax receivability without actual receipt of the income.

3. What revenues are included?

The main charging provision is Article 4 of the Income Tax Act which brings to charge income, whether derived from Malta or abroad, and irrespective of whether received in Malta or not, in respect of:

 gains or profits from any trade, business or profession (including gains from property acquired with a profit-making motive)  employment income (including fringe benefits)  dividends, premiums and interest  pension and annuities  rents and other profits from property.

Capital gains from the transfers of certain capital assets are also chargeable.

4. What deductions are allowed?

The general rule for deductibility of expenses is that such expenses must be "wholly and exclusively incurred in the production of the income." Thus, a strict link must exist between the expense and the income generated. In case of employment income, such expenses must furthermore necessarily be incurred in the performance of duties of the relative employment or office.

5. What are the major expenses that are not deductible?

As a rule, expenses of a capital nature (including losses for loss or diminution of capital) are not deductible, subject to certain exceptions. Accordingly, depreciation is not allowed but capital allowances are available in respect of certain capital assets.

6. What are the applicable federal rates?

Progressive rates of taxation are applicable in case of individuals (the maximum tax rate being 35%). Standard corporate rate is 35%

7. What are the applicable state and/ or other local rates?

N/A

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

As a rule, capital gains are aggregated to the other income of a person and taxed accordingly. Only capital gains derived on the transfers of certain capital assets are chargeable (mainly securities; immovable property; business, intellectual property; transfers of beneficial interests in a trust). Capital gains are normally computed by reference to the consideration received less allowable deductions. However, a deemed consideration concept exists in respect of transfers of shares constituting a “controlling interest” (this applies only in respect of transfers of shares in Maltese resident companies; or shares in companies the assets of which consist wholly or principally of immovable property). A final withholding tax is applied in respect of certain transfers of immovable property situated in Malta.

The main tax exemptions/deferrals (subject to the satisfaction of a number of conditions) in case of tax on capital gains are the following:  Tax deferral is obtained in respect of intra-group transfers of assets; and transfers in case of restructuring of holding upon mergers; demergers; divisions, amalgamations and reorganisations.  Roll-over relief is available in respect of assets used in business.  Exemption from tax in respect of capital gains arising on a transfer (including redemption; liquidation or cancellation) of securities in a Maltese company the assets of which do not consist wholly or principally of immovable property situated in Malta. This exemption applies where such gain is derived by a non-resident who is not owned and controlled, directly or indirectly nor acts on behalf of individuals who are ordinarily resident and domiciled in Malta.

9. How are operating losses handled?

Trading losses may be (i) offset against current year trading gains and capital gains; (ii) carried forward to be offset against future years' trading gains or capital gains and (iii) subject to the satisfaction of certain conditions, available for surrender to other group companies www.lexmundi.com Page 207 © 2012 Lex Mundi

10. How are capital losses handled?

Capital losses may be (i) set-off against current year capital gains or (ii) carried forward to be offset against future year capital gains.

Territorial Rules

11. What are the residence rules?

The concept of "resident in Malta":

 when applied to an individual, is defined as "individual who resides in Malta except for such temporary absences as the Commissioner may seem reasonable and not inconsistent with the claim of such individual to be resident in Malta."

 when applied to a body of persons is defined as "any body of persons the control and management of whose business are exercised in Malta, provided that a company incorporated on or after 1st July 1994 shall be resident in Malta and any other company incorporated in Malta shall be resident in Malta from 1st January 1995 where the management and control of the business of the Company is exercised outside Malta."

12. Is worldwide income taxed?

In terms of Maltese tax law, chargeability to tax on a worldwide basis arises only if a person (whether a company or otherwise) is both resident and domiciled in Malta. In case of persons who are non- Maltese domiciled but resident in Malta, tax is charged on income (including capital gains) arsing in Malta and on foreign source income which is remitted to Malta. No tax is due in respect of foreign source capital and capital gains even if remitted to Malta. No tax is payable in respect of any income arising outside Malta to any person who is in Malta for some temporary purpose only and not with the intention to establish his residence in Malta and who has not actually resided in Malta for an aggregate period of six months in a basis year. Naturally, Maltese jurisdiction to tax in respect of Maltese source income is preserved subject to any exemption under Maltese domestic law or double tax treaty application.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Malta grants double taxation relief on foreign source income on the basis of the simple credit method on the source by source and country by country basis (following amendments to Maltese tax laws in 2007, a participating holding exemption is now available in respect of income or gains deriving from a participating holding in a non-resident company/partnership) . The type of relief available depends on the circumstances of the case. Relief could be available for tax (covered by the treaty) actually paid in a territory with which Malta has a double taxation treaty in force under the treaty relief provisions. Malta also allows relief from double taxation on a unilateral basis where overseas tax is suffered on income received from a country with which Malta does not have a treaty. Whether treaty or unilateral relief is applicable, the overseas tax suffered may be allowed as a simple credit against tax chargeable in Malta on the gross amount, limited to the total tax liability in Malta on the particular income. In respect of both treaty relief and unilateral relief, the foreign tax is to be a tax of a similar character to that imposed under the ITA. Should the foreign tax be applied as a percentage of turnover (rather than income), then it may be that such tax is deemed not to be of a nature similar to income tax under Maltese domestic law and accordingly may not be available as a credit. However, we understand that in circumstances where no foreign tax credit may or is in effect claimed, the Revenue would in practice allow the foreign tax to be taken as a deduction against the gross taxable income. It must be emphasised that this practice is not supported by law given that, as a rule, in order www.lexmundi.com Page 208 © 2012 Lex Mundi for expenses to be deductible they must be incurred in the production of income i.e. the expense must not be an expense incurred after the generation of the income. Malta also operates a type of unilateral tax sparing relief known as the Flat Rate Foreign Tax Credit (FRFTC) in respect of certain foreign source income and subject to the satisfaction of a number of conditions. Such credit assumes a foreign tax of 25% on the net income received in Malta.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Malta operates a full imputation system of taxation whereby the tax suffered at the level of the company on its profits is imputed to the shareholder. Thus, assuming a rate of taxation at the level of both the company and the shareholder at 35% (the maximum arte of tax applicable) no further tax is due by the shareholder in respect of dividends received. Subject to certain conditions, tax refunds may be due to the shareholder upon a distribution of dividends. Tax refunds may be due either because the individual is taxable at a lower rate of tax than that suffered by the distributing company or because of the availability of refunds in respect of income allocated to certain tax accounts.

15. What are the rates on royalties for withholding taxes?

In terms of Maltese domestic law, royalties derived by persons not resident in Malta are exempt from Maltese tax, subject to the satisfaction of a number of straight-forward conditions, namely that: (i) the beneficial owner of the royalty is a person not resident in Malta and is not owned and controlled by, directly or indirectly, nor act on behalf of individuals who are ordinarily resident and domiciled in Malta and (ii) the non-resident person is not engaged in any trade or business in Malta through a permanent establishment situated herein to which the royalties are effectively connected

16. What are the rates on interest for withholding taxes?

In terms of Maltese domestic law, interest (including discounts and premia) derived by persons not resident in Malta are exempt from Maltese tax, subject to the satisfaction of a number of straight- forward conditions, namely that: (i) the beneficial owner of the interest is a person not resident in Malta and is not owned and controlled by, directly or indirectly, nor act on behalf of individuals who are ordinarily resident and domiciled in Malta; and (ii) the non-resident person is not engaged in any trade or business in Malta through a permanent establishment situated herein to which the interest is effectively connected

17. What are the rates of withholding tax on profits realized by a foreign corporation?

In terms of Article 73 Income Tax Act where a person pays to a non-resident person any income chargeable to tax in Malta, the payor has to withhold tax. The withholding tax rate is 35% in case of a non-resident company and 25% in case of other non-resident persons. This applies provided the income being paid is subject to tax in Malta. If the non-resident is simply trading with Malta rather than in Malta; the income-earning activities are definitely carried out outside Malta and the said non- resident does not have a permanent establishment in Malta to which the income is connected, and accordingly there should be no withholding tax.

18. Please list any other rates on withholding taxes that we should be aware of.

N/A

19. What is the taxable reporting period?

The default fiscal year is 1 January - 31 December, but an application can be filed with the Commissioner of Inland Revenue for a different fiscal year. Such applications are ordinarily accepted.

20. What are the due dates for the filing of tax returns?

Companies and other bodies of persons (with accounting date 30 June or earlier) : tax return has to be submitted by 1 April. Companies and other bodies of persons (with accounting date later than 30 June or earlier) : tax return has to be submitted by the last day of the 9th month after the accounting date

21. What are the key compliance requirements?

Provisional tax payments may be required. This generally does not apply in case of companies in respect of income allocated to the foreign income account and companies having to more than 90% of their business outside Malta.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

In case of refunds to which eligible shareholders may be entitled upon distribution of taxed profits by Maltese companies, registration of such shareholders is required.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Yes

24. How does it operate? Is it a VAT or a sales tax?

VAT

25. How is the taxable base determined?

N/A

26. What are the applicable rates?

Standard rate is 18%

Reduced rate of 5% applies to accomodation in hotels and licensed premises; supply of electricity; works of art; collectors’ items and antiques; certain confectionary; medical accessories; printed matter; items for exclusive use of the disabled; domestic acre services; minor repairs on bicycles, shoes, leather goods, clothing and household linen; admission to museums, art exhibitions, concerts and theatres.

0% applies to exports, intra-community supplies, local and international transport, supply and repair of commercial aircraft and vessels, duty free supplies, food, pharmaceuticals, investment gold, goods under a customs duty suspension regime and the supply of goods on board cruise liners

www.lexmundi.com Page 210 © 2012 Lex Mundi Exempt - Immovable property, non-commercial rent, services by non-profit making organisations, insurance, banking and investment services, sports, religious and cultural activities, lotteries and public postal services, health, welfare, education, public broadcasting, supply of water by a public authority and letting of space for artistic and cultural activates.

27. Are there any exemptions?

Refer to answer above

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

Malta does not impose such type of taxes.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Yes, social security contributions

30. How do they operate?

In case of employed persons, a part of the social security contributions are payable by the employer and another part by the employee (deductible directly from his emoluments).

In case of self-occupied or self-employed persons (self-employed persons are persons who engage in an activity where the income derived is less than €910 per annum) ,social security contributions are payable only by such person.

31. How is the taxable base determined?

In case of employed persons, social security is calculated on the "basic weekly wage/basic salary" i.e. gross wage or salary payable but excluding any remuneration for overtime, any form of bonus and extra allowances.

In case of self-occupied persons and self-employed persons , social security is calculated on the earnings: i.e. mainly income derived from any economic activity (including exercise of any trade or profession), net of expenses directly incurred in generating the income.

32. What are the applicable rates?

Weekly rate of contributions Rate Minimum Maximum

Employed persons: - deductible from emoluments 10% €14.65 €32.33 - payable by employer 10% €14.65 €32.33

Self-occupied and self-employed persons 15% €25.50 €48.50

33. Are there any exemptions?

A number of minor exemptions apply including:

www.lexmundi.com Page 211 © 2012 Lex Mundi  in case of employment: employment of a casual nature; employment for less than eight hours in a calendar week, employment of persons not ordinarily resident in Malta where the employer is paying contributions under a scheme of social security in another country;

 in case of self-employment an exemption is available on a means testing basis.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Stamp duty is chargeable on certain documents (e.g. certain insurance policies) and on transfers (inter vivos and transmissions causa mortis) of certain assets (immovable property and real rights thereon; and marketable securities).

Stamp duty is chargeable on documents executed in Malta, or on documents executed outside Malta upon use thereof (as defined in the applicable law) being made in Malta.

Stamp duty is an ad valorem duty - chargeable on the higher of the consideration received or the market value of the chargeable assets. Stamp duty rate in case of transfers of marketable securities is 2% (though this may increase to 5% in case of shares in immovable property companies); whereas the applicable rate in case of transfers of immovable property and real rights thereon is 5%.

A number of exemptions are applicable. Certain companies enjoy an exemption in respect of transfers of marketable securities. The exemption applies also in respect of transfers of marketable securities in the said eligible companies. Furthermore, some intra-group transfers are exempt subject to satisfaction of a number of conditions.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

There are a couple of general anti-avoidance provisions applicable (making references to artificial or fictitious schemes), however no detailed transfer pricing provisions (the transfer pricing provision is quite loosely worded and a number of conditions have to be satisfied for its application); no CFC rules and no thin-capitalisation rules. However as regards thin cap rules, interest is only deductible where the Commissioner is satisfied that the interest was payable on capital employed in acquiring the income. If the capital produces no income or insufficient income to absorb the interest expense, such expense may not be availed of.

www.lexmundi.com Page 212 © 2012 Lex Mundi 38. List the countries in which there are tax treaties. This could impact the withholding taxes on various distributions and to the extent possible, please itemize them below. Please include the impact upon withholding on compensation, interest, dividends or other distributions for each country listed.

Double taxation treaties in force:

Albania Australia Austria Barbados Belgium Bulgaria Canada China Croatia Cyprus Czech Republic Denmark Egypt Estonia Finland France Germany Greece Hungary Iceland Ireland India Italy Korea Kuwait Latvia Lebanon Libya Lithuania Luxembourg Malaysia Morocco Netherlands Norway Pakisatn Poland Portugal Romania San Marino Singapore Slovakia Slovenia South Africa Spain Sweden Switzerland (limited to international air and shipping traffic) Syrian Arab Rep. Tunisia UAE www.lexmundi.com Page 213 © 2012 Lex Mundi UK USA (limited to international air and shipping traffic)

DTT with Montenegro and USA on income has been signed but is not yet in force.

Most of the exemptions from withholding taxes in respect of the repatriation of profits to non-residents apply in terms of Maltese domestic law and thus are not dependant on the existence of double tax treaties or EU directives.

Contact Information:

Stephen Attard Ganado & Associates [email protected] 171, Old Bakery Street Valletta, VLT 09 Nadia Cassar Malta

Tel 356.21235.406 Fax 356.21225.908 http://www.jmganado.com

Nicaragua

Prepared by Lex Mundi member firm Alvarado y Asociados

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components)

The tax system of Nicaragua has the following types of taxes imposed in the national and municipal level:

National taxes a) Direct taxes

- Income Tax, which includes 1. Labor income / Personal Taxes

2. Income from economic activities, and

3. Capital income, capital gains and capital losses.

b) Indirect taxes - Value Added Tax

- Excise Tax

o Fuels Conglobate Specific Tax

o Specific Tax On Cigarettes Consumption

- Stamp Tax

- Special Tax for Road Maintenance Fund Financing (IEFOMAV)

- Special Tax On Casinos, Gambliing Machines and Tables

MunicipalTaxes

- Real State Tax (IBI) - Municipal Income Tax - Registration Tax - Services Tax (iron to mark cattle or wood/ build or make improvements/ services and cemetery maintenance) - Utilization Fees (access of vehicles) - Trash Recollection Fees

1. Calculation of income/profit taxes

A. How is the taxable base determined?

The taxable base is determined according to Taxpayers’ income sources.

a) The taxable base for business entities is the result of subtraction from gross income the amount of the deductions allowed by law. b) For individuals is according to a progressive chart based on wage/salary.

B. What revenues are included?

According to the nature of income tax contemplated in Nicaragua´s tax law, the revenues may vary. For example:

Economic activities Income Tax: income earned or received in cash or in kind by a taxpayer who provides goods and services including capital income and capital gains and losses. Such as: export of produced goods, transport service of persons or goods, communications services, lease, alienation, transfer, profits, surplus, paid benefits in cash or kind, interest or fees of credits or loans, etc.

Labor Income Tax: income from any form of consideration or remuneration, whatever its name or nature in cash or kind, arising from personal work provided by others such as: salary, zoning, seniority, bonds, variable pay, performance awards and other forms of additional remuneration.

Capital income (Renta de capital: the income that comes from capital, which is to say, comes from wealth itself, rather than any specific production or direct work. There are two kind of capital income consider by the Law, the immovable capital income (renta de capital inmobiliario) and the movable capital income (renta de capital mobiliario).

Foreign income is subject to the following withhholdings:

Concept Tax rate Income for activities Transaction with Tax Haven 17% Insurance and reassurance 1.5% Insurance prime and bond, guarantee 3% Maritime vessel and aircraft 3% International telephonic communications 3% Other income 15% Agricultural transactions, rice and rude milk 1% Primary agricultural goods 1.5% Other goods 2% Investments funds 5%

In principle, all cost and expenses are deductible provided that they are necessary and normal to obtain the taxable income and to keep or maintain its source, as long as this cost and expenses are supported by their corresponding receipts. However, there are certain rules that specify which deductions are disallowed or under what circumstances certain expenses are deductible, expressed by Nicaragua´s tax law by an enumeration list.

3. What are major expenses that are not deductible?

Some of the major expenses that are not deductible are: taxes incurred abroad, expenses of recreation and entertainment, property taxes of vacant lots and contributions on concepts of premium or underwriting fees, donations and gifts when exceeds statutory limits.

What are the applicable rates?

1. Federal -Not applicable. National income tax rate for business entities is 30%.

2. State and/or other local - Not applicable. Please see answer 1, Municipal Tax.

4. Capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger etc.

The applicable capital gain rates and base contemplated in Nicaragua’s tax law as part of the income tax is:

The taxable base:

a. In onerous transmissions or sales or transfers to free of charge, the difference between the transfer value and the cost of acquisition, and b. In other cases, the total value or proportional perceived

Tax rate:

1. Five percent (5%), for the assets transmision stablished in Chapter I, Title IX of Law. 741, "Trust Contract Law ", published in the Official Gazette No. 11 of 19 January 2011, and

2. Ten percent (10%), for residents and non residents.

Concept Tax Rate Capital gain Trust 5% Others capital income for resident and non-resident 10% Alienation of immovable properties, from US$1 to US$ 50,000.00 1%

Alienation of immovable properties, from US$ 50,000.01 to US$ 100,000.00 2% Alienation of immovable properties, from US$ 100,000.01 to US$ 200,000.00 3% Alienation of immovable properties, from US$ 200,000.01 to over 4% Transaction in stock market 0.25% Investment Funds 5% www.lexmundi.com Page 217 © 2012 Lex Mundi C. How are losses handled?

Operating: Operating losses may be carry forward for three fiscal periods

Capital: The capital gains rules are applicable for capital losses.

5. Territorial Rules

A. What are the residence rules?

The tax law establishes the following circumstances to be considered a resident:

- who remain in the country for more than one hundred eighty days during the calendar year even if not continuously - whose center of economic interest is in the country except, accreditation of tax residence in another country - persons who have Nicaraguan nationality, habitually resident in other countries under certain professional charges - Foreign persons who have their habitual residence in Nicaragua under the type of work they perform. - Permanent establishment for non-residents referring to a link between the place of business and a specific geographic point, as well as a degree of permanence with respect to the taxpayer.

B. Is worldwide income taxed? - Yes

C. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

6. Withholding Taxes - Not applicable. There are no Double Taxation Treaties and no possibility of deducting taxes paid abroad, or any others.

A. Rates on dividends – 10%

B. Rates on royalties – 10%

C. Rates on interest - 10%

D. Rates of withholding tax on profits realized by a foreign corporation

15% 17% for transaction made with Tax Heaven

E. Others - Not applicable

4. Tax Returns and Compliance

A. What is the taxable reporting period?

Income Tax: one year. Value Added Tax: Monthly Stamp Tax: upon taxable execution of public or private instruments.

B. What are the due dates for filing of tax returns?

Income Tax: Within three months after the expiration of the tax period to which it is subject.

Value Added Tax: filing is done on a monthly basis and is usually due after the 15th of the following month.

C. What are key compliance requirements?

The tax payer must filled tax returns at the Revenue Administration where is submitted meeting the requirements stated on the form.

D. Any other

Excise Tax: upon taxable services provision or import and export of any goods. -Municipal Income Tax: 2% on the average of gross income from the sale of goods or services). -Real State Tax: annual tax of 1% on the assessed value of the property.

INDIRECT TAXES

I . Are there any indirect taxes in your jurisdiction?

Yes. Nicaragua´s tax law contemplates different types of indirect taxes.

How does it operate? Is it a VAT or a sales tax?

It is a Value Added Tax for real estate transfers, services provisions and import, internment and export of goods.

How is the taxable base determined?

VAT: The tax is levied on the difference between the so-called "tax debit" and the "tax credit". The difference between the "tax debit" and the “tax credit", if positive, constitutes the amount to be paid to the tax authority. If negative, it can be carried forward to the following monthly periods and deducted from the difference of Tax Debits and Tax Credits arising from any such periods.

- What are the applicable rates?

- Excise Tax: Rate applied to manufacturer's selling price, for sugar is 2%. - Value Added Tax: Rate of 15 % except on property exportation which is a 0 % rate

- Stamp Tax: Different amounts according to the type of document.

- Special Tax for Road Maintenance Fund Financing (IEFOMAV):

- Specific Tax On Cigarettes Consumption: Established rate for each year which taxable base is thousand cigarettes or equivalent per unit (For 2013, C$ 309.22)

- Special Tax on Casinos, Gaming Machines and Tables: Not specific percent, different amounts are applied according to the type of document.

A. Are there any exemptions?

Exempt Imports:

- Import of goods whose alienation in the country are exempt - Goods that under customs legislation not reach consummation, - Stored goods under customs control by companies operating under the regime of free ports - Etc.

Exempt selling goods:

- Fresh fish - Chicken except chicken breast - Beef except steaks - Books, pamphlets, magazines, school supplies and scientific - Medical equipment and instruments - Drugs, vaccines and human consumption serum - Veterinary products - Lottery games - Domain transmission of real property - Etc.

Exempt Provision of the Following Services:

- Medical and dental - Premiums paid on insurance contracts agricultural - Shows with amateur athletes - Religious events - Internal transport air, land, lake and river - Potable water supply system through a public - Lease of land for agricultural use - Etc.

II. Are there any other taxes such as debit or financial transactions taxes in force the jurisdiction?

PARAFISCAL CONTRIBUTIONS

A. Are there any parafiscal contribution such us social security, science and technology contribution?

Yes

B. How does it operate?

Social Security Contribution: It is to be paid monthly to the National Social Security Institute. (INSS for its acronym in Spanish)

C. How is the taxable base determined?

Social Security Contribution: The employee monthly payment.

D. What are the applicable rates?

Employee: 4% Employer: 8% State: 4 %

E. Are there any exemptions?

No.

INHERITANCE AND GIFT TAXES

I. Is there an inheritance or gift tax or any other taxes like Wealth Tax etc, and if there is one,

A. What triggers the requirement for the tax?

The income received by the beneficiary due to the inheritance or donation. Taxable base is calculated by the same rules as capital income and capital gains and losses of Nicaraguan source.

OTHER MATTERS

I. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/areas, etc., and if so, are there:

A. any anti-deferral regimes; B. transfer pricing provisions; C. tax avoidance measures like legislated General Anti-Avoidance Rules etc; D. controlled foreign companies regulations; E. thin capitalization rules.

www.lexmundi.com Page 221 © 2012 Lex Mundi Considering the legislative model recommended by the OECD, nowadays, with the entry into force of Law No. 822 “Ley de Concertación Tributaria”, Nicaragua has a regulatory framework in the field of transfer pricing in effect that if, from 2016.

Different methods to apply the arm´s length principle, as well as definitions of related parties are contemplated by the Law. Our legislation is based in the established or suggested principles by the OCDE, in which we will enhance 3 elements.

• Improvements in the supplying systems and mechanisms and information exchange.

• Creation of the Specialized Unit of Transfer Pricing.

• Principles and methods of calculation.

III. Tax Treaties.

A. List the countries with which there are tax treaties. This could impact the withholding taxes on various distributions and to the extent possible, they should be itemized. B. Do it in table form, listing the countries and the impact upon withholding on compensation, interest, dividends or other distributions.

There are no tax treaties of Nicaragua with other countries.

Contact Information Alvarado y Asociados Planes de Altamira III Etapa, Jose Anibal Olivas Cajina Semáforos ENITEL Villa Fontana [email protected] 2 Cuadras al Este, 2 ½ Cuadras al Norte. Managua, Nicaragua Gloria Maria de Alvarado P.O. Box 5983. [email protected] Teléfonos: +505 22787708 / 22772308 / 22772417. Fax: +505 22787491

www.alvaradoyasociados.com.ni

www.lexmundi.com Page 222 © 2012 Lex Mundi This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: www.lexmundi.com/GlobalPracticeGuides

Tax Desk Book

Pakistan Prepared by Lex Mundi member firm RIAALAW

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

The law governing taxation in Pakistan is the Income Tax Ordinance, 2001 (“ITO”), which imposes various kinds of direct and indirect tax. The following are the various kinds of tax imposed under the ITO:

Income tax, which includes tax on  salary income  income from property  income from business  capital gains  income from other sources

Withholding tax, which includes tax on  Dividends  Profit on debt  Payments to non-residents  Payment for goods & services  Export proceeds  Rental payments  Prizes & winnings  Pension fund withdrawals

Advance tax, which includes tax on  Imports  Cash withdrawals from banks  Purchase of motor vehicles  Brokerage & commission  Electricity consumption  Telephone bills

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

All capitalized terms used hereunder but not defined shall have the meaning attributed to them in the ITO.

www.lexmundi.com Page 224 © 2012 Lex Mundi Under section 9 of the ITO, the taxable income of a person for a year shall be the total income of the person for the year reduced (but not below) zero by the total of any deductible allowance such as zakat, worker’s welfare fund and worker’s participation fund as stated in Part IX, Chapter III of the ITO.

Under the ITO, the total income of a person for a tax year shall be the sum of the person’s income under each of the heads of income for the year. For purposes of the imposition of tax and computation of total income, all income shall be classified under the following heads; namely Salary; Income from Property; Income from Business; Capital Gains and Income from Other Sources

Pursuant to section 11(5) of the ITO, the income of a resident person under a head of income shall be computed by taking into account amounts that are Pakistan-source income and amounts that are foreign-source income. The income of a non-resident person under a head of income shall be computed taking into account only amounts that are Pakistan-source income.

3. What revenues are included?

Under section 18 of the ITO, the following incomes of a person for a tax year, other than income exempt from tax under the ITO, shall be chargeable to tax under the head, “Income from Business”:

 the profits and gains of any business carried on a person at any time in the year;  any income derived by any trade, professional or similar association from the sale of goods or provision of services to its members;  any income from the hire or lease of tangible moveable property;  the fair market value of any benefit or pre-requisite, whether convertible into money or not, derived by a person in the course of, or by virtue of, a past, present or prospective business relationship;  and any management fee derived by a management company (including a modarba [management company).

Any profit on debt derived by a person where the person’s business is to derive such income shall be chargeable to tax under the head “Income from Business.” Furthermore, any profit and gains arising from the speculation business for a tax year computed in accordance with the ITO shall be included in the person’s income chargeable to tax under the head “Income from Business” for that year.

4. What deductions are allowed?

Zakat, worker’s welfare fund and worker’s participation fund are deductible allowances from the taxable income of a person. There are different kinds of deductions provided for in the ITO, as follows:

(i) A deduction shall be allowed for any expenditure incurred by the person in the year wholly and exclusively for the purposes of business. A person shall be allowed a deduction for the depreciation of the person’s depreciable assets used in the person’s business in the tax year. (ii) A person who places an eligible depreciable asset into service in Pakistan for the first time in a tax year shall be allowed a deduction provided the asset is used by the person for his business for the first time or the tax year in which commercial production is commenced, whichever is later

(iii) A person shall be allowed an amortization deduction in a tax year for the cost of the person’s intangibles:  that are wholly or partly used by the person in the tax year deriving income from business chargeable to tax; and  that have a normal useful life exceeding one year

www.lexmundi.com Page 225 © 2012 Lex Mundi (iv) A person shall be allowed a deduction for any pre-commencement expenditure in accordance with the ITO. The total deductions allowed in the current tax year and all previous tax years in respect of an amount of pre-commencement expenditure shall not exceed the amount of the expenditure.

(v) A person shall be allowed a deduction for scientific research expenditure incurred in Pakistan in a tax year wholly and exclusively for the purpose of deriving income from business chargeable to tax.

(vi) A person shall be allowed a deduction for any expenditure (other than capital expenditure) incurred in a tax year in respect of –  any educational institution or hospital in Pakistan established for the benefit of the person’s employees and their dependants;  any institute in Pakistan established for the training of industrial workers recognized, aided, or run by the government; or  the training of any person, being a citizen of Pakistan

(vii) Deductions shall be allowed for profit on debt, financial costs and lease payments. A person may be allowed a deduction for a bad debt in a tax year if certain conditions under the ITO are satisfied.

The ITO also makes provision for deduction by banking companies, not exceeding 3% of the income of a tax year, arising out of consumer loans for creation of a reserve to off-set bad debts arising out of such loans.

5. What are the major expenses that are not deductible?

Section 21 of the ITO provides for deductions which are not allowed. No deduction shall be allowed in computing the income of a person under the head “Income from Business” for –  any cess, rate or tax paid or payable by the person in Pakistan or a foreign country that is levied on the profits or gains of the business or assessed as a percentage or otherwise on the basis of such profits or gains;  any salary, rent, brokerage or commission, profit on debt, payment to non-resident, payment for services or fee paid by the person from which the person is required to deduct tax under the ITO;  any entertainment expenditure in excess of such limits or in violation of such conditions as may prescribed;  any contribution made by the person to a fund that is not a recognized provident fund;  any fine or penalty paid or payable by the person for the violation of any law, rule or regulation;  any personal expenditures incurred by the person;  any profit on debt, brokerage, commission, salary or other remuneration paid by an association of persons to a member of the association;  any expenditure for a transaction, paid or payable under a single account head which, in aggregate exceeds fifty thousand rupees, made other than by a crossed cheque drawn on a bank or by crossed baking instrument showing transfer of amount from the business bank account of the taxpayer;  any salary paid or payable exceeding fifteen thousand rupees per month other than by a crossed cheque or direct transfer of funds to the employee’s bank account.

6. What are the applicable federal rates?

Please note that there are no different rates which apply in Pakistan. The ITO extends to the whole of Pakistan.

7. What are the applicable state and/ or other local rates?

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Subject to the ITO, a gain arising on the disposal of a capital asset by a person in a tax year, other than a gain that is exempt from tax under the ITO, shall be chargeable to tax in that year under the head “Capital Gains”. The gain arising on the disposal of a capital asset by a person shall be computed in accordance with the following formula, namely:– A – B where : A is the consideration received by the person on disposal of the asset; and B is the cost of the asset.

The ITO provides for set-off of business loss consequent to amalgamation, and states that the assessed loss (excluding capital loss) for the tax year, other than brought forward and capital loss, of the amalgamating company or companies shall be set off against business profits and gains of the amalgamated company, and vice versa, in the year of amalgamation and where the loss is not adjusted against the profits and gains for the tax year the unadjusted loss shall be carried forward for adjustment upto a period of six tax years succeeding the year of amalgamation.

9. How are operating losses handled?

Section 56 of the ITO provides that where a person sustains a loss for any tax year under any head of income, the person shall be entitled to have the amount of the loss set off against the person’s income, if any, chargeable to tax under any other head of income for the year. Furthermore where a person sustains a loss under a head of income for a tax year that cannot be set off, the person shall not be permitted to carry the loss forward to the next tax year.

Where, in a tax year, a person sustains a loss under the head “Income from Business” and a loss under another head of income, the loss under the head “Income from Business shall be set off last.

10. How are capital losses handled?

Section 59(1) of the ITO provides that where a person sustains a loss for a tax year under the head “Capital Gains”, the loss shall not be set off against the person’s income, if any, chargeable under any other head of income for the year, but shall be ca

Territorial Rules

11. What are the residence rules?

Under the ITO, salary shall be Pakistan-source income to the extent to which the salary is received from any employment exercised in Pakistan, wherever paid, or is paid by or on behalf of the government, wherever the employment is exercised. Business income of a resident person shall be Pakistan-source income to the extent to which the income is derived from any business carried on in Pakistan. Business income of a non-resident person shall be Pakistan-source income to the extent to which it is attributable to –  a permanent establishment of the non-resident person in Pakistan;  sales in Pakistan of goods merchandise of the same or similar kind as those sold by the person through a permanent establishment in Pakistan;  other business activities carried on in Pakistan of the same or similar kind as those effected by the non-resident through a permanent establishment in Pakistan, or  any business connection in Pakistan.

www.lexmundi.com Page 227 © 2012 Lex Mundi The ITO also stipulates various types and sources of income which shall be considered to be Pakistan-source income, e.g. dividend paid by a resident company, profit on debt paid by a resident person, any gain arising on the disposal of shares in a resident company, etc. An amount shall be foreign-source income to the extent to which it is not Pakistan-source income.

12. Is worldwide income taxed?

Yes. However, any foreign-source salary received by a resident individual shall be exempt from tax if the individual has paid foreign income tax in respect of the salary. A resident individual shall be treated as having paid foreign income tax in respect of foreign-source salary if tax has been withheld from the salary by the individual’s employer and paid to the revenue authority of the foreign country in which the employment was exercised. For details on tax credits on other foreign-source income, please refer to the answer to Question 18.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Yes. Where a resident taxpayer derives foreign source income chargeable to tax under the ITO in respect of which the taxpayer has paid foreign income tax, the taxpayer shall be allowed a tax credit of an amount equal to the lesser of –  the foreign income tax paid; or  the Pakistan tax payable in respect of the income (In this case, the Pakistan tax payable shall be computed by applying the average rate of Pakistan income tax applicable to the taxpayer for the year against the taxpayer’s net foreign-source income for the year.)

The aforementioned credit shall be allowed only if the foreign income tax is paid within two years after the end of the tax year in which the foreign income to which the tax relates was derived by the resident taxpayer.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Under the ITO, the rate of withholding tax imposed on dividends is 10%.

15. What are the rates on royalties for withholding taxes?

Under the ITO, the rate of withholding tax imposed on royalties paid to non-residents is 15% of the gross amount of such royalties.

16. What are the rates on interest for withholding taxes?

Under the ITO, the rate of withholding tax imposed on profit on debt is 10%.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

Under the ITO, the rate of tax imposed on dividend received from a resident company is 10%.

18. Please list any other rates on withholding taxes that we should be aware of.

The ITO imposes various other withholding taxes, including:

The ITO also imposes withholding tax on rental payments, and the rates for such tax depend on the gross amount of rent paid.

Tax Returns and Compliance

19. What is the taxable reporting period?

The ITO requires persons chargeable to tax there under to file returns of income for each tax year, which has been defined under the ITO as a period of twelve months ending on the 30th day of June, denoted by the calendar year in which the said date falls.

20. What are the due dates for the filing of tax returns?

A return of income under the ITO for any person other than a company shall be furnished on or before the thirtieth day of September next following the end of the tax year to which the return relates.

A return of income of a company shall be furnished –  in the case of a company with a tax year ending any time between the first day of January and the thirtieth day of June, on or before the thirty-first day of December next following the end of the tax year to which the return relates; or  in any other case, on or before the thirtieth day of September next following the end of the tax year to which the return relates.

21. What are the key compliance requirements?

Under the ITO, the following persons are required to furnish a return of income for a tax year, namely:– (a) every company; (b) every person (other than a company) whose taxable income for the year exceeds the maximum amount that is not chargeable to tax under this Ordinance for the year; (c) any non-profit organization as defined in the ITO; and (d) any welfare institution approved under the ITO; (e) any person not covered above, who,-  has been charged to tax in respect of any of the two preceding tax years;  claims a loss carried forward under the ITO for a tax year;  owns immovable property with a land area of two hundred and fifty square yards or more or owns any flat located in areas falling within the municipal limits existing immediately before the commencement of Local Government laws in the provinces; or areas in a Cantonment; or the Islamabad Capital Territory. A return of income - (a) shall be in the prescribed form and shall be accompanied by such annexures, statements or documents as may be prescribed; (b) shall fully state all the relevant particulars or information as specified in the form of return, including a declaration of the records kept by the taxpayer; and (c) shall be signed by the person, being an individual, or the person’s representative where applicable.

The tax payable by a taxpayer on the taxable income of the taxpayer for a tax year shall be due on the due date for furnishing the taxpayer’s return of income for that year. Every resident taxpayer filing a return of income for any tax year whose last declared or assessed income or the declared income for the year is five hundred thousand rupees or more shall furnish a wealth statement for that year along with such return. Such wealth statement shall be submitted in the prescribed form and verified in the prescribed manner.

www.lexmundi.com Page 229 © 2012 Lex Mundi The ITO requires that any person discontinuing a business shall give the commissioner of income tax a notice in writing to that effect within fifteen days of the discontinuance. The person discontinuing a business shall furnish a return of income for the period commencing on the first day of the tax year in which the discontinuance occurred and ending on the date of discontinuance and this period shall be treated as a separate tax year for the purposes of the ITO.

The ITO states that every taxpayer shall maintain in Pakistan such accounts, documents and records as may be prescribed. The Income Tax Rules, 2001 state that every taxpayer deriving income chargeable to tax under the ITO as income from business shall maintain proper books of account, documents and records with respect to,inter alia - (a) all sums of money received and expended by the taxpayer and the matters in respect of which the receipt and expenditure takes place; (b) all sales and purchases of goods and all services provided and obtained by the taxpayer; (c) all assets of the taxpayer; (d) all liabilities of the taxpayer.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Please refer to the answer to Question 21.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Yes.

24. How does it operate? Is it a VAT or a sales tax?

The Sales Tax Act, 1990 (“STA”) imposes sales tax at the rate of sixteen per cent of the value of--  taxable supplies made by a registered person in the course or furtherance of any taxable activity carried on by him; and  goods imported into Pakistan.

25. How is the taxable base determined?

Under the STA, the liability to pay sales tax shall be:  in the case of supply of goods, of the person making the supply, and  in the case of goods imported into Pakistan, of the person importing the goods.

26. What are the applicable rates?

The rate of sales tax applicable to goods chargeable to the same under the STA is sixteen percent.

27. Are there any exemptions?

Yes. The Sixth Schedule to the STA sets out numerous classes of goods the supply and/or import of which is exempt from sales tax.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

The Stamp Act, 1899 imposes stamp duty on various types of instruments, including but not limited to share transfer deeds, contracts, conveyances, debentures, and bonds.

www.lexmundi.com Page 230 © 2012 Lex Mundi The Customs Act, 1969 levies custom duty on goods imported into Pakistan, goods brought from any foreign country to any customs station, and without payment of duty there, transshipped or transported for, or thence carried to, and imported at any other customs-station, and goods brought in bond from one customs station to another. The Federal Excise Act, 2005 imposes duty on goods produced, manufactured or imported into Pakistan, inter alia, and services provided or rendered in Pakistan.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Certain types of employers are required to make contributions in respect of old-age benefits for their employees under the Employees’ Old-Age Benefits Act, 1976 (“EOBA”). Also, industrial establishments are required to make contributions to the Workers’ Welfare Fund constituted under the Workers’ Welfare Fund Ordinance, 1971 (“WWFO”).

30. How do they operate?

Under the EOBA, persons who are insured there under are entitled to avail benefits such as old-age pension (on retirement), invalidity pension (in case of permanent disability), old-age grants and survivor's pension. A contribution equal to five percent of an employee’s salary has to be paid by employers to the Employees’ Old-Age Benefits Institution. Under the EOBA, an "employer", in relation to an industry or establishment, means any person who employs any employee, and includes,- (i) in the case of an individual, an heir, successor, administrator or assign; (ii) a person who has ultimate control over the affairs of an industry or establishment, or where the affairs of an industry or establishment are entrusted to any other person (whether called a managing agent, managing director, manager, superintendent, secretary or by any other name), such other person.

For the purposes of the EOBA, "establishment" means- (i) an establishment to which the West of Pakistan and Establishments Ordinance, 1969 applies, and includes clubs, hostels, organisations and messes not maintained for profit or gain and establishment, including hospitals, for the treatment or care of sick, infirm, destitute or mentally unfit persons ; (ii) a construction industry as defined in the West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 ( iii ) a factory as defined in the Factories Act, 1934 (XXV of 1934); (iv) a mine as defined in the Mines Act, 1923(IV of 1923) ; (v) a road transport service as defined in the Road Transport Workers Ordinance, 1961 (XXVIII of1961) and includes any class of industries or establishments which the Federal Government may, by notification in the official Gazette, declare to be establishments.

An "industry" means any business, trade, undertaking, manufacture or calling of employers, and includes any calling, service, employment, handicraft industrial occupation or avocation of workmen.

The EOBA defines an insured person as an employee who is or was in insurable employment, which means employment of a person under a contract of service or apprenticeship, whether written or oral, express or implied and in respect of which contributions are payable under the EOBA.

Under the WWFO, every industrial establishment to which the WWFO applies is required to pay to the Welfare Fund established under the WWFO a sum equal to two percent of so much of its total income. Every such establishment is required to pay the amount due from it to the income-tax officer having jurisdiction over the establishment.

Please refer to the answer to Question 30.

32. What are the applicable rates?

Please refer to the answer to Question 30.

33. Are there any exemptions?

Please note that the EOBA and WWFO apply to certain classes of establishments and industries as noted in the answer to Question 36. Also, the EOBA does not apply to:  persons in the service of the state, including members of the armed forces, police force and railway servants;  persons in the service of the local council, a municipal committee, a cantonment board or any other local authority ;  persons who are employed in services or installations connected with or incidental to the Armed Forces of Pakistan including an ordinance factory maintained by the Federal Government or Railway Administration ;  persons in service of Water & Power Development Authority ;  persons in the service of a bank or a banking company ;  person in the service of statutory bodies other than those employed in or in connection with the affairs of a factory or a mine;  members of the employer's family, [that is to say, the husband or wife and the dependent children of the employer] living in his house, in respect of their work for him.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Please refer to the answer to Question 34.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

The ITO imposes various anti-avoidance mechanisms. Under the ITO, the Commissioner of Income Tax may, in respect of any transaction between persons who are associates, distribute, apportion or allocate income, deductions or tax credits between the persons as is necessary to reflect the income that the persons would have realised in an arm’s length transaction.

www.lexmundi.com Page 232 © 2012 Lex Mundi For the purposes of determining liability to tax under the ITO, the Commissioner may –  recharacterise a transaction or an element of a transaction that was entered into as part of a tax avoidance scheme;  disregard a transaction that does not have substantial economic effect; or  recharacterise a transaction where the form of the transaction does not reflect the substance. “Tax avoidance scheme” means any transaction where one of the main purposes of a person in entering into the transaction is the avoidance or reduction of any person’s liability to tax under the ITO.

Where, in any tax year, salary is paid by a private company to an employee of the company for services rendered by the employee in an earlier tax year and the salary has not been included in the employee’s salary chargeable to tax in that earlier year, the Commissioner may, if there are reasonable grounds to believe that payment of the salary was deferred, include the amount in the employee’s income under the head “Salary” in that earlier year. Where – (a) any amount is credited in a person’s books of account; (b) a person has made any investment or is the owner of any money or valuable article; or (c) a person has incurred any expenditure, and the person offers no explanation about the nature and source of the amount credited or the investment, money, valuable article, or funds from which the expenditure was made or the explanation offered by the person is not, in the Commissioner’s opinion, satisfactory, the amount credited, value of the investment, money, value of the article, or amount of expenditure shall be included in the person’s income chargeable to tax under head “Income from Other Sources” to the extent it is not adequately explained.

Where the owner of any security disposes of the security and thereafter re-acquires the security and the result of the transaction is that any income payable in respect of the security is receivable by any person other than the owner, the income shall be treated, for all purposes of the ITO, as the income of the owner and not of the other person. For these purposes, “security” includes bonds, certificates, debentures, stocks and shares.

Where an agreement is entered into by the Government of Pakistan with the government of a foreign country for the avoidance of double taxation and prevention of fiscal evasion, the agreement shall have effect in so far as it provides for:

a) relief from the tax payable under the ITO;

b) the determination of Pakistan-source income of non-resident persons;

c) where all the operations of a business are not carried on within Pakistan, the determination of the income attributable to operations carried on within and outside Pakistan, or the income chargeable to tax in Pakistan in the hands of non-resident persons, including their agents, branches, and permanent establishments in Pakistan;

d) the determination of the income to be attributed to any resident person having a special relationship with a non-resident person; and

e) the exchange of information for the prevention of fiscal evasion or avoidance of taxes on income chargeable under the Income Tax Ordinance 2001, and under the corresponding laws in force in that other country.

1 Austria 2 Azerbaijan 3 Bangladesh 4 Belgium 5 Belarus 6 Bosnia & Herzegovina 7 Canada 8 China 9 Denmark 10 Egypt 11 Finland 12 France 13 Germany 14 Hungary 15 Indonesia 16 Iran 17 Ireland 18 Italy 19 Japan 20 Jordan 21 Kazakhstan 22 Korea 23 Kuwait 24 Libya 25 Lebanon 26 Malaysia 27 Malta 28 Mauritius 29 Netherlands 30 Nigeria 31 Norway 32 Oman 33 Philippines 34 Poland 35 Portugal 36 Qatar 37 Romania 38 Singapore 39 South Africa 40 Sri Lanka 41 Sweden 42 Switzerland 43 Saudi Arabia 44 Syria 45 Tajikistan 46 Thailand 47 Tunisia 48 Turkey 49 Turkmenistan 50 United Arab Emirates 51 United Kingdom 52 United States of America 53 Uzbekistan www.lexmundi.com Page 234 © 2012 Lex Mundi 54 Yemen 55 Vietnam

For further details on the impact of the aforementioned treaties on various withholding taxes, please refer to: http://www.fbr.gov.pk/newdt/TaxTreaties/Double%20Taxation/Defualt.asp

Contact Information:

Farhat Naz RIAALAW [email protected] RIAALAW Chambers, D-67 Block 4, Clifton Karachi, 75600 Pakistan

Tel 92.21.3583.6308 Fax 92.21.3587.0014 http://www.riaalaw.com

Tax Desk Book

Peru Prepared by Lex Mundi member firm Estudio Olaechea

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

Article 74 of the Peruvian Constitution of 1993 has established that all taxes have to be created, modified, or discharged by Law (or Legislative Decree when the corresponding powers have been delegated by the Legislative Branch to the Executive Branch). This premise is also applicable to tax exemptions.

The Peruvian Tax regime is regulated by several statutes. The Tax Code is the main legislative body and regulates the tax principles, the nature of taxes, the tax system, and faculties of the Tax Administration, the Tax Court, the tax proceedings, the statute of limitations and the penalties that may be imposed to tax payers.

Our legislation is composed of both direct and indirect taxes.

The first group includes mainly income taxes. These are applied to companies, partnerships, limited liability companies, joint ventures, associations and foundations, as well as to individuals.

On the other hand, the applicable indirect taxes include the General Sales Tax,, which is the most important one, the excise tax, etc.

Taxes also include the Financial Transactions Tax (ITF), the Temporary Tax on Net Assets (ITAN), Real State Property Tax and contributions to health care and pensions.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

In Peru, all resident taxpayers are taxed on their worldwide income, while non-resident taxpayers are taxed on their Peruvian source income.

For resident business entities (companies, partnerships and any other form used to conduct business; also, resident partnerships, limited liability companies, taxable foundations and associations, as well as joint ventures keeping independent accounting from that of the venturers, will be subject to the same tax treatment) the taxable base is determined by taking the revenue and deducting all the expenses that the law allows them to, depending on the rules applicable to each case.

www.lexmundi.com Page 236 © 2012 Lex Mundi For the determination of the taxable base of individuals, in their case, fixed percentages established by the Income Tax Law are deducted from the gross income of each of the categories referred to in question 9.

In the case of non-resident taxpayers, the corresponding withholding taxes are applicable on the net income, as determined by law.

3. What revenues are included?

As a general rule, all revenues obtained by a company stemming from its business activities are considered income for taxation purposes. They fall into the third category: trading and industry income and others expressed in the law.

In the case of individuals, Peruvian source revenues may fall into the following categories:

 First category: income produced by leasing operations  Second category: income from other capitals  Fourth category: income from independent work  Fifth category: income from dependent work and income from independent work expressly stated by law.

4. What deductions are allowed?

Companies may deduct from their gross income, all expenses incurred to produce income and/ or maintain its source, provided that are not expressly forbidden by law and certain conditions are met.

Resident individuals are only allowed the following flat deductions:

 Capital Income (First and Second Category): 20% of total gross income.  Fourth Category: 20% of total gross income, with a limit of 24 UIT (Tax Reference Unit). For year 2009, 1 UIT equals to S/. 3,550 (US$1,115.00, approximately).

Additionally, in the case of individuals, a 7 UIT exemption can be applied to the sum of fourth and fifth category incomes.

5. What are the major expenses that are not deductible?

The following are some expenses that may not be deducted from the gross income:

 Personal expenses;  Income Taxes;  Fines and any other tax sanctions;  Certain donations;  Amounts invested in the acquisition of goods or permanent improvements;  Provisions or reserves whose deduction is not admitted by Law;  Amortization of intellectual property, except for those with a limited lifetime;  Commissions originated abroad for the purchase or sale of goods, in the part that exceeds the amount normally paid in the country in which they originate;  General Sales and Excise Taxes levying gratuitous transfer of property;  Expenses supported by invoices that do not fulfil the formal requirements stated in the Invoices Regulations;  Expenses incurred in some operations connected with tax havens;  Payments that are not carried out through one of the authorized mechanisms of the Financial Transaction Tax Law.

6. What are the applicable federal rates?

There are no states, federal, regional or local income taxes. Taxation is applied on a national basis.

Income tax is applied on a five-category basis.

Business entities’ income (i.e. third Category income) is generally subject to a 30% tax.

Income from individuals is classified into two categories: Capital Net Income (Income from first and second categories) and Work Net Income (Income from fourth and fifth categories and the foreign source income).

The annual capital net income (not including dividends) is subject to a 6.25% rate.

The annual work net income of resident individuals is subject to the following progressive cumulative scale:

Work Net Income Rate Up to 27 UIT 15% More than 27 and up to 54 UIT 21% Over 54 UIT 30%

Income obtained by non-resident individuals is subject to a 30% withholding tax.

Dividends paid to resident, non resident individuals and non resident business entities will be subject to a 4.1% withholding tax rate.

7. What are the applicable state and/ or other local rates?

There are no states, federal, regional or local income taxes. Taxation is applied on a national basis.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

The income tax on capital gains obtained by resident business entities is also 30%, which is applicable on the capital gain only. The same is the case for non-resident business entities, although a procedure will have to be followed before the Tax Administration in order to certify the acquisition cost.

In the case of individuals, the capital gains obtained are part of the Capital Net Income and subject to a 6.25% tax. Currently, capital gains obtained by foreign individuals are subject to a 30% withholding on the gain only (a procedure will have to be followed before the Tax Administration in order to certify the acquisition cost). Starting 2010, the withholding will vary between 5% and 30%.

The Income Tax Law states that in case of business reorganization (considered as either merger or demerger, the parties can choose one of the following regimes:

 If the companies agree the voluntary revaluation of the assets the difference between the greater agreed value and the cost determined by law will be subject of the Income Tax. In this case, the transferred goods, as well as those of the buyer, will have the value of the revaluation as the taxable cost.

www.lexmundi.com Page 238 © 2012 Lex Mundi  The difference stated in a) will not be taxed, as long as it is not distributed. In this case, the greater value from the revaluation will not have a tax effect: it will not be considered as a taxable cost of the goods or their depreciation.  If there is no voluntary revaluation of the assets, the transferred goods of the buyer will have the same taxable cost that it would have had if still in the seller’s hands, and only the fiscal adjustments due to inflation are included.

9. How are operating losses handled?

Resident business entities may compensate their Peruvian source net losses by using one of the following systems:

 Carrying forward the total Peruvian source net loss obtained in a tax year for four (4) years, by applying these losses on a year-by-year basis to income obtained during the aforementioned term. Once this period expires, the remaining losses may not be compensated with profits.

 Carrying forward the total Peruvian source net loss obtained in a tax year by applying it on a year-by-year basis to 50% of the income obtained during the immediately subsequent tax years. Under this system losses may be carried forward for an indefinite period.

Under both systems, the exempt income will be considered in order to determine the compensable net loss. If the taxpayer does not choose one of the above-mentioned systems, the Tax Administration will apply the first system.

No loss carry-backs are allowed.

In the case of individuals, no losses may be deducted or carried forward.

10. How are capital losses handled?

Please refer to the previous question.

Territorial Rules

11. What are the residence rules?

For taxation purposes, business entities will be deemed resident in Peru if they have been incorporated in the country.

Peruvian nationals are also considered to be resident individuals for tax effects. Foreign nationals will be considered as resident individuals if they stay in Peru for more than 183 days in a twelve month period.

12. Is worldwide income taxed?

Resident business entities and individuals are subject to income taxation on their worldwide income.

However, non-resident business entities and individuals are levied only on their Peruvian source income.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

In order to avoid international double taxation, resident business entities and individuals may credit against the Peruvian Income Tax the amounts levied by the source country. However, the amount that may be credited is subject to certain statutory limitations.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Dividends paid to non-resident business entities and individuals are subject to a 4.1% withholding tax. Dividends payable to resident business entities are tax-exempt until they are subsequently distributed to individuals (either resident or non resident) or non-resident business entities.

15. What are the rates on royalties for withholding taxes?

The withholding tax rate on royalties is 30%.

16. What are the rates on interest for withholding taxes?

Interests from financing granted by non-resident business entities are subject to a withholding tax rate of 4.99% provided several requirements are met; otherwise, a withholding tax rate of 30% will apply.

In order to benefit from the 4.99% rate parties may not be related.

On the other hand, interest payable by resident banks, financial entities and other multiple operation entities to non resident entities as a result of the utilization in the country of their credit lines abroad will be subject to a withholding tax rate of 1%.

Interests paid to non-resident individuals are subject to a 30% withholding.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

As a general rule, Peruvian source income obtained by non-resident business entities is subject to a withholding tax of 30%.

Notwithstanding, dividends and any other kind of profit distribution agreed in favour of non-residents are subject to a withholding tax of 4.1%.

18. Please list any other rates on withholding taxes that we should be aware of.

In order to determine the Peruvian source net income regarding the transfer of goods or rights, non resident taxpayers may deduct the cost incurred in their acquisition, provided certain requirements are complied with. Likewise, in regard to the exploitation of goods that may be depreciated, non resident taxpayers may deduct up to 20% of the amount paid or credited.

Due to their international nature, several activities performed by non-resident business entities (and their permanent establishments) are deemed to generate different percentages of Peruvian source net income. The effective tax rate is obtained in those cases by applying the corresponding withholding tax rate to the percentage of said income considered of a Peruvian source.

As a general rule services rendered abroad are not subject to withholding taxes in Peru. However, non-resident business entities which render technical assistance services will be subject to a 15% www.lexmundi.com Page 240 © 2012 Lex Mundi withholding tax provided several requirements are met, irrespective on where the service is rendered. Also, digital services used in Peru are subject to a 30% withholding irrespective on where they are rendered.

Tax Returns and Compliance

19. What is the taxable reporting period?

For income tax purposes, the Peruvian fiscal period runs from the 1st of January until the 31st of December. The tax return must be filed with the Tax Administration (SUNAT) on an annual basis.

20. What are the due dates for the filing of tax returns?

Resident business entities and individuals must file an Annual Income Tax Return during late March or early April, assessing the Income Tax corresponding to the prior tax year (which closes on December 31st). The filing dates will be published by the Tax Administration and will depend on the last digit of each taxpayer’s Registry Number (RUC). Taxes must be paid upon the filing of the tax return.

Similarly, business entities must make Income Tax advanced payments on a monthly basis. Said payments should be made in accordance to the schedule to be published by the Tax Administration (also based on the last digit of the RUC).

Likewise, individuals earning income that classifies into the first category (i.e. from lease operations) must make Income Tax monthly advance payments and file the corresponding tax return according to a given schedule.

Individuals earning income that classifies into the fourth category (i.e. from independent work) must also make monthly advance payments provided their payers do not withhold the tax.

Those who pay to individual’s income that classifies into second category income (i.e. income from capital) or fifth category income (i.e. from dependant work) must withhold the corresponding taxes.

Individuals obtaining only fifth Category income are not required to file an Annual Tax Return.

21. What are the key compliance requirements?

If possible, all taxpayers shall file their Tax Returns online, by using a special program prepared by the Tax Administration for each particular case. Particular attention must be paid in the case of filling in the forms, avoiding leaving blank spaces.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

The Transfer Pricing Regime established in the Income Tax Law and Regulations has disposed that the following formal obligations must be complied with:

(i) Annually present an informative affidavit of the transactions carried with related parties. The said affidavit shall only be presented if the amount of the operations carried out with related parties exceeds S/.200.000 (approx. US$71,500), according to paragraph a) of article 3º of Superintendence Resolution No. 167-2006/SUNAT.

However, the said affidavit shall always be presented if operations with entities that are resident of tax havens are carried out.

www.lexmundi.com Page 241 © 2012 Lex Mundi (ii) Keep detailed documentation and information of each transaction, when applicable, that supports the calculation of the transfer prices, the methodology used and the criteria taken under consideration by the taxpayer that shows that the income, expenses, costs and losses have been obtained in accordance to the prices and utility margins that would have been used by independent parties in comparable transactions, duly translated to Spanish, if necessary, during the corresponding statute of limitations period of the tax obligation.

(iii) Have a Transfer Pricing Technical Study that supports the calculation of the transfer prices and, consequently, the value assigned to the operations performed with related parties.

This will only apply if the income accrued during the fiscal year exceeds the amount of S/.6,000.000 (approx. US$2,143,000) and, additionally, if the amount operations with related parties exceeds the amount of S/.1,000.000 (approx. US$357,000).

However, the said Technical Study must be prepared if operations with entities that are resident in tax havens are carried out.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Yes. The General Sales Tax (IGV) and the Excise Tax are the indirect taxes which exist in our jurisdiction.

24. How does it operate? Is it a VAT or a sales tax?

The General Sales Tax (IGV) is the Peruvian version of a value added tax. It levies (1) the sale of goods in the country; (2) the rendering or utilization of services in the country; (3) construction contracts; (4) the first sale of real estate property performed by the constructor; and (5) the importation of goods. The current IGV rate is 19%. Although the tax will be applied on each level of the commercialization chain, it is designed to transfer to the final consumer its economic burden.

The excise tax is applied on fuels (gas, gas-oils, and diesel), alcoholic beverages, cigarettes and tobacco, vehicles, gassed drinks including mineral water, gambling, chance and lottery games, raffles and other related activities. Tax rates are variable and for some items this tax is applied by charging a fix amount per unit sold.

25. How is the taxable base determined?

In order to assess the corresponding IGV Tax due, the taxpayer will have to deduct from the monthly gross tax the IGV Tax credit.

 The gross tax of each levied transaction will be the amount resulting from the application of the IGV Tax rate (19%) on the amounts received by the taxpayer for any transaction subject to this tax. The addition of all the gross taxes corresponding to the levied transactions on a monthly tax period will be the gross tax of said tax period.

 The tax credit is the tax separately assigned in the invoices that supports the acquisition of goods, services and construction contracts, or the payment for the importation of goods or for the utilization in the country of services rendered by non residents.

To have the right to the tax credit, the transactions (1) should be allowed as costs or expenses of the company in accordance to the Income Tax legislation, even if the taxpayer is not levied by said tax; (2) representation expenses have a special procedure in the regulation law (3) should be destined to transactions for which the IGV Tax should be paid. In addition, certain formal requisites www.lexmundi.com Page 242 © 2012 Lex Mundi

The excise tax is calculated in the same way.

26. What are the applicable rates?

The General Sales Tax rate is 19%.

The excise tax rates are variable and for some items this tax is applied by charging a fix amount per unit sold.

27. Are there any exemptions?

Several goods and services are exempted from the IGV. Also, services which are considered to be exported are also exempted, provided several requirements are met.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

A temporary Financial Transactions Tax (ITF) has been created to levy a series of financial transactions made through the Peruvian banking system, irrespective of the amount. The ITF paid may be credited against the Income Tax.

During 2009 the rate is 0.06% and during 2010, will be 0.05%.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Affiliates to the National Pension System must pay a contribution to the National Pension System.

On the other hand, those individuals affiliated to the Private Pension System must pay a contribution that will depend on the Private Pension Entity (AFP) elected.

30. How do they operate?

The contribution is monthly.

31. How is the taxable base determined?

The taxable base is the monthly retribution earned.

In this case, the monthly retribution comprehends all concepts which are considered to be part of the said retribution according to the labour legislation.

32. What are the applicable rates?

The National Pension System’s contribution is of 13%.

The contribution to the Private Pension System depends on the Private Pension Entity (AFP) elected (the current average is 12.8%).

33. Are there any exemptions?

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

N/A

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

The Peruvian Income Tax Law has established a Transfer Pricing Regime.

In that sense, please note that According to article 32º-A of the ITL, the transactions carried out between related entities will be considered to have been agreed with the prices and retributions that would have been agreed on with or among independent parties in comparable transactions, with the same or similar conditions. In this sense, the transfer prices shall be determined according to an internationally accepted method, several of which are contained in the ITL, which is more appropriate to reflect the economic reality of the operation (comparable uncontrolled price method, resale price method, plus cost method, transactional net margin method and profit split method).

If the costs or expenses made exceed (or are inferior) to the transfer prices determined according to the appropriate method, the Tax Administration will proceed to adjust them.

In certain cases, the transfer prices determined shall also be applied in relation to the Value Added Tax.

On the other hand, paragraph a) of article 37º of the Income Tax Law and part 6) of paragraph a) of article 21º have established thin capitalization rules. Therefore, resident business entities which pay interests to economically related parties may only deduct them provided that the total debt with said economically related parties does not exceed in three times the resident business entity’s net worth. The interests corresponding to the part which exceed the said amount will not be deductible.

Peru has entered into Double Taxation Avoidance Agreements (hereinafter, DTAA) with Chile and Canada. According to the said agreements, all the Peruvian source business profits obtained by a Chilean or Canadian resident entity can only be taxed in Chile or Canada, correspondingly, unless the said entities construe a permanent establishment (hereinafter, PE) in Peru.

www.lexmundi.com Page 244 © 2012 Lex Mundi Nonetheless, interests, dividends and royalties have reduced withholding rates. In the case of both DTAA the said rates are 10% or 15% for dividends (in this case, the lower Peruvian Income Tax Law rate of 4.1% will apply), 15% for interests (in this case, the lower Peruvian Income Tax Law rate of 4.99% will apply provided that the requirements are complied with and the loan is not carried out between related parties) and 15% for royalties. Notwithstanding, the said passive income (interests, dividends and royalties) will also be subject to taxation in Chile or Canada, accordingly, being that the Income Tax paid in Peru could be used as tax credit.

Additionally, Peru has signed DTAA with Brazil and Spain, which are still pending ratification.

Finally, it is worth noting that the Decision No.578 of the Community of Andean Nations, which regulates the regime to avoid double taxation and prevent fiscal evasion between the members of the said organization (Bolivia, Ecuador, Colombia and Peru), is also in force.

Contact Information:

Gustavo Lazo Sappinara Estudio Olaechea [email protected] Bernardo Monteagudo 201 San Isidro Lima, 27 Peru

Tel 511.219.0400 Fax 511.219.0422 http://www.esola.com.pe

Tax Desk Book

Poland Prepared by Lex Mundi member firm Wardynski & Partners

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

Direct taxes: - Corporate Income Tax - Personal Income Tax - Gift and Inheritance Tax

There are no alternative minimum taxes.

Indirect taxes: - Value Added Tax - Civil Law Actions Tax (PCC) - Stamp duty - Excise duty

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

Non-transparent business entities (e.g. LLCs, PLCs): The taxable base is all revenue, including capital gains and financial revenue less the eligible deductible costs.

Transparent business entities (i.e. partnerships): Income is taxed on the level of the partners. It is impossible to opt for non-transparency.

Individuals acting as entrepreneurs: The taxable base is all revenue due to an individual in his capacity of an entrepreneur, including capital gains and financial revenue less the eligible deductible costs.

Individuals not acting as entrepreneurs: The taxable base is all revenue either received (as a rule) or due (in some cases) to an individual, including capital gains and financial revenue but in many cases special rules apply to costs deduction, generally considerably limiting their scope. Some types of income are taxed separately, e.g. capital gains, dividends.

3. What revenues are included?

See above.

As a general rule all the expenses borne for obtaining, securing or preserving a source of income are tax deductible, subject to an extensive list of exceptions. Additionally, for individuals that do not run business costs deductions is considerably limited on many occasions.

5. What are the major expenses that are not deductible?

- Interest that fall under thin capitalization rules. - Debt repayments. - Asset liquidation losses if resulting from change of business activity. - All kinds of penalty payments, fines, etc. - Generally, VAT. - To a certain extent – expenses for acquisition of cars, traveling allowances. - Certain amortization write-offs.

6. What are the applicable federal rates?

Corporate Income Tax (applicable to all the legal persons):  standard rate – 19%,  foreign entities income from royalties, interest and from certain types of intangible services – 20% (subject to reduced rates for EU/EEA countries and DTT countries).

Personal Income Tax (applicable to all individuals):  standard progressive rates of 18%-32%  business revenue – 19% (requires opt-in)  capital gains, interest, royalties, dividends - 19%  foreign entities income from royalties, interest and from certain types of intangible services – 20% (subject to reduced rates for EU/EEA countries and DTT countries),  specific types of business – 3%-5.5%-8.5%-17%-20% (as listed in the Lump Sum PIT Law).

7. What are the applicable state and/ or other local rates?

There are no regional taxes.

Local taxes include:  real estate tax – the local councils may apply rates at their discretion but the maximum rates are stipulated in the Local Taxes and Fees Act;  transport tax – the local councils may apply rates at their discretion but the maximum rates are stipulated in the Local Taxes and Fees Act.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Capital gains Tax rate on capital gains is 19%. Taxable capital gains are calculated by deducting sale-related costs and expenses from the sale proceeds. They are then aggregated with other sources of income and taxed at the standard tax rate. If the sales price differs substantially from market value, the tax office may require an independent expert valuation. Exemptions may result from double taxation treaties. Capital losses are generally deductible from ordinary business income. A capital gain arising from a contribution in kind in exchange for the issue of shares will generally carry the liability to recognize revenue at the nominal value of shares received.

Business re-organization Cross-border mergers and acquisitions of Polish company and company resident in other Member State are tax neutral under Polish income tax law achieved by way of implementation of set of community’s directives regulating company and tax law treatment of cross-border company’s reorganizations. The income tax neutrality means that mergers do not trigger any taxation of yet unrealized gains and is applicable to bidding company as well as to target company’s shareholders (i.e. the Merger Directive).

There are three major principles of cross-border mergers affecting their income tax neutrality:  all kinds of company’s reorganization have to be carried out for “valid commercial reasons”;  surplus of target company assets value over the nominal value of newly issued shares is not taxed at either bidding or newly formed company. However, the principle is not applicable where bidding company holds less than 10% of initial capital of target company;  target company’ shareholder revenue from receiving shares allocated by bidding company or newly formed company is not taxable.  The acquired shares will be taxed upon their alienation for consideration

Business re-organization may trigger Civil Law Action Tax (PCC). Tax liability arises if re-organization causes increase of share capital of company although a number of exemptions is available.

9. How are operating losses handled?

Losses can be carried forward 5 years. Each year no more than 50% of the loss for a given year may be carried forward. There is no carry back available. Carry forward is not available for the individuals not running a business.

10. How are capital losses handled?

See answer above.

Territorial Rules

11. What are the residence rules?

A company is regarded as a Polish resident when either its registered office or a place of management is in Poland. An individual is regarded as a Polish resident if:  his centre of vital interests is in Poland, or  he stays in Poland for more than 183 days during a tax year.

The non-residents are generally subject to income taxation on their Polish income subject to provisions of the double tax treaties.

Partnerships are considered transparent for income tax purposes (i.e. their partners are subject to tax in Poland, if applicable), unless they are subject to Corporate Income Tax in the country of their residence.

12. Is worldwide income taxed?

Yes – both legal persons and individuals resident in Poland are taxed on their worldwide income. However, both domestic laws and DTTs provide for either tax credits (rule in case of legal persons) or exclusion with progression (rule in case of individuals).

www.lexmundi.com Page 248 © 2012 Lex Mundi 13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Under the Corporate Income Tax law the tax paid on the overseas income can be credited against Polish tax but only to the amount equal to the amount of tax that would be imposed in Poland.

Under the Personal Income Tax law if the overseas income is exempt in the country of the origin under an applicable international treaty, that income is added to Polish income for purposes of calculating the effective tax rate which is then applied to the Polish income only (exclusion with progression method). In case there is no tax treaty available or the applicable tax treaty does not provide for exclusion with progression method, the overseas tax can be credited against Polish tax but only to the amount equal to the amount of tax that would be imposed in Poland.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Unless a double tax treaty provides otherwise, outbound dividends are subject to a 19% withholding tax levied on their gross amount.

Income from participation in profits of corporate entities paid by a Polish company to domestic or EU/EEA state company may be exempt from withholding under the Parent – Subsidiary Directive. Exemption applies if dividend recipient holds at least a 10% share in the dividend payer’s share capital for at least 2 years. The minimum holding period does not have to be fulfilled before payment date. If the holding period is not fulfilled after payment, the dividend recipient is obliged to pay the withholding tax (at a treaty rate, if applicable) together with penalty interest.

The right to exemption is conditional on the Polish payer being provided with a certificate of tax residence of a dividend recipient.

Dividends paid to a Swiss parent company may be exempt; however, the shareholding threshold amounts to 25%.

15. What are the rates on royalties for withholding taxes?

In general withholding rate on royalties is 20%. However, tax rate can be reduced or eliminated under double tax treaty. Recipient’s certificate of tax residence is required. Poland implemented the Interest and Royalties Directive, pursuant to which, royalties are exempt form withholding tax paid across the border to company with a qualified shareholding. However, since Poland obtained a transitional period, until 30 June 2009 withholding tax rate is 10%, reduced to 5% between 1 July 2009 and 30 June 2013. Since 1 July 2013 all royalties distributed to qualified EU/EEA shareholders will be exempt from a withholding tax in Poland. Exemption (reduced rates) applies only if the following requirements are met:  royalties are paid by a Polish resident company or the permanent establishment of an EU/EEA company in Poland;  the beneficiary is subject to income tax on its worldwide income in an EU/EEA Member State;  EU/EEA beneficiary and the Polish payer are ‘related companies’, e.g.: the EU/EEA beneficiary directly holds at least 25% of the Polish payer’s shares, or the Polish payer directly holds at least 25% of the EU/EEA beneficiary’s shares, or a third EU/EEA company directly holds at least 25% in the capital of both the EU/EEA beneficiary and the Polish payer;  the holding will be maintained for an uninterrupted period of at least 2 years.

The minimum holding period does not have to be fulfilled before payment date. If the holding period is not fulfilled after payment, the interest/royalties recipient is obliged to pay the withholding tax (at a treaty rate, if applicable) together with penalty interest. www.lexmundi.com Page 249 © 2012 Lex Mundi The right to exemption is conditional on the Polish payer being provided with a certificate of tax residence of a royalties recipient.

16. What are the rates on interest for withholding taxes?

Identical rules apply as to the royalties – see above.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

Apart from the aforementioned, there are no more withholding taxes on profits realized by a foreign corporation applicable in Poland. However, in some cases a foreign corporation may be compelled to settle income tax liability on its own behalf, e.g. in case of realizing income taxable in Poland (e.g. sale of real estate or shares in a real estate company).

18. Please list any other rates on withholding taxes that we should be aware of.

Subject to 20% withholding tax are also fees paid to nonresidents for intangible services such as, among others, legal and advisory services, market research, advertising, management and control, search and selection services, guarantees and pledges and other similar services and data processing unless double taxation treaty does not state otherwise. Under a vast majority of Polish double taxation treaties those fees or payments are recognized as business profits and as such taxable in the taxpayer’s country of residence and exempt from withholding tax in Poland (unless attributable to a permanent establishment in Poland) on condition that payer holds his certificate of tax residence.

Tax Returns and Compliance

19. What is the taxable reporting period?

For Corporate income tax (CIT) – fiscal year which is calendar year or any other consecutive 12- month period as chosen by a tax payer (special rules apply to the transition years); no monthly/quarterly tax returns, monthly/quarterly advance payments only;

For Personal income tax (PIT) – fiscal year which is calendar year; no monthly/quarterly tax returns, monthly/quarterly advance payments only.

20. What are the due dates for the filing of tax returns?

Value added tax Under general rule tax return has to be filed by the 25th day of each month or, for quarterly reporting – by the 25th day of the month following every quarter of the year.

Corporate income tax No monthly/quarterly tax returns/declarations. Monthly/quarterly advance payments have to be settled by the 20th of each month or by the 20th of month following the quarter for which the advance is paid. Annual tax return has to be filed by the third month of the following tax year (tax year may, but does not have to, overlap with calendar year – see answer to question 25 above for additional information).

Personal income tax No monthly/quarterly tax returns/declarations. Monthly/quarterly advance payments have to be settled by the 20th of each month or by the 20th of month following the quarter for which the advance is paid. Employers and entities hiring individual contractors have to withhold tax on taxable salary/payment to the contractors by the 20th day of the month following the month of salary payment; however, there is www.lexmundi.com Page 250 © 2012 Lex Mundi no requirement to withhold tax advance on income paid to employees/contractors for their work abroad when income is not taxed in Poland. Additionally, the employers and entities hiring individual contractors mentioned in the preceding paragraph are required to file with a relevant tax office, by the end of January of each year, information regarding the amount of tax advance paid in the previous year. Moreover, the same entities are compelled to provide the employees/contractors and the relevant tax offices, by the end of February of each year, income tax declarations for the previous year.

Annual tax return has to be filed by each individual receiving taxable income by the end of April of the following year.

Civil Law Actions Tax (PCC) If tax is not collected by a notary public (who is a tax remitter when a contract is done in a form of a notarial act), taxpayer is obliged to calculate and pay tax and file tax return to a relevant tax office within 14 days from the day when tax liability arises.

Gift and Inheritance Tax Tax return has to be filed within one month from the day when tax liability arises.

Stamp duty Obligation to pay tax arises at the moment when request or application is filed or certain document is filed (PoA) with the competent authority.

Local taxes: Real estate tax – natural persons file return within 14 days from the day when tax liability arise or terminate; legal persons and organizational units without legal personality file return by 15th January of each year or whether tax liability arise after this date – within 14 days from the day when tax liability arise;

Transport tax – taxpayer files return by 15th February of each year or within 14 days from the day when tax liability arises.

21. What are the key compliance requirements?

Tax documentation such as books, other documents, copies of bills, invoices should be retained for a period of 5 years from the end of the calendar year in which elapsed time of payment of tax. Accounting requirements Polish Accounting Law followed International Financial Reporting Standards (IFRS). Accounting requirements refer to entities that have their seat or management in Poland such as:

- partnerships and companies, civil law partnerships, other legal persons;

- certain individuals and partnerships if their net revenue from sale and financial operations in year preceding financial year amounts at least EUR 1,200,000;

- insurance and investments entities. The books have to be kept in Polish language and currency (Polish złoty – PLN). They are opened on the day of commencement of the activity which is the first transaction that affects the financial position of a unit and at the beginning of each financial year, and are closed when the unit ends its operations and at the last day of each financial year. It is obligatory to draw up in Polish the documentation describing the accounting policy, including chart of accounts.

Place of keeping the books Books are kept at the premises of a unit. A bookkeeping company may be entrusted to keep the books for a unit as they are kept in Poland. It is permissible to keep separate books (drawn up for branches) at premises of the branches. As of 1 January 2009, it is possible to entrust the custody of the source documents to a bookkeeping company, as long as they are kept in Poland. In addition, subject to certain exceptions, source documents can be stored in a digital form.

Financial statement and activity report A financial statement (in accordance with the Polish accounting rules) should be drafted for each balance sheet date. The statement includes a balance sheet, profit and loss account and explanatory notes. In addition, a statement subject to audit also includes a statement of changes in equity and cash flow. Entities with branches draw up a consolidated report. Limited liability companies, joint- stock companies and certain other entities also draft a report on their activities. Polish statutory audit requirements apply to the annual financial statements of the following entities:

- investment and pension funds,

- joint stock companies (other than ones in organization),

- other entities if:.

 Average annual employment in full-time employees amounted to at least 50 people,

 Total assets at the end of the year were the equivalent in PLN of at least EUR 2,500,000 and

 Net revenues from sales of goods and products, and financial operations for the year were the equivalent in PLN of at least EUR 5,000,000. The statutory audit requirements apply to entities after merger for the year when the merger occurred.

Filings and publication The annual financial statement should be made not later than three months from the balance sheet date, and approved within six months from the balance sheet date. Publication of the financial statement in the Monitor Polski B and filing with KRS (companies registrar) should be made within 15 days (30 days in some cases), and with Tax Office within 10 days of its approval.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Tax return has to be sign by a tax payer or by an authorized person on his behalf (e.g. a member of a management board, a proxy, a person holding an adequate power of attorney). In case of any mistake or change of circumstances taxpayer is allowed to file tax return correction.

If tax is not paid in due time, additional penalty interests are charged for each day after of exceeding a deadline.

Violation of the tax law and the Accounting Act by may be recognized as a criminal offence, punishable by imprisonment or a fine under Fiscal Criminal Code. Persons responsible for the tax

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

The main indirect taxes are: - Value Added Tax (tax on goods and services); - Civil Law Actions Tax (PCC), - Stamp duty - Excise duty

24. How does it operate? Is it a VAT or a sales tax?

Value Added Tax Polish VAT system forms a part of the EU VAT system as currently governed by the 112/2006 VAT Directive. As a Value Added Tax it is applied on every stage of trade and the economic burden is transferred to the end user/consumer. On the earlier stages it is effectively levied only on the added value. Subject to VAT are supplies of goods for consideration and provisions of services for consideration in the territory of the country, export of goods, import of goods, intra-Community acquisition of goods for remuneration in the territory of the country and intra-Community supply of goods.

Civil Law Actions Tax (PCC) Civil Law Actions Tax (PCC) is levied on civil law actions like, among others, goods and property rights sales or exchanges, loan agreements, donation/gift agreements, establishment of mortgage or company’s articles of association as well as amendments of those civil actions if only their cause increase of taxable base which is value of goods or property rights. If a transaction is exempt from VAT (except transfers of shares and real estate) or subject to VAT, PCC does not apply.

Tax liability is incumbent on acquirer of certain goods or rights. However, with reference to exchange contracts tax liability is incumbent on both parties to contract.

Stamp duty Stamp duty is levied on various actions within the scope of public authorities such as issuance of official acts based on application or request; certificate on request, authorization, license or concession; filling a document of power of attorney or proxy and other official actions. As long as stamp duty is not paid, public authority does not take requested action or power of attorney will have no legal force. Stamp duty liability is incumbent on person who requests certain action.

Excise duty Excise duty is a ‘sin tax’, applied upon production of excise duty goods and their sale, import and intra-Community acquisition. Tobacco, alcohol, energy products and electricity, cars, yachts and boats are all subject to excise duty.

New Excise Duty Act of 2008 brings Polish legislation in line with EU provisions. However, there still remain some areas where Polish legislation does not comply with EU regulations. In case of excise duty goods (e.g. energy goods, manufactured tobacco, alcohol and alcoholic beverages), excise duty is paid in installments on a daily basis and a final reconciliation is made on a monthly basis. Traders involved in export or intra-Community supplies of goods with excise duty paid are entitled to a refund of excise duty.

Value Added Tax In general the taxable base is a turnover considered as amount due in respect of sales reduced by the amount of output VAT. Due amount covers the whole payment due from the acquirer. Turnover is increased by the received grants, subventions and other additional payments of a similar character exerting a direct influence on the price (amount due) of goods delivered or services provided by the taxpayer, reduced by the amount of output VAT. If a transaction is subject to customs and/or excise duty, these duties increase the taxable base.

Civil Law Actions Tax (PCC) The taxable base is market value of goods or property rights or amount of money. As for instance:  sale contract – market value of goods or property rights;  exchange contract – difference between market value of converted premises or between market value of goods or property rights on which due PCC is higher;  loan agreement – the amount of loan;  company’s articles of association:  at the conclusion of the contract – the value of contributions to a partnership, or the value of the share capital,  submission or increase of value of contributions to a partnership, or the increase of share capital – the value of contributions or the amount by which share capital was increased,  for the transformation or merger of companies – value of contributions to newly formed partnership, or value of share capital of newly formed company,  for the transfer on the territory of Poland the real center of the management of company (headquarters) – value of share capital,  establishment of a mortgage – value of secured receivables.

Stamp duty There is no taxable base and tax is levied on certain taxable event. Stamp duty amount of each taxable action/event is stipulated in the attachment to the Stamp Duty Act.

Excise duty The taxable base is a given amount of a good which might be weight, volume or number of items.

26. What are the applicable rates?

Value Added Tax Standard rate is 22%, the reduced rates are 7% and 0%. Standard rate applies to all supplies of goods and services unless specific provisions allow reduced rate or exemption. 0% supplies include export of goods (i.e. supply outside the EU) and intra-Community supply of goods. At least until 31 December 2010, the reduced VAT rate of 3% will apply to foodstuffs.

Civil Law Actions Tax (PCC) Tax rates range from 0.1 to 2% (and 20% as a punitive rate) of taxable base, for instance:  sale contract – real estate 2%; others – 1% of taxable base;  loan agreement – 2% of taxable base;  establishment of mortgage – existing receivables 0.1%; receivables of undefined value PLN 19;  company’s articles of association – 0.5% of taxable base.

Stamp duty Stamp duty ranges from PLN 5 to PLN 12.750 (e.g. PLN 17 per power of attorney).

Excise duty www.lexmundi.com Page 254 © 2012 Lex Mundi Excise duty rates vary significantly depending on the product and are expressed as:  a fixed amount per number of units of excise duty goods (e.g. hl of pure alcohol or hl of product) – specific rate  both a fixed amount per number of units of excise duty goods and a percentage of the maximum retail price (in the case of cigarettes) – mixed rate  percentage of the value in case of passenger cars – ad valorem rate.

27. Are there any exemptions?

Value Added Tax Tax exemptions refer to, among others:  financial services;  real estate rental for personal use;  educational services;  health care services;  services related to the activities of artists, from the use of copyright,  supply of second-hand goods;  supply of agricultural products from own farming activities;  supply of buildings management services of investment funds and portfolios of securities;  supply of buildings and their parts(subject to exceptions applicable generally to newly build buildings);  supply of undeveloped land not intended for development;  granting a license or authorization to use license and transfer of copyrights.

If an exemption applies the corresponding input VAT is non-deductible.

Civil Law Actions Tax (PCC) Personal tax exemptions:  foreign states and their diplomats and armed forces, international organizations and institutions – on the condition of reciprocity;  public benefit organizations;  local self-government units;  the State Treasury;  person acquiring equipment for their own rehabilitation;

Objective exemptions:  sale of foreign currencies;  certain types of transfer of ownership of property, in which transactions is carried out between members of the immediate family;  sale of treasury bills and bonds;  sale of financial instruments to financial investment firms, or through them;  sale of goods traded on commodity exchanges;  loans from foreign enterprises involved in credit activity;  related persons loans;  loan made from various loan founds;  shareholder loans;  establishment of a mortgage in specific cases.

Stamp duty Exempt from stamp duty are:  under the condition of reciprocity, foreign countries and their diplomats and armed forces, international organizations and institutions;  budgetary units;  local self-government units; www.lexmundi.com Page 255 © 2012 Lex Mundi  public benefit organizations, if conducting or requesting official action in connection with unpaid activities in the public interest;  individuals if while requesting official action provide evidence of their use for social welfare because of poverty.

Excise duty The Polish excise duty law implements restrictive criteria for excise duty exemptions, e.g. compulsory registration of entities using excise duty goods subject to exemptions or obtaining authorizations to act as an agent. There are also certain exemptions depending on the use of excise duty goods and exemption for foreign entities under the principle of reciprocity. Exempt from excise duty are, among others:  electricity produced from renewable energy sources, on the basis of evidence of remission of energy;  losses of excise goods caused by a chance event or force majeure, provided that taxpayer can prove existence of the facts entitling the exemption;  electricity consumption in the production of electricity, as well as the consumption of energy in order to sustain these production processes as well as in the production of heat in cogeneration processes, produced on board power use for the purpose of shipping;  completely contaminated ethyl alcohol:  contained in the acquired intra-Community articles not intended for human consumption  in the medicinal products  in the essential oils or mixtures of odoriferous substances, used for manufacture of food products and soft drinks with an actual alcoholic strength by volume not exceeding 1.2% by volume, the articles foodstuffs or semi-finished products,

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

Gambling tax Entities operating in the field of betting and gambling on the basis of a permit and those organizing games and lotteries are subject to games tax. Tax obligation arises in the moment of commencement of such business and ends in the moment of its termination.

The taxable base is usually the amount received from the players or the difference between this amount and the amount of paid out in prizes.

The entities subject to game tax are required to calculate and pay tax on games for the monthly periods. The tax is paid to the 10th of the month following the month covered by the settlement. Taxpayers providing numerical game pay game tax within 10 days from the date of the drawing.

Tax return is filed monthly.

Taxpayers carrying out raffle or raffle bingo, regardless of obligation to file tax return, are obliged to provide competent tax office with settlement of results of games within 30 days from date of game completion, specified in the permit.

Game tax rate is:  for raffles, raffles bingo, cash bingo and betting – 10%;  money lottery and telebingo – 15%;  game figures – 20%;  game held in casinos and machines games – 45%.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

1. Social security contributions administered by Social Securities Fund (ZUS).

2. Healthcare insurance contributions are imposed similar to social security contributions.

30. How do they operate?

Social security contributions Poland has a three-tier social security / pension system. The First Tier is disability, sickness and accident insurance funds and is managed by the Social Security Fund. The Second Tier is basic pension fund managed by private institutions like banks, insurers etc. The First and the Second Tiers are compulsory. Employer and the employee contribute to the First and the Second Tier.

Employees may make voluntary payments to Third Tier funds, usually managed by insurers or bank. Fiscal incentives in the Third Tier have been created to encourage employees and employers to set up retirements plans. Contributions are paid on an after-tax basis. The benefits and income from investments are tax-exempt. Social security contributions are imposed on most individuals with some minor exceptions. Employees and contractors have their contributions remitted by the entities or individuals that employ or hire them while professionals and entrepreneurs have to pay the contributions by themselves.

As of 1 May 2004, the EU Social Security Decrees became binding in Poland. Based on these regulations, EU nationals working in Poland are subject to social security in Poland regardless of the place of employment. This does not apply to individuals sent to Poland on short-term secondments. They are allowed to stay in the home country system if the secondment period is less than 12 months (this can be extended to 2 years). Similar rules apply to Polish nationals working in other EU states.

If the individual works in more than one member state, social security is paid in the country of residence.

Healthcare insurance contributions Polish public healthcare system covers all the insured individuals (e.g. employees, contractors, entrepreneurs) as well as uninsured individuals – in certain situations (including poverty, pregnancy, infancy, etc.). The healthcare insurance contributions are administered by the National Health Fund which enters into contracts with so-called healthcare institutions which render healthcare services to the general public and pharmaceuticals. Under these contracts the National Health Fund partly or totally reimburses the cost of healthcare services and pharmaceutics.

Healthcare insurance contributions are basically calculated as the social security contributions.

31. How is the taxable base determined?

Social security contributions The base for calculating the social security contributions is the gross income before deductions.

Healthcare insurance contributions The base for healthcare insurance contributions differs as it is gross income before deductions less the part of the social security contributions imposed on the employee/contractor.

www.lexmundi.com Page 257 © 2012 Lex Mundi Individual entrepreneurs and professionals are allowed to pay their contributions upon a minimal basis established each year respectively to the average wage.

32. What are the applicable rates?

Social security contributions The level of social security contributions for different types of social security insurances is:  for pension insurance – 19.52% of the base (imposed on the 50-50 basis on the employee/contractor and the remitter);  for disability insurance – 6% of the base (imposed on the 25-75 basis on the employee/contractor and the remitter);  for insurance in case of sickness and maternity benefits, referred to as sickness insurance – 2.45% of the base (imposed solely on the employee/contractor) ;  for insurance for work accidents and occupational diseases, referred to as accident insurance – between 0.4% and 8.12% of the base (imposed solely on the remitter).

Healthcare insurance contributions The level of the healthcare insurance contributions is 9% but only 7.75% is deductible for personal income tax purposes.

The entrepreneurs and professionals pay the social security contributions and healthcare security contributions themselves and the listed above rates apply also to them but, as mentioned above, due to application of the minimal calculation base, the effective burden might be considerably reduced.

33. Are there any exemptions?

Particular exemptions refer to insurance overlapping. If a person receives income from more than one source than he is allowed to pay the contributions only once. This, however, does not refer to health insurance.

Temporal exemption refers to entrepreneurs who start their business activity or hire graduates or unemployed person. Additionally, entrepreneurs that suspend their business activity can opt for suspension of the payment of the contributions.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Gift and Inheritance Tax applies when an individual acquires ownership of goods located in Poland or property rights enforced in Poland through:  inheritance (including testamentary legacy, further legacy and other testamentary arrangements),  gifts/donations;  acquisitive prescription;  gratuitous dissolution of co-ownership;  compulsory portion of an inheritance;  gratuitous pension, usufruct, easement;

Tax rate depends on tax group to which acquirer is included:  I – spouse, descendants, ascendants, children-in-law, siblings, stepchildren, stepparents, parents-in-law;  II – siblings’ descendants, parents’ siblings, stepchildren’s spouses and descendants, siblings and spouses' siblings spouses, siblings spouses’ spouses, spouses of other descendants;  III – others;

The tax-free amount is for the group I – PLN 9.637; for the group II – PLN 7.276, for the group III – PLN 4.902.

There is an exemption available for the closest family disregarding the value of the transferred assets.

Tax rates – depend on relation between grantor and grantee and range from 3% to 20% of an amount above tax-free amount.

Taxable base is goods/rights market value.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Thin capitalization rules In general the interest payable on down-stream and cross-stream loans can be included in the borrower’s tax deductible costs when there is a link between such costs and taxable revenue. Thin capitalization rules restrict tax deductibility of interest on the loans granted to the company by its shareholder holding not less than 25% of the shares (voting rights) in the company or loans from shareholders holding jointly not less than 25% of the shares (voting rights) in the company, as well as loans granted to the company by another company where in both companies the same shareholder holds not less than 25% of the shares (voting rights) where the debt to equity ratio exceeds 3:1 at the date of interest payment.

The interest on loans granted by these qualified lenders which exceeds the 3:1 ratio is not tax deductible.

For the purpose of calculation of the debt to equity ratio, the debt includes debt towards:  shareholders holding at least 25% of the borrowing company’s shares (voting rights), and  entities holding at least 25% of the shares (voting rights) of the aforementioned shareholders, and  another company referred to above.

Interest on loans from grandparent company should not be subject to thin capitalization restrictions, but the debt towards grandparent company should be taken into account in calculation of the debt to equity ratio.

www.lexmundi.com Page 259 © 2012 Lex Mundi However, in some tax rulings the Polish tax authorities present a view that also loans granted by indirect shareholders (e.g. grandparent companies) should be subject to thin capitalization rules.

Only the nominal value of the share capital should be considered in calculation of the debt to equity ratio. However, the part of the share capital which was taken up:  but not fully paid for (which may be the case in a joint-stock company), or  in exchange for the receivables from loans (credits) or interest therefrom to which the shareholders are entitled (in practice – where a shareholder loan is converted to equity), or  in exchange for intangible assets which are not subject to depreciation write-offs,  may not be included in the debt to equity ratio.

Transfer pricing provisions Poland generally follows the OECD’s Transfer Pricing Guidelines with respect to profit assessment methods and has implemented transfer pricing rules based on the arm’s length principle.

Under Polish transfer pricing rules, a Polish entity which enters into transactions with a related foreign entity is required to produce and keep transfer pricing documentation evidencing that the arrangements between the parties have been established at arm’s length. This applies when the aggregate level of payments between the related parties in a given tax year exceeds EUR 30,000 (higher thresholds may sometimes apply). If a Polish entity enters into transaction with a tax haven entity the threshold is lowered to EUR 20,000.

Failure to produce transfer pricing documentation within 7 days from the request of the tax authorities if they find that the profits have been underestimated due to non-compliance with the arm’s length principle (e.g. excessive interest, cost of services, etc.), the surplus income would be subject to a corporate income tax at 50%. If, however, transfer pricing documentation is provided on time but the interest is found excessive, the surplus income would be subject to corporate income tax at 19%. Further sanctions may apply in case of mere failure to present transfer pricing documentation.

Currency exchange control Under the Polish Foreign Exchange Act certain transactions with non-EU/OECD/EEA entities require a foreign exchange permit granted by the National Bank of Poland. Additionally, Polish entities dealing with foreign ones are obliged to report conclusion and carrying out of the transactions with foreign entities. The failure to comply may lead to imposition of penal fiscal liability.

CFC regulations Under Polish law exists no controlled foreign companies regulations

Poland concluded over 80 double taxation avoidance treaties:

State Dividends Interest Royalties Albania 5/10 10 5 Algeria 5/15 0/10 10 Armenia 10 5 10 Australia 15 10 10 Austria 0/5/15 0/5 5 www.lexmundi.com Page 260 © 2012 Lex Mundi Azerbaijan 10 0/10 10 Bangladesh 10/15 0/10 10 Belarus 10/15 0/10 0 Belgium 0/5/15 0/5 5 Bosnia and 5/15 10 10 Herzegovina Bulgaria 0/10 0/10 5 Canada 15 0/15 0/10 Chile 5/15 15 5/15 China 10 0/10 7/10 Croatia 5/15 0/10 10 Cyprus 0/10 0/10 5 Czech Republic 0/5/10 0/10 5 Denmark 0/5/15 0/5 5 Egypt 12 12 12 Estonia 0/5/15 10 10 Finland 0/5/15 0 10 France 0/5/15 0 0/10 Georgia 10 0/8 8 Germany 0/5/15 0/5 5 Greece 0 10 10 Hungary 0/10 0/10 10 Iceland 0/5/15 0/10 10 India 15 0/15 20 Indonesia 10/15 0/10 15 Ireland 0/15 0/10 0/10 Israel 5/10 5 5/10 Italy 0/10 0/10 10 Japan 10 0/10 0/10 Jordan 10 0/10 10 Kazakhstan 10/15 10 10 Korea 5/10 0/10 10 Kuwait 0/5 0/5 15 Kyrgyzstan 10 0/10 10 Latvia 0/5/15 0/10 10 Lebanon 5 0/5 5 www.lexmundi.com Page 261 © 2012 Lex Mundi Lithuania 0/5/15 0/10 10 Luxembourg 0/5/15 0/10 10 Macedonia 5/15 0/10 10 Malaysia 0 15 15 Malta 0/5/15 0/10 10 Mexico 5/15 0/5/15 10 Moldova 5/15 0/10 10 Mongolia 10 0/10 5 Montenegro - - - Morocco 7/15 10 10 Netherlands 0/5/15 0/5 5 New Zealand 15 10 10 Norway 0/5/15 0 0/10 Pakistan 15/- - 15/20 Philippines 10/15 0/10 15 Portugal 0/10/15 0/10 10 Romania 0/5/15 0/10 10 Russia 10 0/10 10 Serbia 5/15 10 10 Singapore 10 0/10 10 Slovakia 0/5/10 0/10 5 Slovenia 0/5/15 0/10 10 South Africa 5/15 0/10 10 Spain 0/5/15 0 0/10 Sri Lanka 15 0/10 0/10 Sweden 0/5/15 0 5 Switzerland 0/5/15 10 10 Syria 10 0/10 18 Tajikistan 5/15 0/10 10 Thailand 19 0/10 0/5/15 Tunisia 5/10 12 12 Turkey 10/15 0/10 10 Ukraine 5/15 0/10 10 United Arab Emirates 0/5 0/5 5 United Kingdom 0/10 0/5 5

Contact Information:

Dariusz Wasylkowski Wardynski & Partners [email protected] Aleje Ujazdowskie 10 Warsaw, 00-478 Poland

Tel 48.22.437.82.00 Fax 48.22.437.82.01 http://www.wardynski.com.pl

Tax Desk Book

Romania Prepared by Lex Mundi member firm Nestor Nestor Diculescu Kingston Petersen

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

The Romanian tax regime is regulated in principle by the Romanian Tax Code. The Tax Code is supplemented by other legislation regulating taxes due, as is the case of social contributions. Thus, as per the applicable legislation, the following main taxes are imposed to taxpayers:

 Corporate income tax (for regular companies) or  Tax on micro-company turnover (available for certain category of companies, under certain circumstances) currently of 3%, applicable to micro-company’s revenues;  Tax on individuals’ incomes;  Tax on non-residents income including tax on representative offices held by non-residents in Romania;  VAT and excise duties;  Custom duties;  Local taxes.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

The corporate income tax of 16% due by regular companies is applicable to the taxable profits represented by the accounting profits, adjusted by non-deductible expenses and non-taxable income. The accounting profits are computed as difference between income realized from any source and expenses incurred for the purpose of generating the incomes (i.e. profit and loss account elements) in a fiscal year. Such are decreased by non-taxable income and increased by non-deductible expenses.

The income derived by individuals is generally taxed by a 16% flat tax (except for certain incomes from investments incomes from gambling and lotteries, income from the disposal of own real estate property). The taxable base is determined in accordance with the rules provided by the law for each source of income.

For example:  income from independent activities – the taxable base is determined as difference between incomes realised and any deductible expenses, including the social contributions due;  employment income – the taxable base includes any benefits in-kind and excludes the social contributions;  rental income – taxable base is determined by deducting from the gross income 25% of the gross income or actual expenses recorded, using a single-entry accounting system;  income from investments (including gains arising from sale of shares);

3. What revenues are included?

For corporate income tax purposes, companies include within the taxable base the revenues from any source, except the incomes exempt by the law, such as:

 dividends received from resident companies and qualifying EU dividends received;  positive differences of value of shares that are recorded as the result of the incorporation of reserves, benefits or issuance premiums by the companies where the participation titles are held, as well as by the differences of valuation of long-term financial investments. Such differences are taxable on the date of their transfer for free, assignment, withdrawal of the participation titles as well as on the date of the withdrawal of the share capital in the company in which the shares are held;  income from the cancellation of expenses for which no deduction was allowed, income from the reduction or cancellation of provisions for which no deduction was allowed and income from the recovery of non-deductible expenses; etc.

The incomes obtained by individuals subject to taxation, include:  incomes from independent activities;  employment incomes;  rental incomes;  incomes from investments (including gains arising from sale of shares);  incomes from pensions;  incomes from agricultural activities;  incomes from winnings and lotteries;  incomes from the disposal of own real estate property; and  incomes from other sources.

4. What deductions are allowed?

For corporate income tax purposes, as a general rule, the companies may deduct the expenses incurred for the purpose of obtaining taxable incomes. In addition, service and management expenses are treated as deductible only if back-up documentation is available, attesting that the services were effectively rendered and that they are incurred for business purposes. Beside the invoices received for services and concluded written agreements, other supporting documentation should be made available, such as written reports, studies, internal memos, etc, in order to ensure the deductibility of such services expenses.

Also, the Tax Code provides for a category of expenses whose deductibility for corporate income tax purposes is limited. The non-exhaustive list includes:  representation expenses up to the limit of 2% of the difference between the total taxable income and total expenses related to the taxable income;  per diems granted to employees up to the limit of 2.5 times the statutory per diems provided for public institutions;  social expenses (e.g. allowances for newborns, family members' funerals, legally allowed gifts for children and employees, expenses related to maintenance of kindergartens) up to the limit of 2% of the salary fund;  perishables, within the limits established by specialized bodies of the central administration, together with specialized institutions, with the endorsement of the Ministry of Finance;  expenses for meal tickets granted by employers according to the law;  expenses for provisions and reserves, up to the limits provided by the law.

As a general rule, the following expenses are considered non-deductible for corporate income tax purposes (non-exhaustive list):  own corporate income tax expenses recorded by the taxpayer;  taxes that were not withheld from the income paid to a non-resident and consequently are borne by the taxpayer;  fines, interest and penalties for the late payment due to the Romanian or foreign authorities;  fines, interest and penalties that arise under business contracts concluded with non- residents, except for those which are regulated in the treaties for the avoidance of double taxation;  expenses relating to missing inventory or tangible assets;  expenses related to damaged goods, for which an insurance contract was not entered into;  expenses recorded for the accounting purposes that are not supported by justifying documents;  insurance expenses paid by the employer on behalf of the employee that are not included in the salary of the employee;  expenses incurred due to losses in the value of shares held in other companies, as well as losses related to long-term bonds, except those expenses incurred in relation to sale- assignment of such shares/bonds (the exception is not applicable for the expenses representing the book value of the shares traded on the Romanian Stock Exchange from 1 January 2009 to 31 December 2009);  expenses related to shares traded on the Romanian Stock Exchange from 1 January 2009 to 31 December 2009;  sponsorship expenses; and  reduction in the value of fixed assets further to a revaluation performed.

6. What are the applicable federal rates?

 Corporate income tax – 16%;  Tax on micro-companies revenues – 3%;  Tax on dividends distributed to companies – 10% or 0% for qualifying companies;  Individuals’ income tax – 16% with certain exception: . agricultural incomes – 2% . investment incomes derived from sale of shares in listed joint-stock companies, held for a period exceeding 365 days - 1%, unless sold in 2009 when such gains are tax exempt irrespective of the holding period; . income from transfer of real estate: (i) real estate held for a period shorter than 3 years: 3% of the value of the property, if such value is lower than RON 200,000; and RON 6,000 plus 2% of the value of the property exceeding RON 200,000; (ii) real estate held for a period exceeding 3 years: 2% of the value of the property, if such value is lower than RON 200,000; and RON 4,000 plus 1% of the value of the property exceeding RON 200,000. . gains from winning and lotteries: 16%, 20%, 25%, depending on the nature of the incomes and the amount subject to taxation.  VAT – 19%, 9%, 0%.

7. What are the applicable state and/ or other local rates?

Local taxes are payable in Romania in principal in relation to immovable property, vehicles, advertising etc.

In case of local tax on buildings, companies pay 0.25% to 1.5% of the book value, or 5% to 10% if the building was not revalued in the course of the last 3 years. In the case of local tax on land, a fixed

www.lexmundi.com Page 266 © 2012 Lex Mundi amount per square metre is payable by the owners of the land, depending on the location (within the urban area or not) and utilization of the land (construction or agricultural land).

From 1 January 2008, the local councils have the possibility to grant exemptions from the payment of the real estate tax, in observance of and subject to issuing a state aid scheme as regulated by applicable law.

Individuals pay 0.1% on the taxable value of the buildings, determined in accordance with certain criteria (i.e. the floor area of the building, the nature of building, the place where it is situated, the age and the purpose for which it is used). If several buildings are owned by the same individual, the local tax is increased by 15% to 100% for each next property; in the case of dwellings exceeding a built area of 150 square metres, the local tax is also increased by 5% for each 50 square meter or fraction thereof. The tax on land is due by any individual who owns land situated in Romania and is computed as a fixed amount per m2, based on certain criteria.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Capital gains derived by companies are included in the taxable profits realized by the company, subject to corporate income tax of 16%. Foreign companies are liable to corporate income tax in Romania in relation to capital gains obtained unless otherwise provided by the relevant tax treaty for the avoidance of double taxation, subject to certain compliance requirements.

Capital gains derived by individuals in relation to the sale of shares - determined as the difference between the sales price and the acquisition cost (or the nominal value for founding shareholders), decreased by the transaction costs - are taxable as investment income, based on the following principles:  gains derived from the sale of shares held in closed companies and limited liabilities companies are subject to tax at the rate of 16%; and  gains derived from the sale of shares held in open companies are subject to tax at the rate of 1% if the shares were held for a period exceeding 365 days and 16% if the holding period was shorter than 365 days.

From a corporate income tax perspective, the Romanian Tax Code provides for certain exemptions in case of business reorganization, to the extent such process does not have as main purpose the fiscal evasion or the avoidance of payment of taxes. Thus, the reorganization of Romanian resident companies by way of merger, demerger or transfer of assets as a going concern is not treated as a taxable transfer for corporate income tax purposes. The same treatment applies in the case of cross- border mergers, as the provisions of the EU Merger Directive were implemented in the domestic legislation.

9. How are operating losses handled?

Accounting loss (including operational, financial losses etc) – the company’s accounting result – is the starting point for determining the fiscal loss. Under the Romanian tax law, fiscal losses may be carried forward for 7 consecutive years starting 2009, with respect to fiscal losses recorded from 2009 onwards (i.e. until 2009, 5 years were available to carry forward the fiscal loss).

For individuals, losses incurred from the sale of listed shares are deductible from gains from similar sales in the same tax year (no carry-forward is allowed). From 1 January 2009 to 31 December 2009, gains from shares traded on the Romanian Stock Exchange are exempt from tax and no carry- forward is allowed during the same period. However, losses recorded from the fiscal year 2010 from such transactions can be carried forward, but only to the following year.

Please refer to answer at Q 9.

Territorial Rules

11. What are the residence rules?

According to the Tax Code, a resident is any Romanian legal entity and any natural person who meets one of the following criteria:

 Is domiciled in Romania;  The center of vital interests is deemed to be in Romania;  Is present in Romania for one or more periods exceeding 183 days during any 12 consecutive months ending in a calendar year.

A non-resident is any foreign legal entity and any non-resident natural person. A non-resident natural person is any person who is not a resident natural person.

The foreign individuals becoming residents in Romania are taxable in Romania only for the Romanian sourced income.

However, as per the Tax Code, a foreign individual becoming a Romanian resident by meeting the criteria b) or c) above for a period of three consecutive years, will be subject to Romanian income tax on his/her worldwide income starting the fourth year of tax residency in Romania.

12. Is worldwide income taxed?

Romanian legal entities are subject to taxation on their worldwide income. Same rule applies to Romanian individuals residing in Romania, as well as to foreign citizens starting their forth year of tax residency in Romania.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

The Romanian Tax Code sets provisions regarding the tax credit. As such, under certain circumstances, a tax credit may be granted by the Romanian tax authorities in relation to the tax paid abroad, if any. Such tax credit may not exceed the amount of tax owed in Romania.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Income from dividend distributions paid by a Romanian company to another company resident in Romania, in an EU Member State or in Iceland, Liechtenstein and Norway is exempt from withholding tax if the recipient of the dividend has held at least 10% starting 2009 of the payer's share capital, continuously for at least 2 years prior to the payment date, further to the principles of the EC Parent- Subsidiary Directive (90/435/EEC) implemented in the Romanian legislation. By virtue of the EU- Switzerland Savings Agreement, the above reductions apply also to payments to Swiss companies in corresponding situations.

Otherwise, the general withholding tax rates apply to dividends:

www.lexmundi.com Page 268 © 2012 Lex Mundi  10% if dividends are paid to a company Romanian resident of EU Member State or Iceland, Liechtenstein and Norway which does not meet shareholding requirements for the exemption; and  16% in other cases

Income from dividend distributions paid by a Romanian company to resident or non-resident individuals, are subject to 16% withholding tax.

15. What are the rates on royalties for withholding taxes?

The Romanian tax legislation provides for a withholding tax rate of 16% applicable to payments made to non-residents for royalties.

However, as per EC Interest and Royalties Directive (2003/49/EC, as amended) transposed into Romanian legislation, the royalty payments made to associated company residing in an EU Member State or Iceland, Liechtenstein and Norway are subject to a reduced 10% withholding tax on royalties until 31 December 2010 (starting 2011 the withholding tax rate will be nil) if the recipient company holds at least 25% of the capital of the Romanian payer company for a continuous holding period of 2 years (any tax withheld and paid during the first 2 years of shareholding can be claimed back after the 2-years shareholding condition is fulfilled). By virtue of the EU-Switzerland Savings Agreement, the above reductions apply also to payments to Swiss companies in corresponding situations.

16. What are the rates on interest for withholding taxes?

The withholding tax on interest provided by the Romanian legislation is identical to the one provided for royalties (please refer to our comments to Q21).

However, starting January 1, 2007, interest on the savings income derived by residents of the other EU Member States is exempt from tax.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

Profits realized by a foreign company and subject to taxation in Romania are taxable at a rate of 16% representing corporate income tax. The tax due is not payable by withholding mechanism but by self- assessment made by the taxpayer.

18. Please list any other rates on withholding taxes that we should be aware of.

The withholding tax rate provided by the Romanian legislation is of 16% except for certain category of incomes obtained by non-residents such as dividends, royalties and interest which were presented above.

Tax Returns and Compliance

19. What is the taxable reporting period?

Currently, the tax year is the calendar year. However, for certain taxes, monthly or quarterly payments are required by the law to be made.

20. What are the due dates for the filing of tax returns?

Specific due date are provided by the law for each category of taxes. For instance, taxpayers are required to submit the annual corporate income tax returns but also submit quarterly returns regarding prepayments of corporate income tax due, until the 25th of the month following the reference quarter. www.lexmundi.com Page 269 © 2012 Lex Mundi For social contributions or income tax withheld generally the tax returns are filed monthly, until the 25th of the month following the reference month. For income tax due based in self-assessment made by the taxpayer, a yearly tax return is filed, until the 15th of the year following the reference year.

The VAT returns are filed monthly or quarterly, depending of the taxpayer’s turnover, until de 25th of the month following the reference month/quarter.

21. What are the key compliance requirements?

Under the Romanian tax legislation, the key compliance requirements might be briefly summarized as follows: to register for tax purpose, to keep the records required by the law and to submit the tax returns required by the law at the due dates.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Depending of the nature of the taxable income obtained, other requirements may be provided by the law.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

The main indirect tax provided under Romanian legislation is the value added tax. Other indirect taxes such as excise duties are levied by the Romanian tax legislation.

24. How does it operate? Is it a VAT or a sales tax?

The Romanian value added tax (VAT) system is regulated by the Romanian Tax Code, which was enacted in 2004. However, VAT was introduced in the Romanian legislation in 1992. Since then, the VAT regime was subject to several significant changes and, presently it reflects the provisions of EU Directive 2006/112 on VAT (which replaced the "Sixth VAT Directive").

25. How is the taxable base determined?

The VAT taxable base is determined based on the nature and particularities of the transaction carried out. However, as a general rule, the taxable base is represented by everything that constitutes a counterpart that has been or is to be obtained by the supplier from the purchaser, beneficiary or a third party, including the subsidies that are directly linked to the price of such operations. In addition, the taxable base includes, for instance, taxes, duties and fees, if the law does not provide otherwise, with the exception of the value-added tax. Moreover, it excludes rebates, discounts for early payment and other price reductions that are granted by suppliers directly to customers at the time of the chargeability of the tax and damages-interest established by final court decisions, penalties and other amounts requested for the total or partial non-fulfillment of contractual obligations, if the amounts are imposed over the negotiated prices and/or tariffs.

26. What are the applicable rates?

The standard VAT rate is 19%. However, reduced rates are provided by the law, as follows:

 9% applicable to certain supplies (e.g. access to museums, historical monuments, castles, and zoological and botanical gardens, school manuals, books, newspapers, prostheses, drugs and medicines, hotel accommodation);  5% applicable, in certain conditions to deliveries of dwellings including the related land, as well as of certain social shelters, as part of the social policy program. www.lexmundi.com Page 270 © 2012 Lex Mundi

27. Are there any exemptions?

The VAT legislation regulates two categories of exemptions, namely (i) exemptions without the right to deduct input VAT ("true exemptions") and (ii) exemptions with the right to deduct input VAT (i.e. zero rates applicable to, inter alia, exports and intra-Community supplies of goods).

The true exemptions provided by the Tax Code include, without limitation, the following:  hospital, health care and other related services;  educational services, as provided by the law;  sport-related services rendered by non-profit entities;  public mailing services;  certain financial and banking services;  supplies of old buildings;  import and intra-community acquisition of goods exempt under domestic law;  supplies of goods transported outside Community, etc.

Under the VAT legislation, special exemptions apply to small enterprises whose annual taxable turnover does not exceed EUR 35,000.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

No such taxes are provided by Romanian tax law.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Romania has currently over 100 parafiscal contributions. Such represent in fact various tariffs and fees payable in certain arias. Please however note that social security charges do not fall within the category of parafiscal contributions but within the category of fiscal ones. We will set out below such social security charges payable for employment relationships. Part of them are payable as well by individuals obtaining incomes of other nature (i.e. incomes of freelancers, dividend incomes, etc).

 Social security contribution;  Health contribution;  Unemployment contribution;  Contribution for diseases and work related accidents;  Contribution to the fund for guaranteeing salary liabilities;  Contribution for indemnity and sick leave allowances.

30. How do they operate?

The parafiscal contributions are either payable one-off or periodically. For instance, certain authorization tariffs are payable one-off, when applying for the respective authorization. The petroleum royalty however, falling as well in the category of parafiscal contributions, is payable periodically by oil companies engaged in the exploration, development or extraction of a petroleum reserve.

Social contribution charges are generally payable monthly, until the 25th of the month following the reference month in case of employment relationships or quarterly/annually in case of other types of incomes.

Most of parafiscal contributions are flat amounts. The taxable base however for social security charges is represented generally by the gross incomes for employment incomes or taxable incomes for freelancer’s incomes or other types of incomes, the taxable income being determined as per the specific rules provided by the law for each category of incomes.

32. What are the applicable rates?

We set out below, the social security rates, as currently applicable. Please however note that they are due, depending on the nature of income obtained:

Individuals’ contributions  Social security contribution – 10.5% (i.e. for normal working condition);  Health contribution – 5.5%;  Unemployment contribution – 0.5%.

Employer’s contributions  Social security contribution – 20.8% (i.e. for normal working conditions);  Health contribution – 5.2%;  Unemployment contribution – 0.5%;  Contribution for diseases and work related accidents – between 0.15% to 0.85%, depending of the employer’s object of activity;  Contribution to the fund for guaranteeing salary liabilities – 0.25%;  Contribution for indemnity and sick leave allowances – 0.85%;  Labour commission – 0.25% or 0.75%, depending who keeps and fills in the labour books, labour authority, respectively, the employer.

33. Are there any exemptions?

Exemptions may be provided by specific laws for each category of parafiscal obligations.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Not applicable.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

www.lexmundi.com Page 272 © 2012 Lex Mundi 37. If so, please indicate if there are any of the following: anti-deferral regimes; transfer pricing provisions; tax avoidance measures like legislated General Anti-Avoidance Rules, etc.; controlled foreign companies regulations; thin capitalization rules

In general, the anti-avoidance rules are governed by the Fiscal Evasion Law. Moreover, particular substance-over-form provisions in the Tax Code entitle the tax authorities to look through any transaction and assess tax according to the real substance of the transaction.

Also, transfer pricing regulations are provided by the Romanian Tax Code. The transactions between related parties must be carried on according to the arm's length principle (i.e. transactions should be performed at the same price levels as those which could be reasonably expected from transactions conducted between non-related parties). The Tax Code further stipulates that for transactions performed between related parties, the fiscal authorities may adjust the amount of income or expense of either party, in order to reflect the market price for the goods or services provided in the transaction. The reassessment does not affect the financials of the Romanian company (but only the tax position) and is not applied if the transactions between the related parties are performed on an arm's length basis.

The Tax Code also provides for thin capitalization rules. From a corporate income tax perspective, under the current Romanian thin capitalization rules, there are certain restrictions on the deductibility of interest expenses and the related foreign exchange losses. Generally, interest and foreign exchange expenses incurred by companies in relation to loans obtained from other entities than banks and financial institutions are subject to the limitations as set out below:

Debt-to-equity ratio : Interest expenses are deductible to the extent that the debt-to-equity ratio does not exceed 3:1. In case such ratio is higher than the aforementioned limit, or has a negative value, interest expenses are non-deductible for corporate income tax purposes and can be carried forward until they are fully deductible under the same conditions (i.e. debt-to-equity ratio). Also, the difference between foreign exchange losses and foreign exchange income relating to long-term loans is treated as interest expense and is subject to the debt-to-equity ratio limitation.

Interest rate: Interest related to loans granted by companies other than financial institutions is deductible within the limit of a specific annual interest rate for loans denominated in foreign currencies. The annual interest rate applicable for 2009 is still at the 2008 level, i.e. 7%, but it might be modified in the immediate future. The interest rate test adjustment should be made prior to the debt-to-equity ratio test.

Country Dividends(%) Interest<1>(%) Royalties (%) Individuals, Qualifying companies, companies<2>(%)

Albania 15 10 10 15 Algeria 15 15 15 15 Armenia 10 5 10 10 Australia 15 5<3> 10 10 Austria 5 0 0/3<4> 3 Azerbaijan 10 5 8 10 Bangladesh15 10<3> 10 10 Belarus 10 10 10 15 Belgium 10 5 10 5 Bosnia and Herzegovina 5 5 7.5 10 www.lexmundi.com Page 273 © 2012 Lex Mundi Bulgaria 15 10 15 15 Canada 15 5<3> 0/10<6> 5/10<7> China 10 10 10 7 Croatia 5 5 10 10 Cyprus 10 10 10 5 Czech Republic 10 10 7 10 Denmark 15 10 10 10 Ecuador 15 15 10 10 Egypt 10 10 15 15 Estonia 10 10 10 10 Finland 5 5 5 2.5/5<8> France 10 10 10 10 Georgia 8 8 10 5 Germany 15 5<3> 0/3<4> 3 Greece 20 20 10 5/7<9> Hungary 15 5<10> 15 10 Iceland 10 5 3 5 India 20 15 15 22.5 Indonesia 15 12.5 12.5 12.5/15<11> Iran 10 10 8 10 Ireland 3 3 3 0/3<11> Israel 15 15 5/10<12> 10 Italy 10 10 0/10<6> 10 Japan 10 10 10 10/15<13> Jordan 15 15 12.5 15 Kazakhstan10 10 10 10 Korea (Dem. Rep.)10 10 10 10 Korea (Rep.) 10 7 10 7/10<14> Kuwait 1 1 1 15 Latvia 10 10 10 10 Lebanon 5 5 5 5 Lithuania 10 10 10 10

Luxem- bourg 15 5 10 10 Macedonia 5 5 10 10 Malaysia 10 10 15 12 Malta 5 5 5 5 Mexico 10 10 15 15 Moldova 10 10 10 10/15<15> Monte- negro 10 10 10 10 Morocco 10 10 10 10 Namibia 15 15 15 15 Nether- lands 15 0/5<3> 0/3<17> 0/3<17> Nigeria 12.5 12.5 12.5 12.5 Norway 10 10 10 10 Pakistan 10 10 10 12.5 Philippines 15 10 10 10/15/25<19> Poland 15 5 10 10 Portugal 15 10<20> 0/10<6> 10 Qatar 3 3 3 5 www.lexmundi.com Page 274 © 2012 Lex Mundi Russia 15 15 15 10 San Marino10 0/5<21> 3 3 Serbia 10 10 10 10 Singapore 5 5 5 5 Slovak Republic 10 10 10 10/15<22> Slovenia 5 5 5 5 South Africa 15 15 15 15 Spain 15 10 10 10 Sri Lanka 12.5 12.5 10 10 Sudan 15 10 10 10 Sweden 10 10 10 10

Contact Information:

Ana-Maria-Elena Miron Nestor Nestor Diculescu Kingston Petersen [email protected] Bucharest Business Park, Entrance A, 4th floor 1A Bucuresti-Ploiesti National Road 1st District Bucharest, 013681 Romania

Tel 40.21.201.1200 Fax 40.21.201.1210 http://www.nndkp.ro

Tax Desk Book

Slovak Republic Prepared by Lex Mundi member firm Cechova & Partners

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

Main components are: Direct taxes –Income taxes – Corporate income tax (flat rate 19%), Personal income tax (flat rate 19%);

Indirect – Value added tax (19% on most items), Excise Duty on Beer, Wine and Fuels, Real Estate Tax; - Motor vehicles tax and Municipal taxes.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

The tax base is generally gross income of the entity less related expenses, modified by a number of adjusting items, i.e. revenues less expenses.

3. What revenues are included?

All with minor exceptions.

4. What deductions are allowed?

None for companies, approximately EUR 4 thousand for individuals.

5. What are the major expenses that are not deductible?

Examples of tax non-deductible expenses: representation expenses; penalties (other than contractual, e.g. those imposed by state) paid and other expenses that do not lead to income generation (those not linked to business activities); accounting depreciation costs which exceed tax depreciation costs; losses derived from the sale of receivables.

6. What are the applicable federal rates?

19 percent flat rate

7. What are the applicable state and/ or other local rates?

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

General flat rate of 19% shall apply.

9. How are operating losses handled?

Deductible from tax profits within 5 years.

10. How are capital losses handled?

Generally, capital losses are not tax deductible.

Territorial Rules

11. What are the residence rules?

Legal entities that are seated in Slovak Republic or whose place of effective management is seated in Slovak Republic are generally regarded as resident and liable to pay Slovak corporate income tax. The place of effective management is specified as the place where managerial and business decisions of statutory and supervisory bodies of such entity are adopted).

12. Is worldwide income taxed?

Yes, for residents.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Double Taxation treaties apply in general.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Dividends sourced in Slovakia (from profits earned in 2004 and onwards) are in general not subject to any withholding tax in Slovakia.

15. What are the rates on royalties for withholding taxes?

Mostly based on the applicable double taxation treaties. In the case of non-residents, withholding tax is also charged on royalties, subject to exemptions under the EU Interest and Royalty Directive if the payment is to an EU associated company. According to the EU Interest and Royalties Directive, interest and royalty payments to EU associated companies are exempt from withholding tax under certain conditions.

16. What are the rates on interest for withholding taxes?

Withholding tax is deducted from certain types of income derived in the territory of Slovakia by both residents and non-residents at a single rate of 19%. The rate of withholding tax can be reduced in accordance with applicable double taxation treaties. www.lexmundi.com Page 277 © 2012 Lex Mundi

17. What are the rates of withholding tax on profits realized by a foreign corporation?

Please refer to the answer to question 16 above.

18. Please list any other rates on withholding taxes that we should be aware of.

Please refer to the answer to question 16 above.

Tax Returns and Compliance

19. What is the taxable reporting period?

Taxable period is usually a calendar year; it is possible for companies (not individuals) to notify the tax authorities of use an accounting period not identical to a calendar year (i.e. period of 12 consecutive calendar months – so called: financial year).

20. What are the due dates for the filing of tax returns?

Usually three months following the end of the taxable period, i.e. three months after financial year- end; can be extended to 6 months, upon application, however it is at the discretion of the respective Tax Authority.

21. What are the key compliance requirements?

Submit duly completed tax return, pay tax due.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Please refer to the answer to questions 25 to 27 above.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

VAT, Excise Duty

24. How does it operate? Is it a VAT or a sales tax?

VAT

25. How is the taxable base determined?

Value of product/service.

26. What are the applicable rates?

The standard VAT rate is 19%. A 10% reduced VAT rate has been introduced for medicaments and certain other medical/pharmaceutical products, books and music records (should certain conditions be met).

General EU-wide VAT rules apply. The Slovak VAT Act complies with Directive 2006/112/EC. Since Slovakia's accession to the European Union on 1 May 2004, the Slovak VAT Act has complied with the EU 6th Directive.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

N/A

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Social security contributions are mandatory.

30. How do they operate?

According to the Slovak social and health care security system, an individual pays contributions to the social security and health care systems. Slovak social security payments are subject to a "cap" determined by law. Contributions are also made by employer to Social Insurance company; due when salaries paid.

31. How is the taxable base determined?

Gross salary subject to various caps (different for various contributions).

32. What are the applicable rates?

Approx. 35% in total paid by an employer and additional approx. 13% paid by employee (deducted from gross salary).

33. Are there any exemptions?

N/A

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Inheritance and gift and tax abolished with effect from 1 January 2004. Real estate transfer tax was abolished with effect from 1 January 2005. Real Estate tax (owner taxed) exists. Real estate tax is a municipal tax paid by owners of buildings (including private and weekend houses), apartments and land, or by tenants of land, registered with the cadastral register, and is determined by the size, location and the type of buildings, flats and land. Generally, rate is based on location, taxable base computed from area. The base tax rate is SKK 1.00 (EUR 0.033) per square meter but the Municipal Authority may increase or decrease the rate and determine different rates for www.lexmundi.com Page 279 © 2012 Lex Mundi various types of buildings (the highest rate may not be higher than 40 times the lowest rate). The tax base of the land is the product of the area of the land and its official value per square meter. The base tax rate is 0.25% but the Municipal Authority may increase or decrease the rate and determine different rates for various types of land; the highest rate may not be higher than 20 times the lowest rate.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Slovak tax law contains transfer pricing rules which are largely based on OECD principles (especially OECD Transfer Pricing Guidelines), and which permit the authorities to adjust prices charged between foreign related parties that are not in accordance with the arm's length principle (fair market value). Pricing methods (comparable uncontrolled price method, resale method and cost plus method) and profit methods (profit split method and transactional net margin method) are allowed on this basis. The transfer pricing rules for transactions between domestic entities have been abolished. Thin capitalization re-introduced in 2009.

European Union countries: Austria , Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovenia, Spain, Sweden, United Kingdom.

Other countries: Australia, Belarus, Bosnia and Herzegovina, Brazil, Canada, China, Croatia, Egypt, Iceland, India, Indonesia, Israel, Japan, Macedonia, Mexico, Moldova, Mongolia, Nigeria, Norway, Republic of South Africa, Russia, Serbia, Montenegro, Singapore, Sri Lanka, South Korea, Switzerland, Tunisia, Turkey, Turkmenistan, Ukraine, United States and Uzbekistan.

Maximum tax rate on gross amount from Slovakia into the treaty country: Country Dividends Interest Royalties Australia 15 10 10 Austria 10 0 5 or 0 Belgium 5 or 15 10 or 0 5 Bosnia and Herzegovina 5 or 15 0 10 Belarus 10 or 15 10 or 0 5 or 10 Brazil 15 0,10,15 15 or 25 Bulgaria 10 10 or 0 10 Canada 5 or 15 10 or 0 10 or 0 China 10 10 or 0 10 Croatia 5 or 10 10 10 Cyprus 10 10 5 or 0 Czech Republic 5 or 15 0 10 or 0 www.lexmundi.com Page 280 © 2012 Lex Mundi Denmark 15 0 5 or 0 Estonia 10 10 10 Finland 5 or 15 0 0,1,5 or 10 France 10 0 5 Germany 5 or 15 0 5 Greece 19 10 or 0 10 or 0 Hungary 5 or 15 0 10 India 15 or 25 15 or 0 30 Indonesia 10 10 or 0 10 or 15 Iceland 0 or 10 0 10 or 0 Israel 10 or 5 2,5 or10 5 Island 5 or 10 0 10 Italy 15 0 5 or 0 Japan 10 or 15 0 or 10 10 or 0 South Korea 5 or 10 10 or 0 10 or 0 Latvia 10 10 or 0 10 Lithuania 10 10 or 0 10 Luxemburg 5 or 15 0 10 or 0 Malta 5 0 5 Macedonia 5 or 15 0 10 Mexico 0 10or 0 10 Moldova 5 or 15 10 10 Montenegro 5 or 15 10 10 Netherlands 0 or 10 0 5 Nigeria 12.5 or 15 15 or 0 10 Norway 5 or 15 0 0 or 5 Poland 5 or 10 10 or 0 5 Portugal 10 or 15 10 10 Romania 10 10or 0 10 or 15 Russia 10 0 10 Serbia 5 or 15 10 10 Singapore 5 or 10 0 10 Slovenia 5 or 15 10 10 South Africa 5 or 15 0 10 Spain 5 or 15 0 5 Sri Lanka 15 0 or 10 10 Sweden 0 or 10 0 5 Switzerland 5 or 15 10 or 0 5 or 0 Tunisia 15 or 10 12 5 or 15 Turkey 5 or 10 10 or 0 10 Turkmenistan 10 10 or 0 10 Ukraine 10 10 10 United Kingdom 5 or 15 0 10 or 0 United States 5 or 15 0 10 or 0 Uzbekistan 10 10 10 Yugoslavia 5 or 15 10 10 For further details please refer to the treaty concerned.

Jana Borska Cechova & Partners [email protected] Sturova 4 Bratislava, 811 02 Slovak Republic

Tel 421.2.5441.4441 Fax 421.2.5443.4598 http://www.cechova.sk/en/

Tax Desk Book

South Africa Prepared by Lex Mundi member firm Bowman Gilfillan

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

Taxes imposed in South Africa (“SA”) include direct tax such as income tax, donations tax, capital gains tax (“CGT”), Secondary Tax on Companies (“STC”) and indirect taxes such as Value Added Tax (“VAT”), securities transfer tax (“STT”), Transfer Duty, Estate Duty, Skills Development Levies (“SDL”), Unemployment Insurance Fund (“UIF”) Contributions and Customs and Excise Duties.

Direct taxes:

Income tax, Donations Tax, STC and CGT are imposed in terms of the Income Tax Act No 58 of 1962 (“the ITA”). Withholding taxes such as a withholding tax on royalties, and a withholding tax on the disposal of immovable property by non-residents, are also imposed in terms of the ITA.

SA applies a residence based income tax system, in terms whereof SA residents are taxed on their worldwide income, and non-residents are subject to income tax on income from a SA source, or a deemed SA source.

Income tax is imposed on the taxable income of a person, which includes a natural person, a company or CC, a trust, an insolvent estate and the estate of a deceased person, but not a partnership.

Donations tax is imposed in respect of the gratuitous disposal (including certain deemed disposals) of any property by a SA resident. It is payable by the donor (and not by the recipient of the donation) at a flat rate of 20% on the value of any property donated, subject to certain exemptions.

STC is imposed at a rate of 10% on the net amount of dividends declared by any resident company. It is a tax on a company declaring the dividend. The combined effect of the corporate income tax rate and STC is that companies which distribute all of their profits by way of dividends are effectively taxed at a rate of 34.545%. STC is due to be replaced by a withholding tax on dividends (“DWT”) during 2010. In contrast to STC, the new DWT is a tax on the shareholder, although it will be collected by the company declaring the dividend.

CGT was introduced with effect from 1 October 2001. The net capital gain realised by a resident from the disposal (or deemed disposal) of a capital asset after such date is included in the taxable income of such person for that year of assessment. Non-residents are subject to CGT on capital gains arising from the disposal of immovable property situated in SA held by that non-resident or any interest or right in immovable property situated in SA as well as in respect of the disposal by the non-resident of any asset which is attributable to a permanent establishment (“PE”) of that non-resident in SA.

SA imposes a withholding tax of 12% on royalties payable to non-residents. Furthermore, a withholding tax is imposed on the disposal of immovable property by non-residents at the rate of 5% for individuals, 7.5% for companies and 10% for trusts. The latter tax is not a final tax. In addition, a Double Tax Agreement (“DTA”) may provide relief from such withholding taxes. www.lexmundi.com Page 283 © 2012 Lex Mundi

Provision is also made for resident employers to withhold employees' tax

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

The taxable base is determined by calculating the taxable income of a person, which consists of:  “Gross income” (see below)  Less exempt income  = Income  Less all permissible deductions or allowances  Plus all amounts to be included or deemed to be included in the taxable income of a person in terms of the ITA, such as net capital gains;  = Taxable income.

“Gross Income” includes, in the case of a resident:  the total amount;  in cash or otherwise;  received by or accrued to or in favour of such resident;  during the year or period of assessment;  excluding receipts and accruals of a capital nature; and  including certain specified amounts, irrespective of whether they are of a capital or revenue nature.

“Gross Income” includes, in the case of a non-resident:  the total amount;  in cash or otherwise;  received by or accrued in favour of the non resident;  from a source within or deemed to be within SA;  during the fiscal year or period of assessment;  excluding receipts and accruals of a capital nature; and  including certain specified amounts irrespective of whether they are of a capital or revenue nature.

“Income” is calculated by deducting from gross income any “exempt income” as defined. Gross income which is exempt under the terms of a DTA is not “exempt income” as defined.

”Taxable income” means the aggregate of:  income less all permissible deductions or allowances; plus  all amounts to be included or deemed to be included in the taxable income of a person in terms of the ITA, such as net capital gains.

The ITA does not define when profits will be of a capital as opposed to a revenue nature. The guidelines developed by the courts must be applied to determine the characterisation.

In view of the uncertainty as to the characterisation in the case of the sale of shares, a safe harbour provision was introduced under section 9C of the ITA. It provides that the gain from the sale of shares will be deemed to be of a capital nature if the seller held the shares for a period of at least three years. However, there are several conditions for and exclusions from the safe harbour rule.

As appears from the definition of “gross income” as set out in question 8, a wide scope of revenues are included. The specified amounts referred to in the definition of gross income include:  Annuities;  Alimony or maintenance payments in terms of a divorce order;  Amounts received by virtue of employment, including taxable fringe benefits and gains from the sale of equity instruments;  Payments on termination of employment or loss of office;  Restraint of trade payments;  Retirement fund lump sums or withdrawal benefits;  A premium or like consideration for the use or occupation or land or buildings, right of use of plant, machinery or intellectual property;  Improvements to land in terms of a lease agreement;  Recoupment of amounts previously allowed as a deduction, for example with respect to a capital allowance claimed as a deduction;  Dividends; and  Certain subsidies.

Dividends declared by a resident company generally are exempt from income tax in the hands of the shareholders subject to certain exceptions, e.g. if the dividends were re-characterised as interest under so-called hybrid equity instruments.

Foreign dividends are subject to tax unless they qualify for an exemption, for example where the shareholder holds at least 20% of the ordinary shares and voting rights in the foreign company or where the profits from which the foreign dividends were distributed, had already been taxed in SA.

In general, interest income is taxed on a yield to maturity basis, subject to various conditions and exceptions.

Specific tax regimes apply to certain industries, such as:  Gold mining companies are taxed according to a formula;  The taxable income of oil and gas companies is determined in terms of a separate schedule to the ITA;  Farming operations, including game farming, are taxed under specific provisions of the ITA;  Specific rules may include an amount equal to a proportionate amount of the income of a controlled foreign company (“CFC”) in the income of a resident shareholder (also refer to question 43);  Deeming rules may include certain payments in “remuneration” as defined for employees, labour brokers and personal service providers; and  Micro businesses with a turnover of up to R1 million may elect to be taxed on their “taxable turnover”.

4. What deductions are allowed?

Deductions are allowed either in terms of the so-called “general deductions formula” contained in section 11(a) of the ITA read with section 23(g) thereof, or in terms of specific sections dealing with particular deductions.

The general deductions formula provides for a taxpayer to claim as a deduction against income:  Expenditure or losses;  Actually incurred during the year of assessment;  In the production of income;

Over the years, a substantial body of case law regarding the interpretation of the above has developed.

In addition to the general deductions formula, provision is made for a number of specific deductions in the ITA, for example:  Depreciation allowances with respect to capital assets are generally determined by SARS depending on the type of asset being depreciated;  There is a special depreciation allowance for new or used plant and machinery brought into use for the first time by a taxpayer, and used in a process of manufacture. The write-off period is four or five years depending on the nature of the asset;  100% of the cost of manufacturing plant and machinery owned by or acquired and brought into use by a Small Business Corporation (“SBC”) for the first time after 1 April 2001 may be deducted if it is used directly in the process of manufacture and for the purpose of the SBC’s trade. Other qualifying assets acquired by a SBC after 1 April 2005 enjoy a three-year write-off period;  There are special allowances relating to, among other areas, mining, gas pipe lines, electricity transmission lines and railway lines, renewable energy and to investors in qualifying venture capital companies;  Taxpayers investing in areas which are regarded as urban development zones are entitled to special depreciation allowances for the construction or refurbishment of buildings;  A depreciation allowance has recently been introduced in respect of buildings used for commercial purposes, with a 20-year write-off period; and  Taxpayers can deduct 150% of their research and development expenditure, if the expenses were directly incurred in scientific and technological research and development activities in SA. Taxpayers may also depreciate the cost of buildings, machinery or plant, utensils and articles used for the purpose of such research and development over three years.

5. What are the major expenses that are not deductible?

In terms of the general deductions formula, an expense or loss will not be deductible if it does meet the qualifying criteria as set out in question 10. For example, an expense will not be deductible if:  It was not incurred in the production of income;  To the extent that such moneys were not laid out or expended for the purposes of trade; or  If such expenditure and losses are of a capital nature.

 Provision is further made for deductions to be non-deductible under specific circumstances, for example:  Under certain circumstances payments of royalties or premiums for the use of intellectual property may not be tax deductible to the SA resident if the payment were made to a non-resident. In particular, if the intellectual property had been developed or previously owned by the SA resident, no deduction will be granted. Furthermore, a premium paid to a non-resident for the use of intellectual property will not be deductible unless the non-resident used such intellectual property in a PE in SA; and  Interest expense payable to a non-resident lender may potentially be non-deductible in terms of the thin capitalization rules (see question 43).

SA is a republic, consisting of nine provinces. The taxes as discussed herein are all imposed on a national level and there is no combination of national and/or provincial taxes. Until a few years ago, regional service council levies were imposed to finance the operations of the regional service councils which were responsible for regional infrastructure and regional administration, but these levies were abolished with effect from 1 July 2006. The only local taxes, charges or similar levies currently applicable, are rates and taxes on immovable property, imposed by local municipalities.

The corporate rate of income tax (for companies and CCs) is 28% of the taxable income. In addition, STC is imposed at a rate of 10% on the net amount of dividends declared by any resident company. The combination of income tax and STC increases the effective tax rate of a resident company which distributes all of its profits by way of dividends, to 34.545%.

A non-resident company is taxed at 33%, but there is no tax on the repatriation of branch profits, nor is STC imposed on dividends distributed by the non-resident company.

A trust is subject to income tax at a rate of 40%.

Individuals pay tax at progressive tax rates depending on their taxable income. A year of assessment for individuals ends on the last day of February each year. For the 2010 tax year, ending on 28 February 2010, the maximum income tax rate is 40% of the taxable income where income exceeds R525,000 per annum.

Specific rates are also applied in terms of special dispensations, for example:  A SBC is subject to income tax at progressive tax rates. Annual income of between R1 and R46,000 is subject to income tax at 0%, annual income of between R46,001 and R300,000 is subject to income tax at a rate of 10%, while the income in excess of R300,000 is subject to income tax at a rate of 28%. Only businesses generating no more than R14 million turnover during the year of assessment could qualify as SBCs.  A new Turnover Tax system for micro businesses with a turnover of up to R1 million has been introduced with effect from 1 March 2009. Turnover Tax is calculated by applying a tax rate determined at a sliding scale, to “taxable turnover” as determined in terms of the Sixth Schedule to the ITA. Certain businesses are excluded from the Turnover Tax system.

7. What are the applicable state and/ or other local rates?

Not applicable – refer to previous question.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Residents are subject to CGT with respect to the disposal of their world wide capital assets, while non-residents are subject to CGT only in respect of the disposal of SA immovable property (including shares in certain companies owning immovable property), and assets attributable to a PE of the non- resident in SA, unless an applicable DTA provides otherwise.

The taxable capital gain realised from the disposal of a capital asset after 1 October 2001 is included in the taxable income of such person for that year of assessment:  The capital gain in respect of the disposal of an asset during that year is calculated as the difference between the proceeds (or deemed proceeds) and the base cost of

www.lexmundi.com Page 287 © 2012 Lex Mundi the asset, while the capital loss is the amount by which the base cost of the asset exceeds the proceeds received or accrued;  The aggregate capital gain is the amount by which the sum of the person’s capital gains for the year exceeds the person’s capital losses for that year; and  The net capital gain is calculated after the deduction of the assessed capital loss for the previous year of assessment as well as any disregarded losses for the current year.

A taxpayer’s taxable capital gain is calculated as a percentage of the person’s net capital gain for the year of assessment. As a result, the capital gains of individuals and companies are subject to the following effective rates:  14% for companies and CCs;  16.5% for non-resident companies;  10% (maximum rate) for individuals; and  20% for trusts.

In general, SA tax legislation does not recognise group taxation. However, provided that certain requirements are complied with, rollover tax relief is made available to group companies in respect of certain inter-group restructuring transactions, namely:  Asset for share transactions;  Amalgamation transactions;  Intra-group transactions;  Unbundling transactions; and  Transactions relating to liquidation, winding-up and deregistration.

For purposes of rollover tax relief, the definition of a “group of companies” is limited and non-resident companies and public benefit organisations do not form part of a group of companies as defined.

These sections provide for the deferral (and not exemption) of income tax and CGT consequences of qualifying transactions, and are subject to detailed conditions and rules regarding qualifying criteria, trigger events (such as de-grouping within a certain time period), etc.

9. How are operating losses handled?

Assessed tax losses of a taxpayer may be carried forward to the succeeding tax year and may increase an existing assessed loss or be set off against taxable income. Losses may be carried forward indefinitely, provided the company continues to trade.

A taxpayer may not set off an assessed loss incurred in carrying on a trade outside SA against any amount derived from carrying on trade in SA. It is thus important to distinguish whether a person has merely expanded his local trade abroad or whether a separate trade is being carried on outside SA.

Compromises or concessions reached with creditors have the effect of reducing the assessed loss in certain circumstances. A specific ant-tax avoidance provision in the ITA also counters the trading in assessed losses.

The ITA also provides for the ringfencing of assessed losses from secondary trades, with the consequence that losses from these secondary trades may not be set off against any income that a taxpayer generates, other than the income from such secondary trades. These activities include:  any sport practised by that person or any relative;  any dealing in collectibles by that person or any relative;  animal showing by that person or any relative;  farming or animal breeding, unless that person carries on farming, animal breeding or activities of a similar nature on a full-time basis;  any form of performing or creative arts practised by that person or any relative; or www.lexmundi.com Page 288 © 2012 Lex Mundi  any form of gambling or betting practised by that person or any relative.

There are also limitations on the utilisation of losses created by transactions taking place between connected persons.

10. How are capital losses handled?

An assessed capital loss is calculated in the following manner: o The capital loss in respect of the disposal of an asset during that year, is the amount by which the base cost of the asset exceeds the proceeds received or accrued; o The aggregate cap

Territorial Rules

11. What are the residence rules?

The definition of a resident includes the following persons:  any natural person who is ordinarily resident in SA;  any natural person who is not ordinarily resident, if that person is physically present in SA for a prescribed period. This is known as the “physical presence” test, in terms whereof a person will become tax resident from the beginning of a year of assessment, if such person was physically present in SA:  for a period exceeding 91 days during the relevant tax year;  for more than 91 days during each of the five preceding years of assessment; and  for a total of 915 days during those five preceding years of assessment; and  any juristic person, incorporated, established or formed in SA or having its place of effective management in SA.

The definition is subject thereto that a person will not be regarded as a resident, if such person is deemed to be exclusively a resident of another state, in terms of a DTA between SA and such other state.

12. Is worldwide income taxed?

For residents, the answer is in principle yes, while for non-residents it is no.

All resident companies are taxed on gross income, irrespective of where in the world that income is earned. Resident companies are entitled to foreign tax credits for taxes paid or payable offshore, subject to several restrictions. A DTA may provide alternative relief which may be wider in its scope.

Non-resident companies are taxed on income derived from SA sources or sources deemed to be located in SA as well as on capital gains in respect of SA immovable property or rights in immovable property and assets which are attributable to the PE of that company, unless a DTA exists which provides otherwise.

Foreign companies carrying on business in SA through a branch may be required to register as “external companies” in terms of the Companies Act. It will be required to register as a taxpayer and to submit tax returns if it derives income from a SA source, unless a DTA provides for an exemption, eg if the foreign company does not carry on business via a PE in SA. A branch (or PE) of a foreign company is subject to tax at a rate of 33%. There are no withholding taxes on the remittance of branch profits and no STC (or dividend withholding tax) arises. The taxable income of a branch or PE is determined on the basis that income from a SA source will be reduced by any corresponding deductible expenses. However, where a DTA is applicable, the taxable income must generally be www.lexmundi.com Page 289 © 2012 Lex Mundi determined as if the PE was a separate and distinct person dealing at arm’s length with the head office. In practice, SARS applies the transfer pricing guidelines to determine the attribution of profits to a PE.

A subsidiary company incorporated by a non-resident in SA is treated as a separate legal entity and will be subject to the same tax provisions as other companies incorporated in SA.

In addition, the ITA contains CFC rules, which may function to attribute an amount equal to the net income of the CFCs to the SA resident shareholders. Several exemptions are available, essentially in respect of a substantial business presence of the CFC offshore.

The ITA contains several complex provisions dealing with the taxation of currency gains and losses.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Section 6quat of the ITA provides for a rebate against SA tax for any foreign tax paid in respect of foreign sourced income included in SA taxable income, or for a deduction of foreign taxes to determine taxable income derived by a resident from carrying on any trade.

The section contains detailed provisions regarding the application of the rebate or the deduction.

As a general rule, a resident will be entitled to a rebate against SA tax, if the following amounts are included in the taxable income of such resident:  Income or a taxable capital gain received or accrued from a foreign source, which is not be deemed to be from a SA source;  A proportional amount of the income of a CFC, included in the income of the resident in terms of the CFC rules; or  A foreign dividend.

The rebate granted will be for an amount equal to the sum of any taxes on income proved to be payable to any sphere of government of any foreign country without any right of recovery. The rebate shall not exceed an amount which bears to the total normal tax payable the same ratio as the total taxable income from all foreign countries bears to the total taxable income.

If the sum of foreign taxes exceeds the rebate, the excess may be carried forward to the next tax year and is deemed to be tax paid to a foreign government during that year. The excess may be carried forward for seven years.

The provisions of section 6quat dealing with the deduction, provides for a resident taxpayer to deduct taxes on income proved to be payable by that resident to any sphere of government, without any right of recovery by any person. This deduction is allowed in determining the taxable income derived by a resident from carrying on any trade, but the deduction is limited to the total taxable income attributable to the income which is subject to the foreign tax.

This section does not apply in addition to any relief under a DTA but it may apply as a substitute for DTA relief. The taxpayer is entitled to elect whether the relief in terms of legislation or in terms of the DTA should apply.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

At the time of writing hereof, SA does not impose a withholding tax on dividends, but a company is subject to STC at a rate of 10% on the declaration of dividends. It is anticipated that the new DWT, www.lexmundi.com Page 290 © 2012 Lex Mundi also at a rate of 10%, will be introduced during the latter half of 2010 and that STC will be abolished simultaneously.

STC is a tax on the company declaring the dividend. In contrast, the new DWT will be a tax on the shareholder, although it will be collected by the company declaring the dividend as a withholding tax.

The basic legislative framework for the introduction of the dividend tax was enacted during 2008, but certain of the provisions may still be refined prior to the commencement of the new regime. It is anticipated that further legislative amendments will deal with inter alia specific anti-avoidance concerns and with foreign dividends.

The tax will be imposed at a rate of 10% on dividends paid by a company to an individual, a trust or a non-resident. A resident company will be exempt from the tax.

Unlike STC, the DWT rate may be reduced in terms of the provisions of a DTA, if applicable. A number of DTAs provided for the reduction of tax on dividends to 0%. SARS has indicated that it will be renegotiating the relevant articles of these DTAs prior to the commencement of the new regime. It is anticipated that all of the renegotiated DTAs will provide for a reduction to 5%, typically if the foreign company holds at least 10% of the capital of the resident company.

Provision is made for transitional credits, so that tax paid under the STC regime could be used to offset the dividend tax.

15. What are the rates on royalties for withholding taxes?

Payments to a non-resident for the use of intellectual property, e.g. for the use of a patent, design, trade mark or copyright, are subject to a withholding tax imposed at a rate of 12% unless an exemption applied under a DTA.. Furthermore, payments for the imparting of knowledge and any connected services are also subject to the withholding tax. The latter provision has been interpreted to include the supply of “know-how” as opposed to “show-how”, except to the extent that the “show- how” could be connected services to the supply of the “know-how”.

Should a DTA exemption apply, the licencee must apply to SARS for confirmation that no tax needs to be withheld. The withholding tax is a final tax and the non-resident is not required to render a tax return.

The ITA also contains several restrictions on the deduction of payments to a non-resident for the use of intellectual property.

16. What are the rates on interest for withholding taxes?

SA does not impose a withholding tax on interest.

However, a non-resident may be subject to SA income tax on interest if the interest income is (deemed to be) from a SA source. Interest income is deemed to be sourced in SA if the debtor used the funds in SA. If the place of use is unclear, the residence of the debtor is deemed to be the source of the interest income.

Nevertheless, interest earned by a non-resident from a source in SA is exempt from tax provided the foreign lender does not carry on business via a PE in SA or, in the case of a natural person, he/she did not spend more than 183 days in the fiscal year in SA.

Further relief may be available under a DTA if the non-resident does not qualify for the domestic law exemption.

SA does not impose a withholding tax on profits realized by a foreign corporation. However, a branch is subject to a higher corporate tax rate (33%) than a resident company. The rate of 33% is lower than the effective rate of (34.545% - the combination of corporate rate and STC rate) applicable to a domestic company, but once the DWT has been introduced, the effective rate in those instances where a local company declares dividends to a foreign shareholder, and the DWT rate is reduced to 5% in terms of a DTA, will be 31.6%, i.e. lower than the branch rate of 33%.

18. Please list any other rates on withholding taxes that we should be aware of.

Taxation of foreign entertainers and sportspersons

Amounts paid to foreign entertainers and sportspersons for "specified activities" in SA are subject to income tax at a flat rate of 15%. Specified activities include any personal activity exercised in SA by a person as an entertainer or sportsperson. Any resident who is liable to pay such amounts to a foreign entertainer or sportsperson is obliged to withhold the tax and pay it over to SARS, failure of which could result in the personal liability of the resident. There is also an obligation on any resident who is primarily responsible for founding, organizing or facilitating a specified activity in SA to notify SARS of such activities.

Employees’ tax withholding with respect to non-resident service providers

SA does not impose a specific withholding tax on service fees to non-residents. However payments to a non-resident service provider may be subject to employees’ tax. Where the non-resident service provider is a company, the rate of withholding is 33%.

In the case of a labour broker, the withholding obligation will not apply if the labour broker receives a labour broker exemption certificate. However, it is generally impossible for foreign labour brokers to comply with the requirements for the exemption.

Resident independent contractors are not regarded as employees for employees’ tax purposes if they carry on their trade independently, but this exclusion does not apply to non-residents. Accordingly, payments to foreign service providers could be subject to an employees' tax withholding obligation, unless a DTA provided an exemption.

Sale of immovable property by a non-resident:

If a resident acquires immovable property or shares in an immovable property company from a non- resident, the purchaser (or his agent) must withhold tax from the payment and pay such tax to SARS. The withholding tax rate in respect of a foreign company is 7.5%. The withholding tax is not a final tax and the non-resident remains liable to render a tax return. The withholding tax will be a credit against its final tax liability or a refund will be granted if no tax was due. The seller may apply to the Commissioner of the SARS (“the Commissioner”) for a directive that no tax, or a reduced amount of tax, be withheld by the purchaser.

Mining royalty

The recently promulgated Minerals and Petroleum Resources Royalty Act (“MPRRA”) will impose a royalty on the transfer of mineral resources. Different rates will apply to refined and unrefined minerals, with a maximum rate of 5% applying to refined minerals, and a maximum rate of 7% to unrefined minerals. The royalty is payable by the extractor of the mineral resource as a percentage of gross sales in respect of that mineral resource.

Although the MPRRA will come into operation on 1 November 2009, mining royalties will only become payable with effect from 1 March 2010. www.lexmundi.com Page 292 © 2012 Lex Mundi Tax Returns and Compliance

19. What is the taxable reporting period?

The taxable reporting period with respect to income tax is a year of assessment (also referred to as e.g. a tax year, a fiscal year, etc.). Income tax returns must be filed on an annual basis, after the end of a year of assessment. Resident companies and non-resident companies which have earned income from SA sources are required to file income tax returns.

For individuals, a year of assessment ends on the last day of February each year. For companies, the year of assessment of the company is the same as its financial year-end.

STC payable by resident companies declaring a dividend, is payable after the end of a dividend cycle. A dividend cycle begins immediately after the end of the previous dividend cycle, and ends on the day on which a dividend accrues to a shareholder.

All resident employers are required to withhold employees’ tax and to submit returns on a monthly basis. These returns deal with employees’ tax, UIF contributions and SDL. An employer must also file a so-called EMP 501 reconciliation on an annual basis.

The relevant reporting period for registered VAT vendors is referred to as a VAT period. The VAT period is determined based on the activities and turnover of the vendor, and varies between 1 and 12 months.

20. What are the due dates for the filing of tax returns?

Tax returns for companies must normally be submitted within twelve months after the company’s year-end. Before they become due SARS will mail the relevant returns with the details of the company to be completed and submitted by the due date, or the taxpayer may register to complete the returns online. Returns must be filed by the taxpayer even if they reflect a nil amount due.

Provisional taxpayers must file provisional tax returns during the tax year. All companies, and certain individuals, constitute provisional taxpayers. Provisional tax is not a separate tax, but is a system in terms whereof certain taxpayers are required to make advanced tax payments in respect of normal tax payable for the year. It forms part of the normal income tax payable by these taxpayers and requires them to make payments of their tax during the year of assessment, in accordance with estimates of their liability. The first provisional tax payment must be made six months after the beginning of a year of assessment and again at the end of that year of assessment. A company may make a voluntary third provisional tax payment, known as a “top-up payment” within seven months after the year-end if that year-end is February, or within six months of another approved year-end.

Resident companies are also required to pay STC on the net amount of dividends declared and to file a STC return by the end of the month following the month during which the dividend was declared.

Returns reflecting the employees’ tax, UIF contributions and SDL, must be submitted on a monthly basis, by no later than the 7th day of the month following the month during which remuneration accrued to an employee. An annual return, the EMP 501 reconciliation, must be filed within a specified period of time after the end of February each year. For example, the deadline for submission of payroll records for the 2009 year, was 30 May 2009.

Registered VAT vendors are required to submit VAT returns within 25 days after the end of a VAT period.

21. What are the key compliance requirements?

As a general rule, all persons who incur a liability for SA income tax must register as taxpayers and file tax returns.

Tax returns must be filed at the SARS office where the taxpayer is registered. This is the case for both residents and non-residents. There is also an option to complete and file tax returns electronically.

After the tax returns are filed, SARS will calculate the tax liability of the taxpayer. Taxes paid to SARS during the year of assessment, including employees’ tax (in the case of an individual, a labour broker or a personal service provider), and/or provisional tax, will be set off against the tax liability of the taxpayer. SARS will then send an assessment to the taxpayer, which will indicate the tax payable (if applicable) and the date on which taxes should be paid. Should the tax paid during the year exceed the taxpayer’s tax liability, the excess will be paid to the taxpayer as a refund.

Failure to pay taxes timeously may result in the imposition of penalties and interest.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

It is important to ensure that full disclosure of all relevant information is made in tax returns. In terms of section 79 of the ITA, SARS may issue additional assessments in specific circumstances, e.g. if it is satisfied that any amount which was subject to tax and should have been assessed to tax under the ITA, has not been assessed. This is subject thereto that additional assessments may not be issued more than 3 years after the date of the initial assessment except in specific circumstances, for example should there have been fraud, misrepresentation or non-disclosure of material facts.

Specific provision is made for objection and appeal against tax assessments. It is important that taxpayers take note of the relevant time periods for objection and appeal, to ensure that any objection against an assessment follows the correct procedure and is made within the stipulated time periods. Should an objection be rejected by SARS, the taxpayer may elect to pursue the matter further by either referring the matter to alternative dispute resolution and/or to court. A taxpayer may also, within the stipulated time periods, request reasons for an assessment.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

In terms of the Value Added Tax Act No 89 of 1991 (“the VAT Act”), VAT is payable on the supply of goods and/or rendering of services by a registered VAT vendor, or on goods and certain services imported into SA. Any person who carries on any enterprise in SA, and has taxable supplies that exceeds R 1 million per annum is obliged to register as VAT vendor. There are certain exemptions from VAT, and certain transactions are subject to VAT at 0% (referred to as “zero-rating”).

Transfer duty is payable on the acquisition of immovable property at the following rates: 8% in respect of corporate entities and trusts (save for special trusts); and in respect of individuals, 5% on the value of property from R500,001 to R1,000,000 and where the value of property exceeds R1,000,000, 8% of that value plus R25,000. Where VAT is payable, the transaction is exempt from transfer duty. The transfer of shares in a company or interest in a trust which owns residential property, attracts transfer duty, subject to certain exceptions.

www.lexmundi.com Page 294 © 2012 Lex Mundi Estate Duty is a tax on the transfer of wealth, leviable on death. The duty is levied at the rate of 20% on the worldwide estates of deceased persons in respect of all property owned by residents and SA property owned by non-residents.

Excise duties are imposed on the local production of a number of commodities, including alcoholic beverages, motor vehicles, and jewellery. Customs duties are payable in respect of imported goods at varying rates.

The Stamp Duties Act has been repealed with effect from 1 April 2009. However, stamp duty remains payable on leases of fixed property executed before 1 April 2009, at a fixed rate of 0.5% on the quantifiable amount of the lease.

Also refer to question 34 below which deals with STT and to questions 35 to 39 regarding SDL and UIF.

24. How does it operate? Is it a VAT or a sales tax?

VAT is levied on the supply of all goods and services by a registered VAT vendor at each stage within the production and distribution chain. Vendors collect output tax from their customers and are able to claim credits for input tax paid by them, with the effect that the tax burden is on the final consumer. VAT is also payable on the importation of goods and certain services to SA.

VAT is levied at a rate of 14%, subject thereto that some supplies are exempt from VAT, and others (such as the export of goods from SA) are zero-rated, which means that they are liable for VAT but at a rate of 0% (zero per cent).

A “vendor” is defined as “any person who is or is required to be registered under this Act…”. In terms of section 23 of the VAT Act, any person who carries on an enterprise becomes liable to register for VAT if the total value of its taxable supplies during a 12 month period will exceed R 1 million. Taxpayers may voluntarily register as VAT vendors if their taxable supplies exceeded R20,000 in the previous 12-month period.

An enterprise is defined as, inter alia, “any enterprise or activity which is carried on continuously or regularly by any person in the Republic or partly in the Republic and in the course or furtherance of which goods or services are supplied to any other person for a consideration, whether or not for profit, including any enterprise or activity carried on in the form of a commercial, financial, industrial, mining, farming, fishing or professional concern or any other concern of a continuing nature or in the form of an association or club”.

A branch of a foreign company may, under certain circumstances, be treated as a separate vendor, which implies that transactions with the head office may be subject to VAT. Supplies by the branch to the head office may qualify as zero rated supplies.

In order to constitute an enterprise, the enterprise or activity must be carried on continuously or regularly. The terms 'continuously' and 'regularly' are not defined in the VAT Act, but would imply that the activity is carried on all the time, without interruptions and on a regular basis.

With respect to the requirement that the activities must be carried on in SA, a person would generally require a physical presence in SA, or would have to provide goods or services in SA, whether personally or through an agent, to be regarded as carrying on an activity in SA.

VAT vendors are required to file regular VAT returns to pay the VAT collected with respect to the supply of goods and services.

25. How is the taxable base determined?

Supply of goods and services by a VAT vendor

The VAT payable by a vendor is calculated as the difference between so-called “output VAT” and “input VAT”: • “Input VAT” is the VAT payable by a vendor on the importation of goods or services by a vendor or on the supply of goods or services by another VAT vendor; • “Output VAT” is the VAT payable on the supply by a vendor of goods or services supplied by him in the course or furtherance of any enterprise carried on by him.

The VAT Act contains detailed rules regarding the calculation of VAT payable, and more specifically regarding the requirements for the deduction of input VAT. In particular, a deduction of input VAT on goods and/or services may only be claimed to the extent that such goods and/or services were acquired by the vendor in the course of making taxable supplies. A taxable supply is defined as any supply of goods or services by a vendor in the course or furtherance of his enterprise, which is chargeable with VAT, including VAT chargeable at the rate of 0%. It does not include exempt supplies.

This means that a vendor may claim input VAT on goods and/or services acquired for the purpose of making zero-rated supplies, but not for making exempt supplies.

A vendor must, as a general rule, account for VAT payable on an invoice basis, subject thereto that a specified group of vendors, such as public authorities or municipalities) may, on application to the Commissioner, account for VAT on a payment basis.

The VAT payable by a vendor must be calculated with respect to each tax period during which he has carried in on enterprise, subject thereto that the Minister of Finance may prescribe a different method by regulation.

Imported goods and services

The VAT on imported goods or services is payable by the importer of the goods and by the recipient of the imported services respectively. The definition of “imported services” in the VAT Act does not include the importation of services to the extent that such services are utilized or consumed in SA for the purpose of making taxable supplies, i.e. imported services are only subject to VAT where the importer is not a vendor, or where the import is not for the purpose of making taxable supplies.

26. What are the applicable rates?

VAT is levied at a rate of 14% (fourteen percent) on goods and services supplied by registered VAT vendors. Some supplies are zero-rated, which means that they are liable for VAT, but at a rate of 0% (zero percent).

Section 11 of the VAT Act stipulates a number of supplies which are subject to zero-rating, including for example, the sale of a business as a going concern, the export of goods or services, the supply of certain basic foodstuffs, international transport, etc.

27. Are there any exemptions?

The VAT Act lists a number of supplies which are exempt from VAT. As referred to in question 31, input VAT may not be claimed as a deduction in respect of goods and/or services acquired for the purpose of making exempt supplies.

Exempt supplies include, for example, the supply of: www.lexmundi.com Page 296 © 2012 Lex Mundi  financial services;  residential accommodation, but excluding the supply of commercial accommodation;  services by a body corporate to its members; and  educational services.

The supply of financial services includes, for example:  the exchange of currency;  transactions relating to cheques or letters of credit, debt securities, participatory securities;  the provision of credit;  the provision of a long-term insurance policy; and  the buying or selling of any derivative or the granting of an option.

This is subject thereto that the activities contemplated in the first 3 bullet points above (i.e. the exchange of currency, transactions relating to cheques, debt securities and participatory securities, and the provision of credit) will not be deemed to be financial services, to the extent that the consideration payable in respect thereof is a fee, commission, etc.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

Until recently, two sets of taxes were imposed with respect to the transfer of securities: Stamp duty was levied on the transfer of listed securities, and UST was imposed with respect to the transfer of unlisted securities.

STT was introduced with effect from 1 July 2009 to replace stamp duty and UST on the transfer of listed and unlisted securities. STT is payable on the transfer of any security at a rate of 0.25% on the greater of the market value or consideration payable.

“Transfer” is defined widely to include the sale, assignment, cession or any disposal or cancellation of a security, but excluding any event that does not result in a change of beneficial ownership, any issue of a security, or the redemption or cancellation of a security in the context of the liquidation or deregistration of the company that issued the security.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

There are no parafiscal contributions relating to science and/or technology. SA also does not currently have a social security system, but it does operate a compulsory system of unemployment insurance. In addition, employers are required to pay levies which are intended to contribute to skills development.

30. How do they operate?

Unemployment Insurance

Employers and employees are each required to make a contribution to the UIF to provide an income to employees in a number of instances such as unemployment or absence from work due to illness or

Contributors may qualify for the following types or benefits:  Unemployment benefits;  Illness benefits;  Maternity benefits;  Adoption benefits; and  Dependants’ benefits.

Every employer who pays remuneration to an employee is required to contribute to the UIF. Contributions are made by both the employer and the employee. The employer is required to withhold the employee contribution from the remuneration payable to the employee and to pay over such contribution together with the employer contribution, to SARS or to the Unemployment Insurance Commissioner (whichever applicable) on a monthly basis.

Skills Development

Employers are obliged to pay a levy, known as a SDL, which has as purpose to fund education and training as envisaged in the Skills Development Act. The collection and payment of levies are administered by the Commissioner. Every employer who pays or is liable to pay remuneration to employees, subject to the exemptions as set out below, is required to pay the levy.

31. How is the taxable base determined?

Both the UIF contribution as well as the SDL levy is calculated using the definition of remuneration as defined in the Fourth Schedule to the ITA as basis. However, the UIF contribution is calculated as a percentage of the remuneration payable to the specific employee, while the SDL is calculated as a percentage of the gross payroll of the employer.

The UIF contribution is calculated based on the remuneration paid to a specific employee. Certain amounts are specifically excluded, such as amounts payable by way of commission, restraint of trade payments, lump sums from any pension, provident or retirement annuity fund, etc.

For purposes of calculating the contribution payable by the employee and the employer, the remuneration is capped at a threshold which currently is R12,478 per month.

The leviable amount with respect to SDL consists of the total amount of remuneration paid or payable by an employer to its employees as determined for purposes of employees’ tax, irrespective of whether or not the employer is obliged to withhold employees’ tax from such remuneration. Remuneration for purposes of SDL means remuneration as defined in the Fourth Schedule to the ITA, but excluding certain amounts, such as:  Amounts payable to a labour broker who has been issued with a labour broker exemption certificate;  A pension or retiring allowance; and  Lump sum pension, provident or retirement annuity fund payments.

32. What are the applicable rates?

UIF contributions are payable by an employer and an employee. Each contribution is calculated as 1% of the employee’s remuneration as defined, subject to the thresholds referred to in the previous question. As a result of the current threshold of R12,478 per month, the maximum contribution by each of an employer and employee currently is R124.78.

33. Are there any exemptions?

UIF contributions are not payable in a number of instances, for example with respect to:  employees who are employed by an employer for less than 24 hours per month;  expatriate employees who are obliged to return to their home country at the end of their contract; and  certain employees in the national and provincial spheres of the SA government.

A number of employers are exempted from paying SDL, for example:  A public service employer in the national or provincial sphere of the SA government;  A Public Benefit Organisation which is exempt from income tax in terms of the ITA;  A municipality which has been issued with a certificate of exemption by the Minister of Labour; and  Any employer whose payroll does not exceed R500,000 per annum.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Estate duty is imposed on the death of a taxpayer, while donations tax becomes payable by a donor in respect of gratuitous disposal of property.

Estate Duty

Estate Duty is a tax on the transfer of wealth, leviable on death. The duty is levied at the rate of 20% on the worldwide estates of deceased persons in respect of all property owned by residents and SA property owned by non-residents. A basic deduction of R3.5 million is allowed from the value of the net estate before calculating estate duty. Further deductions are allowed in respect of, for example, liabilities, bequests to public benefit organisations and property accruing to surviving spouses.

Donations Tax

Donations Tax is imposed in respect of the gratuitous disposal of any property by a SA resident. If SARS is of the opinion that property has been disposed of for a consideration which is not adequate, the property shall be deemed to have been disposed of under a donation (albeit that the actual consideration is deducted in calculating the Donations Tax).

Donations Tax is a payable at a flat rate of 20% on the value of any property donated. Certain donations are exempt from donations tax, including certain donations between spouses and donations to public benefit organisations or other charitable organisations. A natural person is entitled to an exemption on donations that are made during the year of assessment of up to R100,000. Non- natural persons are exempt from donations tax in respect of casual gifts up to a threshold of R10,000. Non-residents do not pay donations tax, even if they donate SA assets. Public companies which are residents of SA are also exempt from paying donations tax.

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Tax incentives to encourage investment include special depreciation allowances with respect to:  new or used plant and machinery brought into use for the first time by a taxpayer, and used in a process of manufacture;  plant and machinery owned by or acquired and brought into use by a SBC for the first time after 1 April 2001 used directly in the process of manufacture and for the purpose of the SBC’s trade;  the construction or refurbishment of buildings in areas which are regarded as urban development zones; and  buildings used for commercial purposes.

There are also special allowances or deductions relating to, among other areas, mining, gas pipe lines, electricity transmission lines and railway lines, renewable energy, investment in qualifying venture capital companies, and research and development. For example, taxpayers can deduct 150% of their research and development expenditure, if the expenses were directly incurred in scientific and technological research and development activities in SA. Taxpayers may also claim special depreciation allowances with respect to the cost of buildings, machinery or plant, utensils and articles used for the purpose of such research and development.

The ITA contains a number of anti-tax avoidance provisions, some specific and others general. Specific anti-tax avoidance provisions aim to counter very specific arrangement described in the provisions which may avoid tax, whilst the general anti-avoidance rules (GAAR) in Part IIA of the ITA allow SARS to attack any “impermissible tax avoidance arrangement”. An impermissible tax avoidance arrangement is an arrangement which results in the avoidance, postpone or reduction of any tax liability, if its sole or main purpose was to obtain a tax benefit, and if the arrangement does not satisfy the “normality” criteria as set out in Part IIA.

Part IIB of the ITA contains detailed rules regarding reportable arrangements, in terms whereof certain arrangements must be reported to the Commissioner within a 60-day period after any amount is first received by or accrued to a participant, or paid or actually incurred by a participant. The relevant sections list a number of specific types of arrangements which are reportable, and also list characteristics which will result in an arrangement being reportable.

SARS could also apply the common law doctrine of “substance over form” to attack simulated/artificial transactions.

The ITA contains transfer pricing rules which correspond to the rules applicable in most industrialised countries. SARS has issued a Practice Note on the application of the transfer pricing rules which is based on the OECD Transfer Pricing Guidelines for Multi-national Enterprises and Tax Administrations.

According to the SARS website as at 30 June 2009:  SA had 68 comprehensive DTAs in force;  It has signed but not ratified agreements with Germany (renegotiated) and Mexico;  Four DTAs have been ratified by SA but not yet by the other country, namely Democratic Republic of Congo, Gabon, Rwanda and Sudan; and  Comprehensive DTAs have been or are in the process of being negotiated or renegotiated but have not been signed yet, with Bangladesh, Chile, Cuba, Estonia, Kenya, Latvia, Lithuania, Madagascar, Malawi (renegotiated), Morocco, Namibia (renegotiated), Qatar, Serbia, Singapore (renegotiated), Sri Lanka, Syria, United Arab Emirates, Vietnam, Zambia (renegotiated) and Zimbabwe (renegotiated); and protocols with Cyprus, Ireland, Kuwait, Lesotho, Malta, Oman, Seychelles, Sweden and the United Kingdom.

The table below lists the countries with which SA has comprehensive DTAs. It also lists the reduced withholding rates as provided for in each DTA:  SA does not impose a specific withholding tax on compensation or fees payable to non-residents;  Similarly, as SA does not impose a withholding tax on interest, the treaty rates regarding interest are not included in this table;  SA does not currently impose a withholding tax on dividends. Although STC is imposed when dividends are declared by a company, this is a tax on the company and not the shareholder, and the treaty rates regarding dividends do not apply. However, when the new dividend withholding tax is introduced during 2010 at a rate of 10%, a taxpayer will be entitled to rely on a lower treaty rate, if applicable.  It is important to refer to each DTA for the detailed provisions in each instance. In addition, in light of the current negotiation of protocols and renegotiation of a number of DTAs, it is important to ensure that reliance is placed on the correct DTA, with specific reference to the date when the relevant DTA and/or relevant provisions will come into effect.

Country Dividends Royalties Other taxpayers

Algeria 15 10 10 Australia 15 5 5 Austria 15 5 0 Belarus 15 5 5 / 10 Belgium 15 5 0 Botswana 15 10 10 Brazil 15 10 10 / 15 Bulgaria 15 5 5 / 10 Canada 15 5 6 / 10 China 5 5 7 / 10 Croatia 10 5 5 Cyprus 0 0 0 Czech Republic 15 5 10 Denmark 15 5 0 Eqypt 15 15 15 Ethiopia 10 10 20 www.lexmundi.com Page 301 © 2012 Lex Mundi Finland 15 5 0 France 15 5 0 Germany 15 7.5 0 Ghana 15 5 10 Greece 15 5 5 / 7 Hungary 15 5 0 India 10 10 10 Indonesia 15 10 10 Iran 10 10 10 Ireland 0 0 0 Israel 25 25 0 / 15 Italy 15 5 6 Japan 15 5 10 Korea 15 5 10 Kuwait 0 0 10 Lesotho 15 15 10 Luxembourg 15 5 0 Malawi n/a n/a 0 Malaysia 10 5 5 Malta 5 5 10 Mauritius 15 5 0 Mozambique 15 8 5 Namibia 15 5 10 Netherlands 10 5 0 New Zealand 15 5 10 Nigeria 10 7.5 7.5 Norway 15 5 0 Oman 0 0 8 Pakistan 15 10 10 Poland 15 5 10 Portugal 15 10 10 Romania 15 15 15 Russian Federation 15 10 0 Saudi Arabia 10 5 10

Contact Information:

Wally Horak Bowman Gilfillan [email protected] 165 West Street, Sandton P.O. Box 785812 Aneria Bouwer Johannesburg, 2146 [email protected] South Africa

Tel 27.11.669.9000 Fax 27.11.669.9001 http://www.bowman.co.za

Tax Desk Book

Spain Prepared by Lex Mundi member firm Uría Menéndez

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

Spain has a fairly complex tax system with a wide variety of direct and indirect taxes applicable to both individuals and legal entities. The majority of Spanish taxes are imposed by the Spanish Central Administration, although certain taxes are levied by the Autonomous Communities (Comunidades Autónomas) and the Municipalities (Ayuntamientos). Certain Autonomous Regions (namely, the Basque Country and Navarra) have their own tax systems. The Spanish general tax system and main sources of tax law may be summarized as follows: National taxes a) Direct taxes - Individual Income Tax (Impuesto sobre la Renta de las Personas Físicas), governed by Law 35/2006, of November 28, 2006. - Corporate Income Tax (Impuesto sobre Sociedades), governed by Royal Legislative Decree 4/2004, of March 5, 2004. - Non-Residents Income Tax (Impuesto sobre la Renta de No Residentes), governed by Royal Legislative Decree 5/2004, of March 5, 2004. - Wealth Tax (Impuesto sobre el Patrimonio), governed by Law 19/1991, of June 6, 19916. - Inheritance and Gift Tax (Impuesto sobre Sucesiones y Donaciones), governed by Law 29/1987, of December 18, 1987. b) Indirect taxes - Transfer Tax and Stamp Duty (Impuesto sobre Transmisiones Patrimoniales y Actos Jurídicos Documentados), governed by Royal Legislative Decree 1/1993, of September 24, 1993. - Value Added Tax (Impuesto sobre el Valor Añadido), governed by Law 37/1992, of December 28, 1992. - Insurance Premium Tax (Impuesto sobre las Primas de Seguro), governed by Law 13/1996, of December 30, 1996.

6 Although recent amendments in the Wealth Tax Law, introduced with effects as of January 1, 2008, have almost eliminated the tax. www.lexmundi.com Page 303 © 2012 Lex Mundi - Hydrocarbon Retail Sales Tax (Impuesto sobre las Ventas Minoristas de Determinados Hidrocarburos), governed by Law 24/2001, of December 27, 2001. - Special Taxes (Impuesto Especiales), governed by Law 38/1992, of December 28, 1992. Autonomous Communities taxes The main source of income for the Spanish Autonomous Communities are the National taxes partially or totally transferred to them pursuant to Law 21/2001, of December 27, 20017. Depending on the relevant tax transferred, the Autonomous Communities may have different competences over them: they may be entitled just to a portion of the taxes collected by the Central Administration or they even may regulate some of the main features of the tax, such as the applicable tax rate. Therefore, with respect to some taxes, the Autonomous Community within Spain where the taxable event takes place may be very relevant since the tax consequences could differ from one region to another. Also, Autonomous Communities may create and impose their own taxes, although these have not been relevant in quantitative terms up to now. Local taxes The general terms of the taxes listed below are contained in the Royal Legislative Decree 2/2004, of March 5, 2004 (Ley Reguladora de las Haciendas Locales). Within that general legal framework, however, the Municipalities may regulate some of the features of these taxes: - Real Estate Tax (Impuesto sobre Bienes Inmuebles). - Business Tax (Impuesto sobre Actividades Económicas). - Vehicles Tax (Impuesto sobre Vehículos de Tracción Mecánica). Local Tax on the Increase of the Value of the Urban Land (Impuesto sobre el Incremento de Valor de los Terrenos de Naturaleza Urbana).

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

Business entities: The taxable income for Corporate Income Tax (“CIT”) purposes is based on the accounting result, calculated in accordance with the Spanish Generally Accepted Accounting Principles8, although adjusted as specifically set forth in the CIT Law. Individuals: In principle, taxpayers subject to the Spanish Individual Income Tax (“IIT”) (i.e. any individual which is deemed to be resident for tax purposes in Spain) are taxed on their worldwide income and capital gains (and losses) obtained during the relevant calendar year. For the purposes of determining the taxable income of the individual and, therefore, its final tax liability, the sources of income of the taxpayer must be divided into two different categories:

7 The taxes which have been totally transferred by the Central Administration to the Autonomous Communities are the following: Wealth Tax, Transfer Tax and Stamp Duty, Inheritance and Gift Tax and certain special taxes. 8 A new Spanish Accounting Chart was enacted with effects as of January 1, 2008. In line with EU regulations, the new Spanish Accounting Chart is inspired by, although not equivalent to, the IFRSs. www.lexmundi.com Page 304 © 2012 Lex Mundi 1. On one side, the so-called “general income”, which comprises: (i) employment income, (ii) real estate income, (iii) income from movable capital (except for that classified as “saving income”, as defined below), (iv) business income and (v) capital gains not deriving from the transfer of assets or rights. 2. On the other side, the “saving income”, which includes: (i) capital gains deriving from the transfer of assets or rights, (ii) interest, (iii) dividends and (iv) income deriving from insurance operations (to the extent that such income does not qualify as employment income).

3. What revenues are included?

Please see answer to the question above.

4. What deductions are allowed?

Business entities: Business expenses are generally deductible as long as they are properly recorded in the taxpayer’s books and are not classified as not deductible by the CIT Law. All fixed assets, excluding land, may be depreciated for tax purposes and official guidelines establish maximum annual rates and maximum periods of depreciation, calculated on the basis of the useful life of the asset. Generally speaking, straight-line depreciation is the method used, applicable to the acquisition cost of the asset, however, other methods are also permitted. The amortization of intangible assets (patents, trademarks, software, etc.) is also deductible for tax purposes, within certain limits. Goodwill is considered a deductible expense, provided that it has not been artificially created in a transaction between related parties and that certain requirements are met (namely, to register a reserve in the books of the company equal to the amount of the goodwill deducted for tax purposes). Finally, tax depreciation (up to 5% per year) of the financial goodwill resulting from acquisitions of stakes in non-Spanish companies may also be available provided that certain requirements are met. Individuals: The expenses that the taxpayer is allowed to deduct in order to determine his taxable base will depend on the type of income obtained by the taxpayer. As a general rule, the treatment for the expenses linked to each source of income will be the following: (i) For the determination of the net employment income, the IIT Law establishes that the only deductible expenses will be the following:

. Social Security contributions or other compulsory contributions to general mutual benefit funds for public employees.

. Deductions due to retired public employee rights.

. Contributions to orphanages or similar entities.

. Trade union dues and bar association membership fees, under certain conditions and up to certain limits.

. Some legal defense expenses related to litigation between employer and employee, up to Euro 300 per year. In addition to those deductibles expenses, the taxpayer may apply certain reductions, as follows:

. General employment income reductions (from Euro 2,652 to 4,080, depending on the amount of net employment income obtained).

. Other reductions applicable upon the obtaining of certain type of employment income (such as disability pensions or retirement benefits). (ii) As a general rule, all the expenses necessary to obtain real estate income will be deductible (including the annual depreciation of the real estate). Also, specific reductions may be applicable on income generated during a period of more than two years (40% reduction) and on income derived from dwelling rental (50% or 100% if the lessee is younger than 35 years and its annual income is higher than Euro 7,381.33). (iii) With respect to income from movable capital, the taxpayer will be allowed to deduct the management and deposit expenses of negotiable securities and, in the event of income obtained from the provision of technical assistance, lease of movable assets, mines or from subleasing, the expenses necessary to obtain it and, if applicable, the amount of the depreciation borne by items or rights from which the income derives. Again, a 40% reduction may be applicable to any income generated during a period of more than two years. (iv) Finally, as a general rule, there are no limitations for the deduction of expenses necessary to obtain the business income (i.e. income derived from the development of a professional activity). A 40% reduction will apply if the business income is generated during a period exceeding two years.

5. What are the major expenses that are not deductible?

Business entities: Deductibility is expressly excluded, among others, for returns of equity, expenses arising from the accounting of the CIT itself, criminal and administrative fines and penalties, gifts and certain donations. The CIT Law also includes a rule regarding the non-deductibility of expenses in connection with services performed by persons or entities resident in tax havens or paid through tax havens, unless evidence of the existence of the service is provided. Individuals: Only the expenses described in our answer to question 10 above are deductible from the taxable income of the individual. Other expenses will not be deductible for tax purposes.

6. What are the applicable federal rates?

Business entities: The general CIT rate is 30%. Certain credit institutions and insurance companies are subject to a reduced 25% tax rate, whilst some collective investment institutions are subject to a 1% tax rate. Likewise, certain pension funds are taxed at a 0% tax rate whereas some oil companies are taxed at a 35%. Finally, companies with a turnover in the previous year lower than Euro 8 million can apply a reduced tax rate of 25% for the first Euro 120,202.41 of taxable base. Individuals: The federal rates applicable to the “general income” portion of the taxable income of the individual are the following:

0 0 17,707.20 15.66%

17,707.20 2,772.95 15,300 18.27%

33,007.20 5,568.26 20,400 24.14%

53,407.20 10,492.82 Onwards 27.13%

7. What are the applicable state and/ or other local rates?

Business entities: N/A Individuals: The applicable Autonomous Communities rates applicable to the “general income” portion of the taxable income of the individual are the following: Taxable base- Tax liability Remaining taxable Tax rate Up to Euro -Euro base -Up to Euro

0 0 17,707.20 8.34%

17,707.20 1,476.78 15,300 9.73%

33,007.20 2,965.47 20,400 12.86%

53,407.20 5,588.91 Onwards 15.87%

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Business entities: Capital gains obtained by a Spanish company are subject to CIT as ordinary income at the general 30% CIT rate. However: (i) A 12% tax deduction is available in relation to capital gains resulting from the transfer of fixed assets (whether tangible or intangible) used to perform a business activity which have been used for at least one year during any of the three years prior to the transfer, provided that the proceeds are reinvested within a certain time period (if only part of the proceeds are reinvested, the tax deduction is partially available). This type of tax deduction is also applicable to capital gains derived from the transfer of shares in companies, 5% of which is owned by the transferring company, subject to the same reinvestment requirement. (ii) Taxation of capital gains arising out of certain corporate reorganizations, including those affecting shares and/or assets, whether or not constituting a branch of activity, may be deferred, subject to the compliance with some specific requirements.

www.lexmundi.com Page 307 © 2012 Lex Mundi (iii) In the event of transfers of shares of a Spanish company, and provided that the Spanish resident shareholder company has held a minimum 5% interest in the capital or net equity of the Spanish subsidiary for at least one year, then such shareholder will be entitled to a full tax credit on the CIT payable on the part of the capital gain equivalent to the retained earnings generated by the Spanish subsidiary during the time the seller was a shareholder thereof, pro rata to the participation of the seller in the capital or net equity of the Spanish subsidiary. (iv) Capital gains triggered by a Spanish company on the sale of shares in a foreign subsidiary will be exempt from CIT under the participation exemption regime on foreign source capital gains and dividends, provided that: (a) The Spanish company holds a minimum 5% interest in the capital or net equity of the foreign subsidiary or, alternatively, as it refers to first tier foreign subsidiaries, the acquisition value of the interest in the foreign subsidiary amounts to 6 million Euro9. Foreign participations will be considered to have been held by the Spanish company from the date when they were held by other companies pertaining to the same consolidated group for accounting purposes. (b) The Spanish company directly or indirectly has held such interest in the foreign subsidiary for at least one year. (c) The foreign subsidiary is subject to and not exempt from a tax similar in nature to the Spanish CIT (this requirement will be deemed met if the foreign subsidiary resides in a tax treaty country with an exchange of information clause) and it is not resident in a tax haven country or jurisdiction (unless within the EU and if the subsidiary has been incorporated for valid economic reasons and is engaged in an active trade or business). (d) The foreign subsidiary is engaged in an active trade or business outside of Spain.

The foreign subsidiary must be actively and primarily engaged in an active trade or business carried out abroad. Certain “passive income” may be generated by the foreign subsidiary to the extent that it does not exceed 15% of its total turnover. In general, any trade or business is eligible to the extent that the foreign subsidiary has sufficient material and human resources to perform such trade or business activity. Requirements (c) and (d) must have been met throughout the total holding period. Foreign taxes on the capital gain will not be creditable against the Spanish CIT. Losses triggered on the transfer of a foreign subsidiary are fully tax deductible. Individuals: Saving income (which includes capital gains derived from the transfer of assets or rights) will be taxed at a flat 18% tax rate.

9. How are operating losses handled?

Business entities: Losses can be carried forward for the 15 (immediately succeeding) years after the losses have been generated, although for newly created enterprises the period will start to run from the first period in which a taxable profit is obtained. Loss carry-backs are not allowed. Individuals: Negative income included within the “general income” portion of the taxable income of the individual can only be offset against positive income of the same nature generated in the same year.

9 In this latter case, the Spanish company must opt to be subject to the special tax regime of the Spanish holding companies (Entidad de Tenencia de Valores Extranjeros or “ETVE”). www.lexmundi.com Page 308 © 2012 Lex Mundi Negative income included within the “saving income” portion of the taxable income of the individual can be offset against positive income of the same nature generated in the same year. The excess, if any, can be offset against the “saving income” generated during the following four years.

10. How are capital losses handled?

Business entities: Please, see our answer to question 15 above. Individuals: Capital losses arising out of the transfer of assets could be offset against capital gains of the same nature obtained in the same year. Any excess can be offset against the positive balance of the capital gains and losses generated during the next four years. Capital losses not derived from the transfer of assets can be offset against capital gains of the same nature obtained in the same year and against the positive balance of the “general income”, up to 25% of such balance. Any excess can be offset against the positive balance of the capital gains and losses generated during the next four years.

Territorial Rules

11. What are the residence rules?

Business entities: In accordance with article 8 of the CIT Law, a company will be resident for tax purposes in Spain if any of the following circumstances is met: (i) the company has been incorporated in accordance with the laws of Spain; (ii) the corporate domicile of the company is located in Spain; or (iii) the place of effective management of the company is located in Spain. In addition, the Spanish Tax Authorities shall be entitled to treat as resident in Spain for tax purposes those foreign entities which are resident in a tax haven or in a low tax jurisdiction provided that (a) its main assets are located in Spain or its main assets are rights which have to be exercised in Spain or (b) its main business activity is developed in Spain. This rule would not apply if the foreign entity evidences to the Spanish Tax Authorities that the management of the foreign entity is effectively carried out in its territory of residence and that the incorporation of the entity and the development of its activities took place due to valid economic reasons and sound business reasons, other than the mere management of shares or assets. Individuals: As a general rule, only those individuals that are deemed to be resident in Spain for tax purposes will be subject to the IIT. An individual will be deemed to be resident in Spain for tax purposes in the following cases: (a) The taxpayer is physically present in Spanish territory for more than 183 days in the calendar year. Temporary absences are disregarded when determining the number of days spent by the individual in Spain, unless the individual provides evidence of its tax residence in another country.

In the event of taxpayers alleging to be resident in jurisdictions classified as tax havens under Spanish law, the Spanish Tax Authorities may require the taxpayer to provide evidence of its stay in such tax haven jurisdiction during more than 183 days in the calendar year.

www.lexmundi.com Page 309 © 2012 Lex Mundi (b) The main centre or base of the taxpayer’s business or professional activities or economic interests is in Spain, either directly or indirectly. In the absence of proof to the contrary, it is assumed that an individual is resident in Spain if his/her spouse/husband (from whom he/she is not legally separated) and dependent children are habitually resident in Spain.

Finally, non-resident individuals who are seconded to Spain due to labour reasons and as a consequence of the length of their stay in Spain become residents for tax purposes in Spain, can elect to be taxed in Spain as a non-resident (i.e. in accordance with the provisions of the Spanish Non-Residents Income Tax Law), provided that certain requirements are met.

12. Is worldwide income taxed?

Yes.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Business entities: CIT Law establishes methods under which relief from double taxation may be obtained in connection with dividends and capital gains derived from resident subsidiaries (internal double taxation relief) and income deriving from non-resident subsidiaries (international double taxation relief). (i) Internal double taxation relief: With respect to dividends distributed by Spanish companies, the Spanish shareholder company is entitled to a tax credit amounting to 50% of the CIT liability on the gross dividend received. The tax credit will be 100% when the following conditions are met: (i) the shareholder owns, directly or indirectly, 5% of the share capital or equity of the company paying the dividend and (ii) such shares have been held without interruption for one year before the dividend becomes due (this one year period may be completed after the dividend distribution takes place).

With respect to capital gains realised upon the transfer of shares in Spanish companies, and provided that the Spanish shareholder company has held a minimum 5% interest in the capital or net equity of the Spanish subsidiary for at least one year, then such shareholder will be entitled to a full tax credit on the CIT payable on the part of the capital gain equivalent to the retained earnings generated by the Spanish subsidiary during the time the seller was a shareholder thereof, pro rata to the participation of the seller in the capital or net equity of the Spanish subsidiary. (ii) International double taxation relief: As a general rule, foreign source dividends and capital gains are subject to the standard CIT tax rate. However, dividends and capital gains received by a Spanish company from a foreign subsidiary will be exempt from CIT under the participation exemption regime provided that the requirements described in our answer to question 14 (iv) are met. In the event of dividends, and contrary to what would be the case with respect to foreign source capital gains, it is sufficient that such requirements are met at the time of generation of the profits of the foreign subsidiary which are distributed as foreign source dividend to the Spanish resident shareholder company. In this case, however, foreign withholding taxes on the dividends or capital gains will not be creditable against the Spanish CIT.

Alternatively, should the participation exemption regime not be applicable, the Spanish resident shareholder will be entitled to a tax credit on the Spanish CIT payable on the foreign source dividend equivalent to the underlying income tax paid by the foreign subsidiary (and www.lexmundi.com Page 310 © 2012 Lex Mundi any lower tier subsidiary) on the profits distributed to the Spanish shareholder in the form of dividends. The tax credit may not exceed the Spanish CIT that would have been payable on Spanish source dividends. The tax credit will only be available if the Spanish shareholder holds a minimum 5% interest in the capital or net equity of the foreign subsidiary and to the extent that it has hold such interest in the foreign subsidiary for at least one year or, alternatively, if the one year holding requirement is met after the dividend has been received (and the same requirements will apply with respect to lower tier subsidiaries, if the tax credit relates to income tax paid by the latter).

Additionally, any foreign withholding taxes on the dividends (or any other type of income obtained by the Spanish entity) will be creditable against the Spanish CIT, again, limited to the Spanish CIT that would have been payable on that income should it have been from a Spanish source.

Individuals: The IIT Law contains measures to avoid the internal double taxation with respect to dividends received by a Spanish individual from Spanish companies. In particular, Spanish individuals (as well as individuals resident in a EU member state) benefit from an annual Euro 1,500 exemption on Spanish source dividends. On the other hand, Spanish resident individual may benefit from a tax credit to avoid international double taxation on foreign source income and capital gains, limited to the Spanish IIT that would have been payable on that income should it have been from a Spanish source.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Business entities: As a general rule, dividends paid by a Spanish resident company to a Spanish resident company will be subject to withholding tax, at a 18% tax rate. Withholding tax, however, will not be applicable when the recipient of the dividends is entitled to a 100% full tax credit to avoid the internal double taxation (please, see our answer to question 19 above). There will be no withholding tax either on payments of dividends among companies within the same tax consolidated group. Individuals: Generally, dividends paid by a Spanish entity to a Spanish resident individual are subject to a 18% withholding tax. However, Spanish resident individuals benefit from an annual Euro 1,500 exemption on Spanish source dividends (no withholding tax either will be applied on that Euro 1,500 amount).

15. What are the rates on royalties for withholding taxes?

Business entities: As a general rule, royalties paid by a company resident in Spain to another company resident in Spain will not be subject to withholding tax.

Individuals: As a general rule, royalties paid by a company resident in Spain to a Spanish resident individual will be subject to a 18% withholding tax.

Business entities: As a general rule, interest paid by a Spanish resident company to a Spanish resident company will be subject to withholding tax, at a 18% tax rate.

Withholding tax, however, will not be applicable when the recipient of the interest are credit entities or financial credit entities (Establecimientos Financieros de Crédito) resident in Spain and registered with the Bank of Spain or permanent establishments in Spain of non-Spanish credit entities. There will be no withholding tax either on payments of interest among companies within the same tax consolidated group.

Individuals: As a general rule, interest paid by a company resident in Spain to a Spanish resident individual will be subject to a 18% withholding tax.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

As a general rule, dividends paid by a Spanish resident company to its non-resident shareholder are subject to withholding tax in Spain at a 18% rate or at the reduced rate provided for in the applicable (if any) convention for the avoidance of double taxation.

Under the EU Parent-Subsidiary Directive, as implemented in Spain, dividends paid to a company resident in the EU and holding a participation in the Spanish company equal to or higher than 10%, are exempt from withholding tax when such participation has been held for more than 1 year. This exemption is denied if the stake is directly or indirectly ultimately controlled by a non EU person or entity, unless the EU direct parent company evidences active management of the participation or similar activities to those run by the Spanish subsidiary.

18. Please list any other rates on withholding taxes that we should be aware of.

N/A

Tax Returns and Compliance

19. What is the taxable reporting period?

Business entities: The fiscal year for CIT purposes coincides with the financial year of the Spanish company.

Individuals: The fiscal year for IIT purposes coincides with the calendar year.

20. What are the due dates for the filing of tax returns?

Business entities: CIT returns must be filed during the first twenty five calendar days following the six-month period after the end of the relevant fiscal year.

Therefore, for instance, if the fiscal year coincides with the calendar year (i.e. it ends on December 31), the CIT return would have to be filed during the first twenty five days of the month of July of the following year.

Individuals:

21. What are the key compliance requirements?

Business entities: (i) CIT returns resulting in a positive tax liability must be filed with any financial entity authorized by the Spanish Tax Administration to collect taxes on their behalf (generally, most of the Spanish banks qualify for these purposes). (ii) CIT returns resulting in zero or negative tax liability (and, therefore, in the obligation by the Tax Authorities of reimbursing funds to the taxpayer) will be filed with any financial entity authorized by the Spanish Tax Administration to collect taxes on their behalf (if the taxpayer wants the reimbursement to be made by means of wire transfer to its bank account) or with any office of the Spanish Tax Administration (if there is not reimbursement to be made -when the tax liability is equal to zero- or when the reimbursement is to be made by means of check).

Individuals: (i) Tax returns resulting in a positive tax liability must be filed with any financial entity authorized by the Spanish Tax Administration to collect taxes on their behalf (generally, most of the Spanish banks qualify for these purposes). (ii) Tax returns resulting in a negative tax liability may be filed either with any financial entity authorized by the Spanish Tax Administration to collect taxes on their behalf or with any office of the Spanish Tax Administration.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Business entities: During the first 20 days of the months of April, October and December, the Spanish companies have to make payments on account of their final CIT liabilities.

Individuals: N/A

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Yes, Spain has implemented on its internal legislation the EU Directives on Value Added Tax.

24. How does it operate? Is it a VAT or a sales tax?

The structure and scope of the Spanish Value Added Tax (“VAT”) system are similar to those applicable in other countries of the EU.

As a general rule, VAT is levied on transfers of goods made or services provided by entrepreneurs, on certain intra EU acquisitions and on the import of goods. In the Canary Islands, Ceuta and Melilla (Spanish enclaves in northern Africa) no VAT is applicable (although other specific indirect taxes are levied).

Goods are generally deemed to be supplied in Spain if transfer of ownership takes place in Spain. Services are deemed to be provided in Spain if the provider has its place of business in Spain, with certain exceptions –such as legal, financial, advertising or consulting services, inter alia–.

www.lexmundi.com Page 313 © 2012 Lex Mundi Acquisitions from other EU countries are subject to a special regime: normally, VAT is paid in the “country of origin” in connection with non-commercial intra-EU transactions, whereas VAT is levied in the country of destination on commercial intra-EU transactions.

Taxable persons charging VAT on their transactions are entitled to deduct the tax borne within a taxable period (“input VAT”) from the tax collected (“output VAT”) within the same period. Any excess of output VAT must be paid to the tax authorities; and any excess of input VAT can either be set off against future output VAT or refunded at the end of the next fiscal year (end of the calendar year). In this regard, a taxpayer supplying a combination of both exempt and taxable goods or services is normally entitled to recover a pro rata of input VAT.

VAT taxpayers must file the corresponding tax returns (tax returns 390 or 392 when the turnover of the previous fiscal year of the taxpayer exceeds Euro 6 million) and pay in the VAT due either on a quarterly basis (on or before the 20th of April, July, October and January of each year) or on a monthly basis if their turnover of the previous fiscal year exceeds Euro 6 million (on or before 20th of each month, except the return corresponding to July which must be filed between August the first and September the 20th, and the last one of the year that should be filed on or before the 30th of January). Additionally, a summary return of VAT must be filed annually, on or before January 30th of the following year.

Finally, please note that Spanish VAT Law establishes a special procedure under which taxpayers not established in Spain can obtain a refund of the VAT borne on the transactions performed by them within a taxable period. This VAT refund is limited to States (other than EU members) whereby reciprocity can be evidenced. The Spanish Tax Authorities have recognized such reciprocity with Canada, Japan, Monaco, Norway and Switzerland.

25. How is the taxable base determined?

The general rule is that the taxable is equal to the amount paid for the good delivered or for the service rendered. The VAT Law sets forth certain specific rules for particular transactions (e.g. those where the price is paid in kind, those where different deliveries or goods and provisions of services are involved, those between related parties, etc.).

26. What are the applicable rates?

VAT rates depend on the type of goods delivered or services provided.

The standard rate is 16%. A 7% reduced tax rate is applicable, inter alia, to sport activities, food, health products, housing, entertainment services, hotels and restaurants, or agricultural services. Finally, a 4% super-reduced rate applies, inter alia, to some essential goods and books.

27. Are there any exemptions?

Yes, there are. The transfer and provision of certain goods and services, such as certain transfers of real estate, financial transactions or the transfer of securities are exempt from Spanish VAT.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

Yes, there are other indirect taxes in Spain. The main ones are the following:

Transfer Tax (Impuesto sobre Transmisiones Patrimoniales)

The Spanish Transfer Tax is levied on the transfer of rights and assets located in Spain as well as on the creation of security interests and other rights in rem, provided that such transactions are not

Transfer Tax on the transfer of real estate is levied at different rates depending on the Autonomous Community where the real estate is located. If no specific rate is set forth, a 7% rate is levied on the value of the real estate. Finally, under certain conditions, the transfer of shares of real estate companies may also be subject to Transfer Tax.

Transfer Tax is payable by the acquirer of the assets and is not recoverable.

Capital Tax (Impuesto sobre Operaciones Societarias)

The incorporation, capital increases/reductions and share premium contributions are, as a general rule, subject to a 1% percent Capital Tax in Spain. The tax is generally payable by the Spanish company.

Please note, however, that restructuring transactions and in-kind contributions to the capital of Spanish companies are not subject to Capital Tax.

Stamp Duty (Impuesto sobre Actos Jurídicos Documentados)

Spanish Stamp Duty is levied on:

(i) The granting of notarial deeds with a valuable object, provided that the deed can be registered with the Spanish Commercial Registry, the Land Registry, the Industrial Property Registry or the Moveable Assets Registry. Tax rates range from 0.5% to 2% and are applied to the value stated in the document.

(ii) The issue of bills of credit, promissory notes and other draft documents in those cases when the document implies a transfer of funds (función de giro). A document meets this requirement if (i) it evidences the transfer of funds; (ii) it implies a payment order; or (iii) it is issued “to the order” of the receiver (a la orden). The tax due is determined by applying a sliding scale to the face amount of the document.

The issue of certain administrative documents.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Yes, there are. In accordance with the Spanish labor law, contributions to the Spanish social security system must be made, as explained in our answer to the question below.

30. How do they operate?

Spanish social security system covers all Spanish nationals who reside and perform their activities in Spain, as well as foreigners with work and residence authorisations. Spanish nationals who do not reside in Spain are also covered under certain circumstances.

Social security benefits include health care, disability, family protection, maternity leave, paternity leave, risk during pregnancy or lactation, retirement pensions, unemployment insurance and payments in the event of loss of husband, spouse or parents.

Social Security is mainly financed through contributions made by employers and employees. Social security contributions are calculated using the monthly salary received by the employee plus any annual amounts which are not within the amount paid on a monthly basis. The Spanish Government www.lexmundi.com Page 315 © 2012 Lex Mundi annually establishes the maximum and minimum amount used to calculate social security contributions and the percentages which must be assumed by employers and employees. For year 2009, the maximum contribution base is Euro 3,166.20 per month. As a general rule, employers must contribute at a rate of 29.90% and employees at a rate of 6.35%. In addition to the abovementioned rates, employers must contribute to the Social Security for employees’ professional contingencies (i.e. contingencies that arise from work related accidents or professional illnesses). The specific percentages to be applied by the companies mainly depend on the principal activity of each company (with some exceptions), ranging approximately between 0.90% and 7.75%.

31. How is the taxable base determined?

Please see above.

32. What are the applicable rates?

Please see above.

33. Are there any exemptions?

Please see above.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes, Spanish has an Inheritance and Gift Tax in place, which will be described in more detail in our answers to the questions below.

There is also a Spanish Wealth Tax, although with effects as of January 1, 2008, the Wealth Tax Law was amended in order to introduce a 100% tax deduction creditable against the final Wealth Tax liability and in order to eliminate any filing obligation for the taxpayer. As a result, it can be concluded that, in practice, the Spanish Wealth Tax has already been eliminated.

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Spanish Inheritance and Gift Tax (Impuesto sobre Sucesiones y Donaciones, “IGT”) is a tax charged by the Spanish Autonomous Communities on the acquisition by individuals of assets or rights by means of a gift or inheritance (i.e. on a free basis, without consideration). No IGT is levied with respect to acquisitions made by legal entities (those acquisitions will be subject to the Spanish CIT or to the Spanish Non-Residents Income Tax, as applicable). The elimination of the IGT charged in connection with inheritance and gifts among members of the same family is currently being discussed and analyzed in Spain. In this respect, some Autonomous Communities (Madrid, Valencia, Islas Baleares, Castilla-La Mancha, Castilla y León, La Rioja, etc.) have reduced IGT on gifts between relatives as a prior step to eliminating this tax. As advanced, IGT is applicable to: (i) the acquisition of assets or rights by means of a gift or by any other means provided that it is on a free basis; (ii) the acquisition of assets or rights through inheritance or by any other means of succession; and

www.lexmundi.com Page 316 © 2012 Lex Mundi (iii) amounts obtained by the beneficiaries of life insurance policies if the contracting party is not the beneficiary. The persons liable to pay IGT are: (a) the inheritors in case of mortis causa transfers; (b) the recipient or beneficiary, in the event of gifts or any other equivalent transfer; and (c) the beneficiary, in the case of a life insurance policy. Spanish resident taxpayers are liable for this tax for all assets and rights acquired by them, irrespective of the place where the assets or rights are located or should be considered exercisable. Non-resident individuals are subject to tax if the assets or rights received are located or are exercisable within the Spanish territory or, with respect to assets deriving from life insurance policies, when they are paid by a Spanish resident insurance entity. In the event of mortis causa acquisitions, the taxpayer must self assess the tax and file the applicable return within the six months following the death of the transferor. Under special circumstances, it is possible to apply for an extension of this six-month period, although in such a case (a) the Spanish Tax Authorities will assess the tax due and (b) interests for delayed payment will be accrued as from the end of the six-month period onwards. In the case of gifts, the taxpayer must self assess tax and file the applicable return within thirty days following the acquisition. Tax returns must be filed: (a) with the tax authorities of the Autonomous Community where the deceased individual was resident, in the case of mortis causa transfers; (b) with the tax authorities of the Autonomous Community where the recipient is resident, in the case of gifts; or (c) before the Spanish Central Tax Administration, when the taxpayer is not resident in Spain. In the case of self assessment of the tax liability, tax is payable within the term established for filing the return (i.e., six months in the case of mortis causa transfers and thirty days for gifts). When the tax authorities are in charge of assessing the tax due, payment is to be made within the month following the notification of the tax due. Tax rates are determined by the Autonomous Communities. As a general rule, rates range from 7.65% to 34%. There are additional coefficients which are to be applied on the tax due. These coefficients depend on the kinship between the acquirer and the donor or the deceased and the prior net wealth of the acquirer. In the case of mortis causa transfers, the taxable amount attributed to each inheritor is the market value of the goods or rights received, reduced by the amount of the charges and liabilities assumed, if any. The law establishes reductions depending on the kinship with the deceased and the age of the inheritor. In this regard, some Autonomous Communities have included important reductions. In the case of gifts, the taxable amount is the market value of gifts and rights, minus any charges and debts assumed. Finally, in the case of life insurance benefits, the taxable amount is the amount received by the beneficiary. Please note that under certain requirements, the acquisition of a family business will benefit from a 95% tax credit of its total value, provided that the acquirer holds the family business for at least ten years.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Transfer pricing provisions: According to the CIT Law, Spanish companies are obliged to assess transactions with related parties on an arm’s length basis. In order to determine the fair market value of the transaction, and following the OECD guidelines, the Law sets forth that the parties will use any of the following methods: the comparable uncontrolled price method, the cost plus method, the resale price method, the profit split method or the transactional net margin method, the first three being preferential in use. Additionally, the parties will have to produce and keep appropriate documentation in order to evidence to the Spanish Tax Authorities, as the case may be, the valuation used. The Tax Authorities could impose penalties in two different situations: (i) when the taxpayer does not comply with the mentioned documentation obligations and (ii) when the taxpayer complies with the documentation obligations but the value of the transaction used by the taxpayer is not the one resulting from the documentation provided to the Authorities. Finally, in order to resolve the issue of transfer pricing on a preliminary basis, the CIT Law provides for the possibility of submitting to the authorities a preliminary proposed valuation of transactions between related parties (Advance Pricing Agreements). Legislated General Anti-Avoidance Rules: Section 15 of the Spanish General Tax Law (Ley General Tributaria) permits the Spanish tax authorities to request the relevant tax liability resulting from applying the rule corresponding to the usual or proper acts and agreements, when the taxable event is completely or partially avoided or the tax base or the tax liability is reduced through the performance of acts or agreements: (i) that individually considered, or taken as a whole, are obviously artful or non-appropriate for the consecution of the result achieved, and (ii) that no further juridical or economic relevant effects are achieved other than the tax savings and those effects corresponding to the usual or appropriate acts or agreements. Additionally, under Section 16 of the Spanish General Tax Law, the Spanish tax authorities may also attack “simulated” transactions. CFC rules: Spanish companies are subject to Controlled Foreign Corporation (“CFC”) rules. Under the CFC rules, certain income generated by a foreign entity in which the Spanish company holds a minimum 50% participation in its capital, equity, Profit & Loss or voting rights, qualifies as taxable income of the Spanish company if, in addition, such income: (i) qualifies as tainted income (such as financial income or passive real estate income, amongst others); and (ii) is subject to a lower tax than 75% of the Spanish CIT which would have been payable. The Spanish company is not required to recognize tainted income obtained by its EU affiliates to the extent that it evidences before the Spanish Tax Authorities that the incorporation and operative of the EU affiliate is carried out for valid economic reasons and that the EU affiliate is engaged in an active trade or business. Thin cap rules: The thin capitalization rules apply to financing arranged by a resident entity with related non-resident entities. When the net interest-bearing debt, be it direct or indirect, of a Spanish entity with one or more related individuals or entities not resident in Spain exceeds three times the entity’s equity (excluding profit or loss for the year), interest accruing on the excess is deemed to be a dividend www.lexmundi.com Page 318 © 2012 Lex Mundi distribution. Therefore, interest paid over the maximum allowed ratio is not considered a deductible item for tax purposes and is subject to dividend withholding tax in the same way as an ordinary dividend (and also subject to the potential dividend withholding tax exemptions). The Spanish entity may submit proposals to the tax authorities to apply a coefficient other than the three-to-one debt-to-equity ratio. The proposals must be based on the financing which the Spanish entity would have been able to obtain from unrelated persons or entities under normal market conditions. The thin-cap rules do not apply when the non-resident lender is resident in an EU member state other than a tax-haven jurisdiction.

Currently, Spain has entered into 62 conventions for the avoidance of double taxation with the following countries: Algeria, Argentina, Australia, Austria, Belgium, Bolivia, Brazil, Bulgaria, Canada, Chile, China, Croatia, Cuba, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mexico, Morocco, Norway, New Zealand, Netherlands, Philippines, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, former Soviet Socialist Republics (except for Russia)10, South Africa, Sweden, Switzerland Thailand, Tunisia, Turkey, United Arab Emirates, United Kingdom, USA, Venezuela, and Vietnam. Spain has also signed treaties regarding Inheritance Tax with Greece, Sweden and France, and treaties regarding taxation on air and sea navigation with Argentina, Ireland, Chile, Venezuela and South Africa. The following chart summarizes the relevant treaty rates on dividends, interest and royalties:

Spain Dividends Interest Royalties Treaty Partner (%) (%) (%) Algeria 5/15 5 14/7 (a) Argentina 10/15 0/12.5 (b) 3/5/10/15 (c) Australia 15 10 10 Austria 10/15 5 5 Belgium 0/15 10 5 Bolivia 10/15 15 15 Brazil 15 10/15 10/15 (d) Bulgaria 5/15 0 0 Canada 15 15 0/10 (e) Chile 5/10 5/15 (f) 5/10 (g) China (P.R.C.) 10 10 10 (h) Croatia 0/15 8 8 Cuba 5/15 10 5 Czech Republic 5/15 0 5 Ecuador 15 5/10 (i) 5/10 (j) Egypt 9/12 10 12

10 Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.

www.lexmundi.com Page 319 © 2012 Lex Mundi Estonia 5/15 0/10 (k) 5/10 (l) Finland 10/15 10 5 France 10/15 10 5 Germany 10/15 10 5 Greece 5/10 8 6 Hungary 5/15 0 0 Iceland 5/15 5 5 India 15 15 10/20 (m) Indonesia 10/15 10 10 Iran 5/10 7.5 5 Ireland 15 0 5/8/10 (n) Israel 10 5/10 (o) 5/7 (p) Italy 15 12 4/8 (q) Japan 10/15 10 10 Korea (R.O.K.) 10/15 10 10 Latvia 5/10 10 5/10 (r) Lithuania 5/15 10 5/10 (s) Luxembourg 10/15 10 10 Macedonia 5/15 5 5 Malaysia 0/5 10 5/7 (t) Malta 0/5 (u) 0 0 Mexico 5/15 10/15 (v) 10 Morocco 10/15 10 5/10 (w) Netherlands 5/10/15 10 6 New Zealand 15 10 10 Norway 10/15 10 5 Philippines 10/15 10/15 (x) 10/15/20 (y) Poland 5/15 0 10 Portugal 10/15 15 5 Romania 10/15 10 10 Russia 5/10/15 5 5 Saudi Arabia 0/5 5 8 Slovakia 5/15 0 5 Slovenia 5/15 5 5 former Soviet Socialist 18 10 0/5 Republics (except for Russia)11 South Africa 5/15 5 5 Sweden 10/15 15 10 Switzerland 0/15 0 5 Thailand 10 10/15 (z) 5/8/15 (aa) Tunisia 5/15 5/10 (bb) 10 Turkey 5/15 10/15 (cc) 10 United Arab Emirates 5/15 0 0 United Kingdom 10/15 12 10 United States 10/15 0/10 (dd) 5/8/10 (ee) Venezuela 0/10 4.95/10 (ff) 5 Vietnam 7/10/15 10 10

11 Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.

www.lexmundi.com Page 320 © 2012 Lex Mundi Footnotes to the chart: (a) The 14 percent rate applies to literary, artistic, and scientific copyright royalties; the 7 percent rate applies in all other cases. (b) The 0 percent withholding tax rate applies to interest paid on the sales of industrial, commercial, and scientific equipment. (c) The 3 percent rate applies to news royalties; the 5 percent rate applies to literary, theatrical, musical, and artistic work copyright royalties; the 10 percent rate applies to patent royalties and to commercial, industrial, and scientific equipment and information royalties; the 15 percent rate applies in other cases. (d) The 10 percent rate applies to literary, artistic, and scientific work copyright royalties; the 15 percent rate applies in other cases. (e) The reduced withholding tax rate applies to artistic copyright royalties. (f) The 5 percent rate applies to loans granted by banks and insurance companies, bonds and securities traded on a recognized stock exchange, and the sale of machinery and equipment. The 15 percent rate applies in other cases. (g) The 5 percent rate applies to industrial, commercial, and scientific equipment royalties, the 10 percent rate applies in other cases. (h) For industrial, commercial, and scientific equipment royalties, the 10 percent rate applies to the adjusted amount of the royalties (60 percent of the gross amount of the royalties). (i) The 5 percent rate applies to the sale of industrial, commercial, and scientific equipment, the sale of merchandise by one enterprise to another enterprise, and the financing of construction, installation, and assembly projects. The 10 percent rate applies in other cases. (j) The 5 percent rate applies to literary, dramatic, musical, and artistic work copyright royalties. The 10 percent rate applies in other cases. (k) The 0 percent withholding rate applies to interest paid regarding the sale on credit of merchandise or industrial, commercial or scientific equipment except when the sale or indebtedness is between related persons. (l) The 5 percent rate applies to industrial, commercial, and scientific equipment royalties, and the 10 percent rate applies in other cases. (m) The 10 percent rate applies to industrial, commercial, and scientific equipment royalties, and the 20 percent rate applies in other cases. (n) The 5 percent rate applies to literary, dramatic, musical, and artistic work copyright royalties; the 8 percent rate applies to film royalties and to industrial, commercial, and scientific equipment royalties; and the 10 percent rate applies in other cases. (o) The 5 percent rate applies to the sale on credit of industrial, commercial, and scientific equipment; the sale on credit of merchandise by one enterprise to another enterprise; and to a loan granted by a financial institution. The 10 percent rate applies in other cases. (p) The 5 percent rate applies to literary, dramatic, musical, and artistic work copyright royalties, and to industrial, commercial, and scientific equipment royalties. The 7 percent rate applies in other cases. (q) The 4 percent rate applies to literary, dramatic, musical, and artistic work copyright royalties, and the 8 percent rate applies in other cases. (r) The 5 percent rate applies to industrial, commercial, and scientific equipment royalties, and the 10 percent rate applies in other cases. (s) The 5 percent rate applies to industrial, commercial, and scientific equipment royalties. The 10 percent rate applies in other cases. www.lexmundi.com Page 321 © 2012 Lex Mundi (t) The 5 percent rate applies to technical services royalties, and the 7 percent rate applies in other cases. (u) Spain applies a zero percent rate when the beneficial owner is a company that holds at least 25 percent of the capital of the payer company and it applies a 5 percent rate in other cases. The Malta withholding tax may not exceed the tax chargeable on the profits out of which the dividends are paid. (v) The 10 percent rate applies if the beneficial owner is a bank, and the 15 percent rate applies in other cases. (w) The 5 percent rate applies to literary, artistic, and scientific work copyright royalties. The 10 percent rate applies in other cases. (x) The 10 percent rate applies to the sale on credit of industrial, commercial, and scientific equipment, and to the issues of bonds and debentures. The 15 percent rate applies in other cases. (y) The 10 percent rate applies to royalties paid by an enterprise registered with the Philippine Board of Investments; the 20 percent rate applies to film and broadcasting royalties; and the 15 percent rate applies in other cases. (z) The 10 percent rate applies to interest paid to a financial institution, and the 15 percent rate applies in other cases. (aa) The 5 percent rate applies to literary, dramatic, musical, artistic, and scientific work copyright royalties; the 8 percent rate applies to the leasing of industrial, commercial, and scientific equipment; and the 15 percent rate applies in other cases. (bb) The 5 percent rate applies to loans whose term exceeds seven years and the 10 percent rate applies in other cases. (cc) The 10 percent rate applies to a loan granted by a bank and to the sale on credit of merchandise and equipment. The 15 percent rate applies in other cases. (dd) The zero percent rate applies to interest paid in connection with the sale on credit of any industrial, commercial, or scientific equipment. (ee) The 5 percent rate applies to copyright royalties, the 8 percent rate applies to films and to industrial, commercial, or scientific equipment, and the 10 percent rate applies in other cases. (ff) The 4.95 percent rate applies to financial institutions, and the 10 percent rate applies in other cases.

Contact Information:

Rafael Vargas Uría Menéndez [email protected] Calle Principe de Vergara, 187 Plaza de Rodrigo Uría José Gabriel Martínez Madrid, 28002 [email protected] Spain

Tel 34.91.586.04.00 Fax 34.91.586.04.03 http://www.uria.com

Tax Desk Book

Sweden Prepared by Lex Mundi member firm Advokatfirman Vinge KB

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

Income is calculated for individuals in three different sources: employment, business and capital.

You can deduct a basic allowance of between SEK 12,600 and SEK 33,000 on taxable earned income (employment and business activity) if you have had unlimited tax liability for the whole year.

After the basic deduction you pay the following taxes on taxable earned income: municipal tax in your municipality of residence (approx. 30-33%), church tax and burial charges (approx. 1-2%), state progressive income tax. State income tax is 20% of the part of your taxable earned income exceeding SEK 367,600 (2008: SEK 328,800). If your taxable earned income exceeds SEK 526,200 (2008:SEK 495,000), you have to pay state income tax of a further 5 per cent on the part exceeding SEK 526,200 (2008:SEK 495,000).

On income of capital only a flat rate national income tax is levied, 30%.

National corporate income tax is presently 26,3 % and is paid by limited liability companies, economic associations and foundations

The VAT rate is generally 25% but can exceptionally be 6% (e.g. books) or 12%(e.g food).

The social security contribution rate is, depending on whether you are an employer or a self employed person, between 29,7 to 31,4%.

Examples on selective purchase taxes in Sweden are on tobacco, alcohol, energy, lottery, waste, gambling and advertising.

If you own a detached or semi-detached house for one or two families, so called “småhus”, in Sweden you will have to pay a municipal property fee. For 2009 you will have to pay a fee of a fixed amount of SEK 6,362 , or a maximum of 0,75% of the total assessed value for the house and its plots. The fixed amount is linked to an index which follows changes in the Swedish income base amount. Presently the income base is SEK 48,000. On average, the increase the last couple of years has been around four per cent. The property fee for the whole income year will be paid by the person who owned the house on 1 January each year. Newly constructed houses are exempted from the property fee for the first five years and pay half the fee for the next five years.

Real-estate contribution is also levied on residential apartment houses (maximum SEK 1,272 for every apartment or 0,4% the assessed value if this amount is lower). There is a real-estate tax levied on other real estates, such as undeveloped plots, leasehold sites, apartment buildings that are non- residential premises, industrial premises etc. The rate is between 0,4-2,2%.

As from 1 January 2007 no wealth tax is levied in Sweden.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

Individuals + Income of employment (e.g. salery, benifits, expense allowance, pension) - Common deductions = Assesed income - Tax allowance = Taxable earned income

Business entities The business’s surplus (income – costs) -Common deduction =Taxable earned income

3. What revenues are included?

Income of employment - e.g. salery, benifits, expense allowance, pension, sickness allowance, life annuity i.e. almost all remuneration an employer receives from his or her employer.

Income of capital – only individuals can have this income. All income that is not assignable to income of employment or business is assignable to income of capital. Principally, all income and deductions are granted for all expenses assignable to assets. All capital profit is subject to tax.

Income of business – The main rule is that remuneration for goods, services, equipment, return on assets, capital profit and all other income in the business are included. There are a few exceptions to this rule e.g. insurance remuneration for damage on assets.

4. What deductions are allowed?

Income of employment Deductions are granted for the following:  travel to and from work: Deductions for traveling expenses between the residence and place of work are granted only if the expenses exceeds SEK 9,000. If the self employed person has expenses exceeding SEK 9,000 there are further conditions to fulfill. For example, the distance between the residence and place of work has to be more than five kilometers. Deduction is only granted if the self employed person, by using the car instead of public transportation, regularly saves a minimum of two hours a day. If the self employed person use his or her own car deductions for traveling expenses of SEK 18,50 can be made.  on-the job (business) travel with a private vehicle  higher living expenses in conjunction with business trips.  higher living expenses because of dual residence  journey home once a week if the place of work is situated more than 50 kilometers from home

Income of business Deduction can be claimed on all costs necessary to maintain and develop the business operation. Cost for employees and their welfare, research, representation, marketing and other activities promoting the business’s sales and social security contribution. Established losses, expenses for www.lexmundi.com Page 324 © 2012 Lex Mundi future guarantees with an amount calculated on the risk of fulfilling the guarantee bond and expenses for courses and education

5. What are the major expenses that are not deductible?

Income of employment -Personal living expenses

6. What are the applicable federal rates?

From the 1 January 2009 the corporation income tax is 26,3% (previously the rate has been 28%)

State income tax is 20% of the part of your taxable earned income exceeding SEK 367,600 (2008: SEK 328,800). If your taxable earned income exceeds SEK 526,200 (2008:SEK 495,000), you have to pay state income tax of a further 5 per cent on the part exceeding SEK 526,200 (2008:SEK 495,000).

7. What are the applicable state and/ or other local rates?

Municipal tax: 30-33% (in Gothenburg 32,72%, including church fee 0,84%, funeral fee 0,13%, tax to the municipality 21,3% and tax to the county council 10,45%.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

The capital gain rate is thirty percent.

9. How are operating losses handled?

Limited liability companies etc.: The main rule is that losses in income of business from previous taxable years are deducible. There are however restrictions in companies after inter alia changes in the owner stricture, after bankruptcy, composition and debt restructuring and after qualified merger and fission.

Individuals: Individuals who have income of business, self employed individuals, can deduct the taxable year the individual has started the business and the following five years. The deduction is limited to SEK 100,000 a year. Deduction is not allowed if the individual has pursued similar business the last five years or if a real estate, on the owner’s request, is part of the business instead of being a private residence. In reality it is therefore possible to set off losses in income of business against employment income.

10. How are capital losses handled?

Income of capital – only seventy per cent of the capital losses are deductible. The deduction is made on income of capital. If you have a deficit from capital, your tax is automatically reduced in the form of a tax reduction when calculating your final

Territorial Rules

11. What are the residence rules?

Individuals www.lexmundi.com Page 325 © 2012 Lex Mundi If you are resident in Sweden, have a habitual abode in Sweden or have an essential connection with Sweden, you have unlimited tax liability here. This means that you are liable to tax on all income both in Sweden and abroad.

A person is considered resident in Sweden if his or her actual residence is here. This normally means anyone who is registered for population purposes here or who takes his or her daily rest here. A person moving to Sweden has unlimited tax liability from the date of arrival here.

To be considered to have a habitual abode in Sweden a stay of at least six months is required. The period of stay is calculated without taking account of the turn of the year. Temporary interruptions to the stay in Sweden are irrelevant.

Even if you move from Sweden you may still be considered to have unlimited tax liability here. This applies if you have been resident here and has an essential connection with Sweden. If you cannot yourself show that you have no essential connection you will be regarded as having am essential connection for five years from your departure if you are a Swedish citizen or have lived in Sweden for at least ten years. Circumstances that give an essential connection with Sweden is e.g. having a family or a house in Sweden, carrying on business activity in Sweden in the form of a private business or a company, having a Swedish citizenship, if he or she is not permanently resident in a foreign country. Other circumstances may also be of relevance and an overall assessment is made.

If you do not have an essential connection after leaving, your tax liability ceases on departing from Sweden. Otherwise the tax liability ceases when the connection can no longer be regarded as essential.

Legal entities Legal entities are unlimited tax liability in Sweden if they are registered here or if registration is not made, they are considered as Swedish legal entities because of the place for the board of directors or any other circumstance.

An unlimited tax liable legal entity is liable to tax assignable to both Sweden and abroad.

12. Is worldwide income taxed?

If you are subject to unrestricted taxation you are you are liable to tax on all income both in Sweden and abroad. Provisions in tax agreements with other countries may mean that the Swedish right to tax is restricted.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

According to the law of tax credit, tax credit can be made against the Swedish tax on the part of the foreign tax on the income. To fall within the law you have to be subject to unrestricted taxation in Sweden or subject to restricted taxation and have had an income assignable to a permanent establishment in Sweden. The income has to be taxable according to the Income Tax Act, the person has paid tax on the income abroad and according the tax legislation in the foreign country the income has to be assignable to that country. The tax credit shall be against national and municipal income tax.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Dividend payments beneficially owned by non-residents are liable to a 30% non-resident withholding tax. Depending upon the persons's residency, however, it may be possible to reduce the rate of tax www.lexmundi.com Page 326 © 2012 Lex Mundi payable in accordance with the provisions of a double taxation treaty. Dividends on Swedish shares and participations in Swedish securities funds are subject to dividend tax according to Kupongskattelagen (1970:624) ) or in English, Dividend withholding tax Act. Both individuals and legal entities that are subject to restricted taxation are subject to tax when receiving dividends.

15. What are the rates on royalties for withholding taxes?

Sweden has no withholding tax on royalties.

16. What are the rates on interest for withholding taxes?

Sweden has no withholding tax on interest.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

Sweden has no withholding tax on profits realized by a foreign corporation. According to the Income Tax Act limited tax liable individuals or entities are liable to pay taxes if they carry on business activity from a fixed place of business or have a business property here. They have to pay state and municipal income tax on such business income.

18. Please list any other rates on withholding taxes that we should be aware of.

N/A

Tax Returns and Compliance

19. What is the taxable reporting period?

Income tax: one financial year. VAT: once a year if the taxable base is less than SEK 200.000 and the individual or entity shall report VAT in his/its income-tax return form, every quarter of the year if the taxable base more than SEK 1.000.000 but less than SEK 40.000.000 and every month if the taxable base exceeds SEK 40.000.000.

The local government charge and the real estate tax shall be paid for the whole income year by the registered owner at the beginning of the year.

20. What are the due dates for the filing of tax returns?

You must submit the tax return not later than 2 May. If you are resident or have your habitual abode abroad you must submit the return not later than 31 May. You may send it by post, but this must be done early enough to allow the return to reach the Swedish Tax Agency on time. If you submit a tax return too late you risk having to pay a late filing penalty. In many cases you can submit your tax return via the Internet, by phone or by sms.

21. What are the key compliance requirements?

If you have unlimited tax liability you submit Inkomstdeklaration 1 [Personal Tax Return 1] if:  you have been resident in Sweden during the whole 2008 and had taxable earned income (income from employment and income from active business activity) of SEK 17 343 or more.  you have been resident in Sweden during part of 2008 and had taxable earned income of SEK 100 or more.  you have had capital income of SEK 100 or more and there has not been a tax deduction of the whole amount.

www.lexmundi.com Page 327 © 2012 Lex Mundi  you have received - from a close company or closely held partnership - dividend income, profit on sale of shares, or other payments and emoluments which are to be shown as income from employment or you have had income from passive business activity for at least SEK 100 in total during the fiscal year.  you have owned real property or part of real property during 2008.  you have been instructed to submit a tax return.

If the Swedish Tax Agency has information concerning the income and deductions you have had, you will receive a tax return form with this information preprinted.

If you have limited tax liability you must submit Inkomstdeklaration 1 [Personal Tax Return 1] if:  you have had an income of SEK 100 or more. If you have paid SINK-tax (Special income tax for non-residents) on your income you do not need to submit a return. Nor need you declare dividends from Sweden.  you have owned real property (e.g. a house, holiday property, land) or part of real property in Sweden during 2008.  you have been instructed to submit a tax return.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Yes. VAT and sales taxes.

24. How does it operate? Is it a VAT or a sales tax?

VAT is levied on almost all consumption of goods and services. VAT is paid by all consumers, but payments directly to the state are made by businesses. VAT is an expense for those who pay it to the state. Selective purchase tax is levied on tobacco, alcohol, energy, lottery, waste, gambling and advertising.

25. How is the taxable base determined?

VAT: taxable supply of goods and services after deducting input value added tax. Sales taxes: taxable volumes

26. What are the applicable rates?

The general VAT rate is 25%.

The VAT rate is 12% for foodstuffs all substances or products intended to be eaten or can reasonably be expected to be eaten by people), sale of works by the artist or the artist’s estate, import of works of art, collector’s items and antiques, letting of rooms in hotel and boarding-house businesses.

The tax rate is 6% for books, brochures, pamphlets and such works including single leaflets, newspapers and magazines regardless of subject matter (such as news magazines and weekly magazines), picture books, drawing books and coloring books for children, sheet music, maps, such as atlases, wall maps and topographic maps, passenger transport (travel), including taxis, trains and domestic flights, entrance fees to concerts and circuses, cinemas, theatres, ballet or opera www.lexmundi.com Page 328 © 2012 Lex Mundi performances and similar, library and museum activities, entrance fees and guiding fees for animal parks, services in the field of sports, such as fees for participating in sports or entrance fees to sporting events, grant or transfer rights to certain copyrighted works.

The 25% rate is to applied to grants and transfers regarding photographs, advertising work, information films, computer systems and computer software, grant or transfer rights to sound or image recordings of an artist’s or actor’s performance of literary or artistic work, programs and catalogues issued for information about activities. There are a number of goods and services that are exempt from VAT. There are also some exceptions to the above rates.

Sales tax Alcohol: There are different rates depending on the type of alcohol and the alcohol-rate. Tobacco: The general rate is SEK 0,31 per cigarette and 39,2 % of the retail price, SEK 1,12 per cigar or cigarillo and SEK 1,560 per kilo smoking-tobacco, SEK 336 per kilo moist snuff and SEK 402 per kilo chewing-tobacco Advertising: Advertisement in daily newspapers are taxed at the rate of 3 % and in other printed media 8 %

27. Are there any exemptions?

VAT: Banking and financial services, dental care, insurance and insurance agency work, staff magazines, medical care, letting of property,

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Employer's contributions Employer's contributions are paid by the person who has paid employees for work and is calculated on the sum of salaries and benefits paid.

The employer's contributions are made up of the following charges: old-age pension charge, survivor's pension charge, sickness insurance charge, parental insurance charge, work injury charge, labour market charge and general payroll tax. For 2009 they amount in total to 31,42% of the total salary (2008: 32,42%). A foreign employer without a fixed place of business in Sweden does not pay the general payroll tax, however, and the charges then total 23,93% in 2009(2008: 24,93%).

On payment to persons born 1938 - 1943 employer's contributions of 10,21% are payable, consisting of old-age pension charge. If the employee is born 1983-1990 (person who at the beginning of the year has reached the age of 18 but not 26) the employer's contributions will be 15,49% and are made up of the old-age pension charge and half of the other charges. If you work in Sweden for a foreign employer without a permanent establishment in Sweden, you and your employer may agree that you pay social security contributions in the form of self-employed person's contributions.

If you have social insurance in another country, your employer pays no employer's contributions in Sweden.

Self-employed person's contributions

www.lexmundi.com Page 329 © 2012 Lex Mundi If you are self-employed and carry on business as a one-man business or partnership you must yourself pay social security contributions in the form of self-employed person's contributions. The self- employed person's contributions are calculated on the net income, i.e. the surplus from business activity. If you carry on business in a limited company the company pays employer's contributions on your salary in the same way as for employees. Self-employed person's contributions consist of the same component charges as the employer's contributions listed above but the sum of the charges is 29.71 per cent in 2009 (2008: 30.71 per cent). For persons born in 1943 or earlier reduced charges are paid, 10.21 per cent. If you are born 1983-1990 (i.e. you have at the beginning of the year reached the age of 18 but not 26) the contributions will be 15.07 per cent.

If you have social insurance in another country, you do not have to pay any self-employed person's contributions.

30. How do they operate?

See question above.

31. How is the taxable base determined?

Employer's contributions are calculated on the sum of salaries, fees, benefits and other remuneration for work the employer has paid to the employee. The self-employed person's contributions are calculated on the net income, i.e. the surplus from business activity. If you carry on business in a limited company the company pays employer's contributions on your salary in the same way as for employees.

32. What are the applicable rates?

Employer's contributions: 32,42% The self-employed person's contributions 29.71%

33. Are there any exemptions?

If you have social insurance in another country, your employer does not pay any employer's contributions in Sweden.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

N/A

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

www.lexmundi.com Page 330 © 2012 Lex Mundi 37. If so, please indicate if there are any of the following: anti-deferral regimes; transfer pricing provisions; tax avoidance measures like legislated General Anti-Avoidance Rules, etc.; controlled foreign companies regulations; thin capitalization rules

Anti-defferal regimes: No

Transfer pricing provisions: Yes. Swedish law on transfer pricing is based on the so-called arm’s length principle. Under this principle, the Tax Authority may adjust income of a Swedish company if it is taxable income in Sweden is reduced as a result of contractual provisions that differ from those that would be agreed by unrelated parties.

Anti-Avoidance Rules: To prevent tax avoidance there is a special Act, “Skatteflyktslagen” (The Tax Avoidance Act).

Controlled foreign companies Regulation: The premise of the new CFC-rules is that a person, whether a legal entity or individual, holding 25% or more of the equity or voting rights in a foreign legal entity with low taxed income, is taxed in Sweden for his share of the foreign entity’s income. A foreign entity is considered having “low taxed income” if the entity’s net income –as computed under Swedish rules –has been taxed at a rate below 15,4%. There is, however, a general exemption from CFC-taxation for companies in certain countries according to a special “white list”, with the exception of certain businesses in some cases. Most of the countries with which Sweden has a double taxation treaty are included on this list.

Thin capitalization rules: No

Sweden has double tax treaties with over eighty countries.

Contact Information:

Ulf Käll Advokatfirman Vinge KB [email protected] Smålandsgatan 20 PO Box 1703 Stockholm, S-111 87 Sweden

Tel 46.10.614.30.00 Fax 46.10.614.31.90 http://www.vinge.com

Tax Desk Book

Switzerland Prepared by Lex Mundi member firm Pestalozzi

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

 Income taxes (individuals) / profit taxes (corporations); federal as well as cantonal/communal level;  Wage withholding tax (non-Swiss citizens except for “C-permit”/unlimited residence permit holders);  Net worth tax (individuals) / annual capital (net asset value) tax corporations;  Withholding tax on dividends;  Withholding tax on bond interest payment;  Withholding tax on pension payments to recipients domiciled outside Switzerland;  Withholding tax on board member fees paid to recipients domiciled outside Switzerland;  VAT;  Stamp duty on capital contributions to corporations;  Stamp duty on securities transactions;  Stamp duty on debt securities of Swiss issuers (0.12% / 0.06% p.a.);  Real property transfer tax.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

Individuals: basically all income with certain exceptions (such as private capital gains on movable property/capital assets);

Corporations: based on Swiss GAAP financial statements; non deductible items, if any, are added back to the taxable basis.

3. What revenues are included?

Individuals: As a rule: any income unless there is a an explicit tax exemption; Worldwide income except for foreign permanent establishments and foreign real estate; Earned income; Income from self employment; Investment income; Rental income; Gains on disposal of real property; Pensions and Annuities.

www.lexmundi.com Page 332 © 2012 Lex Mundi Corporations: As a rule: any income unless there is an explicit tax exemption; Worldwide income except for foreign permanent establishments and foreign real estate; Capital gains; Exchange gains.

4. What deductions are allowed?

Corporations: As a rule: any expenses made for business reasons; General business expense; Interest expense; Management and service fees paid to a foreign group company; Tax expenses; Exchange losses; Depreciations; Provisions for bad and doubtful debts; Loss carry-forwards.

5. What are the major expenses that are not deductible?

Excess of expenses incurred vis-à-vis related parties; Private expenses (to the benefits of shareholders) in a corporation; Bribe payments to office holders (both, Swiss or non-Swiss).

6. What are the applicable federal rates?

Individuals: 0 – 11.5%; Corporations: 8.5% after tax, approx. 7,83% pre-tax (= 8,5/108,5).

7. What are the applicable state and/ or other local rates?

Individuals: Combined federal, cantonal, communal rates for an annual income of CHF 1 million: approx. 18,4% – 43,5% depending on municipality, canton and family status; privileged tax deductions possible for expatriates; privileged lump sum tax regime available for certain non-Swiss individuals.

Corporations: Combined federal, cantonal, communal pre-tax rates: 12.5% - 25%, depending on municipality and canton.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Individuals: private capital gains on movable property/capital assets are not taxed; Corporations: capital gains are not taxed separately; roll-over provisions in case of mergers etc.

Business re-organizations in terms of the tax law can be made tax neutral.

9. How are operating losses handled?

Can be carried forward during 7 years.

Individuals: tax deductible only in case the underlying capital assets are held as business assets; not deductible in case the underlying capital assets are held as private assets. Corporations: tax deductible.

Territorial Rules

11. What are the residence rules?

Individuals: center of vital interest or qualifying sojourn. Corporations: Statutory domicile or effective management.

12. Is worldwide income taxed?

Yes, except for foreign permanent establishment (even if “offshore”) and foreign real estate.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Non recoverable foreign withholding tax can be deducted from the taxable base.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

35%, reduced by applicable double tax treaty (if any) or under art. 15 of the Agreement between the European Community and the Swiss Confederation providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments.

15. What are the rates on royalties for withholding taxes?

n/a, no domestic withholding tax on royalties.

16. What are the rates on interest for withholding taxes?

% on bond interest and the like; further on interest paid on deposits with Swiss banks and distributions of Swiss investment funds. This withholding tax is reduced by an applicable double tax treaty (if any) or under art. 15 of the Agreement between the European Community and the Swiss Confederation providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

n/a, there is no such withholding tax in Switzerland.

18. Please list any other rates on withholding taxes that we should be aware of.

15% and 8% on certain insurance payments Withholding tax rates on pension payments and board members fees paid to domiciled outside Switzerland vary depending on the canton.

19. What is the taxable reporting period?

Business year or calendar year

20. What are the due dates for the filing of tax returns?

Due dates for filing depend on cantonal tax law i.e., can be different depending on the canton.

Canton of Zurich: Individuals: March 31 Corporations: September 30 Extensions may normally be obtained without difficulty upon written request

21. What are the key compliance requirements?

Filing of completed tax return incl. necessary enclosures such as e.g. balance sheet/profit and loss account (tax return forms are sent out to all individuals and corporations at the beginning of each calendar year).

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

The cantonal tax authorities may forward information to the tax authorities of other cantons involved.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

VAT (7.6% standard rate) Stamp duty on capital contributions to corporations (1%; CHF 1 million allowance); Stamp duty on securities transactions (0.3%; 0.15%); Stamp duty on debt securities of Swiss issuers (0.12% / 0.06% p.a.); Real estate transfer taxes and real estate transfer registration fees (some cantons do not levy a real estate transfer tax; rates depend on canton, approx. 0,2% - 3,3%).

24. How does it operate? Is it a VAT or a sales tax?

VAT is imposed on domestic deliveries of goods and services and the assessment system is broadly similar to the EU system. Further VAT is levied on the import of goods. For the import of services, the Swiss recipient may owe VAT.

25. How is the taxable base determined?

The VAT base is the (agreed) consideration. For transactions between related parties the VAT rate is the arm’s length value.

26. What are the applicable rates?

Standard rate: 7.6% Reduced rate: 2.4% Special rate (for certain services in the hotel sector): 3.6%

There is a broad list of VAT exemptions. One has to distinguish between VAT exemptions which do not affect the entitlement to Input VAT refund (“exemptions with credit”) and VAT exemptions which will exclude Input VAT refund (“exemptions without credit”).

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

Some cantons impose cantonal stamp taxes such as e.g., a tax on liens or a tax on the issuance of certain written instruments.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Mandatory old age and disability insurance; Mandatory employer pension plan (employees); Mandatory disability insurance; Mandatory unemployment insurance (only for employees); Mandatory accident insurance; Mandatory health insurance.

Switzerland has concluded treaties on the coordination of the levy of social security contributions with many countries. Special regulations apply to EU citizens according to the Agreement between the European Community and its Member States and the Swiss Confederation on the free movement of persons.

30. How do they operate?

Social security benefits in Switzerland are governed partly by federal and/or cantonal law and partly by collective employment agreements. Participation in the federal social security program is compulsory for all persons, whether employed, self-employed or not gainfully employed.

31. How is the taxable base determined?

Social security contributions are calculated based on the individual’s income. In case of employment income, employee/employer both have a 50% share in the contributions.

32. What are the applicable rates?

Employees: The combined rate for the mandatory contributions to the old age/disability/unemployment insurance is 12,1% (6,05% employer/employee, plus re-charge of administration costs which is also to be borne by the employer). This rate does not include contributions to the mandatory employer pension plan, the respective rates vary depending on the insurer involved. For the contributions to the unemployment insurance (2%; 1% employer/employee), a CHF 126’000.- (annual income) assessment ceiling applies.

Self-employed persons: The combined rate for self-employed persons is progressive (9,5% for an annual income of CHF 54’800.- or more; plus re-charge of administration costs). Self-employed persons do not pay contributions to the unemployment insurance. Persons who are not gainfully employed:

www.lexmundi.com Page 336 © 2012 Lex Mundi The social security contributions of persons who are not gainfully employed depend on the individual’s wealth and certain rental income and are calculated on a progressive scale. The maximum contribution is CHF 10’100/year (plus re-charge of administration costs).

33. Are there any exemptions?

Exemptions may apply based on treaties which Switzerland has concluded with other states regarding the coordination of the levy of social security contributions including the Agreement between the European Community and its Member States and the Swiss Confederation on the free movement of persons.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Gift taxes may be imposed by the cantons and communes on the following gifts: Gifts made by Swiss resident donors; and Gifts of Swiss real property made by resident and nonresident donors. The cantons of Schwyz and Lucerne do not levy gift taxes.

Inheritance taxes may be imposed by the cantons and communes in the following situations: Estates of deceased persons having had their last domicile in Switzerland; and Estates of foreign deceased persons involving the transfer of Swiss real property or unincorporated business enterprises in Switzerland.

The canton of Schwyz does not levy inheritance taxes.

The rates of gift and inheritance taxes are generally the same. They depend upon the relationship existing, respectively, between the deceased and the heirs, or between the donor and the donee. Interspousal gifts and inheritances collected by the surviving spouse and children are – depending on the canton - very frequently exempt or taxed at very low rates. Gifts to, and inheritance received from, unrelated persons can attract rates ranging from 20% to 40% depending on the canton.

Switzerland has concluded several double tax treaties in the field of gift and/or inheritance taxation with other countries (e.g., Austria, Denmark, France, Germany, Norway, Sweden, The Netherlands, United Kingdom and North Ireland, USA).

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Privileged tax regimes for holding companies, for companies which carry out their business activities predominantly outside of Switzerland (approx. 9% - 12% depending on the canton/municipality) and for Swiss finance branches.

General anti-avoidance rule Thin capitalization rules No CFC rules

Under Swiss domestic law, there is no withholding tax on royalties.

Country Dividends Dividends Interest Individuals % Qualifying Companies% Companies%

Albania 15 5 5 Algeria 15 5 0/10 Argentinia 15 10 0/12 Armenia 15 5 0/10 Australia 15 15 10 Austria 15 0 0 Azerbaijan 15 5 0/5/15 Belarus 15 5 5/8 Belgium 15 10 10 Bulgaria 15 5 10 Canada 15 5 10 China 10 10 10 Croatia 15 5 5 Czech Rep. 15 5 0 Denmark 0 0 0 Ecuador 15 15 10 Egypt 15 5 15 Estonia 15 5 0/10 Faroe Islands 0 0 0 Finland 10 0 0 France 15 0 0 Germany 15 0 0 Greece 15 5 10 Hungary 10 10 10 Iceland 15 5 0 India 10 10 10 Indonesia 15 10 10 Iran 15 5 0/10 Ireland 15 5 0 Israel 15 5 5/10 Italy 15 15 12.5 Ivory Coast 15 15 15 Jamaica 15 10 0/5/10 Japan 15 10 10 Kazakhstan 15 5 10 www.lexmundi.com Page 338 © 2012 Lex Mundi Korea (Rep.) 15 10 10 Kuwait 15 15 10 Kyrgyzstan 15 5 5 Latvia 15 5 10 Lithuania 15 5 10 Luxembourg 15 0/5 0/10 Macedonia 15 5 0/10 Malaysia 15 5 10 Mexico 15 5 10/15 Moldova 15 5 10 Mongolia 15 5 0/10 Montenegro 15 5 10 Morocco 15 7 10 Netherlands 15 0 5 New Zealand 15 15 10 Norway 15 0 0 Pakistan 35 15 15 Philippines 15 10 10 Poland 15 5 10 Portugal 15 10 10 Romania 10 10 10 Russia 15 5 5/10 Serbia 15 5 10 Singapore 15 10 10 Slovak Republic 15 5 0/10 Slovenia 15 5 5 South Africa 7.5 7.5 10 Spain 15 10 10 Sri Lanka 15 10 5/10 Sweden 15 0 5 Thailand 15 10 10/15 Trinidad and Tobago 20 10 10 Tunisia 10 10 10 Ukraine 15 5 0/10 United Kingdom 15 5 0 United States 15 5 0 Uzbekistan 15 5 5 Venezuela 10 0 5 Vietnam 15 7/10 10 Zambia 35 35 0

Contact Information:

M. Bauer Pestalozzi [email protected] Loewenstrasse 1 Zurich, CH-8001 O. Gehriger Switzerland [email protected] Tel 41.44.217.91.11 Fax 41.44.217.92.17 http://www.pestalozzilaw.com

Tax Desk Book

Thailand Prepared by Lex Mundi member firm Tilleke & Gibbins

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

In Thailand, taxes are imposed at both national and local levels. The central government is the main taxing authority. The principal taxes levied by the central government are as follows:

Direct Taxes

. Personal Income Tax . Corporate Income Tax . Petroleum Income Tax

Indirect Taxes

. Value Added Tax . Specific Business Tax . Customs Duties . Excise Tax . Stamp Duties

Source of Tax Law

The principal tax law in Thailand is the Revenue Code, which governs personal and corporate income taxes, value added tax, specific business tax, and stamp duties. Customs duties are regulated by the Customs Act; the Excise Act governs excise tax; and the Petroleum Income Tax Act governs petroleum income tax.

Tax Administration Structure

The Revenue Department of the Ministry of Finance is responsible for the administration of personal income tax, corporate income tax, petroleum income tax, value added tax, specific business tax, and stamp duties. The administration of customs duties is the responsibility of the Customs Department, Ministry of Finance, while the administration of excise tax is the responsibility of the Excise Department, Ministry of Finance.

In general, Thailand’s tax administration follows the concept of self-assessment. Taxpayers have a legal duty to declare their income and pay tax to the authorities. The income declared and tax paid are assumed to be correct. However, assessments may be conducted by the authorities in certain circumstances, such as failure to file tax returns or filing of false or inadequate tax returns.

The Thai Revenue Code imposes taxes on income except income subject to petroleum income tax. There are two types of income tax: personal income tax (income tax on individuals) and corporate income tax (income tax on juristic entities).

Calculation of Income/ Profit Taxes

Corporations In Thailand, the tax on income of juristic entities is called corporate income tax. All juristic companies and partnerships established under Thai or foreign law which carry on business in Thailand are subject to corporate income tax. A domestic corporation is subject to tax on worldwide income, while a foreign corporation is subject to tax on income generated in Thailand. Tax is generally levied at the rate of 30% of net profits.

International transportation companies, associations, and foundations all fall within the scope of corporate income tax but only pay tax on gross receipts instead of on net profits.

Individuals In Thailand, the tax on income of an individual is called personal income tax. The Thai Revenue Code provides principles for the collection of personal income tax on income derived from sources both inside and outside Thailand. According to the Code, individual taxpayers are classified into five categories and assessable income is classified into eight categories. Taxable income of an individual is derived after all expenses and allowances have been deducted from the assessable income. Tax levied on taxable income ranges from 5% up to 37%.

Taxable Persons Individual taxpayers are classified into five categories as follows:

a. a natural person; b. a group of persons which do not constitute a legal entity; c. an unregistered ordinary partnership; d. a deceased person for their assessable income and estate throughout the year in which death occurred; e. an undistributed estate of the deceased.

2. How is the taxable base determined?

Corporations Corporate income tax is levied on juristic companies and partnerships. For income tax purposes, “juristic companies and partnerships” include the following:

a. A limited company, a public company, or a juristic partnership (a limited partnership or a registered ordinary partnership) organized under Thai or foreign law.

b. A business or profit-seeking enterprise operated by a foreign government, an organization owned by a foreign government, or any other juristic person organized under a foreign law.

c. A joint venture.

d. A foundation or association engaged in any business that produces revenue.

Although joint ventures, foundations, and associations are all subject to corporate income tax, there are special rules applicable to them. (See Sections I.C.1 and I.C.3 for details.)

www.lexmundi.com Page 341 © 2012 Lex Mundi Individuals The taxable base is determined by deducting certain allowances from the total assessable income. The total assessable income is determined by aggregating the amounts under the different categories of income after deducting certain permitted expenses from assessable income of each category.

3. What revenues are included?

Corporations Corporate income tax is computed by taking into account all revenue arising from or in consequence of a business carried on in an accounting period and deducting therefrom all expenses, in accordance with the conditions prescribed in Sections 65 bis and 65 ter of the Revenue Code. The tax year for a corporation is its accounting period, which normally has a duration of 12 months.

In computing net profits, an accrual basis following generally accepted accounting principles may be applied. However, other methods of computation can also be applied for certain types of income, e.g., income derived from businesses such as banking, finance, securities, insurance, hire-purchase, installment sale, construction, sale of immovable properties, golf courses, etc.

Taxable Income In determining taxable income, the all-inclusive concept of income is applied. All realized economic gains are treated as income whether they occur frequently or sporadically. Taxable income includes business or professional income, dividends, interest, royalties, service fees, etc. Capital gains are treated as ordinary income and are subject to corporate income tax.

Income can be in money or in kind, provided that it is convertible into money or monetary value.

The Petroleum Income Tax Companies granted licenses to explore, produce, and export petroleum (crude oil, natural gas, etc.) under the Petroleum Act and companies purchasing oil for export from a concessions (licensed) holder are subject to tax under the Petroleum Income Tax Act instead of corporate income tax under the Revenue Code.

Petroleum Income Tax is chargeable on net profits at the rate of 50%. No further tax is levied on dividends payable to shareholders or on the distribution of profits to the head office by a branch. Net profit for petroleum income tax purposes is computed in the same manner as for corporate income tax but net losses may be carried forward for ten accounting periods and interest is not a deductible expense.

Exemptions Certain exemptions from corporate income tax are provided under the Revenue Code, Royal Decrees issued under the Revenue Code, and the Investment Promotion Act. Examples of such exemptions are as follows:

a. Dividends paid by a limited company, registered under Thai law, to another Thai limited company or to a company registered under the law governing the Stock Exchange of Thailand may be exempt from corporate income tax, if the holding of the shares in the payer company is in compliance with conditions prescribed in the Revenue Code.

b. A reduction or exemption from tax may be granted to juristic entities in accordance with tax treaties between Thailand and foreign countries (see Section V.C, Tax Treaties).

c. A corporate income tax exemption for a period of 3 to 8 years may be granted to promoted businesses under the Investment Promotion Act. In addition, dividends, fees for goodwill, copyright or other rights received from the promoted businesses may also be exempt from income tax in the hands of the recipient (see Section V.A, Tax Incentives).

www.lexmundi.com Page 342 © 2012 Lex Mundi Individuals In general, all types of income are assessable unless expressly exempt by law. Assessable income includes the tax absorbed by the payer of assessable income, or any other persons at all levels. According to Section 40 of the Revenue Code, assessable income is classified into eight categories, as follows:

a. income derived from personal services rendered to employers (employment income);

b. income derived by virtue of a post, office of employment, or service rendered;

c. income from goodwill, copyrights, franchises, patent, other rights, annuity, etc.;

d. income in the nature of interest, dividends, bonus for investor, reduction of capital, increment of capital, gain on amalgamation, acquisition, or dissolution, and gain on transfer of shares;

e. income from letting properties, breaches of contracts of installment sale or hire-purchase contracts;

f. income from liberal professions such as law, engineering, architecture, and accounting;

g. income from contracting of work whereby the contractor provides essential materials besides tools;

h. income from business, commerce, agriculture, industry, transport, or any other activity not specified above.

The definition of employment income is broad and inclusive of almost all fringe benefits such as gratuity, pension, meals provided, house rental allowance, monetary value of rent-free accommodation, tax paid or reimbursed by an employer, life insurance premium paid by an employer, and payment by an employer for settlement of any obligation of an employee.

Exemptions Income specified as exempt from personal income tax is provided under the Revenue Code and by Royal Decrees issued under the Revenue Code. Some examples of income which is exempt from personal income tax are as follows:

a. per diem or transport expenses spent in good faith by an employee, a holder of office, or a person rendering services necessarily, exclusively, and wholly for carrying out his/her duties;

b. the portion of traveling expenses paid by an employer to an employee for traveling from another place to take employment for the first time or for returning to his/her place of origin at the termination of employment if such expenses are incurred necessarily for those very purposes (traveling expenses received by an employee who returns to his/her place of origin and then takes up employment with the same employer within 365 days from the expiration of the previous term of employment are not exempted);

c. medical expenses paid by an employer for an employee and his/her family;

d. maintenance income derived under a moral obligation, a legacy, or an inheritance, or gifts made in a ceremony or on occasions in accordance with established custom;

e. proceeds from the sale of movable property acquired by bequest or acquired without a view to trading or profits;

g. compensation for wrongful acts, sums derived from insurance or from a funeral assistance scheme;

h. share of profits obtained from a non-registered ordinary partnership or a group of persons;

i. income from sale of securities on the Stock Exchange of Thailand, excluding income from sale of debentures and bonds;

j. compensatory benefit received by an insured person from the social insurance fund under the law governing social insurance.

4. What deductions are allowed?

Corporations Generally, expenses incurred exclusively for the purpose of generating income or for the purpose of business, other than certain expenses specified under Section 65 ter of the Revenue Code, are tax deductible. However, the deduction of some expenses and allowances must comply with the rules prescribed in the Revenue Code as follows:

a. Depreciation Allowance

Any accounting method of depreciation which is generally accepted can be used, but the depreciation rates cannot exceed the rates specified in the Royal Decree issued under the Revenue Code (No. 145). Accelerated depreciation may be allowed for cash registering machines and machinery and/or accessories used in research and technological development.

Buses with no more than a 10-seating capacity, or passenger cars, may be depreciated but only for the part of the cost value which does not exceed Baht 1,000,000.

b. Reserves

Reserves set aside from premiums of an insurance business as well as reserves set aside as provision for bad or doubtful debts from credit extension by banks or finance and securities or credit foncier companies are allowed as deductions. Other reserves are not allowed.

c. Contribution to Funds

Contribution to a provident fund for employees, established in accordance with Ministerial Regulations, is deductible.

d. Bad Debts

For tax purposes, bad debts may be written off only in accordance with the procedures and conditions prescribed by Ministerial Regulations.

e. Entertainment Expenses

Actual entertainment expenses may be deducted from gross income. However, the total deduction of entertainment expenses in an accounting period shall not exceed 0.3 % of total gross revenue or gross sales, or of the paid-up capital, whichever is greater. In addition, the total entertainment expenses allowed for deduction shall not exceed Baht 10 million.

f. Donations

g. Losses Carried Forward

Operating losses may be carried forward for five accounting periods to offset against future profits. However, there is no provision for the carry back of losses to previous accounting periods.

Individuals

Deductible Expenses A standard deduction in percentage of assessable income or the actual expenses incurred in deriving income are allowed, depending on the category of the income. Deductible expenses are as follows:

(1) For income under Sections 40(1) and 40(2), a standard deduction of 40% with a maximum deduction of Baht 60,000 is allowed. In the case that a lump-sum payment is made because of retirement or termination, a deduction of expenses is available of Baht 7,000 multiplied by the number of years of employment, but not in excess of the payment itself. A further deduction of 50% is available for the balance.

(2) No deduction of expenses is allowed for income under Sections 40(3) and (4) except for income from copyrights for which a standard deduction of 40%, with a maximum deduction of Baht 60,000, is allowed.

(3) For income under Sections 40(5) – 40(8), either the actual expenses incurred in deriving such income or alternatively the optional standard deductions ranging from 10% to 85% in respect of each category of income are allowed.

In order for the actual expenses to be deductible, the following rules must be satisfied:

(1) The expenses must be proved by supporting evidence.

(2) The expenses must be necessary and reasonable.

(3) The expenses must not be prohibited from being deducted by the Revenue Code.

(4) If special rules are provided in the Revenue Code with respect to any expenses, those rules must be followed, e.g. bad debts reserve and depreciation.

Allowances Various kinds of allowances are allowed to be deducted from a taxpayer’s total assessable income in order to arrive at taxable income. Such allowances are as follows:

(1) For taxpayer Baht 30,000 (2) For taxpayer’s spouse Baht 30,000 (3) For each child (maximum of 3 children) Baht 15,000 (4) Education allowance for each child studying in Thailand Baht 2,000 (5) Parent care allowance (per person) Baht 30,000 (6) Life insurance premium, not exceeding Baht 100,000 (7) Spouse’s life insurance premium, not exceeding Baht 10,000 (8) Parent’s health insurance premium (per person) Baht 15,000 (9) Interest on loan for acquiring houses, not exceeding Baht 100,000 (10) Provident fund contribution Baht 10,000 (for a sum exceeding Baht 10,000, it shall be deducted from the assessable income with a maximum deduction www.lexmundi.com Page 345 © 2012 Lex Mundi of Baht 490,000) (11) Payment for the purchase of investment units in a Retirement Mutual Fund (“RMF”), not exceeding 15% of gross income, when Combined with provident fund contribution Baht 500,000 (12) Payment for the purchase of investment units in a Long Term Equity Fund (“LTF”), not exceeding 15% of gross income Baht 500,000 (13) Social security allowance in the amount actually paid (14) For an estate of a deceased person Baht 30,000 (15) For each partner of a non-juristic partnership or group of persons who reside in Thailand, Baht 30,000 per person but not exceeding Baht 60,000 (16) Charity allowance, not exceeding 10% of the balance after deduction of other allowances

5. What are the major expenses that are not deductible? Corporations Various items of non-deductible expenses are stated under Section 65 ter of the Revenue Code. Such items include:

a. Personal expenses and gifts.

b. Tax penalties, surcharges and criminal fines under the Revenue Code.

c. Any artificial or fictitious expenses.

d. Consideration for properties owned and used by the juristic entity.

e. Interest on capital, reserves, or funds of the juristic entity.

f. Any damage recoverable under an insurance or contract of indemnity.

g. Any disbursement if the identity of its recipient cannot be proved by the payer.

h. The portion of the purchase price of properties and the expenses in connection with the purchase or sale of properties which exceeds a reasonable amount.

Individuals Regarding non-deductible expenses for corporations (expenses stated under Sections 65 bis and 65 ter of the Revenue Code), such expenses are also prohibited from being deducted from the income of an individual. Examples of such expenses are as follows:

a. private expenses and gifts; b. tax penalties, surcharges and criminal fines under the Revenue Code; c. any artificial or fictitious expense; d. any damage recoverable under an insurance contract or contract of indemnity; e. any disbursement, if the identity of its recipient cannot be proved by the payer.

Losses from operations are not permitted to be carried forward for individuals

6. What are the applicable federal rates?

Corporations Generally, the rate of income tax for juristic companies and partnerships is 30% of net profits.

Reduced rates at the progressive rates of 15% to 30% are granted to small and medium-sized enterprises (“SMEs”), and reduced rates at the flat rates of 20% and 25% are granted to companies listed on the Market for Alternative Investment (“MAI”), and companies listed on the Stock Exchange www.lexmundi.com Page 346 © 2012 Lex Mundi of Thailand (“SET”), respectively, subject to certain rules, regulations, and conditions prescribed by laws.

A company established as a Regional Operating Headquarters (ROH) providing qualifying services to affiliated juristic companies or partnerships or branches is subject to tax at a reduced rate of 10% of net profits.

In lieu of tax on net profits, foreign corporations engaged in the business of international transportation are subject to tax at the rate of 3% of gross ticket receipts collected in Thailand for transportation of passengers and 3% of gross freight charges collected anywhere for transportation of goods from Thailand.

Foundations and associations engaged in business activities are subject to tax at the rate of 2% and 10% of gross business income depending on category of income (see Section I.C.3, “Associations and Foundations”).

Individuals Taxable income (net assessable income) is arrived at after all expenses and allowances have been deducted from the assessable income. Taxable income shall be subject to tax at progressive rates ranging from 5% to 37%, with an exemption on the first Baht 150,000 of net assessable income, as follows:

Taxable income from Tax Rate Tax Amount Accumulated Tax 0 - 150,000 Exempt -0- -0- > 150,000 - 10% 35,000 35,000 500,000 > 500,000 - 20% 100,000 135,000 1,000,000 > 1,000,000 - 30% 900,000 1,035,000 4,000,000 > 4,000,000 37%

For individuals with a gross income, excluding income under Section 40 (1) of the Revenue Code (employment income), amounting to Baht 60,000 or more, the income tax payable shall not be less than 0.5% of said gross income.

7. What are the applicable state and/ or other local rates?

See above.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Please contact firm for more information.

9. How are operating losses handled?

Please contact firm for more information.

10. How are capital losses handled?

Please contact firm for more information.

11. What are the residence rules?

Corporations Foreign juristic entities in the form of corporations, limited companies, or partnerships carrying on business in Thailand through branch offices or otherwise are subject to income tax.

The term “carrying on business in Thailand”, for income tax purposes, is very broad. Foreign juristic entities are deemed to be “carrying on business in Thailand” if they have in Thailand an employee, agent, representative or go-between and thereby derive income or gains in Thailand. Accordingly, such person has the duty to file a return and pay corporate income tax in respect of such income or gains on behalf of the foreign juristic entities.

Individuals Under the Revenue Code, an individual, Thai or foreign, who derives assessable income from sources in Thailand is liable to pay personal income tax whether or not such income is paid within or outside Thailand.

A person (Thai or foreign) who resides in Thailand at one or more times for an aggregate period of 180 days or more in any tax (calendar) year will be regarded as a resident of Thailand for tax purposes. A resident of Thailand is liable for personal income tax on income from sources inside Thailand and on assessable income derived from sources outside Thailand. However, the imposition of tax on income derived outside Thailand will apply only to income derived and brought into Thailand in the same year in which such income is earned. A non-resident is subject to pay tax only on income from sources within Thailand (irrespective of the place of payment).

12. Is worldwide income taxed?

Corporations A juristic entity incorporated in Thailand is subject to tax on its worldwide income, derived from both domestic and foreign sources. A juristic entity incorporated abroad but carrying on business in Thailand is subject to tax only for income arising from or in consequence of the business carried on in Thailand. The computation of net profits and the rate applied to foreign corporations carrying on business in Thailand is the same as domestic corporations. However, a branch remitting its net after- tax profits to its head office, or the keeping of profits abroad in case the head office has received abroad a payment for service rendered in Thailand, is subject to a further income tax (profit remittance tax) at the rate of 10% of the amount actually remitted or deemed remitted.

Foreign corporations not carrying on business in Thailand but deriving certain types of income from or in Thailand, usually in the form of service fees, royalties, interest, dividends, capital gains, rent, or professional fees are subject to a flat rate of corporate income tax. This is a final tax but is collected in the form of withholding tax based on gross income (see Section 9 below for more information on “Withholding Taxes”).

Individuals Assessable income from sources in Thailand includes the following: a. income from a post or an office held in Thailand; b. income from a business carried on in Thailand; c. income from the business of an employer in Thailand; d. income from a property situated in Thailand.

Assessable income from sources outside Thailand includes the following: a. income from a post or office held abroad; b. income from a business carried on abroad; c. income from a property situated abroad. www.lexmundi.com Page 348 © 2012 Lex Mundi

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Corporations Tax credit for income tax paid abroad is granted by a Royal Decree issued under the Revenue Code and double tax treaties, whereby income tax paid in a foreign country can be used as a credit against Thai income tax payable. However, the amount of tax credit allowed shall not exceed the Thai income tax imposed on the same income.

Export made by any juristic corporation to its head office, branch, affiliated company, principal, agent, employer, or employee are treated as sales made in Thailand. The profits from such exports are taxable in Thailand. The revenue from export is determined according to the market price of the goods on the date of export, excluding freight and insurance premium.

Withholding Taxes

Corporations Withholding taxes apply to various categories of income paid to juristic entities. The amount of tax to be withheld depends on the category of income and the tax status of the recipient.

14. What are the rates on dividends for withholding taxes?

10% on dividends paid to domestic and foreign corporations

15. What are the rates on royalties for withholding taxes?

3% on royalties paid to domestic companies and partnerships (juristic partnerships)

10% on royalties paid to associations and foundations

15% on royalties paid to foreign corporations (final tax payment)

16. What are the rates on interest for withholding taxes?

1% on interest paid by financial institutions (banks, finance or credit foncier companies) to domestic companies that are not financial institutions

10% on interest paid by financial institutions to associations and foundations

15% on interest paid to foreign corporations (final tax payment)

17. What are the rates of withholding tax on profits realized by a foreign corporation?

The withholding tax rates applied to foreign corporations may be reduced or exempted under tax treaties.

Tax withheld must be remitted to the local district office within seven days from the last date of the month in which the payment is made. The tax withheld will then be credited against the final tax liability of the domestic corporations or branches of foreign corporations.

18. Please list any other rates on withholding taxes that we should be aware of.

3% on service fees and professional fees paid to domestic corporations or permanent branch offices of foreign corporations

5% on service fees and professional fees paid to non-permanent branch offices of foreign corporations

Withholding Taxes – Individuals

Withholding taxes are applied to some categories of income paid to an individual such as employment income, royalties, dividend, capital gain, income from hire of assets, income from hire of work, advertising fee, and professional fee. The amount of tax to be withheld depends on the category of income.

In the case of income received by way of salary (employment income), the withholding tax applied for residents and non-residents is the same. The tax to be deducted from the periodic payment of income is determined by:

a. projecting the income paid for a full year; b. deducting expenses and allowances from the full year’s income; c. computing the tax on such amount in accordance with the personal income tax rate; d. dividing the amount of tax computed by the number of payments.

The tax withheld must be remitted to the local district office within seven days from the last date of the month in which the payment is made.

The tax withheld at source will be credited against the final tax liability of the taxpayer. If the tax withheld is more than the actual tax payable, the excess will be refunded to the taxpayer.

Tax Returns and Compliance

19. What is the taxable reporting period?

Corporations Juristic entities must file tax returns and pay corporate income tax twice a year (once a year for associations and foundations)

Individuals Personal income tax is imposed on a preceding year basis. The tax year is determined on a calendar year basis.

20. What are the due dates for the filing of tax returns?

Corporations A half-year income tax return must be filed within two months from the last day of the first six months of an accounting period. The amount of tax to be paid is computed either on one-half of the estimated net profits for the whole year or on the actual net profits for the first six months of an accounting period. A juristic entity selecting to pay tax on the actual net profits must submit financial statements together with the tax return. The financial statements must be reviewed by an authorized auditor. The tax paid for a half-year is treated as a credit in the computation of the annual income tax liability.

Juristic entities that pay taxes on gross receipts instead of net profits (i.e. foreign corporations engaged in international transportation, associations and foundations) as well as juristic entities whose first or last accounting period is less than 12 months are not required to file half-year tax returns. www.lexmundi.com Page 350 © 2012 Lex Mundi

An annual income tax return must be filed and tax must be paid within 150 days from the end of an accounting period. The tax return must also be filed together with an audited balance sheet and profit and loss accounts, or a statement of gross receipts, as the case may be.

In cases involving profit remittance tax, the tax return must be filed and tax must be paid within seven days from the date of remittance.

21. What are the key compliance requirements?

Individuals Every person, except a minor or a person adjudged incompetent or quasi incompetent, must file an income tax return if such person:

a. has no spouse and the assessable income of the preceding tax year exceeds Baht 30,000; b. has no spouse and the assessable income of the preceding tax year arises exclusively under Section 40(1) and exceeds Baht 50,000; c. has a spouse and the assessable income of the preceding tax year exceeds Baht 60,000; d. has a spouse and all of the assessable income of the preceding tax year arises exclusively under Section 40(1) and exceeds Baht 100,000.

Generally, personal income tax is due and payable once a year on or before March 31 of the following year, except for a taxpayer who derives income under Sections 40(5) to 40(8) who is thus liable to file a half-year tax return and pay tax on or before September 30 of each year, for the income earned between January and June. The tax paid for the half-year is allowed as credit against tax due for the full year.

An individual taxpayer is required to file a tax return and pay tax at the local district office where he/she resides. However, the taxpayer may file the tax return at a Thai commercial bank or through the Internet.

Upon filing an individual tax return, if the tax payable amounts to Baht 3,000 or more, the taxpayer is allowed to pay such tax in three equal installments, without any interest or surcharge. The first installment must be paid together with the filing of the tax return. The second installment must be paid within one month from the date when the first installment was due, and the third installment must be paid within one month from the date when the second installment was due.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Corporations There is no consolidated treatment under the Thai Revenue Code whereby corporations within a group may be treated as one tax entity. Each corporation is taxed as a separate legal entity.

In addition, there is no form of group relief or relief by consolidation in respect of losses incurred by an affiliate.

Registration Duties An application for registration of a company must be filed with the Department of Business Development, Ministry of Commerce, if the principal registered office of the company is in Bangkok Metropolis. If the registered office is outside Bangkok, the application must be filed with the Provincial Registration Office in the province where the registered office is located.

Registration Duties Due Upon the Incorporation of a Company The registration duties due upon the incorporation of a company (except public companies) are as follows: www.lexmundi.com Page 351 © 2012 Lex Mundi

1. Fee for Registering the Memorandum of Association

The fee payable will depend on the size of the company’s registered capital. The fee is charged at the rate of Baht 50 for every Baht 100,000 registered capital or a fraction thereof, but not less than Baht 500 and not exceeding Baht 25,000.

In addition to the aforesaid fee, stamp duties of Baht 200 are required to be affixed to the Memorandum of Association submitted to the registrar.

2. Fee for Approving Incorporation Registration

The fee is charged at the rate of Baht 500 for every Baht 100,000 registered capital or a fraction thereof, but not less than Baht 5,000 and not exceeding Baht 250,000.

The company’s Articles of Association must be submitted to the registrar as part of the application. Stamp duties of Baht 200 must be affixed to the company’s Articles of Association submitted to the registrar.

Registration Duties Due Upon an Increase in Capital The fee for registration of an increase in capital is charged at the rate of Baht 500 for every Baht 100,000 increase or a fraction thereof, but not exceeding Baht 250,000.

The company’s Memorandum of Association must be amended in respect of an increase in capital and the fee for registration of an amendment of the Memorandum of Association is Baht 200. The amended Memorandum of Association submitted to the Registrar must have the required stamp duties affixed at the amount of Baht 50.

Registration Duties Due Upon the Transfer of a Company’s Shares There is no registration fee for the transfer of a company’s shares. However, stamp duties are required to be affixed to the share transfer instruments at the rate of Baht 1 for every Baht 1,000 or a fraction thereof of the paid-up value of the shares or of the nominal value of the instrument, whichever is greater.

Registration Duties Due Upon the Transfer of a Company’s Assets There are no registration duties for the transfer of a company’s asset(s). However, the transfer of land and/or building is subject to a government fee at the rate of 2.5% of the transfer price. The said transfer price of the land and/or building must not be less than the assessed price prescribed by the Land Department.

Other Registration Duties

1. Registration Fees a. Registration fees for amendment of the Memorandum of Association of a company: Baht 400. b. Registration fees for amendment of the Articles of Association of a company: Baht 400. c. Registration fee for the appointment of new directors: Baht 400 for each director. d. Registration fees for a decrease in capital: Baht 400.

2. Stamp Duties Stamp duties must be affixed to the following documents: a. New Articles of Association, copy of amended Memorandum of Association or Articles of Association submitted to the registrar: Baht 50 for each instrument. b. Share Certificate issued by a company: Baht 5. c. Proxy for voting at a meeting of a company: Baht 20 for one meeting and Baht 100 for more than one meeting. www.lexmundi.com Page 352 © 2012 Lex Mundi d. Power of Attorney: (1) appointing one or more persons to perform an act once only: Baht 10. (2) authorizing one or more persons jointly to perform acts more than once: Baht 30. (3) authorizing several persons, who may act independently of one another, to perform acts more than once: Baht 30.

Individuals

Tax Credit for Dividend An individual, either a resident of Thailand or domiciled in Thailand, who receives dividends from any company organized under the laws of Thailand is entitled to claim a tax credit equal to the amount of dividend, multiplied by the corporate income tax rate (i.e., 30%) and divided by the result of 100 minus the corporate income tax rate (i.e. 30%). This tax credit is required to be first included as assessable income and then deducted from the total amount of tax payable.

Taxation on Capital Gains There is no separate capital gains tax in Thailand. Capital gains are taxed as ordinary income.

Gains on the sale of immovable property, other than ships or vessels of six tons or more, steam launches or motor boats of five tons or more, or floating houses, are exempt from income tax if the property was acquired by bequest or was not acquired for trading or profit-making.

Gains on the sale of immovable property are generally subject to personal income tax and the tax is usually withheld at source. The special tax computation is elective and based on the price of the immovable property as appraised by the Land Department and a standard deduction, based on the length of holding period, is applied in case the property was not acquired for trading or profit-making. Gains on sale of securities are generally subject to personal income tax at progressive tax rates from 5% up to 37%, but gains on sale of securities listed on the Stock Exchange of Thailand (not including gains on sales of debentures and bonds) are exempt from income tax.

Taxation of Stock Options Stock options received are regarded as taxable income of an employee. However, Thai income tax is not imposed when the employee receives the stock option, but when the employee exercises the option to buy shares. The taxable income derived from receiving the stock option is based on the difference between the exercise price and the market price of the shares on the date of receiving the ownership in such shares.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Apart from income tax, other major taxes and duties in Thailand are value added tax (VAT), specific business tax (SBT), customs duties, excise tax, stamp duties, property tax and signboard tax.

24. How does it operate? Is it a VAT or a sales tax?

VALUE ADDED TAX (VAT)

VAT was put into effect on January 1, 1992 to replace the business tax. It is an indirect tax collected upon consumption, i.e. at each stage of production, or distribution of goods, or provision of services.

Generally, the operator charges VAT on the sale of goods or provision of services to the consumer (”Output Tax”). The VAT paid by the operator to other operators for the purchase of goods or services (”Input Tax”) is then deducted and the balance remitted to the Revenue Department. Thus, tax will accrue at each stage only on the ”value added” to the goods or services at that stage. Under www.lexmundi.com Page 353 © 2012 Lex Mundi the VAT system, the tax will ultimately be borne by the consumer. The operator is therefore regarded as a collector of tax for the Revenue Department.

Persons liable to pay VAT are as follows:

a. Operators or persons who sell goods or render services in the course of their business or professional activities. Operators include companies, partnerships, joint ventures, sole proprietors and government enterprises conducting a business.

b. Importers.

c. Agents who sell goods or render services in the ordinary course of business for operators residing outside Thailand;

d. Transferees of goods or services from certain persons or organizations, i.e. the United Nations, consulates, embassies, etc. Sale of goods or provision of services to such persons or organizations is subject to VAT at a zero-percent rate.

e. Operators residing outside Thailand and the persons with the responsibility to carry on business in Thailand, including their employees or representatives residing in Thailand who have direct or indirect authority to manage for such operators, are jointly liable for VAT.

VAT is imposed on the following transactions:

a. Sale of goods or provision of services by an operator.

b. Importation of goods by an importer.

Under the given definition, "sale" is the disposition, distribution, or transfer of goods, whether or not for a benefit or consideration. It also includes the delivery of goods on hire-purchase or installment sale, the delivery of goods to an agent for sale or to a foreign country. ”Service” is defined as any activity performed with a view to benefits, other than sale of goods, and includes making use of the supplier’s own service by any means.

Furthermore, “provision of services in Thailand” means performing a service in Thailand, regardless of whether the use of such service is made locally or overseas. A service that is performed in a foreign country and made use of in Thailand will be regarded as provided in Thailand.

Computation VAT is computed monthly by deducting the amount of VAT paid on the purchase of goods and services for sale or utilization in the production process during the month (”Input Tax”) from VAT due from the sale of goods or provision of services during the same month (”Output Tax”). If Output Tax exceeds Input Tax, the operator must remit the excess amount to the Revenue Department. If Input Tax exceeds Output Tax, the excess amount may either be claimed as a tax refund from the Revenue Department or carried forward to offset against the VAT due in the following months.

VAT arising from the purchase of goods or services (”Input Tax”) is not always deductible from the total VAT due (”Output Tax”). Examples of non-deductible input tax are as follows:

a. Input tax without a tax invoice.

b. Input tax with a tax invoice containing materially inaccurate or incomplete contents.

d. Input tax on entertainment expense.

e. Input tax of a tax invoice issued by non-authorized person.

If an operator carries on business in both categories subject to and not subject to VAT, then the operator is required to apportion Input Tax to each business. Only the Input Tax that is attributable to the business of the category subject to VAT may be deducted from Output Tax.

VAT Registration An operator must apply for VAT registration within 30 days after its annual revenue exceeds Baht 1,800,000. However, an operator still has the right to apply for VAT registration before commencing business.

An application for VAT registration must be filed with the local district office where the place of business is located.

If the operator has several offices or branches, the application for VAT registration must be filed at the local district office of the Revenue Department which has jurisdiction over the operator’s head office.

The registered operator is required to issue a ”Tax Invoice” when VAT liability arises in respect of sale of goods or provision of services. The Tax Invoice must contain all the particulars as prescribed by law. The original Tax Invoice must be given to the purchaser and copies of all invoices must be maintained for at least 5 years.

Filing VAT Returns and Payment of Tax

A registered operator must file a VAT return and pay tax (if any) to the local district office within 15 days from the end of the month in which the VAT is to be accounted for.

If an operator has several places of business, the filing of a VAT return and payment of tax must be made separately for each place of business, unless otherwise permitted by the Director- General of the Revenue Department.

Besides the duty to file VAT returns and pay tax, registered operators who make payments for the following transactions are also required to remit VAT to the Revenue Department within 7 days from the end of the month in which the payment is made:

a. Payment for goods or services to a supplier residing outside Thailand and temporarily carrying on business in Thailand without being recorded for temporary VAT registration.

b. Payment for services to a supplier providing services in a foreign country and the use of which is made in Thailand.

25. How is the taxable base determined?

VAT The tax base for sale of goods or provision of services is the total value received or receivable by a supplier from the sale or service inclusive of excise tax.

The value of the tax base includes money, property, compensation, consideration for services, or any benefit ascertainable in terms of money. However, the value of the tax base will not include the following:

b. Rebates, subsidies or compensation prescribed by the Director-General of the Revenue Department, with the approval of the Minister;

c. Output tax.

d. Compensation answering to the description and conditions given or prescribed by the Director General, with the approval of the Minister.

The tax base for the import of goods is the C.I.F price of goods plus import duty and excise tax (if any) and surcharges and other taxes and fees.

26. What are the applicable rates?

VAT VAT rates can be classified into two categories:

a. 10% Rate

The VAT is generally imposed at a standard rate of 10%. This rate includes municipal tax, charged at the rate of one-ninth of the VAT rate. All sales of goods, provision of services and importation of goods are subject to this rate, except the businesses or transactions stated in (2) hereunder. The 10% VAT is currently imposed at a reduced rate of 7% but will go back to 10% from October 1, 2010 onward if the reduced rate is not extended.

b. 0% Rate

The 0% rate applies only to certain businesses specified under the provisions of VAT. A business that makes only zero-rated supplies will not be required to collect any tax on its supplies and can refund all input tax paid. The following are examples of businesses subject to the 0% rate:

(1) Exporters of goods. (2) Providers of services performed in Thailand but used in a foreign country. (3) Providers of international transport services by aircraft or sea-going vessels, organized under Thai or foreign law. (4) Sellers of goods and providers of services to the United Nations organization or its specialized agencies or to a foreign embassy or consulate.

27. Are there any exemptions?

VAT

Exempt Persons The following persons are exempted from VAT:

 Small businesses with annual sales volume not exceeding Baht 1,800,000.  Persons exempted by other laws, such as corporations falling under the Petroleum Income Tax Law.

Exempt Transactions

www.lexmundi.com Page 356 © 2012 Lex Mundi In general, the sale of goods or provision of services that are necessary for the maintenance of life and social welfare will be exempt from VAT. The exempted transactions also include cultural services, and religious and charitable services. Examples of exempted transactions are as follows:

 Sale of unprocessed agricultural products.  Provision of educational services.  Provision of health care services.  Provision of domestic transportation services and international transportation by land.  Sale of goods or provision of services exclusively for the benefit of a religion or a public charity in Thailand, provided that the profits are not applied for other purposes.

SPECIFIC BUSINESS TAX (SBT)

SBT is imposed on certain types of businesses that provide services whose “value added” is difficult to define. Such businesses are considered to be outside the VAT system and therefore are not subject to VAT.

SBT is computed on monthly gross receipts, at the applicable rate stipulated in the law. Unlike the VAT system, operators who are subject to SBT cannot claim payment as a credit for VAT paid and are not entitled to charge VAT to customers. In other words, they are characterized as ultimate consumers in the VAT system.

Operators residing outside Thailand may be liable to SBT if they carry on business through a place of business, an agent, a representative, or an employee residing in Thailand.

An operator subject to SBT must apply for SBT registration within 30 days from the date of commencing business. Business in the sale of securities and temporary business are exempted from SBT registration.

The types of business, tax base, and tax rates under the SBT are as follows: Tax Rate (as Type of Business Tax Base Percentage of Gross Receipts)

1. Banking or 1.1 Interest, discounts, fees, service charges 3.0 similar or profits before deduction of any business, expenses from the purchase or sale of finance, credit negotiable instruments or documents of foncier and indebtedness 3.0 securities 1.2 Gross profits before deduction of any business expenses from the exchange or sale of currencies, issuance of negotiable instruments or documents of indebtedness, or remittance of currencies to a foreign country

2. Life Insurance Interest, fees or service charges 2.5

3. Pawnshop 3.1 Interest, fees 2.5 3.2 Money, property, consideration or benefit of value received or receivable from sale 2.5 of forfeited pawned goods

4. Sale of Gross receipts before deduction of any 3.0 immovable expenses www.lexmundi.com Page 357 © 2012 Lex Mundi property in a commercial (The 3% rate has been reduced to 0.1%, manner or for effective from March 29, 2008 to March profits. 28, 2010).

5. Sale of Gross receipts before deduction of any 0.1 securities in expenses (to be exempted by Royal SET Decree No. 240)

The aforesaid SBT rates do not include municipal tax. When SBT is paid, an additional amount of 10% of SBT is levied as municipal tax.

SBT returns must be filed monthly within 15 days from the end of the month in which the SBT is to be accounted for.

In addition to SBT, an operator liable for SBT may also be subject to pay VAT on the following business transactions:

 Business transactions that are not directly related to the specific businesses.  Business transactions which, though directly related to specific businesses, are prescribed by Royal Decree as business subject to VAT, e.g. provision of letting out movable properties on hire, provision of credit card services, provision of securities underwriting services, etc.

If an operator carries on not only a business that is subject to SBT but also a business subject to VAT, such operator must allocate its Input Tax between the business subject to SBT and the business subject to VAT. Only Input Tax related to VAT taxable supplies will be credited against the Output Tax.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

CUSTOM DUTIES Customs duty is imposed mainly on imported and selected exported goods, specified by the Law on Customs Tariff. Most tariffs are ad valorem. In certain cases, however, both ad valorem and ad naturam rates are given and the tariff that gives the most revenue will apply. In general, the invoice price is the basis for the computation of duty and duty is normally applied to the C.I.F. value.

Customs duty is levied in accordance with the Harmonized Commodity Description and Coding System or Harmonized System. Most imported goods are subject to customs duty rates of 0% to 100%. Reduction of and exemption from customs duties on certain imported goods is granted to promoted persons under the Investment Promotion Act and to petroleum concessionaires under the Petroleum Act. Reduction of or exemption from customs duties on imported goods is also granted to members of the ASEAN Free Trade Area (AFTA) and the World Trade Organization (WTO), and to parties of free trade agreements and international agreements to which Thailand is a party [e.g., the Thailand and Australia Free Trade Agreement (TAFTA) and the Japan and Thailand Economic Partnership Agreement (JTEPA)]. Thailand is also a member of the General Agreement on Tariffs and Trade (GATT) and Thai Customs law adopts practices and standards in accordance with GATT codes in determination of customs prices.

EXCISE TAX Excise Tax is levied on selected goods (mainly luxury goods) such as petroleum products, tobacco, liquor, beer, soft drinks, crystal glasses, perfume and cosmetic products, air-conditioners not over 72,000 BTU, and passenger cars with 10 seats/or less.

www.lexmundi.com Page 358 © 2012 Lex Mundi Excise Tax is computed on an ad valorem basis or at a specific rate, whichever is greater. All goods subject to excise tax remain subject to VAT. The excise tax is collected by the Excise Department and usually imposed at the time of delivery of the goods from factories.

STAMP DUTIES Stamp duty is levied on 28 classes of instruments specified in the Stamp Duty Schedule of the Revenue Code. The rates vary according to the nature or content of the instrument. Examples of instruments subject to stamp duties are powers of attorney, letters of credit, cheques, bills of lading, memorandum of association of limited companies, articles of association of limited companies, and partnership contracts.

PROPERTY TAXES Property tax is imposed and collected annually. There are two kinds of property tax in Thailand: House and Land Tax and Local Development Tax. Owners of land and/or buildings may be subject to either House and Land Tax or Local Development Tax.

1. House and Land Tax

House and Land Tax is imposed on owners of a house, building, structure or land that is rented or otherwise put to commercial use. Taxable property under the House and Land Tax includes houses not occupied by the owner, industrial and commercial buildings and land used in connection therewith. The tax rate is 12.5% of the assessed annual letting value of the property.

2. Local Development Tax

Local Development Tax is imposed on a person who either owns land or possesses land. The tax rate varies according to the estimated land value. An appraisal will be conducted by the local authorities. Allowances are granted for land utilized for personal dwellings, the raising of livestock, and the cultivation of crops by the owner. The extent of the allowances permissible to any land depends on the location of the land.

SIGNBOARD TAX This tax is levied on signboards which show names, symbols or marks of business or advertisements. The rates specified in the Signboard Tax Act are computed based on signboard size and type of display (e.g., language, picture, or sign) shown in signboard, ranging from Baht 3 to Baht 40 per 500 square centimeters (but not less than Baht 200 per signboard).

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Please contact firm for more information.

30. How do they operate?

Please contact firm for more information.

31. How is the taxable base determined?

Please contact firm for more information.

32. What are the applicable rates?

Please contact firm for more information.

33. Are there any exemptions?

Please contact firm for more information.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

There is no specific law on inheritance or gift taxes in Thailand.

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

N/A

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Thailand was the first country in Asia to introduce investment promotion laws (tax and non-tax incentives) to encourage investors to invest in Thailand. Investment Promotion laws were first enacted in 1954 and have been revised several times since then. Under the investment promotion laws, the Board of Investment (“BOI”) – a policy-making body – was established to promote domestic and foreign investments considered important and useful to the country’s economic and social development. The BOI defines priority areas for investment, identifies investment opportunities, provides services to investors, and decides which investments will qualify for promoted status and privileges.

The privileges that the BOI offers are not absolute. The BOI still retains the right to stipulate certain conditions, such as the amount and the source of capital, the nationality and number of shareholders, training of manpower and distribution of products, all of which the investors must comply with in order to qualify for privileges.

The BOI has also published a list of activities that are eligible for promotion. The list covers mainly manufacturing and agricultural activities but also includes mineral exploration, mining, service sectors, etc.

In granting privileges, the BOI does not discriminate between foreign and Thai investors. However, under certain circumstances, the BOI may impose conditions on foreign investors who wish to enter into joint ventures with Thai investors.

Tax Incentives According to Investment Zones At present, the BOI, in its attempts to urbanize the country, places top priority on encouraging investors to locate their projects to upcountry areas. To achieve this goal, tax incentives are given to investors to locate to rural areas. The BOI sets the amount of incentives granted according to the level of development of particular regions and has thus divided Thailand into three zones: www.lexmundi.com Page 360 © 2012 Lex Mundi

Zone 1 is the highly developed area, which includes Bangkok and five surrounding provinces, namely Samut Prakarn, Samut Sakhon, Pathum Thani, Nonthaburi, and Nakhon Pathom.

Qualified projects located in Zone 1 may receive the following tax incentives:

(1) A 50% import duty reduction on machinery that is subject to import duty greater than or equal to 10%. (2) Corporate income tax exemption for 3 years for projects located within their industrial estate zones, provided that such a project with capital investment of Baht 10 million or more (excluding cost of land and working capital) obtains ISO 9000 or similar international standard certification within 2 years from its start-up date, otherwise the corporate income tax exemption will be reduced by 1 year. (3) Import duty exemption on raw or essential materials used in export products for 1 year.

Zone 2 is a developing area comprising 12 provinces around Zone 1, namely Samut Songkram, Ratchaburi, Kanchanaburi, Suphanburi, Ang Thong, Ayutthya, Saraburi, Nakhon Nayok, Chachaoengsao, Phuket, Rayong, and Cholburi.

Qualified projects located in Zone 2 may receive the following tax incentives:

(1) A 50% import duty reduction on machinery that is subject to import duty greater than or equal to 10%. (2) Corporate income tax exemption for 3 years, increased to 7 years, for projects located within industrial estates or promoted industrial zones, provided that such a project with capital investment of Baht 10 million or more (excluding cost of land and working capital) obtains ISO 9000 or similar international standard certification within 2 years from its start-up date, otherwise the corporate income tax exemption will be reduced by 1 year. (3) Import duty exemptions on raw or essential materials used in export products for 1 year.

Zone 3 covers the remaining 58 provinces throughout the country.

Qualified projects located in Zone 3 may receive the following tax incentives:

(1) Import duty exemption on machinery. (2) Corporate income tax exemption for 8 years provided that a project with capital investment of Baht 10 million or more (excluding cost of land and working capital) obtains ISO 9000 or similar international standard certification within 2 years from its start-up date, otherwise the corporate income tax exemption will be reduced by 1 year. (3) Import duty exemption on raw or essential materials used in export products for 5 years. (4) Deduction can be made from net profit of 25% of the project’s infrastructure installation or construction cost for 10 years from the date of first sale, and net profit for one or more years of any year can be chosen for such deduction. The deduction is in addition to normal depreciation. (5) A project located in one of the 36 more developed provinces (including Laem Chabang Industrial Estate or promoted industrial zones in Rayong province) will be granted tax and duty privileges under (1) – (4) plus further privileges, as follows:

A project located within industrial estates or promoted industrial zones is entitled to the following privileges:

www.lexmundi.com Page 361 © 2012 Lex Mundi (i) 50% reduction of corporate income tax for 5 years after the exemption period. (ii) Double deduction from taxable income of transportation, electricity and water costs for 10 years from the date of first revenue derived from promoted activity. (iii) 75% import duty reduction on raw or essential materials used in manufacturing for domestic sales for 5 years, based on annual approval (this incentive is not available to projects in Laem Chabang Industrial Estate or promoted industrial zones in Rayong province.) (6) A project located in one of the 22 less developed provinces will be granted tax and duty privileges under (1) – (4) plus further privileges, as follows: (i) 50% reduction of corporate income tax for 5 years after the exemption period. (ii) Double deduction from taxable income of transportation, electricity and water costs for 10 years from the date of first revenue derived from promoted activity. (iii) 75% import duty reduction on raw or essential materials used in manufacturing for domestic sales for 5 years, based on annual approval, for projects located in industrial estates or promoted industrial zones.

Tax Incentives for BOI Priority Activities Although any industry may apply for promotional privileges, the BOI target industries are agricultural products, direct involvement in technological and human resource development, public utilities and infrastructure, environmental protection and conservation, and other targeted industries. Certain promotional activities are identified as priority activities. Projects within these fields will receive corporate income tax exemptions for 8 years and import duty exemption on machinery, regardless of location, in addition to privileges entitled to each zone.

Tax Incentives for Research and Development Projects Research and development projects are identified as priority activities entitled to full privileges.

Tax Incentives for Export-Oriented Projects The BOI no longer imposes the export requirement as a criterion for investment promotion. Export- oriented projects will receive import duty exemption on raw or essential materials used in export products or products imported for re-export.

Additional incentives from other government organizations are also available for goods produced for export. For example, VAT is applied at a 0% rate to exported goods. The imports of raw materials, parts, and components for export projects are also generally exempt from import duty. Investors of these projects can apply for import duty exemptions not only at the office of the BOI but also at other government organizations such as the Customs Department and the Industrial Estate Authority of Thailand.

Agreements can be made with the Customs Department to refund any import duty payment or to have a bank guarantee provided in lieu of payment of duty. For projects located in free zone, investors may apply for duty free rate for the importation of raw materials or parts or components at the Industrial Estate Authority of Thailand.

Furthermore, financial assistance is available to exporters from banks in the form of packing credits (pre-shipment finance) through the means of discounting promissory notes at a rate of not more than 13% per year. The Bank of Thailand provides 60% of the packing credits offered by the banks at an interest rate of 5% per year.

Additional tax incentives

(1) Losses incurred during the tax exemption period by a promoted activity may be carried over and set off for 5 years against the net profits accruing after the exemption period. (2) Dividends derived from a promoted activity will be exempted from income tax in the hands of the recipient for a period equal to the exemption period from the corporate income tax of a promoted person. (3) Fees for goodwill, copyright or other rights received from a promoted activity, according to the contract approved by the BOI, will be exempt in the hands of the recipient for 5 years from the date the promoted person first derived income from the promoted activity.

Additional non-tax incentives

The BOI offers several non-tax incentives to promote foreign investment such as granting permission to own land for carrying on promoted projects, permission to bring in foreign technicians and experts to work on promoted projects, and permission to take or remit abroad foreign currency.

Investment Services and the BOI Application Procedure Potential investors who wish to explore business opportunities in Thailand may contact the Investment Service Center for general as well as specific information and advice. The Center also offers matchmaking services to both Thai and foreign potential investors who seek cooperation concerning technology and marketing as well as joint venture partners.

A detailed manual on how to apply for investment promotion is available, in both Thai and English, to assist investors in preparing their applications. The applications take 2-3 months to process. If an application is not approved, the applicant can appeal to the Secretary General of the BOI, in writing, within 60 days after receiving notification.

EXCHANGE CONTROL Exchange control restrictions are set forth in the Exchange Control Act, B.E. 2485 (A.D. 1942) as amended from time to time, empowering the Ministry of Finance and the Bank of Thailand to issue the relevant regulations and notifications to control inward and outward remittance of foreign exchange, and are administered by the Bank of Thailand under the supervision of the Ministry of Finance. As a general rule, all matters involving foreign currency are regulated by and require permission of the Bank of Thailand. In particular, except for the sale of foreign exchange by authorized dealers (i.e. authorized banks, companies, or persons) which have been authorized and delegated certain powers to approve certain foreign exchange transactions on behalf of the Bank of Thailand, no person other than such authorized dealers may buy, sell, lend, exchange, or transfer any foreign exchange without permission of the Bank of Thailand.

Permitted Transactions Unlimited amounts of Thai Baht or foreign currency may be brought into Thailand. However, as a general rule, such foreign currency must be sold or converted into Thai Baht or deposited into a foreign currency account with authorized financial institutions located in Thailand within three hundred sixty (360) days from the date of receipt, except foreigners temporarily staying in Thailand for not more than three months, foreign embassies, and international organizations.

Under the following conditions, Thai Baht may be taken out of Thailand without permission of the Exchange Control Office of the Bank of Thailand: (i) into Vietnam and countries immediately bordering Thailand, i.e. Laos, Cambodia, Malaysia and Myanmar, up to Baht 500,000 per trip; or (ii) into other countries up to Baht 50,000 per trip. www.lexmundi.com Page 363 © 2012 Lex Mundi

Transactions to be Approved by Authorized Commercial Banks Commercial banks are authorized by the Bank of Thailand to approve certain foreign exchange transactions, in its name, including: a. Remittance of unlimited amount in payment of imported goods. However, importer importing goods valued at more than Baht 500,000 or its equivalent per transaction must submit application to Customs official when submitting bill of lading. b. Remittance of up to US$100 million or its equivalent per year per remittee for direct foreign investment or for lending to subsidiaries in foreign countries. c. Remittance of up to US$1 million or its equivalent per year per remittee to relatives or family members permanently living abroad. d. Remittance of up to US$1 million or its equivalent belonging to Thai national permanently living abroad per year. e. Remittance of inherited money to heir living permanently abroad of up to US$1 million or its equivalent per year per remittee. f. Remittance of up to US$5 million or its equivalent per remittee for purchase of real property in a foreign country. g. Remittance of up to US$1 million or its equivalent per remittee per year for purchase of any affiliate company’s shares in a foreign country in the form of employees’ benefits. h. Remittance of up to US$1 million or its equivalent per remittee per year for public donation. i. Remittance of unlimited amount in repayment of foreign loan and payment of accrued interest and other related fees and costs, net of all taxes, with proper documentary evidence. j. Unlimited remittance of proceeds from sale of shares, warrants, investment units, mutual funds or any financial instrument with required documentary evidence. k. Remittance of unlimited amount in returning investment funds of branch office or representative office or from dissolution of business, or decrease of capitals or value of shares. l. Remittance of unlimited amount from providing rental services or sale of a foreigner’s real property. m. Remittance of unlimited amount from payment of dividend or profits to a head office in a foreign country. n. Remittance of unlimited amount in payment of certain types of service fees including transport and communication, or any cost or expense arising from an agreement charged from abroad, with appropriate documentary evidence. o. Sale of unlimited amount of foreign currency to any buyer for traveling purposes with appropriate documentary evidence, i.e. passport and air ticket or ticket of traveling vehicle.

When purchasing foreign currency for one of aforesaid purposes in an amount exceeding US$20,000 or its equivalent, application must be submitted to authorized banks, together with appropriate supporting documentary evidence.

If purchasing any lesser amount or equivalent according to market rate for any purpose other than payment of goods or purchase of immovable property and/or securities abroad, purchasers must complete a foreign currency purchase form as documentary evidence of currency sale.

Transactions to be Approved by the Bank of Thailand Foreign exchange transactions involving amounts in excess of above limitations or for purposes other than those mentioned above require approval of the Bank of Thailand.

The main purpose of Thai tax treaties is the avoidance of double taxation. The general principle is that the country in which the income arises (source country) has the prior right to tax and the country of residence will grant relief (tax exemption or tax credit) from paying taxes twice on the same income.

In addition, the treaties also provide for cooperation between governments in preventing the evasion of taxes.

Tax Treaties in Effect At present, Thailand has double taxation treaties with the following countries:

Armenia Malaysia Australia Mauritius Austria Nepal Bahrain Netherlands Bangladesh New Zealand Belgium Norway Bulgaria Oman Canada Pakistan China (Peoples Republic of China) Philippines Cyprus Poland Czech Republic Romania Denmark Seychelles Finland Singapore France Slovenia Germany South Africa Hong Kong Spain Hungary Sri Lanka India Sweden Indonesia Switzerland Israel Turkey Italy Ukraine Japan United Arab Emirates Korea (Rep.) United Kingdom Kuwait U.S.A. Laos Uzbekistan Luxembourg Vietnam

Tax Covered Under the Treaties The aforesaid tax treaties cover taxes on income and on the capital of individual and juristic entities. The Petroleum Income Tax is covered under most treaties except the treaty with The Netherlands. Local Development Tax is also covered under some treaties, but Value Added Tax and Specific Business Tax are not covered under any tax treaty.

Benefits Under Tax Treaties In general, tax treaties place a resident of a Contracting State in a more favorable position for Thai tax purposes than under the domestic law (Thai Revenue Code). The provisions of tax treaties minimize or exempt certain types of income from taxation.

Business profits (industrial and commercial profits) earned in Thailand by a resident of a Contracting State will generally be exempt from income tax in Thailand unless it has a permanent establishment (”PE”) here.

The Thai Revenue Code does not give a definition of PE. However, the definition in the old tax treaties follow that given by the OECD model of tax treaties, while the new tax treaties follow the definition provided under the UN model. The treaties provide a list of situations which would be regarded as a PE. These situations are classified into three types:

(a) Asset-type PE (b) Activity-type PE (c) Agent-type PE

In Thailand, in addition to the OECD criteria, a person is deemed to be a dependent agent if he/she habitually secures orders in Thailand, wholly or almost wholly, for a foreign enterprise or related foreign enterprises. In such cases, the person is deemed to be an agent-type PE and has the duty to file a tax return and pay income tax on behalf of the enterprise.

Shipping and Aircraft

Thai tax treaties (except for some treaties, e.g. Poland and the United Kingdom) allow shipping income to be taxed by the other Contracting State but only at half the rate normally imposed. This means at a rate of 1.5% on the freight, fees and any other benefits collectible, whether in Thailand or elsewhere, in respect of transport of goods from Thailand before deduction of any expenses.

For aircraft, Thai tax treaties (except for some treaties, e.g. the Philippines) exempt income tax on the operation of aircraft in international traffic derived by an enterprise of a Contracting State.

Dividends Under the Thai Revenue Code, dividends paid to non-residents are subject to withholding income tax at the rate of 10%. There is no treaty that provides for a lower rate.

Interest Pursuant to the Thai Revenue Code, the withholding tax rate on interest paid to an individual and an ordinary company abroad is 15%. However, under most tax treaties, the withholding tax rate on interest paid to foreign banks or financial institutions (including insurance companies) is generally reduced to 10%. Furthermore, interest paid to the government of a Contracting State, or a local authority thereof, the Central Bank or any other financial institution wholly owned by the government of the Contracting State, may be exempt from income tax under some treaties.

Royalties According to the Thai Revenue code, the withholding tax rate on royalties paid to non-residents is 15%. However, under some tax treaties, the rate may be reduced to 5% or 10% on royalties paid for the alienation or the use of, or the right to use any copyright of literary, artistic, or scientific work. The tax exemption on royalties may be provided on royalties paid to a Contracting State or a State-owned company in respect of films or tapes.

Capital Gains Capital gains paid to non-residents are generally subject to 15% withholding tax under the Thai Revenue Code. Tax may be exempted under tax treaties for gains on the alienation of any property, other than immovable property or movable property of a PE or movable property of a fixed base, for the purpose of performing professional services.

Tel 66.2653.5555 Fax 66.2653.5678 http://www.tilleke.com

Tax Desk Book

Trinidad and Tobago Prepared by Lex Mundi member firm Hamel-Smith

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

The principle direct taxes are:-  Corporation Tax: A tax on the profits and short term gains of companies accruing in Trinidad & Tobago and includes a business levy.  Income Tax: A tax on income accruing in Trinidad & Tobago including  withholding taxes on distributions of companies and payments to non-residents.  Unemployment Levy: A tax on the profits of companies subject to thePetroleum Taxes Act.  Business Levy: A tax on gross revenue at rate of .2% payable quarterly.Final liability is off set by corporation tax payable at year end.  Green Fund Levy: A tax on gross revenue at the rate of .1% payable quarterly.  Health Surcharge: A tax levied at two rates based on income.  Petroleum Profits Tax: A tax on the profits earned by businesses in thecourse of petroleum operations falling under the Petroleum Taxes Act.  Supplemental Petroleum Tax: A tax charged on the gross income of companies liable to petroleum profits tax based on the price of oil.  Lands and Buildings Taxes: A tax based on the assessed values of lands and buildings.  Withholding Taxes: A tax based on various income payments to non-residents.  The principal indirect taxes are:  Value Added Tax: A tax levied on imports and on the value of commercial supplies of goods and services.  Customs and Excise Duties: Taxes on imports and manufactured goods.  Import Surcharge: A tax on imports.  Stamp Duty: A tax on instruments generally based on the value of the consideration.  Financial Services Tax: A tax on financial transactions with banks, etc.  Motor Vehicles Tax: A tax levied on sale of motor vehicles.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

For business entities and sole traders: Gross income less deductible expenses wholly and exclusively incurred in the production of the income;subject to any exemptions provided in the legislation.

For employees: all emoluments arising from the employment including benefits in kind such as housing and provision of a motor vehicle are taxable. The only expense allowed as a deduction is travelling wholly exclusively and necessarily incurred in the performance of the duties of the employment. www.lexmundi.com Page 368 © 2012 Lex Mundi

3. What revenues are included?

The following revenues are included:  Income from sources derived in or accruing in Trinidad &Tobago or elsewhere and whether received in Trinidad & Tobago or not in respect of gains and profits from: farming, fishing,operation of mines or other natural resources, trade or business,professions, vocations or management charges, royalties, rents, interest, discounts, annual payments, fees, commissions, distributions, short term capital gains.

 The business levy is payable quarterly at the rate of .2% of the gross income of the company. Payments of corporation tax are set off against the business levy liability of the corporation in the following year when returns are filed. The individual taxpayer is entitled to a tax credit against his business levy liability for a year of income of any payment made in respect of his income tax liability for that year up to a maximum of his business levy liability.No liability accrues in respect of gross sales giving rise to exempt income or gross sales not exceeding $200,000.00 per annum.

Green Fund Levy applies even if the business is exempt from business levy and is chargeable at the rate of .1% of the gross income of the company.

Supplemental Petroleum Tax is levied at scales based on the price of oil.

Residents are taxed on income derived from abroad whether remitted to Trinidad and Tobago or not.

4. What deductions are allowed?

All expenses wholly and exclusively incurred in the production of the income are allowed except where specifically disallowed.

5. What are the major expenses that are not deductible?

Major expenses not allowed are domestic and private expenses, capital expenses and certain payments to non-residents unless withholding taxes have been accounted for and paid over to the Board of Inland Revenue.

With respect to management charges paid to non-residents the deduction is limited to 2% of the outgoings and expenses(excluisve of the management charges) allowed under the legislation OR the actual deductible expenses whichever is the LESSER

6. What are the applicable federal rates?

Not applicable

7. What are the applicable state and/ or other local rates?

Current corporation tax rate is 25%.

Companies engaged in liquefaction of natural gas, manufacture of petrochemicals and transmission and distribution of natural gas and wholesale marketing and distribution of petroleum products - rate is 30%.

Petroleum profits tax is levied at 50%.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

There is no capital gains tax. Gains arising from the disposal of property within 12 months of acquisition are taxable as income. Shares and other securities are excluded from this provision.

9. How are operating losses handled?

Operating losses which cannot be set off against profits from other sources for the same year can be carried forward and set off against what would otherwise have been chargeable profits for the succeeding years.

Operating losses from trade or business cannot be set off against losses from profession or vocation or employment income; and losses from profession or vocation cannot be set off against employment income.

Unrelieved losses of one company may not be transferred to and carried forward by another company in the case of a corporate reorganisation.

There are rules preventing a company from carrying forward its own losses after ownership of the majority of its shares changes hands, unless approved by the Board of Inland Revenue as not being for the purpose of avoiding tax

10. How are capital losses handled?

The only capital losses relieved are those arising from acquisition and disposal of an asset within 12 months. Such losses can only be set off against future income from a similar capital gain.

Territorial Rules

11. What are the residence rules?

An individual is resident if he is present in Trinidad and Tobago for a period of 183 days or more in the tax year which runs form January to December.

The corporation/company is resident where its central management and control takes place. Control is exercised where the Board of Directors meet and make decisions, unless the Board is itself controlled by a third party.

12. Is worldwide income taxed?

Yes, in respect of residents and resident companies.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Unilateral relief can be given by way of tax credit where a resident individual or company has suffered double taxation in respect of the any income and there is no applicable tax treaty.

14. What are the rates on dividends for withholding taxes?

10% to an individual or company but where payment is made to a parent the rate is 5%. Parent is not defined but a body corporate shall be deemed to be a subsidiary of any other body corporate if and so long as not less than half its share capital of all classes of stock, or half of the total combined voting power in respect of all classes of that stock is owned by that other body corporate, whether directly or through any other body corporate, or other bodies corporate, or partly through any other body corporate or other bodies corporate.

15. What are the rates on royalties for withholding taxes?

15%

16. What are the rates on interest for withholding taxes?

15%

17. What are the rates of withholding tax on profits realized by a foreign corporation?

10% on remittances of profits from a branch to a head office."Profits" means profits after the payment of income tax, corporation tax and petroleum profits tax. An office or a branch or agency of a non- resident company shall be deemed to have remitted all the profits thereof, except to the extent that the office or the branch or agency has re-invested to the satisfaction of the Board such profits or any part thereof in Trinidad and Tobago, other than in the replacement of fixed assets.

18. Please list any other rates on withholding taxes that we should be aware of.

15% on remittances of rentals, management charges, premiums (except to insurance companies and contributions to pension funds and schemes),commissions, fees, licences,annuities and other annual payments

Tax Returns and Compliance

19. What is the taxable reporting period?

12 months ending with the date of the financial year end in respect of companies or the date of commencement of business to the year end. In respect of individuals the 12 month period January to December.

20. What are the due dates for the filing of tax returns?

April 30th in each year

21. What are the key compliance requirements?

 Filing the return and paying of outrstanding taxes  Paying quarterly instalments in respect of companies and self -employed persons. This is based on the profits of the previous year and adjusted in December to make the final payment.  Deduction of tax monthly from salaries of employees by the employer and remitting same to the Board of Inland Revenue by the 15th day of the following month.

The employee who wishes to have his tax reduced based on statutory claims must obtain from the Board of Inland Revnue a stamped form TD1 which he gives to the employer to authorise the deduction.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

The principal indirect taxes are:  Value Added Tax: A tax levied on imports and on the value of commercial o supplies of goods and services.  Customs and Excise Duties: A tax on imports and manufactured goods.  Import Surcharge: A tax on imports.  Stamp Duty: A tax on instruments.  Financial Services Tax: A tax on financial transactions with banks, etc.  Motor Vehicles Tax: A tax levied on sale of motor vehicles.

24. How does it operate? Is it a VAT or a sales tax?

Vat is levied on the value of the commercial supply made or the value of the consideration and on imports.

Customs Duties are based on the cif value of the imported goods. Excise duties are based on the value of the goods manufactured.

Import Surcharge is an additional tax at a fixed percentage levied and depending on the type of goods.

Stamp Duty is levied on the value of the consideration stated in the instrument or the value imposed by the Revenue where market value exceeds the value stated.

Financial Services Tax is levied at a fixed percentage on the value of the transaction. otor Vehicles Tax is levied on the market value of the vehicle.

25. How is the taxable base determined?

see section 24 above.

26. What are the applicable rates?

Vat and Financial Services Tax are levied at 15% Customs Duties vary from nil to about 30% Stamp Duty rates vary from TT$25.00 to TT$4.00 per $1,000.00 on mortgages and charges.Rates depend on the nature of the transaction recorded in the instrument and the value of the consideration. Residential transfers have a graduated range from exempt to 7.5% .

27. Are there any exemptions?

There are some exemptions; for example, from Vat and from stamp duty on residential transfers

See 23 and 24above

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Social Security or National Insurance Contributions are compulsory for all employees.The employer must contribute twice the employee's weekly contributions.

30. How do they operate?

There are 16 Classes of wage earners and contributions vary according to the Class.

31. How is the taxable base determined?

The specific contribution amounts are set out in the legislation

32. What are the applicable rates?

No applicable rates.

33. Are there any exemptions?

Persons under the age of 16 and persons aged 65 and over do not contribute.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

N/A

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Tax avoidance measures are set out in the Income Tax Act and are wide enough to cover transfer pricing:

www.lexmundi.com Page 373 © 2012 Lex Mundi Section 67. (1) Where the Board is of opinion that any transaction which reduces or would reduce the amount of tax payable by any person is artificial or fictitious, or that full effect has not, in fact, been given to any disposition or settlement, within the meaning of section 72 the Board may disregard any such transaction or disposition or settlement, within the meaning of section 72, and the persons concerned shall be assessable accordingly.

Country Dividends Dividends where Royalties Interest Management voting control Charges

China 10% 5% (25%+shareholding) 10 % 10% 20% Denmark 20% 10% (25%+shareholding) 15% 15% 5% Norway 20% 10% (25%+shareholding) 15% 15% 5% Italy 20% 10% (25%+shareholding) 5% 10% 5% Switzerland 20% 10% (10% + shareholding) 10% 10% 5% Germany 20% 10%(25% + share holding) 10% 15% 20% Sweden 20% 10%(25% + shareholding) 20% 15% 12.5% Luxembourg 10% 5% (10%+ shareholding) 10% 7.5% 10% USA 15% 10%(10% + shareholding) 15% 20% 20% Canada 15% 5% (10%+ shareholding) 10% 10% 10% United Kingdom 20% 10%(25%+ shareholding) 10% 10% 20% Caribbean Community (Caricom) 0% 0% 15% 15% 15% India 10% 10% 10% 10% 10% Venezuela 10% 5%(25%+ shareholding) 10% 15% 10%

Rentals of Real Property In all treaties this is 20% except for the following:-to companies in the USA 10%.

Branch Profits 10% in the treaties generally except for the following : to China ,Canada ,Luxembourg and Venezuela 5%; to Italy 8%; to Caricom 0

Contact Information:

Myrna Robinson-Walters Hamel-Smith [email protected] Eleven Albion Cor. Dere & Albion Streets Port of Spain, Trinidad and Tobago

Tel 1.868.821.5500 Fax 1.868.821.5501 http://www.trinidadlaw.com

Tax Desk Book

Turkey Prepared by Lex Mundi member firm Pekin & Pekin

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

The Turkish tax system comprises direct and indirect taxes. Direct taxes include individual income tax and corporate income tax. Indirect taxes include value added tax (VAT), excise taxes which are charged on the sale and importation of certain goods, raw materials, energy, natural gas, oil, etc. and transaction taxes, such as stamp tax, banking and insurance transaction tax, real estate sale and purchase tax, etc. Corporate income tax is governed by the Corporation Tax Law (Law No. 5520) (published in the Official Gazette dated June 21, 2006, No. 26205) (as amended from time to time) and individual income tax is governed by the Income Tax Law (Law No. 193) (published in the Official Gazette dated January 6, 1961, No. 10700) (as amended from time to time). VAT is governed by the Value Added Tax Law (Law No. 3065) (published in the Official Gazette dated November 2, 1984, No. 18563) (as amended from time to time). Excise taxes are governed by the Special Consumption Tax Law (Law No. 4760) (published in the Official Gazette dated June 12, 2002, No. 24783) (as amended from time to time). In respect of major transaction taxes, stamp tax is governed by the Stamp Tax Law (Law No. 488) (published in the Official Gazette dated July 11, 1964, No. 11751) (as amended from time to time), banking and insurance transaction tax is governed by the Transaction Tax Law (Law No. 6802) (published in the Official Gazette dated July 23, 1956, No. 9362) (as amended from time to time), and real estate sales and purchase tax, court charges and other similar levies are governed by the Charges Law (Law No. 492) (published in the Official Gazette dated July 17, 1964, No. 11756) (as amended from time to time).

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

See below.

3. What revenues are included?

The net income of corporations is subject to corporation tax and the net income of individuals is subject to income tax. Corporations

www.lexmundi.com Page 375 © 2012 Lex Mundi The net income of corporations as defined in Article 1 of the Corporation Tax Law and which includes the following earnings realized from their commercial and agricultural activities in Türkiye is subject to corporate income tax at a rate of 20%:  Private and public (i.e. listed) companies (including banks, finance companies, insurance companies, securities, brokerage companies, commercial and industrial companies, investment companies and mutual funds);  Cooperatives;  State-owned enterprises;  Commercial entities of associations and foundations;  Joint ventures and partnerships; and  Foreign entities similar to the above and foreign investment companies, mutual funds and trusts Individuals The net income of individuals realized from their commercial, professional and agricultural activities in Türkiye and the salaries of individuals paid in Türkiye are subject to income tax at the following rates pursuant to Article 103 of the Income Tax Law:  Up to TL 8,700 15%  Up to TL 22,000 (for first TL 8,700, TL 1,305 20%  Up to TL 50,000 (for first TL 22,000, TL 3,965) 27%  Over TL 50,000 (for first TL 50,000, TL 11,525) 35%

4. What deductions are allowed?

Corporations According to Article 6 of the Corporation Tax Law and Article 37 of the Income Tax Law all income generated from commercial and industrial activities qualifies as corporate income. From this corporate income the following expenses are deductible:  All expenses that are directly related to the generation of corporate income;  Salaries and social benefits (such as food and medical expenses, social security premiums, severance indemnities etc.) of employees;  Indemnities paid in connection with damages provided that such indemnities are directly related to the taxable business;  Travel expenses in connection with the taxable business;  Rental payments of the premises and the cars used for the business;  Transaction taxes (such as stamp taxes, real estate taxes, municipality taxes, etc.) in connection with the business;  Depreciation;  Expenditures related to General Assembly meetings;  Incorporation expenses to incorporate the taxable business; and  Securities (including equity and debt offerings) issuance expenses. Individuals

www.lexmundi.com Page 376 © 2012 Lex Mundi Individuals who render independent professional services or those who are carrying out commercial activities may deduct from their taxable income ordinary business-related expenses, including salaries, rental payments, fees and the cost of utilities. Depreciation on fixed assets is also deductible. The employee parts of social security contributions and unemployment insurance premiums are deductible from gross employment income. The premiums paid by the employee for himself, his/her spouse or children related to the personal insurance policies covering life, death, accident, illness, disablement, unemployment, maternity, birth and education, as well as the contributions paid to the Individual Retirement System are in general deductible. However, certain conditions must be fulfilled for such premiums to be deductible, as follows: • The insurance policy and the retirement contract should be concluded with an insurance company resident in Türkiye and headquartered in Türkiye; • The amount of the monthly premium, membership fee or contributions that are paid to the Individual Retirement System, should not exceed 10% of the salary earned in that month (the premiums paid for the personal insurance policies other than the Individual Retirement System should not exceed 5% of the wages earned in the month the premium was paid); • The annual totals of monthly premiums, membership fees and contributions that are deductible may also not exceed the annual total amount of the minimum wage (as determined by law). Lightening, heating, water, elevator, administration, insurance, interest, taxes, depreciation and maintenance expenses paid by an individual who derives rental income are deductible.

5. What are the major expenses that are not deductible?

Corporations The following expenditures do not qualify as tax-deductible-expense:  Any interest paid to shareholders against their equity capital;  Interest and foreign exchange loss related to loans obtained from lenders having an direct or indirect equity interest in the company acting as the borrower to the extent the total amount of such loans exceed three times the net equity of the company;  Expenditures that are not based on arm’s length pricing;  Legal reserves of the company;  Tax penalties, other monetary fines and the interest related to such penalties and fines;  Losses incurred from the issuance of securities (including stocks) below their nominal values and fees and commissions paid for the issuance of such off-market securities; and  Indemnities paid in connection with the damages incurred from a crime committed by shareholders, directors, officers and employees. Individuals Any expenditures that are not directly related to the scope of taxable business may not be deducted.

6. What are the applicable federal rates?

Since Türkiye is not a federal state, taxation is on a one-level country wide basis.

7. What are the applicable state and/ or other local rates?

Local municipalities receive a share from national income taxes. In addition, certain ad valorem taxes, such as the real estate tax, are directly collected by local municipalities.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Capital gains derived by all companies, including branches of foreign companies, are included in ordinary income and are subject to corporation tax. Capital gains are generally computed by subtracting the cost of the asset, after deducting expenses related to the sale, from the selling price. Capital gains derived from sales of depreciable fixed assets are not taxable to the extent such gains are reinvested in new fixed assets to replace the sold assets. Capital gains to be used for reinvestment are transferred to a special reserve account. If the special reserve is not used to finance the purchase of similar new assets within the following three years, the balance in the reserve must be included in taxable income. 75% of capital gains derived by resident and non-resident companies from disposals of shares held for at least two years qualify for corporate tax exemption on the condition that the capital gain is reserved in an equity reserve fund and is not distributed for five years. Tax treaty provisions may reduce the holding period for such an exemption to one year.

9. How are operating losses handled?

In general, losses may be carried forward for five years. Losses may not be carried back. An order of priority applies for the use of losses and exemptions to offset against taxable income for the year. Past years’ losses must be exhausted after applicable exemptions even if there is a loss. Then the other exemptions (which are only applicable if a taxable profit exists) will be applied (e.g. investment allowances).

Resident companies may deduct the losses incurred in relation to business activities performed abroad provided that the foreign losses are approved by auditors authorized under the laws of the relevant jurisdiction. Foreign losses may not be deducted if related income arising from the foreign activity would have been exempt from corporation tax in Türkiye.

10. How are capital losses handled?

See above.

Territorial Rules

11. What are the residence rules?

Corporations Under the Corporation Tax Law companies incorporated in Türkiye and branch offices of foreign companies established in Türkiye are recognized as full tax liability companies. Companies incorporated outside Türkiye and the branch offices of Turkish companies established abroad are recognized as limited tax liability companies.

Individuals Under the Income Tax Law individuals resident in Türkiye permanently or who stay more than six months during any calendar year are recognized as full tax liability individuals and individuals resident outside Türkiye or who stay less than six months in Türkiye during any calendar year are recognized as limited tax liability individuals. www.lexmundi.com Page 378 © 2012 Lex Mundi

12. Is worldwide income taxed?

Yes. Resident entities or individuals are subject to tax on their worldwide income, whereas non- resident entities and individuals are taxed solely on their income derived from activities in Türkiye.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Yes, for example, a withholding tax is applied on rent payments from businesses as tenants to individual landlords. The individual landlords are in turn entitled to a tax credit on such withholding when they declare their annual income.

Withholding Taxes

Corporations Income (other than commercial and agricultural income) such as interest, dividends and capital gains generated in Türkiye by limited tax liability corporates are, in general, subject to a withholding tax by the resident counterparty. However, if a limited tax liability corporate is deemed to have a permanent establishment in Türkiye it should file an annual corporate tax return as all resident companies do. The withholding tax rates (if not provided for otherwise in the Double Taxation Treaties) for certain income derived by a limited tax liability corporate are as follows:  Income from the sale of listed Turkish equity 0%  Interest from Turkish debt securities (including Treasury bills/bonds) 0%  Income from repo transactions 15%  Dividends 15%  Loan interest provided that the lender is a bank 0%  Income from discounting of promissory notes and drafts 10%  Income from financial leasing 1%  Rent income 20%  Income from the sale, transfer and licensing of intellectual property and royalties 20%  Withholding tax on dividends paid out to a non-resident corporation 15%

Individuals Income (other than commercial, professional and agricultural income and salaries) such as interest, dividends and capital gains generated in Türkiye by limited tax liability individuals are subject to withholding taxation. Other types of income require annual filings as applicable to resident individuals. The withholding tax rates (if not provided for otherwise in the Double Taxation Treaties) for certain income of a limited tax liability individual are as follows:  Income from the sale of listed Turkish equity 0%  Interest from Turkish debt securities (including Treasury bills/bonds) 0%  Income from repo transactions 15% www.lexmundi.com Page 379 © 2012 Lex Mundi  Dividends 15%  Rent income 20%  Income from the sale, transfer and licensing of intellectual property and royalties 20%

14. What are the rates on dividends for withholding taxes?

See above.

15. What are the rates on royalties for withholding taxes?

See above.

16. What are the rates on interest for withholding taxes?

See above.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

See above.

18. Please list any other rates on withholding taxes that we should be aware of.

See above.

Tax Returns and Compliance

Corporations Tax returns for t annual corporate income tax are required to be filed with the Turkish tax office located within the precinct of their company address from the 1st to the 25th day of the fourth month following the end of the fiscal year of the corporation, and the corporate income tax assessed accordingly is required to be paid in full on such day. The fiscal year of a corporation is, by default, the calendar year. However, corporations may, with the prior permission of the Ministry of Finance, designate another term (which must be 12 months) as their fiscal year. Corporations are also required to file interim tax returns by the end of each quarter and pay advance corporate income tax on their quarterly profits at the same rate as the annual corporate rate (20%). These interim corporate income taxes paid are offset against the annual corporate income tax for the fiscal year.

Individuals Individuals who perform basic artisan work (shoe shiners, individual tailors, etc.) and have annual turnovers of less than EUR 45,000 file their returns with the Turkish tax office located within their precinct of residency from the beginning of February till the 25th day of February of the following year, and the income tax assessed is required to be paid in two equal installments, the first by the end of March and the second by the end of July following the end of the fiscal year. The fiscal year for individuals is the calendar year. All other individuals who are subject to income tax are required to file their annual returns from March 1st to March 25th of the following year and pay their assessed tax in two installments by the end of March and July. This group also has to file interim tax returns at the end of each quarter and pay advance income tax on their quarterly profits at the same rate as their income tax bracket. These interim corporate income taxes paid are offset against the annual their income tax for the whole fiscal year.

19. What is the taxable reporting period?

See above.

20. What are the due dates for the filing of tax returns?

See above.

21. What are the key compliance requirements?

See above.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

See above.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

VAT The transfer of all goods and the rendering of all services including importation the same into Türkiye are, in general, subject to VAT at a rate of 18%. There are, however, reduced or increased rates depending on the subject matter of taxation. For instance, the rate of VAT on lease payments of financial lease arrangements (including those with non-resident financial lessors) is 1% whereas increased rates of VAT are charged on the sale of some luxury goods and cars.

Excise Tax The sale of certain goods such as cars, cigarettes, oil, energy and natural gas is also subject to additional excise and special consumption taxes that could be as high as 50+% for certain cars for example.

Banking and Insurance Transaction Tax All revenues of resident banks, finance and insurance companies, such as interest, commission, premiums and other fees and charges, are subject to banking and insurance transaction tax (“BITT”) at a general rate of 5%. Revenues derived from inter-bank transactions are subject to BITT at a reduced rate of 1%. Local foreign exchange spot purchase and forward purchase transactions are subject to BITT at a further reduced rate of 0.1%.

Real Estate Sale and Purchase Tax The sale and purchase of real estate is levied at a rate of 3% over the sale and purchase price, half of which is payable by the seller and the other half by the purchaser. It is possible, however, to cap the sale and purchase price at the amount of minimum real estate values declared periodically by the municipalities.

www.lexmundi.com Page 381 © 2012 Lex Mundi Stamp Tax All documents that contain a monetary amount of undertaking are subject to stamp tax at a general rate of 0.75% over the amount of monetary undertaking. However, exemptions are available in relation to certain transactions, such as cross border financing, issuance and transfer of securities, exportation, etc., provided that such exemptions are explicitly granted by law.

24. How does it operate? Is it a VAT or a sales tax?

See above.

25. How is the taxable base determined?

See above.

26. What are the applicable rates?

See above.

27. Are there any exemptions?

See above.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

Yes. More detailed information on the Banking and Insurance Transactions Tax (“BITT”) and Resource Utilization Support Fund (“RUSF”) is provided below: Banking and Insurance Transactions Tax Under the current Turkish tax system transactions by banks and other financial institutions are exempt from VAT but are subject to Banking and Insurance Transactions Tax (BITT). The gross income (fees minus the cost of the transaction) derived by these in Türkiye (e.g., banking charges, insurance premiums, brokerage fees) are, in general, subject to BITT, regardless of whether they are actually collected or recorded as an income accrual. Nevertheless, purchases of goods and services by financial companies are subject to VAT and, as they may not offset such against BITT they collect, they are allowed to deduct such output VAT as an expense.

Resource Utilization Support Fund In order to direct the investments and to lower the costs incurred in special loans in accordance with development plans and yearly programs, the Resource Utilization Support Fund was established within the Central Bank of Türkiye in 1988. Resource Utilization Support Fund Levy (“RUSFL”) applies on the following transactions:  Credits supplied by Turkish Banks and financial institutions,  Credits obtained by Turkish Banks and financial institutions from abroad,  Credits obtained by Turkish residents, other than banks and financial institutions, from abroad,  Imports realized under acceptance credits, term letters of credit and on a cash against goods basis.

www.lexmundi.com Page 382 © 2012 Lex Mundi RUSFL is applied on the principal amount of the loan amount at a general rate of 3%. Inter-bank lending and funding for terms longer than one year are not subject to RUSFL. The 15% RUSFL on consumer credits has been recently reduced to 10% as part of an Anti Crisis Measures Package.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Certain parafiscal contributions are payable in Türkiye, which mainly pertain to social security premiums as listed below in a nutshell:

Insured’s Employer’s Security Branches Share Share Total Share Short-term Security Branch Premium - 1-6, 5 1-6, 5 Long-term Security Branch Premium 9 11 20 General Health Security Premium 5 7,5 12,5 Unemployment Security Premium 1 2 3 Total 15 21, 5-27 36,5-42

There are a limited number of other parafiscal duties that do not accumulate significant fiscal funding. A recent example would be the Competition Board Levy that is charged to founders of (new) companies at the rate of one per ten thousandth of the capital of the company under formation.

30. How do they operate?

See above.

31. How is the taxable base determined?

See above.

32. What are the applicable rates?

See above.

33. Are there any exemptions?

See above.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Transfers by way of a gift and upon death trigger gift and inheritance tax at the following rates:

www.lexmundi.com Page 383 © 2012 Lex Mundi Amount Rate of Inheritance Tax Rate of Gift Tax First TL 160,000 1% 10% Following TL 350,000 3% 15% Following TL 760,000 5% 20% Following TL 1,500,000 7% 25% Following exceeding TL 2,770,000 10% 30%

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

See above.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

The investment incentive scheme was revised in 2006 to promote investment in manufacturing, services and the energy sector and also to encourage exports. Local and foreign investors have, in principle, equal access to these incentives.

General investment incentive scheme The general incentive scheme is mainly a tax benefit program, though in certain cases there are possibilities for financing and refinancing. Its application varies according to the location, scale and subject of the underlying investment. The major investment incentive instruments under current regulations are:  Exemption from customs duties for imported machinery and equipment subject to an investment incentive certificate to be obtained by the investor from the Turkish State;  VAT exemption for imported or locally delivered machinery and equipment subject to an investment incentive certificate notwithstanding a few exceptions where VAT exemption is granted without a certificate. Interest rate support on investment loans is provided for:  Small and Medium Sized Enterprises (“SME”);  Projects in relation to the Law on Supporting Research and Development Activities (Law No. 5746) (published in the Official Gazette dated March 12, 2008, No. 26814) (as amended from time to time) (“R&D Law”);  Environmental projects;  Projects in 50 prioritized development provinces. [+] 50 Prioritized provinces and 4 provinces are shown on the country map herein below:

Incentives provided are mainly:  Free land allocation  Income tax relief  Social security relief on the employer’s share  Energy support

Incentives granted to Small and Medium Sized Enterprises (SME incentives) SMEs are defined as companies which operate in the manufacturing, agro-industry, tourism, education and health, mining, and software industries:  Medium size: employing 50−250 workers and with yearly net sales or a total value of assets less than TL 25,000,000 (approx. USD 20 million)  Small size: employing 10−49 workers and with yearly net sales or a total value of assets less than TL 5,000,000 (approx. USD 4 million)  Micro size: employing 1−9 workers and a yearly net sale or a total value of assets less than TL 1,000,000 (approx. USD 800 thousands). Investment and operational credit support for SMEs covers:  Manufacturing or agricultural investments  Tourism investments in selected regions  Modernization investment in existing tourism facilities  Healthcare investments in priority regions  Education investments in primary and secondary schools in developed and normal regions  Mining investments  Software development investments  Investments utilizing capital goods (including building, machinery, equipment and/or raw materials) of not more than TL 950,000 Incentives provided:

www.lexmundi.com Page 385 © 2012 Lex Mundi  Customs duties exemption  VAT exemption  Interest support  KOSGEB support of SMEs; The Small and Medium Industry Development Organization (KOSGEB) makes significant contributions to strengthen SMEs by means of various support instruments in financing, R&D, common facilities, market research, investment sites, marketing, export and training

Research and development support TUBITAK (Scientific and Technological Research Council of Türkiye) and TTGV (Turkish Technology Development Foundation) both reimburse and/or grant R&D related expenses and capital loans for R&D projects. Projects eligible for TUBITAK Incentives cover:  Concept development  Technological research and technical feasibility research  Laboratory studies in the transformation of a concept to a design  Design and sketching studies  Prototype production  Construction of pilot facilities  Test production  Patent and license studies  Activities related to post-sale problems stemming from product design

New R&D law Türkiye’s new R&D law provides special incentives for R&D investment projects in Türkiye provided that at least 50 personnel are employed. The incentives within the new law, which will be available until 2024, are:  100% deduction of R&D expenditures from the related tax base  Income withholding tax exemption for employees  Exemption of 50% of employer’s social security premium contribution for five years  Stamp duty exemption for documents drawn up  Techno-initiative capital grant for new scientists up to TL 100,000  Deduction of certain funds granted by public bodies and internal organizations from the tax base of the R&D company

Technology development zone support  Infrastructure facilities are provided.  Profits derived from software and R&D activities are exempt from income and corporate taxes until 12.31.2013. www.lexmundi.com Page 386 © 2012 Lex Mundi  The salaries of researchers and software and R&D personnel employed in the zone are exempt from all taxes until 12.31.2013.  VAT exemption during the exemption period of income and corporate taxes is provided for IT specific sectors.  Exemption from customs duties and fund levies.

State incentives for export The principle aim of this scheme is to encourage exports and to increase the competitiveness of firms in international markets. This specific package mainly covers R&D activities, market research, participation in exhibitions and international fairs, and expenditure on patents, trademarks and industrial designs.

Yes. Please find below information on significant present regulations:

Turkish Transfer Pricing Regulations In dealing with related parties, a Turkish company is required to apply arm’s length transfer prices, i.e. prices that unrelated parties would have used in similar conditions. Transfer prices are determined in accordance with OECD transfer pricing guidelines. Accordingly, acceptable transfer pricing methods are the Comparable Uncontrolled Price, Cost Plus or Resale Minus – other methods are subject to pre-approval by the Ministry of Finance. After major changes to the tax laws were enacted in 2006, the Turkish Revenue drastically increased its reviews in relation to transfer pricing by introducing an extremely wide scope on the definition of related entities and individuals that are subject to non-compliance in this respect. Therefore, it is highly recommend that all taxpayers who are involved in inter company transfer pricing make use of the advance clearing option that was put in effect starting January 1, 2008.

Turkish Thin Capitalization Rules Thin-Cap rules apply if the amount of loans received from shareholders or other related parties exceeds three-times the amount of equity of a Turkish company; A ratio of six-times applies in the event the shareholder or the related party is a bank or financing company; A related party is, in general, a company in which a Turkish shareholder owns at least 10% of the shares but, as explained under the (recently enacted) Transfer Pricing Regulations above, the Turkish Revenue is inclined to widen the scope of the related-party qualification; In the event the Thin-Cap qualification kicks in, the interest and FX losses on any borrowing that is deemed as Thin-Cap becomes non-deductible. Further, such parts of any borrowing are deemed as profit and are subject to dividend taxation.

Double Taxation Treaties As of the date hereof, Türkiye has income tax treaties in force with the following countries:

Albania Algeria Austria Azerbaijan Bahrain Bangladesh Belarus Belgium Bosnia-Herzegovina Bulgaria The Republic of China Croatia Turkish Republic of North Czech Republic Denmark Cyprus Egypt Estonia Ethiopia Finland France Germany Greece Hungary India Indonesia Iran Israel Italy Japan Jordan Kazakhstan The Republic of Kyrgyzstan Kuwait Latvia Lebanon Lithuania Luxembourg Macedonia Malaysia Moldova Mongolia Morocco The Netherlands Norway Pakistan Poland Portugal Qatar Romania Saudi Arabia Serbia Russia Singapore Slovakia Slovenia The Republic of South Africa South Korea Spain Sudan Syria Sweden Tajikistan Thailand Tunisia Turkmenistan Ukraine United Arab Emirates United Kingdom United States Uzbekistan

Netherlands 20% WHT 10% WHT rate The transfers of 10% ceiling rate applies to applies to interest corporate equity or applies concerning dividends on loans from debt issues of non- the total tax distributed by non-banks and public companies are burden on the a Turkish Co non-finance exempt subject to a 1- outbound (if 25% or companies. 0% year holding period. payments of more owned WHT rate applies royalties and other

by Dutch to loans from fees in return for IP company, banks and by Turkish users of then it is finance IP. reduced to institutions 10% for stand- (Turkish internal alone Turkish tax regulation). companies

and 7.5% for branches of the Dutch parent).

Spain 20% WHT 10% WHT rate Transfers of corporate 10% ceiling rate applies to applies to interest equity or debt issues of applies concerning dividends on loans from non-public companies the total tax distributed by non-banks and are exempt subject to a burden on the a Turkish Co non-finance one-year holding outbound (if 25% or companies. 0% period. payments of more owned WHT rate applies royalties and other by Spanish to loans from fees in return for IP company, banks and by Turkish users of then it is finance IP. reduced to institutions

5%). (Turkish internal tax regulation).

Double tax treaty between Türkiye-Netherlands Dividends: 20% WHT rate applies to dividends distributed by a Turkish Co (if 25% or more owned by Dutch company, then it is reduced to 10% for stand-alone Turkish companies and 7.5% for branches of the Dutch parent). Interest: 10% WHT rate applies to interest on loans from non-banks and non-finance companies. 0% WHT rate applies to loans from banks and finance institutions (Turkish internal tax regulation). Capital gains: The transfers of corporate equity or debt issues of non-public companies are exempt subject to a 1-year holding period. Intellectual Property (IP): 10% ceiling applies concerning the total tax burden on the outbound payments of royalties and other fees in return for IP by Turkish users of IP.

Double tax treaty between Türkiye-Spain Dividends: 20% WHT rate applies to dividends distributed by a Turkish Co (if 25% or more owned by Spanish company, then it is reduced to 5%). www.lexmundi.com Page 389 © 2012 Lex Mundi Interest: 10% WHT rate applies to interest on loans from non-banks and non-finance companies. 0% WHT rate applies to loans from banks and finance institutions (Turkish internal tax regulation). Capital gains: The transfers of corporate equity or debt issues of non-public companies are exempt subject to a one-year holding period. Intellectual Property (IP): 10% ceiling applies concerning the total tax burden on the outbound payments of royalties and other fees in return for IP by Turkish users of IP.

Contact Information:

Ali Sanver Pekin & Pekin [email protected] 10 Lamartine Caddesi Taksim Irmak Dirik Istanbul, 34437 Turkey Yeliz Yüksel Tel 90.212.313.3500 Fax 90.212.313.3535 Batuhan Şahmay http://www.pekin-pekin.com

Tax Desk Book

USA, Arkansas Prepared by Lex Mundi member firm Rose Law Firm, a Professional Association

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

The following are the majority of the taxes that are imposed in the State of Arkansas: income tax, gross receipts (sales) and use tax, franchise tax, property tax, and real property transfer tax. A brief summary of each tax is set forth below.

The Arkansas income tax is imposed by the State of Arkansas upon resident and non-resident individuals, estates, trusts, and corporations deriving income from within the state. Additional information about the Arkansas income tax is set forth in the answers to questions 8-28.

The Arkansas gross receipts (sales) tax is a tax on gross receipts from the sale or rental of tangible personal property and certain selected services. The Arkansas use tax is a tax on items purchased out of state, but used, stored, or consumed within Arkansas. The Arkansas gross receipts tax and the Arkansas use tax are imposed by the State of Arkansas, as well as by certain counties and municipalities. Additional information about the Arkansas gross receipts tax and the Arkansas use tax is set forth in the answers to questions 29-34.

The Arkansas franchise tax is imposed by the State of Arkansas on all domestic and foreign (Arkansas-based and non-Arkansas-based) corporations, associations, joint stock companies, business trusts, limited liability companies, and all other organizations exercising or attempting to exercise corporate-type acts in Arkansas. The Arkansas franchise tax is imposed at the rate of 0.3% on the corporation’s outstanding capital stock that is apportioned to Arkansas. There is a tax of $300 on non-stock corporations and mutual assessment insurance companies.

The Arkansas property tax is levied on both real and tangible personal property by counties, municipalities, school districts, and certain improvement districts. The State of Arkansas is constitutionally prohibited from levying any statewide property tax. Property taxes in Arkansas are established by multiplying the millage rate to the assessed value of the taxpayer’s real and personal property. The local millage rate determines the amount taxable per $1,000 of assessed value. A mill, or one one-thousandth of a dollar (.001), is the basis for Arkansas property taxes. There is a constitutional limit on the maximum number of mills that can be levied by a city (up to 20) or county (up to 21). Conversely, school districts must levy at least a 25-mill tax on property in the district with no maximum limit.

The Arkansas real property transfer tax is imposed by the State of Arkansas on conveyances of real property. The tax does not apply to certain transfers, including mortgages, leases, or transfers between corporations, partnerships, limited liability companies, or other business entities or between a business entity and its shareholders, partners, or members incident to the organization, reorganization, merger, consolidation, capitalization, asset distribution, or liquidation of a corporation, partnership, limited liability compa

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

To arrive at taxable income, a taxpayer starts with his or her total income and reduces it by the deductions permitted under Arkansas law.

The corporate income tax base is a corporation’s net taxable income, which is generally represented by the corporation’s profits.

3. What revenues are included?

An individual taxpayer’s income includes wages, salaries, tips, taxable interest and dividend income, business and farm income, realized net capital gains, income from rents, royalties, trusts, estates, partnerships, taxable pension and annuity income, and alimony received.

A corporation’s income generally includes gross sales minus cost of goods sold. Other items such as federally-exempt interest, including interest on another state’s obligations, bank deposits and mortgages, taxable dividends, except those received from 80%-owned subsidiaries and capital development corporations, and rents and royalties, are added to arrive at gross income.

4. What deductions are allowed?

To arrive at net taxable income, individual taxpayers may either itemize their deductions or use the standard deduction of $2,000 per taxpayer (including $2,000 per spouse when married filing jointly). The amount paid to the federal government in federal taxes is not deductible in the calculation of the Arkansas income tax.

A corporate taxpayer is entitled to deduct from its gross income the cost of doing business. Deductible costs include the cost of materials, wage payments to employees, and interest payments on loans where the corporation is the debtor. Depreciation, or the decline in value of tangible assets, is also a deductible cost. Arkansas allows the deduction of out-of-state manufacturing or merchandising costs, interest income attributable to federal or Arkansas governmental obligations and capital corporation bonds, net operating losses for a carry-forward period of five years, capital losses, charitable contributions (within limits), and depreciation (often consistent with federally allowed depreciation). Taxes paid to other states are deductible from Arkansas corporate income while income taxes paid to the federal government are not.

5. What are the major expenses that are not deductible?

No answer provided

6. What are the applicable federal rates?

The federal income tax rates for individuals are composed of marginal rates of tax ranging from 10% to 35%. There are special, lower rates for many long-term capital gains.

The federal income tax rates for corporations are composed of marginal rates of tax ranging from 15% to 35%. There are no special rates for a corporation’s capital gains.

7. What are the applicable state and/ or other local rates?

The Arkansas income tax rates for corporations are composed of marginal rates of tax ranging from 1% to 6.5%. If a corporation does business both inside and outside the state of Arkansas, the net income of the corporation is apportioned according to the percentage of property and payroll in Arkansas and the amount of sales attributable to Arkansas. The resulting amount is then subject to the Arkansas rate structure.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

In Arkansas, 30% of long-term net capital gains are exempt from tax, but 100% of short term net capital gains are taxable. For qualified small businesses, if certain holding requirements are satisfied, then gross income does not include a portion or all of the gain from the sale of qualified small business stock. All of the gains from the sale of a qualified venture capital investment are not included in gross income, if the investment has been held by the taxpayer for five years.

9. How are operating losses handled?

A corporation’s net operating losses are deductible and may be carried forward for five years. In the case of the acquisition of assets of one corporation by another corporation, the acquiring corporation succeeds to and takes into account any net operating loss carryover apportionable to Arkansas. The net operating loss may be claimed only when not less than 80% of the voting stock of each corporation is owned by the same person or where prior to the acquisition the acquiring corporation owned at least 80% of the voting stock of the acquired corporation.

10. How are capital losses handled?

Long term capital gains are netted with long term capital losses and short term capital gains are netted with short term capital losses to compute net long term capital gains or losses, and net short term capital gains or losses. An individual taxpayer m

Territorial Rules

11. What are the residence rules?

Residents are those taxpayers domiciled in Arkansas (those with a settled connection for legal purposes) as well as those maintaining a permanent home in the state and spending more than six months per year within the state. All other taxpayers deriving income from Arkansas sources are taxed as non-residents. These Arkansas sources include property as well as income from businesses or occupations carried on in Arkansas. Non-residents are subject to the same tax and rates as residents, but the tax is imposed only as to the net income earned within Arkansas.

12. Is worldwide income taxed?

Income derived from Arkansas sources is taxed by the State of Arkansas.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

The State of Arkansas provides a tax credit to individuals for taxes paid to another state. This credit is generally available when Arkansas and another state both seek to tax the same income.

14. What are the rates on dividends for withholding taxes?

A pass-through entity, such as a partnership or S corporation, is required to withhold Arkansas income tax at the highest Arkansas income tax rate on the share of income of the pass-through entity that is derived from or attributable to sources within the State of Arkansas and distributed to a nonresident member. There are certain exceptions to the withholding requirements. For example, if the pass through entity has filed with the Director of the Arkansas Department of Finance and Administration the nonresident member's signed agreement to timely file an Arkansas nonresident individual or trust income tax return, to pay any tax due on the return, and to be subject to the jurisdiction of the Department of Finance and Administration in the Arkansas courts for the purpose of determining and collecting any Arkansas income tax together with interest and penalties owed by the nonresident member, then the withholding requirements do not apply.

Arkansas employers are required to withhold Arkansas income taxes from the wages of employees who work within the State of Arkansas. The withholding requirements can be computed by using a formula or tables established by the State of Arkansas.

15. What are the rates on royalties for withholding taxes?

No answer provided.

16. What are the rates on interest for withholding taxes?

No answer provided.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

No answer provided.

18. Please list any other rates on withholding taxes that we should be aware of.

No answer provided.

Tax Returns and Compliance

19. What is the taxable reporting period?

For individuals, the taxable year for Arkansas income tax is a calendar year, beginning January 1 and ending December 31. Corporations may elect either a calendar or fiscal taxable year for Arkansas income tax purposes.

20. What are the due dates for the filing of tax returns?

Individual income tax returns are due April 15. Income tax returns for corporate calendar year taxpayers are due March 15 or on the 15th day of the third month following the end of the fiscal year for corporate fiscal year taxpayers.

When a taxpayer reasonably anticipates that the Arkansas income tax liability for the income year will exceed $1,000, it must file a declaration of estimated income tax with the Arkansas Department of Finance and Administration. If the estimated tax liability is less than $1,000, the payment must be made at the time the declaration is filed. If the estimated liability is greater than $1,000, the payment may be made at the time the declaration is filed or in four installments. The first payment must be made on the 15th day of the fourth month of the taxable year, to be followed by payments on the 15th www.lexmundi.com Page 394 © 2012 Lex Mundi day of the sixth and ninth months with the final payment to be made by the 15th day of the last month of the taxable year.

Arkansas gross receipts and use tax returns are due monthly to the Arkansas Department of Finance and Administration. Some large retailers must remit the tax payment in advance while some smaller retailers may file quarterly or yearly returns based on the amount of tax actually due.

Franchise tax returns are due May 1.

21. What are the key compliance requirements?

Compliance requirements, including forms and instructions, may be found online at http://www.state.ar.us/dfa/. The physical and mailing address for the Arkansas Department of Finance and Administration is as follows:

Corporation Income Tax 1816 West Seventh Street Room 2250 Ledbetter Building Little Rock, AR 72201 P.O. Box 0919 Little Rock, AR 72203

Individual Income Tax 1816 West Seventh Street Room 2300 Ledbetter Building Little Rock, AR 72201 P.O. Box 3628 Little Rock, AR 72203

Office of Excise Tax Administration 1816 West Seventh Street Room 2420 Little Rock, AR 72201 P.O. Box 8054 Little Rock, AR 72203

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

No answer provided.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

A gross receipts (sales) tax and a use tax are both imposed in the State of Arkansas.

24. How does it operate? Is it a VAT or a sales tax?

The Arkansas gross receipts (sales) tax is a tax on gross receipts from the sale or rental of tangible personal property and certain selected services. The Arkansas use tax is a tax on items purchased out of state, but used, stored, or consumed within Arkansas. The taxpayer for the Arkansas gross receipts tax is the seller of goods or the provider of services, and is the party responsible for the www.lexmundi.com Page 395 © 2012 Lex Mundi payment of the tax, but may pass along that tax to consumers. The taxpayer for the Arkansas use tax is the individual or entity that purchases items out of state, but uses, stores, or consumes those items within Arkansas, and is the party responsible for the payment of the tax.

25. How is the taxable base determined?

The Arkansas gross receipts tax applies to a sale, which is defined as the transfer of either title or possession of tangible personal property for valuable consideration. The consideration paid or to be paid is the basis for the gross receipts tax. A sale also includes leases, barters, or rentals. In the case of a lease or rental, the basis for the tax is the rental or lease payment. In the case of services, the consideration provided or to be provided for the service is the basis for the gross receipts tax.

The Arkansas use tax is applied to items purchased out of state, but used, stored, or consumed within Arkansas. The use tax rate is equal to the difference between the rate of tax paid outside of Arkansas and the Arkansas rate, provided that the Arkansas rate is higher. The use tax does not apply to services performed outside of Arkansas.

26. What are the applicable rates?

The Arkansas gross receipts (sales) or use tax is generally imposed at the flat rate of 6% by the State of Arkansas. Municipalities and counties may also impose a gross receipts or use tax, and currently the standard combined state and local rates range from 6% to 10.75%. The State of Arkansas imposes a lower rate on the sale of natural gas and electricity sold to a manufacturer, and on the sale of food and food ingredients. Additional excise taxes are imposed upon certain items, such as tobacco, gasoline, and alcohol.

27. Are there any exemptions?

A variety of goods or services are exempt from the Arkansas gross receipts tax and Arkansas use tax. Some of the most important exemptions are for machinery and equipment used in producing articles of commerce, manufacturing forms, gas and energy produced from biomass, isolated sales, and most resale sales.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

No.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

No.

30. How do they operate? No answer provided.

31. How is the taxable base determined?

No answer provided.

32. What are the applicable rates?

No answer provided.

33. Are there any exemptions?

No answer provided.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

N/A

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

The State of Arkansas has not adopted any anti-deferral regimes, transfer pricing provisions, general anti-avoidance rules, controlled foreign companies regulations, or thin capitalization rules.

The State of Arkansas has entered into the Multistate Tax Compact, which was enacted for the purpose of facilitating the proper determination of state and local tax liabilities of multistate taxpayers, including the equitable apportionment of taxes and settlement of apportionment disputes, to promote uniformity or compatibility in significant components of tax systems, to facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration, and to avoid duplicative taxation.

Contact Information:

Adam H. Crow Rose Law Firm a Professional Association [email protected] 120 East Fourth Street Little Rock, Arkansas 72201 Dan C. Young USA [email protected] Tel 1.501.375.9131 Fax 1.501.375.1309 http://www.roselawfirm.com This guide is part of the Lex Mundi Global Practice Guide Series which features substantive overviews of laws, practice areas, and legal and business issues in jurisdictions around the globe. View the complete series of Lex Mundi Global Practice Guides at: www.lexmundi.com/GlobalPracticeGuides www.lexmundi.com Page 397 © 2012 Lex Mundi

Tax Desk Book

USA, Kansas Prepared by Lex Mundi member firm Foulston Siefkin LLP

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

Kansas imposes a tax on the net income of individuals, corporations, trusts, and estates. A privilege tax, based upon net income, is separately imposed upon banks and certain other financial institutions. Kansas also imposes an estate tax on the value of a decedent's estate. The Kansas estate tax applies to Kansas residents and to nonresidents owning property having a tax situs in Kansas. In addition to a net income and estate tax, Kansas imposes the following indirect taxes: (i) sales and use tax; (ii) franchise tax; (iii) property tax; and (iv) various excise and severance taxes.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

The Kansas adjusted gross income of an individual or business entity is based on federal adjusted gross income for the taxable year, subject to certain modifications, allocations, and apportionment adjustments.

3. What revenues are included?

The following modifications are added to an individual's federal adjusted gross income: (i) state and municipal bond interest not specifically exempt from Kansas income tax; (ii) contributions to Kansas Public Employees' Retirement Systems; (iii) federal net operating loss carry forward; (iv) contributions to a Regional Foundation; and (v) a handful of other uncommon modifications. The following modifications are added to a corporation's federal adjusted gross income: (i) state and municipal bond interest not specifically except from Kansas income tax; (ii) taxes on or measured by income or fees or payments in lieu of income taxes; (iii) federal net operating loss deduction; and (iv) a handful of other uncommon modifications.

4. What deductions are allowed?

The following modifications are subtracted from an individual's federal adjusted gross income: (i) social security benefits; (ii) Kansas Public Employees' Retirement Systems lump-sum rollovers; (iii) interest on United States government obligations; (iv) state or local income tax refunds; (v) Kansas net operating loss carry forward; (v) exempt retirement benefits; (vi) military compensation of a non- resident service member; (vii) qualified long-term-care insurance premiums; (viii) contributions deposited in a learning quest education savings program or a similar qualified 529 tuition program established by another state; (ix) armed forces recruitment, sign-up, or retention bonuses; and (x) a handful of other uncommon modifications. The following modifications are subtracted from a corporation's federal adjusted gross income: (i) interest on United States government obligations; (ii) Internal Revenue Code Section 78 and 80% of foreign dividends; (iii) business and job development www.lexmundi.com Page 398 © 2012 Lex Mundi credit; (iv) research and development credit; (v) alternative-fuel motor vehicle property credit; (vi) petroleum refinery credit; (viii) qualifying pipeline credit; (ix) BioMass-to-Energy credit; and (x) a handful of other uncommon modifications.

Individuals are also entitled to a standard or itemized deduction and an exemption allowance based on the number of exemptions claimed.

5. What are the major expenses that are not deductible?

The State of Kansas is a conforming state (i.e. Kansas income tax law generally conforms to the federal income tax code). Subject to the modifications noted in Question 9 above, major expenses that are not deductible under the federal income tax code are generally not deductible for Kansas income tax purposes.

6. What are the applicable federal rates?

The 2008 federal income tax rates for a single individual are as follows: (i) taxable income (hereinafter "TI") not over $8,025 @ 10%; (ii) TI not over $32,550 @ $802.50 plus 15% of amount over $8,025; (iii) TI not over $78,850 @ $4,481.25 plus 25% of amount over $32,550; (iv) TI not over $164,550 @ $16,056.25 plus 28% of amount over $78,850; (v) TI not over $357,700 @ $40,052.25 plus 33% of amount over $164,550; (vi) TI over $357,700 @ $103,791.75 plus 35% of amount over $357,700. The 2008 federal income tax rates for married filing joint/qualifying widow(er) are as follows: (i) TI not over $16,050 @ 10%; (ii) TI not over $65,100 @ $1605 plus 15% of amount over $16,050; (iii) TI not over $131,456 @ $8,962.50 plus 25% of amount over $65,100; (iv) TI not over $357,700 @ $44,828 plus 33% of amount over $131,450; (v) TI over $357,700 @ $96,770 plus 35% of amount over $357,700. The 2008 federal income tax rates for married filing separately are as follows: (i) TI not over $8,025 @ 10%; (ii) TI not over $32,550 @ $802.50 plus 15% of amount over $8,025; (iii) TI not over $65,725 @ $4,481.15 plus 25% of amount over $32,550; (iv) TI not over $100,150 @ $12,775 plus 28% of amount over $65,725; (v) TI not over $178,850 @ $22,414 plus 33% of amount over $100,150; (vi) TI over $178,850 @ $48,385 plus 35% of amount over $178,850. The 2008 federal income tax rates for head of household are as follows: (i) TI not over $11,450 @ 10%; (ii) TI not over $43,650 @ $1,145 plus 15% of amount over $11,450; (iii) TI not over $112,650 @ $5,975 plus 25% of amount over $43,650; (iv) TI not over $182,400 @ $23,225 plus 28% of amount over $112,650; (v) TI not over $357,700 @ $42,755 plus 33% of amount over $182,400; (vi) TI over $357,700 @ $100,604 plus 35% of amount over $357,700.

The 2008 federal corporate tax rates are as follows: (i) TI not over $50,000 @ 15%; (ii) TI not over $75,000 @ $7,500 plus 25% of amount over $50,000; (iii) TI not over $100,000 @ $13,750 plus 34% of amount over $75,000; (iv) TI not over $335,000 @ $22,250 plus 39% of amount over $100,000; (v) TI not over $10,000,000 @ $113,900 plus 34% of amount over $335,000; (vi) TI not over $15,000,000 @ $3,400,000 plus 35% of amount over $10,000,000; (vii) TI not over $18,333,333 @ $5,150,000 plus 38% of amount over $15,000,000; (viii) TI over $18,333,333 @ 35% of the amount over $0.

7. What are the applicable state and/ or other local rates?

The 2008 Kansas income tax rates for resident/married filing joint are as follows: (i) taxable income (hereinafter "TI") not over $30,000 @ 3.5%; (ii) TI not over $60,000 @ $1,050 plus 6.25% of the amount over $30,000; (iii) TI over $60,000 @ $2,925 plus 6.45% of the amount over $60,000. The 2008 Kansas income tax rates for resident/single or resident/married filing separate are as follows: (i) TI not over $15,000 @ 3.5%; (ii) TI not over $30,000 @ $525 plus 6.25% of the amount over $15,000; (iii) TI over $30,000 @ $1,462.50 plus 6.45% of the amount over $30,000.

The 2008 Kansas corporate income tax rate is 4% of total taxable income plus a 3.10% surtax on taxable income over $50,000.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Capital gains are not subject to a special income tax rate in Kansas. Kansas does not impose any special or different income tax rate upon business reorganizations, combinations, amalgamations or the sale of the stock or assets of a business.

9. How are operating losses handled?

A net operating loss deduction is allowed in the same manner that it is allowed under the federal internal revenue code except that such net operating loss may only be carried forward for each of the ten taxable years following the taxable year of the net operating loss. If any portion of a net operating loss is not utilized prior to the final year of the carry forward period, a refund is allowed in such final year in an amount equal to the refund which would have been allowable for the unused portion in the taxable year the loss was incurred by utilizing a three year carry back.

10. How are capital losses handled?

Kansas law does not provide for a separate capital loss carry back; however, as a conformity state Kansas taxable income takes into account capital loss carrybacks which are allowed for federal income tax purposes and included in federal taxable income be

Territorial Rules

11. What are the residence rules?

A corporation is a domiciled in Kansas if it is organized or created under Kansas law.

An individual is a Kansas resident if he or she is domiciled in this state. A person who spends in the aggregate more than six months of the taxable year in Kansas is presumed to be a resident in the absence of proof to the contrary. Additionally, the following factors generally are considered in determining whether or not a person's domicile (and therefore residency) is in Kansas: (i) the percentage of time that the person is physically present within the state of Kansas and the percentage of time that the person is physically present in each jurisdiction other than the state of Kansas; (ii) the location of the person's domicile for prior years; (iii) the location at which the person votes or is registered to vote; (iv) the peron's status as a student; (v) the location of services peformed by the person in the course of employment; (vi) the classification of the person's employment as temporary or permanent; (vii) the change in the person's living quarters; (viii) the person's ownership of other real property; (ix) the jurisdiction in which the person has been issued a valid driver's license; (x) the jurisdiction from which any motor vehicle registration was issued to the person and the actual physical location of the person's vehicle or vehicles; (xi) the purchase of any resident fishing or hunting licenses by the person; (xii) the filing by the person of a Kansas tax return, report, or application as a Kansas resident or a nonresident individual; (xiii) the fulfillment or failure to fulfill by the person of the tax obligations required of a Kansas resident; (xiv) the address where personal mail is received by that person and not subsequently forwarded; (xv) the location of the jurisdiction from which any unemployment compensation benefts are received by the person; (xvi) the location of any school that the person or the person's spouse attends and whether resident or nonresident tuition was charged, as well as the location of the school attended by any of the person's children who are grades K-12; (xvii) the representations made to any insurance company concerning the person's residence and on which any insurance policies are issued; and (xviii) the location where the person, the person's spouse, or the person's minor children regularly participate in sporting events, group activities, or public performance.

12. Is worldwide income taxed?

Kanas individual residents and Kansas corporations are taxed upon their federal taxable income with certain adjustments described previously. A credit is allowed for taxes paid to other states, as described in Question 19.

Nonresident individuals and nonresident corporations doing business in Kansas are subject to Kansas income tax based upon their Kansas source income. Kansas source income for nonresident individuals generally includes income earned while a Kansas resident, income from services performed in Kansas, income from a business, trade, profession or occupation operating in Kansas (including partnerships and S corporations), income from a resident estate or trust or trust that received income from Kansas sources, but does not include income from annuities, interest, dividends or gains from the sale or exchange of intangible property unless earned by a busines, trade, profession or occupation carried on in Kansas. Kansas source income of nonresident corporations is generally determined by 3 factor apportionment of the corporation's business income and by allocation of the corporation's non-business income. Kansas generally follows traditional 3 factor apportionment on the basis of Kansas sales, property and payroll as a percentage of total sales, property and payroll. In general, "sales" for this purpose means gross receipts, including world-wide gross receipts.

When a group of corporations conduct a unitary business both within and outside of Kansas, the source of income is determined by using apportioning the business income of the unitary group on the basis of the Kansas property, payroll and sales factof of the entire group as a percentage of the total property, payroll and sales of the entire group.

Kansas allows qualifying corporations to elect to utilize a two-factor formula of property and sales. A qualified corporation is one whose payroll factor exceeds 200% of the average of the property and sales factor for the year. The election is irrevocable, binding on all unitary group members, and binding for the taxable year and none succeeding taxable years.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Kansas does not maintain any separate tax treaty with other states or foreign countries. A credit is allowed for income taxes paid to another state of the United States, District of Columbia, Puerto Rico, any territory or possession of the United States, and any foreign country or political subdivision of a foreign country. The credit is limited to the difference between the actual tax paid to the foreign country and the foreign tax credit allowed on the taxpayer's federal return. In general, the credit is further limited to a percentage of the Kansas tax otherwise due that the other state's adjusted source income bears to the taxpayer's Kansas adjusted gross income.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Kansas law does not require withholding on dividend income.

15. What are the rates on royalties for withholding taxes?

Kansas law does not require withholding for royalty income.

16. What are the rates on interest for withholding taxes?

17. What are the rates of withholding tax on profits realized by a foreign corporation?

Except as provided in Question 24, Kansas law does not require withholding on profits realized by a foreign corporation.

18. Please list any other rates on withholding taxes that we should be aware of.

Kansas withholding applies to wages paid to employees in connection with services physically performed in Kansas. In general, Kansas income tax wage withholding is required whenever a payment is subject to federal income tax withholding, including payments of taxable fringe benefits, 401K, profit sharing and cafeteria plan distributions, as well as miscellaneous other types of wage- related payments. If a wage is paid to a nonresident alien for services performed in Kansas and the payment is subject to federal income tax withholding, Kansas income tax withholding is also required. Generally the withholding rate is equal to 5% of the federal withholding rate.

Since July 2003, S corporations, partnerships, limited liability companies, and limited liability partnerships have been required to withhold Kansas income tax from the Kansas taxable income of a nonresident shareholder, partner, or member. The Kansas withholding rate on a nonresident owner's share of Kansas taxable income is equal to the highest Kansas individual income tax rate (currently 6.45%), whether or not the nonresident is an individual, corporation or other entity. A nonresident owner may elect to "opt out" of withholding on Kansas source income by providing the entity with an affidavit agreeing to be subject to the personal jurisdiction of the state for tax purposes.

Management and consulting fees paid to a nonresident are subject to a 5% Kansas withholding tax when the payment is made by a Kansas entity in the normal course of its trade, business or other for profit venture, and the nonresident physically performs the management or consulting services in Kansas.

Tax Returns and Compliance

19. What is the taxable reporting period?

The Kansas taxable reporting periods are in conformity and overlap with the federal taxable reporting periods.

20. What are the due dates for the filing of tax returns?

The Kansas due dates for the filing of tax returns are are in coformity with and overlap the federal due dates for the filing of tax returns.

21. What are the key compliance requirements?

See above. The due dates for filing and paying Kansas withholding tax depends on the amount of Kansas withholding- the larger the Kansas withholding, the more frequent the reporting and payment of the withholding tax. Kansas has five withholding filing frequencies — annual, quarterly, monthly, semi-monthly, and quad-monthly.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Franchise tax and franchise tax returns or corporations, limited liability companies, limited partnerships and limited liability partnerships are due annually.

23. Are there any indirect taxes in your jurisdiction?

Kansas levies a 5.3% sales and companion compensating use tax. In addition, counties and cities in Kansas have the option of imposing a local sales tax. Cities are authorized to impose a maximum sales tax rate of 3% (2% general and 1% special). Counties are authorized to impose a 1% general sales tax. The following excise taxes are also imposed in Kansas: (i) bingo tax; (ii) cigarette tax; (iii) corporate franchise tax; (iv) liquor gallonage tax; (v) liquor excise and enforcement tax; (vi) mineral tax; (vii) motor fuel tax; (viii) privilege tax for banks and other financial institutions; (ix) tire tax; (x) vehicle rental tax/gross receipts; (xi) water protection fee/1,000 gallons; and (xii) clean drinking water fee/1,000 gallons.

24. How does it operate? Is it a VAT or a sales tax?

The 5.3% Kansas sales tax operates as a sales and use tax imposed on the consumer but collected by the retailer. The Kansas sales tax generally applies to three broad types of transactions: (i) the retail sale, rental or lease of tangible personal property, inlcuding the sale or furnishing of utilities within the state of Kansas; (ii) charges for labor services to install, apply, repair, service, alter, or maintain tangible personal property; and (iii) the sale of admissions to places providing amusement, entertainment, or recreation services, including admissions to state, county, district, and local fairs.

25. How is the taxable base determined?

The taxable base for the Kansas sales tax is the total selling price or the amount received in money, credits, property, or other consideration. The selling price is the total cost to the consumer, excluding discounts allowed and credited, but including freight and transportation charges from a retalier to a consumer.

26. What are the applicable rates?

See Question 23 above.

27. Are there any exemptions?

Yes, Kansas sales tax exemptions fall into three general categories: (i) buyers who are exempt; (ii) specific items that are exempt; and (iii) uses of an item which makes it exempt.

BUYERS WHO ARE EXEMPT

Direct purchases of goods or services by the following entities are exempt from sales tax: (i) the United States government, its agencies, and instrumentalities; (ii) the state of Kansas and its political subdivisions, including school districts, counties, cities, port authorities, and groundwater management districts; (iii) elementary and secondary schools; (iv) noncommerical educational radio and TV stations; (v) nonprofit blood, tissue, and organ banks; (vi) nonprofit educational institutions; (vii) nonprofit 501(c)(3) hisorical socities; (viii) nonprofit hospitals; (ix) nonprofit 501(c)(3) museums; (x) nonprofit primary care clinics/health centers; (xi) nonprofit 501(c)(3) religious organizations; and (xii) nonprofit 501(c)(3) zoos.

SPECIFIC ITEMS THAT ARE EXEMPT

Items used by the following industries and groups are exempt from sales tax: (i) aircraft sales, parts, and repair services for carriers in interstate or foreign commerce; (ii) boardcasting equipment purchased by over-the-air free access radio and television stations to generate their broadcast signals; (iii) drill bits and explosives used in the exploration of oil and gas; (iv) drugs and pharmaceuticals sold to veterinarians; (v) farm machinery and equipment; (vi) integrated production www.lexmundi.com Page 403 © 2012 Lex Mundi machinery and equipment; (viii) railroad parts, materials, and services for railroad rolling stock used in interstate or foreign commerce; (ix) warehouse machinery and equipment; and (x) a handful of other exemptions.

USES OF AN ITEM WHICH MAKE IT EXEMPT

The following items are exempt from Kansas sales tax becuase of their use: (i) animals used for agricultural purposes; (ii) seeds, tree seedlings, chemicals, and services purchased and used for the purpose of producing plants to prevent soil erosion on land devoted to agricultural uses; (iii) items that are essential and are depleted or dissipated within one year which are consumed in the production, manufacture, processing mining, drilling, refining or compounding of tangible personal property; (iv) materials and labor services sold to a buyer holding a special project exemption certificate; (v) gasoline, diseal fuels, gasohol, and alcohol fuels and other similar combustible fuels which are subject to a motor fuel tax; and (vi) tangible personal property or taxable services sold at an isolated or occasional sale. An isolated or occasional sale includes (i) any infrequent sale of a nonrecurring nature made by a person not engaged in the business of selling tangibel personal property; (ii) any sale by a nonprofit entity that meets the requirements for de minimis fund-rasing events; (iii) sale of business assets in conjunction with the sale or termination of a business; and (iv) certain auctions.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

Generally no. However, Kansas does impose a mortgage registration tax.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Unlike the federal tax code, Kansas does not impose social security or medicare taxes on wages. However, certain employers in Kansas are required to pay state unemployment taxes upon Kansas wages. See the Kansas Unemployment Insurance Employer Handbook for more information.

30. How do they operate?

See Question 29.

31. How is the taxable base determined?

See Question 29.

32. What are the applicable rates?

See Question 29.

33. Are there any exemptions?

See Question 29.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

A Kansas estate tax is imposed upon the taxable estate of a decedent. The Kansas estate tax applies to Kansas residents and also to nonresidents owning property having a tax situs in the State of Kansas.

The amount of the tax depends on the year of the decedent's death. If the estate of a decedent does not exceed $1,000,000, the estate is not subject to the Kansas estate tax. The tax rate for deaths occurring in 2007 begins at 3%, for 2008 the rate begins at 1%, and for 2009 the rate begins at 0.5%. Absent legislative action, estates of individuals passing away after 2009 will not subject to the Kansas estate tax. By way of example, the Kansas estate tax rates for 2009 are as follows: (i) Taxable Estate Tax Rate $1,000,000 - $2,000,000 @ 0.5% of amount over $1,000,000; (ii) $2,000,000 - $5,000,000 @ $5,000, plus 1% of amount over $2,000,000; (iii) $5,000,000 - $10,000,000 @ $35,000, plus 2% of amount over $5,000,000; (iv) Over $10,000,000 @ $135,000, plus 3% of amount over $10,000,000.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Kansas does not have specific anti-deferral, transfer pricing, controlled foreign compan, anti- avoidance or thin capitalization provisions, as it is a conformity state and generally relies upon the internal revenue service to determine federal taxable income, which is the starting point for the determination of Kansas taxable income.

However, in the case of two or more businesses owned or controlled directly or indirectly by the same interests which contrive through inter-company transactions to evade taxes, the state is authorized to distribute or allocate income and deductions between or among such businesses or mayrequire returns on a consolidated basis. The burden of proof of any contrivance to evade taxes rests upon the state.

The state of Kansas does not enter into tax treaties with foreign jurisdictions. Kansas does participate in various tax information-sharing agreements with other states.

Chris Hurst Foulston Siefkin LLP [email protected] Commerce Bank Center 1551 N. Waterfront Parkway, Suite 100 Wichita, Kansas 67206-4466 USA

Tel 1.316.267.6371 Fax 1.316.267.6345 http://www.foulston.com

Tax Desk Book

USA, Mississippi Prepared by Lex Mundi member firm Butler, Snow, O'Mara, Stevens & Cannada, PLLC

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

Corporate income tax imposed at a maximum rate of 5%.

Corporate franchise tax imposed at a rate of $2.50 per each $1,000 of taxable capital. Retail sales of tangible personal property are generally subject to tax at the rate of 7%. Items of tangible personal property bought o/s MS and first used in MS are subject to use tax at the rate of 7%.

Revenue earned from the performance of certain specified services are subject to tax at the rate of 7%.

Contractor's are required to pay tax at the rate of 3.5% on the total contract price for the project.

Insurance companies are required to pay a tax at the rate of 3% on gross insurance premiums.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

Mississippi is a separate reporting state. Net income for each entity having nexus with Mississippi is apportioned generally based on a three factor apportionment formula, consisting of sales, payroll and property.

3. What revenues are included?

Mississippi generally taxes the same revenue that is taxable for federal income tax purposes except interest on bonds issued by Mississippi governmental subdivisions.

4. What deductions are allowed?

Mississippi generally allows the same deductions that are allowed for federal income tax purposes.

5. What are the major expenses that are not deductible?

Mississippi law denies a deduction for royalties or other fees paid to an affiliated intangible holding company. Mississippi income tax paid is not deductible for Mississippi income tax purposes.

Approximately 35%

7. What are the applicable state and/ or other local rates?

The maximum income tax rate is 5%.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Mississippi does not have a separate rate for capital gains.

9. How are operating losses handled?

Net operating losses may be carried back 3 years and carried forward 15 years.

10. How are capital losses handled?

There is no distinction in Mississippi law for capital losses.

Territorial Rules

11. What are the residence rules?

Residency for individuals is determined based on a facts and circumstances test.

12. Is worldwide income taxed?

Mississippi is a separate reporting state. If the entity having nexus with Mississippi has income from sources outside the U.S., that income is included in apportionable business income.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Only individual residents in Mississippi are allowed a credit for income tax paid to another jursidiction.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

N/A

15. What are the rates on royalties for withholding taxes?

N/A

16. What are the rates on interest for withholding taxes?

N/A

17. What are the rates of withholding tax on profits realized by a foreign corporation?

N/A

18. Please list any other rates on withholding taxes that we should be aware of.

Employers doing business in Mississippi must withhold state income tax from the wages paid to its employees in Mississippi.

Tax Returns and Compliance

19. What is the taxable reporting period?

Twelve months for income tax and corporate franchise tax. Three months generally for sales and use tax.

20. What are the due dates for the filing of tax returns?

Mississippi follows federal income tax law regarding the due dates for filing state income tax returns.

Sales tax returns are due not later than 20 days after the end of the calendar quarter.

21. What are the key compliance requirements?

Mississippi income tax compliance requirements are generally the same as federal income tax compliance requirements.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

N/A

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

N/A

24. How does it operate? Is it a VAT or a sales tax?

N/A

25. How is the taxable base determined?

N/A

26. What are the applicable rates?

N/A

27. Are there any exemptions?

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

N/A

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

N/A

30. How do they operate?

N/A

31. How is the taxable base determined?

N/A

32. What are the applicable rates?

N/A

33. Are there any exemptions?

N/A

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

N/A

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Mississippi income tax law contains an intangible expense add back statute, whick disallows a deduction for intangible expenses paid to an affiliated holding company.

N/A

Contact Information:

J. Paul Varner Butler, Snow, O'Mara, Stevens & Cannada, [email protected] PLLC Renaissance at Colony Park 1020 Highland Colony Parkway, Suite 1400 Ridgeland, Mississippi 39157 USA

Tel 1.601.948.5711 Fax 1.601.985.4500 http://www.butlersnow.com

Tax Desk Book

USA, Nebraska Prepared by Lex Mundi member firm Baird Holm LLP

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

The major taxes comprising the Nebraska tax system are corporate and individual income tax returns, sales and use taxes, and gasoline and special fuel taxes. In addition, a locally imposed and collected general property tax on real estate and tangible personal property is the most important source of local revenue. These taxes are supplemented by state taxes on franchises, privileges, or occupations and municipal taxes and inspection fees that the legislature authroizes the local governments to impose.

Specific taxes imposed in Nebraska include:

--Air carriers tax.

--Alcoholic beverages tax, which is an excise tax on certain wine, beer, and alcohol.

--Cigarette tax and tobacco products tax.

--Corporate organization and qualification fees imposed at the time of incorporation for a domestic corporation or upon an increase in capital stock. A fixed fee is imposed on foreign corporations doing business in Nebraska.

--Corporate franchise tax is imposed on corporations based on domestic paid-up capital stock and foreign capital employed in Nebraska. This tax ranges in amount from $26 to $23,990 for domestic corporations and up to $30,000 for foreign corporations.

--Documentary stamp tax on certain real estate transfers.

--Financial institution franchise tax based on the lesser of $0.47 per $1,000 of average deposits or 3.81% of net income before taxes and extraordinary items.

--General property tax in an amount determined annually to meet budget based on a percentage of fair market value of the property.

--Income tax for individuals, trusts, and corporations. Individual rates range from 2.56% to 6.84%, while corporate rates range from 5.58% to 7.81%.

--Inheritance tax.

--Insurance companies tax.

--Litter tax for certain manufacturers and wholesalers.

--Motor vehicle fuel tax, diesel fuel tax, and compressed fuel taxes.

--Motor vehicle rental tax.

--Oil and gas conservation tax set by Oil and Gas Conservation Commission.

--Oil and gas severance tax.

--Railroad excise tax of 7.5 cents per train mile and $100 for each public grade crossing.

--Sales and use tax on "retail sales" or storage, use, or consumption of tangible personal property and certain enumerated services.

--Uranium tax.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

Nebraska’s taxable income for purposes of individual income tax of residents domiciled in Nebraska is determined using federal adjusted gross income as a starting point, subject to certain adjustments described below. For nonresidents and part-year residents, Nebraska income tax is imposed on amounts of federal adjusted gross income derived from sources within Nebraska. Nebraska also imposes an Alternative Minimum Tax (AMT) on certain taxpayers. See questions 9 and 10 below for the applicable additions and subtractions.

Nebraska’s corporate income tax calculation begins with the corporation’s federal taxable income as reported on its federal income tax return filed with the IRS. Federal net operating loss carryovers and federal capital loss carryovers are added back, and specified Nebraska additions and subtractions (see questions 9 and 10 below) are aggregated to reach an adjusted federal taxable income amount.

Nebraska’s taxable income for purposes of fiduciary income tax is determined using federal adjusted gross income as a starting point. See questions 9 and 10 for applicable additions and subtractions.

3. What revenues are included?

Generally, items of gross income for federal purposes derived from sources within Nebraska are subject to Nebraska income tax. The amount of federal income apportioned to Nebraska is discussed below.

For purposes of the individual taxable base, Nebraska adds the following amounts to the federal AGI amount: • Nonqualified withdrawals from certain education or medical savings plans; • Early termination of certain education or medical savings plans; • Interest income from state and local bonds; • Federal net operating losses; and • Pass-through entity adjustments for certain S corporation and limited liability company losses.

For purposes of the corporate taxable base, Nebraska adds the following amounts to the federal AGI amount: • Capital loss carryovers; • Net operating loss carryovers; www.lexmundi.com Page 413 © 2012 Lex Mundi • Interest or dividends from obligations issued by other states; and • Nebraska College Savings Plan refunds due to cancellation.

For purposes of the fiduciary taxable base, Nebraska adds the following amounts to the federal AGI amount: • Undistributed state and local bond interest, but not interest from Nebraska source bonds; and • The portion of the estate tax deduction claimed on Federal Form 1041 for income that is not subject to Nebraska income tax.

4. What deductions are allowed?

Nebraska’s individual tax, corporate, and fiduciary deductions are generally in accordance with federal tax deductions, taking into consideration the modifications discussed below.

Nebraska subtracts the following from the federal AGI, taking into consideration the additions outlined above, to arrive at the individual taxable base: •Amounts required to be included on a taxpayer’s federal return for a claim of right payment; •Government money markets or mutual fund dividends issued by regulated investment companies; •Education savings plan contributions; •A one-time election to exclude gains on certain capital stock acquired while employed by an eligible corporation; •Interest on certain U.S. obligations; •Medical savings plan contributions to a Nebraska Long-Term Care Savings Plan account; •Military pay; •Net operating loss carryforward or carryback connected to operations in the state; •Native American Indian reservation income; •Pass-through entity adjustments for certain S corporation and limited liability company income not derived from Nebraska sources; •Railroad retirement benefits; •State and local income tax refunds; and •Nebraska Agricultural Revenue and Federally Taxable NIFA Bonds. The optional standard deduction or the itemized deduction is applied to arrive at the taxable base. Nebraska subtracts the following from the federal AGI to arrive at the corporate taxable base: •Capital loss carryovers attributable to Nebraska sources; •Dividends for certain corporation not subject to the IRC; •Interest on federal obligations; •Contributions to the Nebraska College Savings Plan; •Net operating loss carryovers connected with Nebraska sources; •Certain non-business income not subject to apportionment; and •Special foreign tax credit deduction. Nebraska subtracts the following from the federal AGI to arrive at the fiduciary taxable base: •The portion of interest or dividends from U.S. government obligations not distributed to beneficiaries; •20% of undistributed bonus depreciation added back in the years 2000 through 2005; •Gifts, grants, and donations made to the Nebraska College Savings Plan Trust to the extent not already deducted for federal income tax purposes; •Fiduciaries making contributions as participants in the Trust may deduct contributions up to $5,000 per tax year; and •Nonresident estates and trusts may deduct income amounts included in federal AGI but not included in federal distributable net income.

5. What are the major expenses that are not deductible?

Nebraska’s individual tax deductions are in accordance with federal tax deductions, subject to the modifications discussed above in determining the tax base.

www.lexmundi.com Page 414 © 2012 Lex Mundi Nebraska’s corporate tax deductions are in accordance with federal tax deductions, subject to the modifications discussed above in determining the tax base for Nebraska corporations.

Nebraska’s fiduciary tax deductions are in accordance with federal tax deductions, subject to the modifications discussed above in determining the tax base for fiduciaries in Nebraska.

6. What are the applicable federal rates?

The federal individual tax rates range from 10% to 35% of taxable income. The applicable tax rate is levied at different taxable income amounts depending on whether an individual (1) is married filing a joint return or is a surviving spouse; (2) is a head of household; (3) is unmarried (and not a surviving spouse or head of household); or, (4) is married filing a separate return.

The federal corporate tax rate on taxable income ranges from 15% to 35%, with the lowest rate imposed on taxable income under $50,000.00 and the highest imposed on taxable income over $18,333,333.00.

The federal tax rates for estates and trusts range from 15% to 35%, with the lowest rate imposed on a fiduciary’s taxable income under $2,200.00 and the highest rate imposed on a fiduciary’s taxable income over $10,700.00.

7. What are the applicable state and/ or other local rates?

The Nebraska tax rate on individuals ranges from 2.56% to 6.84%. The applicable tax rate is levied at different taxable income amounts depending on whether the taxpayer is (1) single; (2) married filling a joint return; (3) a head of household; or, (4) married filing a separate return. These rates may be inapplicable if a taxpayer is subject to the Nebraska Alternative Minimum Tax (AMT).

The Nebraska corporate tax rate is 5.58% on the first $100,000.00 of corporate taxable income and 7.81% on taxable income over $100,000.00.

Nebraska imposes a fiduciary tax rate of a flat 6.84% for resident trusts and estates, as well as on non-resident estates and trusts with income from Nebraska sources.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

In Nebraska, capital gains are generally taxed at the same rate as ordinary income. Nebraska law provides for the exclusion from federal adjusted gross income extraordinary dividends paid on and the capital gain from the sale or exchange of capital stock of a corporation acquired by an individual on account of employment by such corporation or while employed by such corporation. This exclusion is often referred to as the "special capital gains election."

Business reorganizations are generally governed by the same rules that apply to mergers, divisions, and other entity reorganizations for U.S. federal tax purposes.

9. How are operating losses handled?

Nebraska Form NOL is used to determine if a Nebraska net operating loss ("NOL") exists and to figure the amount of the loss. The NOL form is similar to Schedule A of Federal Form 1045; however, there are some differences. For example, the Nebraska Form NOL requires a taxpayer to make adjustments increasing or decreasing federal adjusted gross income (AGI). In addition, differences can arise because Nebraska non-business itemized deductions do not include state or local income taxes.

10. How are capital losses handled?

Capital losses allocated to Nebraska are generally handled in the same way as for federal purposes. A Nebraska taxpayer may carry over the capital loss until the loss has been exhausted. Nonresident individuals and partial-year resident individuals who m

Territorial Rules

11. What are the residence rules?

An individual is considered a Nebraska resident and must pay state income tax when the individual is domiciled in the state or when the individual maintains a permanent home within the state, and is present in the state for an aggregate of more than six months. An individual’s domicile is determined by the totality of circumstances in a given case, but the individual must have both a true, fixed and permanent home or principal establishment in the jurisdiction and an intent to stay there. Once acquired, domicile is presumed to continue until an actual change in domicile or residence occurs.

Resident trusts are taxed differently than non-resident trusts. A resident trust is a trust or portion of a trust that consists of property transferred by the last will and testament of a decedent who, at the time of his or her death, was domiciled in Nebraska, or a trust or portion of a trust that was created by or that consists of property of a person domiciled in Nebraska at the time the test became irrevocable. If the settlor of a trust is domiciled in Nebraska when the trust becomes irrevocable, the trust is considered a resident for the entire life of the trust, even when the situs of the trust, the property held in it, or the trustees are located in another state. Even in the case of a non-resident trust, Nebraska income tax is still imposed for each taxable year on the income of the trust that is derived from sources within Nebraska. Trusts that are taxed as corporations under the Internal Revenue Code are also taxed as corporations in Nebraska.

Any corporation or entity taxed as a corporation under the Internal Revenue Code, whether foreign, domestic or domesticated, is subject to Nebraska income tax, provided the entity has not been exempted, is not a financial institution, and has part of its federal taxable income derived from sources within Nebraska. For a corporate taxpayer subject to tax in another state, taxable income is the portion of the entity’s federal taxable income, as adjusted, that is determined to be connected with the taxpayer’s operations in Nebraska.

12. Is worldwide income taxed?

In Nebraska, the entire federal taxable income of a unitary business operating within and without the state is presumed to be subject to apportionment. A corporation subject to taxation in another state must apportion its federal taxable income as adjusted so that Nebraska income tax is imposed only upon the portion of income determined to be connected with the corporation’s operation in Nebraska. Nebraska uses a single-factor apportionment formula consisting only of the sales factor. The sales factor in the apportionment formula is: Total sales in Nebraska during the tax period, divided by total sales everywhere during the tax period. This factor includes income from intangibles such as interest, royalties or dividends and the net income from gains on the sale of intangibles. Sales are all gross receipts of the taxpayer.

Unitary businesses must subtract any income that they have shown isn’t subject to apportionment from their federal taxable income. Income not subject to apportionment must be reduced by interest expense and expense incurred in the income production.

www.lexmundi.com Page 416 © 2012 Lex Mundi A taxpayer engaged in a multi-state business may separately account taxable income to Nebraska if: (1) The records are kept by recognized accounting standards to accurately reflect income from Nebraska during the taxable period, and (2) The business operations are distinct, and there are no interstate, inter-company or inter-divisional purchases, sales or transfers during the taxable period.

S corporations must use the same apportionment formula used by C corporations. If an S corporation is a member of a unitary group, it is deemed to be doing business in Nebraska if any part of its income is derived from transactions with other members of the unitary group doing business within the state. If an S corporation is not a member of a unitary group and is subject to tax in another state, it must apportion its income. If an S corporation is not subject to tax elsewhere, all of its income is treated as derived from/connected to Nebraska.

Nebraska adopts the federal classification of an LLC. An LLC must apportion its income as either a partnership or a corporation depending on the federal class. If an LLC isn’t a member of a unitary group and is subject to tax in another state, it must apportion its income. If an LLC isn’t subject to tax in another state, all of its income is treated as derived from Nebraska.

Nebraska Corp. Income, 1 Neb. St. Tax Rep. (CCH) ¶¶ 11-505 to -525 (2007).

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

As a state, Nebraska cannot enter into any foreign treaties. However, resident individuals, trusts and estates do receive a credit for income taxes imposed by other states on income derived from the other states. If an individual taxpayer is a resident of more than one state for income tax purposes, the individual will receive a tax credit for any portion of income that is subject to double taxation, provided that the other state also allows such credit.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Dividends are not subject to Nebraska withholding.

15. What are the rates on royalties for withholding taxes?

Royalties are not subject to Nebraska withholding.

16. What are the rates on interest for withholding taxes?

Interest is not subject to Nebraska withholding.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

Any person paying a nonresident for services substantially performed in Nebraska may be required to withhold Nebraska income tax. A person must withhold if: (1) the payee is not an employee; (2) the payment is not subject to federal withholding; and (3) the payor is either making payment(s) in excess of $5,000, or maintaining an office or transacting business within Nebraska and making payment(s) of more than $600.

Payments to a corporation are subject to withholding requirements if 80% or more of the voting stock of the corporation is held by the shareholders who are performing personal services. Payments made to a partnership or a limited liability company are subject to withholding requirements if 80% or more of the capital interest or profits interest is held by the partners or members who are performing personal services. www.lexmundi.com Page 417 © 2012 Lex Mundi

If payment is made to a corporation, partnership, or limited liability company for personal services provided, and the entity is controlled by the individual(s) performing such services, payment will be treated as if it was made directly to the individual(s) involved. The total payment must be divided among the shareholders, partners, or members performing the services according to their interest in the entity. The amount withheld is divided in a similar manner, and is allowed as a credit on the individual income tax returns of the shareholders, partners, or members.

There are several methods to figure income tax withholding, such as the Nebraska percentage method or the Nebraska wage bracket method, regardless of the method used to calculate the federal withholding. If a taxpayer calculates federal withholding using the annualized wages method, average estimated wages, cumulative wages, or part-year employment methods, the same method can be used to figure the Nebraska withholding tax. The withholding percentage varies based upon the amount of wages.

18. Please list any other rates on withholding taxes that we should be aware of.

All amounts that are wages and subject to federal withholding are wages for Nebraska purposes and subject to Nebraska withholding if paid for services performed in Nebraska.

Pensions and Annuities. For periodic payments of employer-provided pensions and annuities, the withholding is figured in the same manner as withholding from wages. Payors must use the same marital status and number of allowances claimed by the payee on the Federal Form W-P, Withholding Certificate for Pension or Annuity Payments. The appropriate payroll period coincides with the type of periodic payment; e.g., monthly. For non-periodic payments, subject to either the mandatory 10% or 20% federal withholding rate, the withholding rate is 5% of the distribution for Nebraska income tax purposes.

Bonuses, Supplemental Wages, and Taxable Awards. A payor may choose the percentage method, the wage bracket method, or choose the option of using a flat withholding rate on bonuses, supplemental wages, and other such taxable awards; e.g., commissions, overtime pay, and sales awards. The Nebraska rate of withholding is 5% of the bonuses, supplemental income, or other taxable awards subject to the special federal withholding rate of 25%.

Gambling winnings. There is a flat withholding rate of 5% of the winnings subject to federal withholding.

Contractor payments. Every contractor who maintains an office or transacts business within Nebraska who makes a payment to any contractor or any person who is not an emploee for construction services performed within Nebraska must withhold 5% of such payments. The withholding does not apply to any payment made to a person that provides the payor with a statement that the income is not subject to tax because of US treaty obligations, a contractor if such payment or payments do not exceed $600, or a contractor when the payor contractor determines that the payee contractor is in the database required by the Contractor Registration Act. Any contractor who determines that a contractor is in the database is relieved from liability for withholding for any future payments on a contract in existence at the time the determination was made or for payments made during the same calendar year in which such determination was made. Nebraska law dictates that such contractor withholding shall be considered withholding of income tax. The Contractor Registration Act takes effect on January 1, 2010.

19. What is the taxable reporting period?

Nebraska corporation, S corporation, and financial institution income taxes are reported annually, as are individual income taxes, partnership income taxes, fiduciary income taxes, and the financial institution franchise tax. Property taxes are imposed locally and are assessed on an annual basis.

The corporation franchise tax is reported bi-annually.

The reporting period for the local and consumer’s use, local sales and use, and Nebraska state and county lodging is monthly. Sales and use taxes may be reported annually for taxpayers with yearly liability of less than $900 and may be reported quarterly for taxpayers with yearly liability between $900 and $3,000.

Nebraska income tax withholding is typically reported on a quarterly basis, although employers can apply to report on an annual basis.

20. What are the due dates for the filing of tax returns?

Nebraska income tax deadlines correspond with the federal return and payment deadlines. Nebraska corporations and S corporations may file corporate income taxes on either a calendar year or fiscal year basis. On a calendar year basis, the return must be filed on or before March 15. On a fiscal year basis, the return must be filed on or before the 15th day of the third month following the close of the taxable year.

The financial institution franchise tax return may be filed on a calendar year or fiscal year basis. On a calendar year basis, the return is due March 15. On a fiscal year basis the return must be filed on or before the 15th day of the third month following the close of the financial institution’s taxable year.

Corporations, S corporations, and financial institutions with a taxable year of less than 12 months must file a short-period return on or before the 15th day of the third month following the end of the short tax year.

The corporation franchise tax is due April 15 of each even numbered year.

Individual income tax returns are due April 15.

Nebraska fiduciary deadlines correspond with federal deadlines. Fiduciary income tax returns may be filed on either a calendar year or fiscal year basis. On a calendar year basis, the return is due on or before April 15. On a fiscal year basis, returns must be filed on or before the 15th day of the fourth month following the close of the taxable year of the estate or trust. If this return is being filed by an exempt organization which has unrelated business income, the due date is the 15th day of the fifth month following the close of the taxable year of such exempt organization.

Nebraska partnership deadlines correspond with federal deadlines. Partnership income tax returns may be filed on a calendar year or fiscal year basis. On a calendar year basis, the return is due on or before April 15. On a fiscal year basis, the return is due on or before the 15th day of the fourth month following the close of the taxable year.

Local and consumer’s use tax returns are due on the 25th of each month. Local sales and use tax returns are also due on the 25th of each month, although small taxpayers may file quarterly or annual returns.

www.lexmundi.com Page 419 © 2012 Lex Mundi The Nebraska income tax withholding return is due quarterly on April 30 (first quarter), July 31 (second quarter), October 31 (third quarter), and January 31 (fourth quarter). Employers licensed to file annually must do so on or before January 31.

21. What are the key compliance requirements?

Sales Tax Permit: Every person engaged in business as a retailer making retail sales of goods or taxable services in Nebraska must obtain a sales tax permit for each location in this state.

Any retailer having at least 80 percent ownership in more than one licensed location making retail sales in Nebraska may apply for permission to file a combined sales tax return by filing a Nebraska Application for Permission to File a Monthly Combined Sales and Use Tax or a Combined Annual Litter Fee Return, Form 11.

Consumer’s Use Tax: Every person or business, storing, distributing, using or consuming property or making a use of taxable services in Nebraska, is subject to consumer’s use tax when the applicable Nebraska sales tax has not been paid. If you apply for a sales tax permit, the tax can be remitted on the sales tax return. If you are not required to have a sales tax permit, then a consumers use tax number should be applied for.

Corporate Income Tax: Every entity subject to federal corporate income tax and engaged in business in Nebraska or having sources of income from Nebraska must file a Nebraska Corporation Income Tax Return, Form 1120N. Insurance companies and certain nonprofit organizations filing Federal Forms 990-T, 1120H, or 1120POL, also must file Form 1120N. Corporations which have elected to file under Subchapter S of the Internal Revenue Code must file a Nebraska S Corporation Income Tax Return, Form 1120-SN, unless all shareholders are Nebraska residents, and all income is derived from Nebraska sources.

Partnership Income Tax: The Nebraska Partnership Return of Income, Form 1065N, must be completed by every partnership that has one or more nonresident partners or income derived from outside of Nebraska. A partnership return is not required if all partners are residents of Nebraska and all income is derived from Nebraska sources. A limited liability company treated federally as a partnership will also file a Nebraska partnership return.

Fiduciary Income Tax: Every fiduciary of a resident estate or trust must file a Nebraska Fiduciary Income Tax Return, Form 1041N, if the estate or trust is required to file a federal income tax return for the taxable year. A fiduciary return is not required for a simple trust if all of the trust’s beneficiaries are residents of Nebraska, all of the trust’s income is derived from sources in Nebraska, and the trust has no federal taxable income.

Financial Institution Tax: Every financial institution which maintains a permanent place of business in Nebraska and actively solicits deposits from Nebraska residents must file a Nebraska Financial Institution Tax Return, Form 1120NF. A financial institution does not file a Nebraska Corporation Income Tax Return.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Withholding: An individual or entity with an office or conducting business in Nebraska and considered an employer for federal purposes must apply for a withholding certificate prior to withholding income taxes for Nebraska. This includes payments made to all employees, including nonresidents, for services performed in Nebraska. Withholding may also be required when paying a nonresident of Nebraska for services performed in Nebraska who is not an employee. Nebraska income tax must also be withheld on pension and annuity payments which are subject to federal withholding.

23. Are there any indirect taxes in your jurisdiction?

Nebraska imposes a sales tax on the retail sale of most tangible personal property and certain enumerated services. A use tax complements the sales tax and is imposed on the storage, use, distribution, or other consumption in Nebraska of tangible personal property purchased, leased, or rented from any retailer and on transactions subject to sales tax when the sales tax has not been paid.

24. How does it operate? Is it a VAT or a sales tax?

The sales tax is imposed on the consumer, but the retailer is required to withhold and collect the tax. The tax required to be collected is a debt owed by the retailer to the state.

Nebraska use tax is imposed on the person storing, using, or otherwise consuming in Nebraska tangible personal property purchased from a retailer. Retailers engaged in business in Nebraska must collect the tax.

25. How is the taxable base determined?

The sales tax is imposed on the "gross receipts" derived from a taxable sale. The use tax is imposed on the sales, lease, or rental price of the consumption of the item or service.

"Gross receipts" generally means the amount of the sale, lease, or rental price of retail sales of retailers. "Retail sale" means any sale, lease, or rental for any purpose other than for resale, sublease, or subrent. Special rules apply to gross receipts received from utlities and communications services, computer programming services, and satellite and videotape services.

The following are not included in the definition of "gross receipts":

--Cash discounts; --Motor vehicle or motorboat rebates that function as discounts; --Sales price of property or services returned or rejected by a customer; --Finance charges, carrying charges, service charges, or interest on deferred payments of the purchase price; --The value of property taken by a seller in trade for a sale of any other property; and --The value of a motor vehicle or motorboat taken in trade by any person for a sale of another motor vehicle or motorboat.

26. What are the applicable rates?

The Nebraska state sales and use tax rate is 5.5%. Counties, municipal counties, and incorporated municipalities may also impose a local sales and use tax at a rate of 0.5%, 1.0%, or 1.5%.

27. Are there any exemptions?

There are numerous exemptions, exclusions, and exceptions to the Nebraska sales and use tax. Certain transactions are exempt because of the nature of the seller, the nature of the buyer, the buyer's intended use of the item, or the type of product sold.

Exemptions because of the nature of the seller include sales by school and church related organizations, hospital and care organizations, and occasional sales, among others.

Entity-based transactions exempt because of the nature of the buyer include:

www.lexmundi.com Page 421 © 2012 Lex Mundi --Sales to certain governmental agencies; --Sales to religious organizations; --Sales to certain nonprofit organizations; --Sales to Native American Indian tribes; and --Others.

Use-based transactions that are exempt include:

--Sales for resale; --Ingredients and component parts of manufactured products; --Property delivered outside of Nebraska; --Feed or water for the care or consumption of animals; --Seeds and annual plants for agricultural purposes; --Certain diesel fuels; --Certain agricultural chemicals; --Fuel when more than 50% is used for irrigation, processing, manufacturing, or refining or in the generation of electricity; --Certain medical supplies; --Materials for certain community-based energy development projects; and --Numerous others.

Product-based transactions exempt because of the nature of the product sold include: --Aircraft fuels; --Motor vehicle fuels; --Weekly newspapers; --Prescription medicines; --Insulin; --Animals ordinarily used as food for human consumption; --Lodging rented for more than 30 days; --Rental of dormitories; --Coin-operated laundry and dry-cleaning services; --Food, but not meals, for human consumption; --Lottery tickets; --Railroad rolling stock and replacement parts; and --Others.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

Please see the summary of Nebraska taxes above.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Nebraska imposes parafiscal contributions (commonly known as “checkoffs”) on several agricultural commodities. In addition to any checkoffs required by federal law (i.e. those imposed upon pork, beef, dairy, and soybeans), Nebraska imposes checkoffs on corn, grain sorghum, dry beans, wheat, turkey, and eggs. The revenue generated through the checkoffs is used for research, education, and marketing within the state relating to the subject commodity.

30. How do they operate?

Corn/Grain Sorghum: All corn and grain sorghum sold through commercial channels in Nebraska or delivered into Nebraska is subject to the Nebraska corn/grain sorghum checkoff. The checkoff is www.lexmundi.com Page 422 © 2012 Lex Mundi assessed against the grower at the time of sale or at the time of delivery and is remitted to the Nebraska Corn/Grain Sorghum Board. The revenue generated by the checkoff is used to fund corn and grain sorghum research, market development, and programs designed to expand the demand for Nebraska corn and grain sorghum. An additional ethanol checkoff is imposed on all sales of corn and grain sorghum that is assessed against the grower at the time of sale or delivery and is remitted to the Nebraska Department of Agriculture. The ethanol checkoff revenue is used to assist producers with programs and strategies for marketing, supports organizations and policies that advocate the increased use of ethanol fuels, and administers public education of ethanol and ethanol uses.

Wheat: All wheat sold through commercial channels in Nebraska is subject to the Nebraska wheat checkoff. The wheat checkoff is imposed on the grower at the time of sale or delivery and is remitted to the Nebraska Wheat Board for purposes promoting sound research, policy development, and international and domestic marketing.

Dry Beans: All dry edible beans (i.e. great northern, pinto, and red kidney beans) grown in Nebraska and sold through commercial channels in the state are subject to the Nebraska dry bean checkoff. The assessment is paid 2/3 by the grower and 1/3 by processors at the time of sale or delivery and is remitted to the Nebraska Dry Bean Commission for purposes of facilitating research, education, advertising, publicity, and promotion to increase total consumption of dry beans on a state, national, and international basis.

Eggs: All commercial eggs sold through commercial channels in Nebraska are subject to the Nebraska commercial egg checkoff. The assessment is collected by a purchaser from egg producer. The purchaser remits the checkoff amount to the Department of Agriculture for purposes of research, education, and marketing.

Turkey: All turkeys grown and sold through commercial channels in Nebraska are subject to the Nebraska turkey checkoff. The turkey purchaser collects the checkoff from the turkey producer and remits collected amounts to the Department of Agriculture for purposes of research, education, and marketing.

31. How is the taxable base determined?

The taxable base is determined by the amount of the commodity sold as follows:

Corn: The corn checkoff is assessed by the bushel.

Grain Sorghum: The grain sorghum checkoff is assessed by hundredweight (cwt).

Dry beans: The dry bean checkoff is assessed by the hundredweight (cwt).

Wheat: The wheat checkoff is assessed by the bushel.

Eggs: The commercial egg checkoff is assessed by the case (30 doz. eggs).

Turkey: The turkey checkoff is assessed by the head.

Ethanol: The ethanol checkoff is assessed by the bushel of corn or the hundredweight (cwt) of grain sorghum.

32. What are the applicable rates?

Corn: The corn checkoff cannot exceed 4/10 cent per bushel and is currently set at a rate of 1/4 cent per bushel. The ethanol checkoff assessed on corn between October 1, 2005 and October 1, 2012 is set at 7/8 cent per bushel of corn. The total current corn/corn ethanol checkoff is thus 1 -1/8 cents per bushel. www.lexmundi.com Page 423 © 2012 Lex Mundi

Grain Sorghum: The grain sorghum checkoff cannot exceed 1 cent per cwt. The current grain sorghum checkoff is set at 1 cent per cwt. The ethanol checkoff assessed on grain sorghum between October 1, 2005 and October 1, 2012 is set at 7/8 cent per cwt. of grain sorghum. The total grain sorghum/sorghum ethanol checkoff is thus 1 -7/8 cents per cwt.

Wheat: The wheat checkoff cannot exceed 1 -1/2 cents per bushel. The current wheat checkoff is set at 1 -1/4 cents per bushel.

Dry Beans: The dry bean checkoff cannot exceed 10 cents per cwt. The current dry bean checkoff is set at 10 cents per cwt.

Eggs: The commercial egg checkoff cannot exceed 5 cents per case (30 dozen eggs). The current egg checkoff is set at 3 cents per case.

Turkey: The turkey checkoff cannot exceed 3 cents per turkey. The current turkey checkoff is set at 1.5 cents per hen and 2 cents per tom.

33. Are there any exemptions?

Generally, there are no exemptions to checkoffs; however, no commodity can be subject to the tax more than once. Also, crops grown by a producer and then fed to the producer’s livestock are not subject to the checkoff.

Amounts subject to checkoff that are payable by the federal government are when the checkoff would violate the Constitution or other federal laws.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Nebraska imposes an inheritance tax on the fair market value of a decedent's real estate, joint tenancy property, securities, cash, certain annuities and life insurance, retirement accounts, and transfers during the decedent's life. The rate of tax is based on the relationship of the decedent to the beneficiary as follows:

Class 1 Beneficiaries: Father, mother, grandfather, grandmother, brother, sister, son, daughter, and certain adopted persons, and spouses of such persons are provided a $40,000 exemption with a 1% rate.

Class 2 Beneficiaries: Uncle, aunt, niece, or nephew or spouse or lineal descendant thereof are provided a $15,000 exemption with a 13% rate.

Class 3 Beneficiaries: All other recipients of distributions from a decedent are provided a $10,000 exemption with an 18% rate.

Property passing to surviving spouses is not subject to Nebraska inheritance tax. The amount subject to inheritance tax is reduced by deductions for attorney's fees, funeral and burial expenses, and other administration expenses. www.lexmundi.com Page 424 © 2012 Lex Mundi OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Nebraska's tax incentives generally provide refunds of Nebraska sales, use, income, or property tax, or some combination, for investment in Nebraska property and the employment of Nebraska residents.

Nebraska's tax incentive programs include:

--Nebraska Advantage Act. This Act provides breaks for certain taxpayers for sales and use taxes, income tax, withholding tax, and/or real and personal property tax. The amount and type of tax benefit received depends on the amount of investment and/or employment created by the applicant.

--Nebraska Advantage Rural Development Act. This Act provides that a business which has at least the minimum required growth in investment and/or employment in an eligible location earns a refundable income tax credit of up to $4 million. Certain counties may provide benefits at a threshhold as low as $125,000 of qualified investment and two qualified employees.

--Nebraska Advantage Microenterprise Tax Credit Act. This Act provides credits of up to $10,000 that can be used against Nebraska income tax for certain "micro-businesses."

--Nebraska Advantage Research and Development Act. This Act provides a tax credit for certain expenditures in research and experimental activities in Nebraska. The credit amount under this subdivision shall equal fifteen percent of the federal credit allowed under section 41 of the Internal Revenue Code of 1986 allocable to Nebraska. The credit is allowed for the first tax year it is claimed and for the four tax years immediately following.

Nebraska has no tax treaties with foreign countries.

Contact Information:

Jesse D. Sitz Baird Holm LLP [email protected] 1500 Woodmen Tower 1700 Farnam Street Omaha, Nebraska 68102 USA

Tel 1.402.344.0500 Fax 1.402.344.0588 http://www.bairdholm.com

Tax Desk Book

USA, Nevada Prepared by Lex Mundi member firm Lionel Sawyer & Collins

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

Nevada does not have a state corporate income tax, personal income tax, franchise tax, nor unitary tax, and has minimal estate taxes. Under its constitution, Nevada cannot impose a personal income tax.

Business Tax: Nevada imposes a tax of 0.65% on gross wages paid during each calendar quarter. However, financial institutions, nonprofit organizations, Indian tribes, political subdivisions, and any person who does not supply a product or service are not subject to this tax.

Business Licensing: The state of Nevada requires most businesses performing a service or engaging in a trade for profit in Nevada to have a state business license issued by the Department of Taxation. The initial and annual license fee is $100.

Bank Excise Tax: Nevada imposes a quarterly excise tax of $1,750 per bank branch that is maintained within the state with the exception of the first bank branch. Financial institutions also must pay a payroll tax of 2% of wages.

Property (Ad Valorem) Tax: Property taxes in Nevada are imposed on all real and personal property located within the state, unless exempted. Generally the maximum rate of property tax is a total of $3.64 for each $100 of assessed valuation. Real property is assessed at 35% of its taxable value. Personal property is assessed at 35% of its original cost less depreciation. Nevada also provides tax relief to its property owners by capping annual property tax increases at 3% on an individual's primary residence, and 8% on all property that is not the owner's primary residence.

Property Transfer Tax: A transfer tax is imposed on each deed conveying real property with a market value of more than $100, at $2.55 for each $500 in value or fraction thereof for counties whose population is 400,000 or more; and $1.95 for each $500 in value or fraction thereof for counties with less than 400,000.

Sales and Use Tax: Sales taxes totaling a maximum of 7.75% are imposed on retailers. Use tax is assessed on tangible personal property purchased outside of Nevada and stored, used or consumed within Nevada.

Live Entertainment Tax: Nevada has a live entertainment tax on certain admissions and sales, based on seating capacity of the venue. No tax for occupancies of 200 or less; 10% on admissions and sales for occupancies of 201 to 7,500; 5% of admission on occupancies of 7,500 or more.

Gaming Tax: Each casino pays a monthly percentage of its gross gaming revenue. The percentage increases with the amount of gaming revenue received, with a maximum of 6.75%. In addition to the gross gaming revenue tax, casinos pay quarterly fees for the operation of gaming devices, and an annual fee for the operation of other games.

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

No Nevada income / profits tax - - See Item 1

3. What revenues are included?

Not applicable to Nevada

4. What deductions are allowed?

Not applicable to Nevada

5. What are the major expenses that are not deductible?

Not applicable to Nevada

6. What are the applicable federal rates?

Not applicable to Nevada - - See item 1

7. What are the applicable state and/ or other local rates?

Not applicable to Nevada - - See item 1

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Not applicable to Nevada - - See item 1

9. How are operating losses handled?

Not applicable to Nevada - - See item 1

10. How are capital losses handled?

Not applicable to Nevada - - See item 1

Territorial Rules

11. What are the residence rules?

Residency rules are generally not applicable to Nevada taxation - - See item 1

For other contexts, a Nevada resident can be anyone who a) Physically resides in this state and engages in a trade, profession, occupation or accepts gainful employment in this state. b) Declares himself to be a resident of this state to obtain privileges not ordinarily extended to nonresidents of this state.

www.lexmundi.com Page 427 © 2012 Lex Mundi c) Engages in intrastate business and operates in such a business any motor vehicle, trailer or semitrailer, or any person maintaining such vehicles in this state, as the home state of such vehicles. The term does not include a person who is an actual tourist, an out-of-state student, a foreign exchange student, a border state employee or a seasonal resident.

12. Is worldwide income taxed?

Not applicable to Nevada -- See item 1

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Not applicable to Nevada - - See item 1

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Not applicable to Nevada - - See item 1

15. What are the rates on royalties for withholding taxes?

Not applicable to Nevada - - See item 1

16. What are the rates on interest for withholding taxes?

Not applicable to Nevada - - See item 1

17. What are the rates of withholding tax on profits realized by a foreign corporation?

Not applicable to Nevada - - See item 1

18. Please list any other rates on withholding taxes that we should be aware of.

Not applicable to Nevada - - See item 1

Tax Returns and Compliance

19. What is the taxable reporting period?

Not applicable to Nevada with respect to income taxes - - See item 1 Business Tax: Each calendar quarter Bank Excise Tax: 1st day of each quarter Property Taxes: Assessed each July 1 Sales Tax: Reported and remitted on a monthly basis Gaming Tax: Monthly, quarterly, and annually

20. What are the due dates for the filing of tax returns?

Not applicable to Nevada with respect to income tax returns - - See items 1 and 19

21. What are the key compliance requirements?

Not applicable to Nevada with respect to income tax returns - - See items 1 and 19

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Not applicable to Nevada with respect to income tax returns - - See items 1 and 19

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Yes - - See item 1

24. How does it operate? Is it a VAT or a sales tax?

See Item 1

25. How is the taxable base determined?

See item 1

26. What are the applicable rates?

See item 1

27. Are there any exemptions?

Exemptions to taxes listed in item 1:  Business Tax: financial institutions, nonprofit organizations, Indian tribes, political subdivisions, and any person who does not supply a product or service but only consumes a service are not considered employers and not subject to this tax  Business License: government entities, nonprofit, religious, charitable, fraternal, or other organizations that qualify as tax exempt under the United States internal revenue code.  Bank Excise Tax: First bank branch exemption, credit unions, automated teller machines  Property Tax: Governmental, religious, educational, and charitable organizations; personal property in transit, all personal property stored, assembled or processed for interstate transit, all raw materials and supplies utilized in the manufacturing proces, personal property held for sale by merchant or manufacturer, and all real and personal property that qualifies for and is used for the purpose of air or water pollution control. Also, annual property tax increases are capped at 3% for an individual's primary residence and 8% for all other property.  Property Transfer Tax: Transfers between a business entity and its parent or subsidiary; transfers between a business entity and an affiliated business entity if the affiliated entity has identical common ownership with transferor; transfers in bankruptcy; governmental; transfers of title between spouses; transfers to or from trusts; between joint tenants without consideration; and transfers of real property to a business organization if the person conveying the real proeprty owns 100% of the organization.  Sales and Use Tax: New or expanding business abatement; governmental, tax-exempt organizations, occasional sales, food, newspapers, prescriptions/prosthetics, fuels, and purchases for resales.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

Yes - See item 1

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

30. How do they operate?

Not applicable

31. How is the taxable base determined?

Not applicable

32. What are the applicable rates?

Not applicable

33. Are there any exemptions?

Not applicable

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Not applicable

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Not applicable

www.lexmundi.com Page 430 © 2012 Lex Mundi 38. List the countries in which there are tax treaties. This could impact the withholding taxes on various distributions and to the extent possible, please itemize them below. Please include the impact upon withholding on compensation, interest, dividends or other distributions for each country listed.

Not applicable to Nevada

Contact Information:

Dan McGuire Lionel Sawyer & Collins [email protected] 1700 Bank of America Plaza 300 South Fourth Street Las Vegas, Nevada 89101 USA

Tel 1.702.383.8888 Fax 1.702.383.8845 http://www.lionelsawyer.com

Tax Desk Book

USA, Puerto Rico Prepared by Lex Mundi member firm McConnell Valdés LLC

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

The information contained in this survey is consistent with legislation in effect as of December 31, 2008.

Taxes are imposed in Puerto Rico at the federal, Commonwealth and Municipal levels. The following are the principal Puerto Rican taxes:

Central government: • Income tax on corporations and individuals; • Social Security tax • Unemployment tax; • Excise tax; • Sales and Use tax; and • Estate and gift tax.

Municipal government: • Real and personal property taxes; and • Municipal license tax.

The sources of these Puerto Rico tax laws are the Puerto Rico Internal Revenue Code of 1994, the Municipal Property Tax Act of 1991, and the Municipal License Tax Act. U.S. citizens residing in Puerto Rico, including those born in Puerto Rico, although generally exempted by the IRC from income taxes on Puerto Rico source income, are subject to U.S. tax on most U.S. and foreign source income.

Taxes imposed at the central government level are administered and collected by the Puerto Rico Department of Treasury. Real and personal property taxes are collected by the Municipal Revenue Collection Center (CRIM). Employment tax is collected by the U.S. Internal Revenue Service (IRS) and the Puerto Rico Department of Treasury. Municipal license tax is administered and collected by each municipality.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

The tax basis for the taxes imposed in Puerto Rico is as follows:

www.lexmundi.com Page 432 © 2012 Lex Mundi Income Taxes - Individuals. Assessed on gross income less business and other deductions (standard or itemized deductions, additional deductions) less exemptions (personal and exemption for dependents).

Income Taxes – Corporations and Partnerships. Assessed on net income (gross income less deductions and credits).

Income Taxes – Nonresidents. Taxable only on income from sources within Puerto Rico.

3. What revenues are included?

All natural and juridical persons having Puerto Rico source income are subject to Puerto Rico income tax on that income, unless expressly exempted. Resident individuals (those domiciled in Puerto Rico) are taxed on their worldwide income.

Non-residents are taxed only on Puerto Rico source income and income effectively connected with the conduct of a trade or business in Puerto Rico (ECI). Normally non Puerto Rico source income is not ECI. However, such income is considered ECI if the non-resident corporation or partnership has an office or branch in Puerto Rico and the foreign source income is attributable to the Puerto Rico office and consists of (1) royalties on intangibles derived from the active conduct of such Puerto Rico business, (2) dividends, interest or gain or loss from sale of securities in a banking or finance business or income received by the business from trading securities for its own account, and (3) income received from the sale of goods outside of Puerto Rico through the Puerto Rico office (unless the goods are sold for use, consumption or disposition outside of Puerto Rico).

Resident foreign corporations or partnerships, that is, those not organized in Puerto Rico but engaged in trade or business here, are taxed on ECI.

4. What deductions are allowed?

Generally, deductions from gross income apply to all taxpayers (individuals, corporations, partnerships, estates or trusts).

Individuals. An individual’s deductions are classified as (1) those deducted from gross income to find adjusted gross income (deductions for adjusted gross income) and (2) those deducted from adjusted gross income to find taxable income (deductions from adjusted gross income). The deductions from adjusted gross income include itemized deductions, the standard deduction and personal exemptions. Itemized deductions are those not deductible for adjusted gross income. Deductions from adjusted gross income may not be claimed separately on the return unless the taxpayer elects to itemize, except in the case of certain additional deductions which are allowable in addition to the standard or itemized deductions.

Itemized deductions. Itemized deductions allowable in lieu of the standard deduction include: mortgage interest, interest on student loans of the taxpayer, automobile license for personal use, child-care expenses (limit depends on number of dependents), personal rent paid, property tax on principal residence, casualty loss on principal residence, medical expenses, charitable contributions, casualty loss of personal properties, expenses for windmills, special equipment or treatment of an individual with a disability or chronically ill, dependents' educational expenses, expenses for solar energy equipment, elderly care expenses (limit depends on number of elderly dependents).

Additional deductions. These include: payments made to a government pension or retirement system, contributions to an Individual retirement account, interest paid on an auto loan, and professional or un-reimbursed employees' expenses, among other additional deductions available.

5. What are the major expenses that are not deductible?

Generally, no deduction shall be allowed with respect to the following expenses:

 Personal living or family expenses, or those related with the exercise of a profession or trade as employee;  Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate;  Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made;  Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy;  Any amount otherwise allowable as a deduction;  Any amount paid or accrued on indebtedness incurred or continued to purchase a single premium life insurance or endowment contract;  Amounts paid or accrued for such taxes and carrying expenses chargeable to capital account with respect to a property;  Premiums on insurance policies against any risks, paid to an insurer not authorized to contract insurance in Puerto Rico and/or through an agent or broker not authorized to procure insurance in Puerto Rico pursuant to the provisions of the Insurance Code of Puerto Rico;  Any amount paid as interest on which no informational return has been filed;  Interest paid on loans or other obligations whose amount has been invested, directly or indirectly, in deposits in savings accounts or certificates, or in bonds, notes, or other obligations or mortgage loans, which are equivalent to the sum of the interest generated by the savings account or certificate, or by the bonds, notes, or mortgage loans over which an election to avail of the tax rate of 10% was made;  Interest paid or accrued on indebtedness incurred or continued to purchase or carry obligations the interest upon which is wholly exempt from the taxes imposed by this subtitle; or  Expenses related to the entitlement, use and maintenance of boats otherwise deductible as expenses of trade or business or for the production of income for any taxpayer (certain exceptions apply);  Amounts, other than interest, paid or accrued by a corporation that are directly or indirectly related with the redemption of its stock.

6. What are the applicable federal rates?

U.S. citizens residing in Puerto Rico, including those born in Puerto Rico, although generally exempted by the IRC from income taxes on Puerto Rico source income, are subject to U.S. tax on most U.S. and foreign source income. Accordingly, the applicable rates range between 15% and 39.6%. The taxable income thresholds applicable to each tax rate vary depending on the taxpayer’s filing status.

7. What are the applicable state and/ or other local rates?

Tax Rates taxable income of individuals, trust and estates

• $17,000 or less, 7% • Portion over $17,000 but not over $30,000, 14% • Portion over $30,000 but not over $50,000, 25% • Portion over $50,000, 33%

www.lexmundi.com Page 434 © 2012 Lex Mundi A 5% add-on tax is imposed on taxable income exceeding $75,000 or $37,500 if married taxpayer computes tax separately. This tax is limited to amount that will result in flat tax, at maximum rate in effect, on taxpayer's entire taxable income increased by his personal and dependent exemptions.

Individual tax liability will be higher of regular tax or alternative base tax (ABT). ABT only applies to individuals whose adjusted gross income (AGI) (determined with certain adjustments) exceeds $75,000.

ABT rates are 10% on income starting with $75,000 but not over $125,000, 15% on income starting with $125,000 but not over $175,000 and 20% on income over $175,000. Levels of AGI are reduced by 50% if married taxpayer computes tax separately.

Corporations and Partnerships. For tax purposes, partnerships are treated the same as corporations. Also, partners are not taxed on undistributed partnership profits.

Corporations and partnerships are subject to tax rate of 20% on net income. For foreign corporations, the tax applies to net income that is effectively connected with the conduct of a trade or business in Puerto Rico (ECI). Also, to the extent the corporation’s net income exceeds $25,000, it will be subject to additional income taxes at the following rates:

• $25,001 - $75,000, 5% • $75,001 - $125,000, $3,750 plus 15% of the excess over $ 75,000 • $125,001 - $175,000, $11,250 plus 16% of the excess over $125,000 • $175,001 - $225,000, $19,250 plus 17% of the excess over $175,000 • $225,001 - $275,000, $27,750 plus 18% of the excess over $225,000 • Over $275,000, $36,750 plus 19% of the excess over $275,000

An additional 5% tax applies to net ECI-PR in excess of $500,000, until the total taxable income is taxed at the maximum rate of 39%, which is at $905,000.

Unless otherwise exempt all corporations and partnerships are also subject to an alternate minimum tax (AMT) equal to 22% of Alternative Minimum Taxable Income (AMTI). The tax liability is the greater of AMT or the regular tax liability. AMTI is calculated by making various adjustments to the regular taxable income, which has the effect of accelerating recognition of income.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Individuals. Net long-term capital gains subject to 10% special tax rate. However, individual may elect to include such gain as gross income for purposes of computing regular tax, if such election would result in lower tax. Gains and losses from capital asset transactions are subject to special rules and limitations.

Corporations and Partnerships. Net long-term capital gains subject to 15% tax rate. The rules for capital gains and losses of individuals apply, with some exceptions, to corporations and partnerships. Important differences are that corporations and partnerships may not deduct a net capital loss from ordinary income in the year it is sustained. A net capital loss may be carried over as a short-term loss and offset against net capital gains.

9. How are operating losses handled?

Corporations and partnerships are entitled to the NOL deduction in computing their tax. NOLs may be carried over for the seven succeeding taxable years in which it occurred. The general rules governing an NOL are similar to those for individuals, but the adjustments for figuring NOLs and NOL carryovers are different. www.lexmundi.com Page 435 © 2012 Lex Mundi

The amount of the NOL deduction shall be, the aggregate of the NOL carry-overs to the taxable year reduced by the amount, if any, by which the net income computed with certain exceptions and limitations exceeds, in the case of a taxpayer other than a corporation or partnership, the net income, computed without such deduction.

In the case of a corporation or partnership, the aggregate of the NOL carry-overs to the taxable year reduced by the amount, if any, by which the net income computed with certain exceptions and limitations exceeds the normal-tax net income, computed without such deduction.

The carry-over for each such succeeding taxable year shall be the excess, if any, of the amount of the NOL over the net income for each of the intervening taxable years computed: (A) with certain exceptions, additions, and limitations, and (B) by determining the NOL deduction for each intervening taxable year, without regard to such NOL or to the NOL for any succeeding taxable year and without regard to any reduction.

10. How are capital losses handled?

Individuals. Generally, losses from capital asset transactions are fully deductible from gains recognized from such sales or exchanges. A net loss from capital asset transactions is deductible up to the lesser of taxable income or $1,000. The balance is n

Territorial Rules

11. What are the residence rules?

Natural persons. Resident individuals are those domiciled in Puerto Rico; it is presumed that individual is resident if physically present and living in Puerto Rico for at least 183 days during year.

Juridical persons. Resident foreign corporations are not organized in Puerto Rico but engaged in trade or business in Puerto Rico. A person is considered “engaged in trade or business in Puerto Rico” if they have income that is effectively connected with the conduct of trade or business in Puerto Rico (ECI). This determination may generally require substantial, regular or continuous ordinary business in Puerto Rico.

ECI rules apply to resident foreign corporations and all Puerto Rico source income is treated as ECI. As general rule, all non-Puerto Rico source income is not ECI. An exception to this general rule is if corporation has an office or fixed place of business in Puerto Rico (i.e., branch office), and income attributable to Puerto Rico office consists of: royalties on intangibles derived from Puerto Rico business, dividends, interest or gain or loss from sale of securities in banking or financing businesses or income received by corporation trading securities for its own account, and income received from sale of goods outside Puerto Rico through Puerto Rico office (but if goods are sold for use or consumption or disposition outside Puerto Rico, exception does not apply and income will not be ECI).

12. Is worldwide income taxed?

Yes.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Yes. The amount of income and excess profits taxes imposed by the U.S., possessions of the U.S., and foreign countries shall be allowed as a credit against the tax. The credit amount shall be as follows:

Citizens and domestic corporations. In the case of a citizen of the U.S. who is a resident of Puerto Rico, and of a domestic corporation or partnership, the amount of any income, and excess-profits taxes paid or accrued during the taxable year to the U.S., any possession of the U.S., or any foreign country.

Alien resident of Puerto Rico. In the case of an alien resident of Puerto Rico, the amount of any such taxes paid or accrued during the taxable year (A) to the U.S., or any possession of the U.S., and (B) to any foreign country, if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the U.S. residing in such country.

Estates and trusts. In the case of any such individual who is a beneficiary of an estate or trust, his proportionate share of such taxes of the estate or trust paid or accrued during the taxable year to the U.S., any possession of the U.S., or any foreign country, as the case may be.

Nonresident aliens and foreign corporations and partnerships. In the case of a nonresident alien individual or a foreign corporation or partnership engaged in trade or business within Puerto Rico during the taxable year, a credit shall be allowed for the amount of taxes paid or accrued during the taxable year to the U.S., any U.S. possession or any foreign country with respect to income from sources without Puerto Rico effectively connected with the conduct of a trade or business within Puerto Rico. For special rules for the application of this paragraph. Such choice may be made or changed at any time prior to the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this subtitle.

Limit on credit. The amount of the credit shall be subject to each of the following limitations:

(1) The amount of the credit in respect of the tax paid or accrued to any country shall not exceed (in the case of a taxpayer other than a corporation or partnership) the same proportion of the tax against which such credit is taken, which the taxpayer's net income from sources within such country bears to his entire net income for the same taxable year, or in the case of a corporation or partnership, the same proportion of the tax against which such credit is taken, which the taxpayer's normal- tax net income from sources within such country bears to its entire normal-tax net income for the same taxable year; and

(2) The total amount of the credit shall not exceed (in the case of a taxpayer other than a corporation or partnership) the same proportion of the tax against which such credit is taken, which the taxpayer's net income from sources without Puerto Rico bears to his entire net income for the same taxable year; or, in the ca

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

Generally, income from dividends or participation in partnership profits is taxed at a 10% rate. The withholding tax rates on income from dividends is 29% if the recipient is an alien, or 20% if the recipient is a citizen of the U.S.

Generally, the withholding tax rate is 29% if the recipient is an alien, or 20% if the recipient is a citizen of the U.S.

Certain royalties for use of industrial intangibles are also taxed at rates between 2% and 15%.

16. What are the rates on interest for withholding taxes?

The payor of interest shall deduct and withhold a tax of 10% or 17% on the basis of the total interest paid or credited to the taxpayer. The applicable rate depends on the taxpayer’s election and compliance with the requirements set forth for each election.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

Corporations not engaged in trade or business in Puerto Rico are generally taxed on fixed or determinable gross income at 29% to extent amounts so received are considered to be from sources within Puerto Rico. Exceptions are dividends and partnership profit distributions, which are taxed at 10% rate. Certain royalties for use of industrial intangibles are also taxed at rates between 2% and 15%.

18. Please list any other rates on withholding taxes that we should be aware of.

Withholding tax in cases of sale of property by nonresident persons. Any person acquiring from any nonresident real property or stock (if the profit derived from the transaction constitutes income from sources within Puerto Rico) shall deduct and withhold 25% of the payments made to the nonresident alien during the current taxable year or in subsequent taxable years, as part of the purchase price of such property. If the recipient is an individual citizen of the U.S., the withholding shall be 10%.

The nonresident alien may request a waiver to the withholding tax if certain requirements are met to the satisfaction of the Secretary of the Treasury.

Tax Returns and Compliance

19. What is the taxable reporting period?

Income Tax – Taxpayer’s taxable year

Withholding tax – Calendar month

Personal property tax – Fiscal year

Municipal license tax – Fiscal year

Sales and Use tax – Calendar month

20. What are the due dates for the filing of tax returns?

Income Tax - 15th day of the fourth month following close of taxpayer’s year end.

Income Tax – nonresident aliens and nonresident foreign corporations - 15th day of the sixth month following close of taxpayer’s year end.

Withholding tax - 15th day of the month following the month of withholding.

Municipal license tax - Within 5 working days after April 15.

Sales and Use tax - 20th day of the month following the month of sales and use.

Estate tax - 270 days following decedent’s death.

21. What are the key compliance requirements?

• Income Tax Returns • Municipal License Tax Registration • Personal Property Tax Return • Puerto Rico Merchant Registry • Puerto Rico State Department Annual Report • Puerto Rico State Department Authorization to do business • Volume of Business Declaration

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Real Property Tax. Additions to tax: 5% if payment made after 30 but within 60 days from due date, 10% if payment made after 60 days. 10% interest on delinquent taxes. Criminal penalties may apply.

Personal Property Tax. Delay in payment of more than 30 days but less than 60 days, 5% penalty; delay of more than 60 days but less than 90 days, 10% penalty; and delay in excess of 90 days, 15% penalty. Delay in filing return, unless such failure is due to reasonable cause, 5% if delay is not more than 30 days, and additional 5% for each additional 30 days, but not to exceed 25% in aggregate. In case of deficiency, 10% of deficiency if any part of it was due to negligence, and 100% of deficiency if it was due to fraud. 10% interest on delinquent taxes.

Income Tax. Additions to tax: failure to file return: 5% for first 30-day period, 10% for each 30-day period not to exceed 25%; failure to file declaration of, or pay, estimated tax by individual: 10% of each due and unpaid installment plus 2% per month not to exceed 20%; failure to pay on time: 5% if payment made after 30 but within 60 days from due date, 10% if payment made after 60 days; failure to pay estimated tax by corporation: addition of 20% of deficiency; substantial underestimate of estimated tax: 12% per year. Criminal penalties may apply.

Estate and Gift Tax. Additions to tax: willful neglect to file return: 5% for first 30-day period, 10% for each additional 30-day period not to exceed 25%; failure to pay on time: 5% if payment made after 30 but within 60 days from due date or 10% if payment made after 60 days. Criminal penalties may apply.

Excise Tax. Administrative penalties: failure to pay on time: 5% surcharge if payment made after 30 but before 60 days from due date or 10% if payment made after 60 days. 10% interest on delinquent taxes. Criminal penalties may apply.

Municipal License Tax. Additions to tax: willful neglect to file: 5% for each 30-day period not to exceed 25%; failure to pay on time: 5% if payment made after 30 but before 60 days or 10% if made after 60 days. Criminal penalties may apply.

Sales and Use Tax. Penalties: failure to register with Merchant Registry: $10,000; falsification or possession of false Merchant Registry Certificate (Certificate): $10,000 per Certificate; providing false information: $5,000; posting false Certificate: $5,000 per occurrence; transfer of Certificate: $5,000; failure to update information: $500; failure to deposit sales and use tax: 25% to 50% of deficiency for www.lexmundi.com Page 439 © 2012 Lex Mundi first occurrence (100% additional occurrence); failure to post Certificate in visible place: $1,000; false advertising: $1,000 to $20,000; failure to reflect tax separately in sales receipt: $100 per occurrence; falsification of or posting a false Certificate of Exemption: $10,000 per Certificate; failure to obtain valid Certificate of Exemption from exempt buyer: 50% of applicable sales and use tax in addition to tax due; collection of tax in excess: $100 each.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Sales and Use Tax (SUT). A general SUT is imposed on the retail sale, use, consumption or storage of a taxable item in Puerto Rico. The general sales tax on taxable items must be paid by the consumer at the time of sale. Taxable items include tangible personal property, taxable services, admission fees, and bundled transactions.

Stamp and seal taxes. There are stamp taxes on notarial documents and construction plans and recording fees for real property transactions.

24. How does it operate? Is it a VAT or a sales tax?

Sales and Use Tax. Tax imposed on sales at retail and leases of tangible personal property; certain leases of real property; amusement and sports events admissions; cable or satellite television services; telecommunication services; sale of computer software; and taxable services, all with certain exemptions and limitations.

Tax imposed on use, storage or consumption of taxable item in Puerto Rico including use, storage, or consumption of any tangible advertising material (e.g., pamphlets, catalogues, price lists) imported into Puerto Rico. Sales tax exemptions apply also to use tax.

25. How is the taxable base determined?

Sales Tax. The sales tax is imposed on the sales price of any sale of “taxable item” in Puerto Rico. A “taxable item” is any tangible personal property, taxable services, admission rights and bundled transactions. “Sales price” means the total price paid for a taxable item, valued in money, whether paid in money or otherwise, and including any amount for which credit is given to the purchaser by the seller, without any deduction on account of: the cost of the property sold, including excise taxes and other taxes imposed on such property by the PRIRC; the cost of materials used, labor or service cost, interest charged, losses, transportation, taxes on the seller and any other cost of the seller; charges billed by the seller for any service necessary to complete the sale, other than charges for delivery or installation; delivery charges; installation charges; the value of exempt property delivered to the buyer, when taxable and exempt tangible personal property is sold in a bundled transaction; and tips and other charges imposed by a merchant as part of the sales price of a taxable item.

Exclusions. The term “sales price” does not include services that are part of the sale (i.e., service warranty, guaranty, and extended warranty), trade-ins or discounts allowed and taken at the time of the sale. The sales price includes, however, the face value of any coupon reimbursed by third parties. Interest and financing charges, and taxes or charges imposed by law upon the consumer are not included, if these are separately itemized on a bill or other similar document delivered to a buyer.

Use tax—purchase price. Use tax is based on the purchase price of each taxable item when used, consumed or stored for use or consumption. “Purchase price” has the same meaning as sales price.

Admissions. For admissions, tax is computed and collected on the basis of the actual price of admission charged. Also, the sale price or actual value does not include those charges collected for ticketing or for box office services. www.lexmundi.com Page 440 © 2012 Lex Mundi

Rentals. The tax on the lease or rental of tangible personal property is based on the gross rental payments.

26. What are the applicable rates?

The sales and use tax rate in Puerto Rico is 7%. The sales and use tax rate is 5.5% at the central government level. Municipalities are also required to impose a sales and use tax of 1.5%.

27. Are there any exemptions?

Exemptions, exceptions and exclusions from sales and/or use tax are listed below ,however, this is not intended to be an exhaustive list:

 Admissions to athletic and other events sponsored by schools  Admissions charged by physical fitness facilities owned or operated by hospitals  Admissions to collective transportation systems  Air or sea terminals stores, items acquired by persons traveling abroad  Boats used for towing or bunkering  Business assets transferred in certain reorganizations  Certain leases, subleases, licenses, or rental of real property  Certain professional services rendered to registered businesses  Certain utilities  Construction, taxable items introduced on a temporary basis  Dues and fees paid to nonprofit private clubs and membership clubs providing recreational or physical fitness facilities  Food and food ingredients (taxable at 1% rate by municipalities)  Funeral services  Gifts and certain promotional material  Government transactions  Hospitals  Hotel and other tourist facilities  Insurance services  Internet access services  Labels for packaging and shipping  Medical supplies  Motion pictures, taxable items introduced on a temporary basis  Motor fuel, residential fuel and electricity, and other fuels  Motor vehicles  Optical supplies  Orthopedic and prosthetic devices  Packaging materials and containers  Prescription drugs and medicines  Public libraries  Public records  Purchases of raw materials and property plant and equipment by manufacturing businesses  Residents traveling abroad  Resales  Residential fuel and electricity  Safety deposit boxes  School lunches  School tuition  Services provided by child care centers www.lexmundi.com Page 441 © 2012 Lex Mundi  Services provided by educational institutions  Services provided by nursing homes  Solar electric equipment  Tangible personalty for export  Transportation services

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

None.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Social security and Medicare taxes are imposed at the federal level. For employees, the payment is divided equally between the employer and the employee. Self-employed individuals pay the total amount of these taxes.

Also at the federal level, unemployment taxes are imposed against employers on the first $7,000 paid to an employee. This tax is not deductible from employee wages.

30. How do they operate?

Social security and Medicare taxes. Generally, the social security tax is imposed on persons who employ one or more individuals for some portion of a day in each of 20 weeks in the current or preceding calendar year, or who pay in the aggregate $1,500 or more of wages in a calendar quarter of the current or preceding calendar year. The social security tax liability is determined based only on the existence of an employer-employee relationship. Retired employees receiving pension payments are excluded.

Unemployment taxes. An employer generally must pay a federal excise tax on a limited amount of the wages paid to his employees. All employees not engaged in exempt employment also must pay a tax on the same limited amount of wages at the same rate as the employer. This tax, referred to as the social security tax, is a combination of the Old-Age, Survivors and Disability Insurance Tax (OASDI), and the Hospitalization Insurance Tax (HI). The amount of the tax imposed on the employee must be withheld by the employer from the employee's wages as and when paid.

31. How is the taxable base determined?

Social security and Medicare taxes. The social security tax is imposed on wages paid to an employee. Generally, wages are considered all remuneration paid for employment. Remuneration may be paid in cash or in property. If paid in property, it is the property's cash value that constitutes the amount of wages.

Unemployment taxes. The tax base used is determined annually by the U.S. Secretary of Health and Human Services. It is published in the Federal Register on or before November 1 preceding the calendar year in which that new maximum amount takes effect.

Employers and employees are not subject to the unemployment tax on all types of employment. In general, the following employment is subject to unemployment tax:

 Services performed in the U.S. by employees for their employers, regardless of the citizenship or residence of either,

www.lexmundi.com Page 442 © 2012 Lex Mundi  Services performed outside the U.S. by a U.S. citizen for an American employer.  Services performed outside the U.S. on an American vessel or American aircraft if the contract of hire was made in the U.S., or if while the employee is working on the vessel or aircraft it touches at a U.S. port.

32. What are the applicable rates?

The tax rate for social security is at 15.3% of earnings. The Tax rate for unemployment tax is 6.2% on the first $7,000 paid to employees.

33. Are there any exemptions?

Exempt employment for Social Security, Medicare and unemployment tax purposes:

 Agricultural labor. Agricultural labor if services performed are: (a) compensated for in the aggregate, in cash, during any calendar quarter in the current or preceding year for less than $20,000; or, (b) rendered by less than 10 persons in less than 20 days in the current year or preceding year, each day being in a different calendar week.  Domestics. Domestic services performed in a private home, local college club, or local chapter of a college fraternity or sorority if cash remuneration for the services for the calendar quarter is below $1,000.  Casual labor. Services performed outside the course of the employer's trade or business as long as remuneration in any calendar quarter for the services is below $50.  Non-American vessel or aircraft. Services performed on or in connection with a non-American vessel or aircraft if the employee is employed in connection therewith when outside the United States.  Family employment. Services performed by a spouse, a child under the age 21 in the employ of a parent, or a parent in the employ of a child.  Government personnel. Services performed in the employ of federal, state, local and foreign government, and certain of their instrumentalities, and international organizations.  Nonprofit organizations. Services performed in the employ of a religious, charitable, educational or other organization described as exempt from federal income tax.  Students. Service performed in the employ of a school, college or university if performed by a student who is enrolled and regularly attending classes at the institution, or by the spouse of that student.  Hospital patient. Service performed in the employ of a hospital by a patient of that hospital.  Student nurse or intern. Service performed for a hospital by a student nurse or intern.  Insurance agents. Service by insurance agents or solicitors as long as all such services performed by that individual are remunerated solely on a commission basis.  Newsboys and newsvendors. Services performed by an individual under the age of 18, and certain others, in the delivery or distribution of newspapers or shopping news.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Estate Tax. The Puerto Rico Internal Revenue Code (PR Code) imposes a unified tax upon transfers by gift or inheritance. In cases of U.S. “citizens” resident in Puerto Rico, whose gross estate is taxable

www.lexmundi.com Page 443 © 2012 Lex Mundi under the U.S. Internal Revenue Code (IRC), the tax imposed on part of the gross estate located in Puerto Rico shall be equal to the credit granted under the IRC.

Gift Tax. Imposed on all gifts of property wherever situated if the donor is resident of Puerto Rico. If the donor is nonresident, the gift tax is imposed on all gifts of property situated in Puerto Rico. Property situated in Puerto Rico means all property in fact situated in Puerto Rico, all shares issued by Puerto Rico corporations and partnerships and by foreign corporations or partnerships when at least 80% of their gross income for three years ending with close of taxable year preceding gift was derived from Puerto Rico sources and any intangible physically situated in Puerto Rico. Bonds, promissory notes or other obligations of Commonwealth, its municipalities, or its public authorities or corporations, irrespective of physical location of such instruments, are deemed situated in Puerto Rico.

A Unified tax imposed upon transfers by gift or inheritance is graduated from 18% on transfers up to $10,000 to 50% on transfers in excess of $2,500,000.

Returns are required to be filed annually with Secretary of Treasury on or before April 15 of each year for gifts made during the prior calendar year in excess of the $10,000 annual exclusion, except in case of gifts of real properties which require filing of return regardless of gift amount. Information returns are required on the same date from each donor in case of gifts in excess of $10,000 exclusion. Each notary must, within 30 days, notify Secretary of any instrument of gift executed before him.

Annual exemption of $10,000 per donee. Additional exemptions are allowed of $1,000 annually for gifts to each incapacitated child and without limit for gifts for educational or medical purposes. Gifts for public, charitable or religious purposes are excluded in computing annual donation, both for residents and nonresidents.

In the case of native-born Puerto Rico residents, a deduction is allowed for the value of real and personal property which at date of gift is located in Puerto Rico.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Transfer pricing provisions. The Secretary of the Treasury (Secretary) may, in any case of two or more juridical persons (whether or not incorporated or organized in Puerto Rico) is authorized to distribute, apportion, or allocate gross income and deductions, credits, or allowances between or among such juridical persons if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or to clearly reflect the income of any of such juridical person. The Secretary is also authorized to impute income by reason of interest, dividends, compensation or for any other concept or nature in transactions, trades or businesses when it is necessary to avoid tax evasion or to reflect the actual income of any of such organizations, trades or businesses.

Contact Information:

Janelle A. Reyes McConnell Valdés LLC [email protected] 270 Muñoz Rivera Avenue San Juan, Puerto Rico 00918 USA

Tel 1.787.759.9292 Fax 1.787.759.9225 http://www.mcvpr.com

Tax Desk Book

USA, Utah Prepared by Lex Mundi member firm Van Cott, Bagley, Cornwall & McCarthy

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

For businesses and individuals the primary taxes are income taxes based on net income, sales and use taxes based on final retail prices with several exceptions, and property taxes based on the value of real estate (and tangible prersonal property for businesses). Employers are subject to special taxes, withholding and reporting requirements. There are also several limited taxes including taxes on tobacco products, entertainment, motor vehicles, fuels and utilities, so any person (including individuals) doing business transactions in the State should check with a professional or the Utah State Tax Commission to see if any special tax might apply to their activity. The Utah State Tax Commission can be contacted over the Internet at http://tax.utah.gov/index.html.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

Utah uses the United States Federal Income Tax ("FIT") measure of income for both businesses and individuals. With some exceptions for non-residents and aliens, world wide income from all sources is normally included in income. Non-resident aliens normally include only income from United States sources, and in some cases aliens may be entitled to special rules under treaties. Also, for business and legal entities other than corporstions, and in some cases trusts and estates, income is determined and characterized at the entity level, but taxed to the owners or beneficiaries of the entities. Certain corporations with a limited number of shareholders can also elect to have the incme taxed to the shareholders instead of the corporation, and some related corporations are allowed to elect to be taxed as a group rather than separately.

3. What revenues are included?

As a general matter for income taxes on citizens and residents (including businesses considered domiciled in Utah), everything which represents an increase in wealth (including, in some cases, earnings of separtate businesses and trusts, particularly foreign entities) except death benefits from certain sources (mostly insurance or employment), gifts and inheritances, interest on some state and local bonds, compensation for physical injuries or illness, amounts received under accident and health plans, contributions by employers to accident and health plans, the rental value of a parsonage for ministers, discharge of indebtedness if net worth isn't increased, improvements to a lessor's property by a lessee, certain construction allowances by to a lessee by a lessor, recovery of tax benefit items to the extent there was no prior tax benefit, some combat zone compensation by members of armed forces, certain scholarships, contributions to the capital of a corporation, some food and lodging furnished by an employer for the employer's convenience, amounts from a group services legal plan, some gain from sale of a principle residence, some armed forces or social security retirement payments, some insurance repayments of tempory living expenses, some www.lexmundi.com Page 446 © 2012 Lex Mundi dependant care and educational assistance programs, some foster care payments, some employee fringe benefits, some military benefits, some energy conservation payments by public utilities, some income from United States bonds used for educational benefits, medicare advantage medical savins account payments, certain adoption assistance payments, disaster relief payments, federal subsidies for prescription drug plans, and certain benefits for volunteer firefighters and emergency medical responders. In addition, some transfers of property to, from or between business entities, involving exchanges or involuntary conversions of property may be exempt if rules are followed.

For non-citizens and non-residents, the same rules apply except that items of income not considered to be connected with the State are excluded. In addition, the rules determining what is located in Utah, and what is not vary depending upon whether the income is from business or non-business activity.

Taxes other than income tax have separate rules.

4. What deductions are allowed?

For Income Taxes, most business expenses, alimony (for individuals), costs of creating or collecting income, some required payments, some losses in excess of income from other years, some interest, some taxes, some losses, some bad debts, depreciation, depletion, amortization, some circulation expenditures, some soil and water conservation expenditures, elective expensing of certain depreciable business property, certain costs of clean fuel vehicles, expenditures to remove architectural barriers to handicapped and charitable contributions to qualified recipients are allowed. In addition, (subject to being phased out at higher income levels), individuals are allowed deductions for personal exemptions for each taxpayer and qualified dependent, medical and dental expenses, certain moving expenses, some interest on education loans, some retirement and health care savings account payments, certain education expenses and alimony. Corporations also get deductions for dividends between corporations, elimination of double counting of income between related corporations, certain dividends paid on preferred public utility stock, and orgazational expenditures.

The rules are also modified when activities occur inside and outside the State or the United States and when non-citizens and non-residents are involved.

5. What are the major expenses that are not deductible?

For Income Tax purposes, personal, living and family expenses, capital expenditures, some losses, some interest and expenses related to transactions between related persons, expenses and interest for creating tax exempt income, acqusitions made to evade or avoid income tax, certain entertainment and travel expenses, a portion of business meal expenses, some taxes, fines and penalties, some expenses for business use of a home, improperly documented expenses, expenses for illegal activities, illegal payments and bribes, some political expenses or losses on debts owed by political parties, interest on debt incurred by a corporation to buy stock in another corporaton, certain expenditures for which credits are allowed, some expenses of luxury automobiles, excessive compensation of employees, and excessive retirement or separation payments are the main expenses which are not deductible.

6. What are the applicable federal rates?

For individuals in 2009, the federal rates begin at 10% of taxable income and go up to 35% for income over $372,950 ($186,475 of married filing separately). For trusts and estates, the rates begin at 15% and increase to 35% on income over $11,150. Corporations also begin at 15% and increase to 35% at $18,333,333.

7. What are the applicable state and/ or other local rates?

For individuals, the state rate is 5%. For corporations, ther rate is 5%, but not less than $100. There are no local income taxes.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Federal capital gains tax on gains from capital assets held more than one year can not presently exceed 15% (although there is discussion of increasing this maximum rate, and without legislation the rate will increase in 2011). State taxation is at the standard 5% rate. Gains are determined by subtrancting the unrecovered tax cost of the property (tax basis) from the sales price less the costs of sale.

In some cases, the taxation of gains can be postponed. The major areas where this occurs is when businesses are formed, combined, divided or terminated; and in cases involving exchanges of property of like-kind or when property is destroyed or involuntarily converted into other property or money, or sold under threat of condemnation or court order. However, all of these circumstances have special rules and limitations, and those rules are frequently different when related parties are involved. In determining if parties are related, indirect and beneficial ownership can be considered in addition to actual ownership, and business relationships can be considered in addition to marital and geneological relationships.

9. How are operating losses handled?

For income tax purposes, the basic rule is losses can be carried back two years, and forward twenty, except that the taxpayer can elect to only carry the losses forward. There are, however alternative carry back periods which can be elected under various circumstances. Also, the calculation of the amount of loss carryover or carry back is different for individuals and corporations.

10. How are capital losses handled?

Capital losses can not be carried back, but can be used to offset up to $3,000 of other gains each year, and unused capital losses can be carried forward idefinately.

Territorial Rules

11. What are the residence rules?

For state tax purposes, with the exception of military personel and their spouses who are stationed in Utah for military purposes, any person who has a home in the State of Utah and is physically present in the state for any part of at least 183 days during any calendar year is considered a resident. Similarly, persons establishing a domicle in Utah (i.e., an intent to live here permanently and to return to after an absense of any length) are consdered residents regardless of the time present in the state until a new domicile is established outside the state, and domicile may be established through evidence other than the taxpayer's testamony. Having immediate family members living in Utah is evidence of domicile. Persons moving into the state with the intention of remaining, are considered residents for the part of the year they live in the state. Persons leaving the state are considered residents for the part of the year prior to the time they establish a domicile elsewhere. Income from labor performed in Utah is taxed here regardless of residency. I do not feel qualified to discuss the rules for determining U.S. residency rules under the federal Income Tax, but observe that under the federal rules an person can continue to be taxed as a citizen if citizenship is given up for tax motivations. www.lexmundi.com Page 448 © 2012 Lex Mundi

12. Is worldwide income taxed?

For citizens and residents, yes. Non-citizens and non-residents pay only on Utah source income for State purposes, and on U.S. source or effectively connected income for federal purposes.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

For Utah Income Tax purposes, credits, subject to certain limitations, are allowed for income taxes paid to other states and possessions of the United States on the income earned in those jurisdictions. There are also individual credits (which phase out starting with incomes over $12,000 if filing as single or married filing separately, $24,000 if filing as married jointly or qualifying widow(er), and $18,000 if filing as head of household to compensate for loss of personal exemptions and itemized deductions. There are also several special situation credits covering agricultural fuel, low income at- home parents of infants, clean fuel vehicle, enterprise zones, farm hand tools, capital gains reinvested in Utah small businesses, historic preservation, live organ donation, low-income housing, Medical Care Savings Account, non-resident shareholder of Utah S-corp, recycling market Development Zones, renewable energy systems, research activities, retirement income, sheltered workshop, special needs adoptions, targeted business, tutoring disabled dependents and Utah Educational Savings Plan. Under the federal Income Tax, there are also credits or deductions for income taxes paid to foreign jurisdictions and deductions for taxes paid to states.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

There is no direct withholding for Utah taxes on dividends, but small business corporations (S- corporations) must pay 5% of the amount of Utah source income allocable to non-resident shareholders, who have the option of filing no Utah return or of fiiling a Utah return and receiving a credit for the amount paid on their behalf by the corporation. U.S. income tax withholding may apply.

15. What are the rates on royalties for withholding taxes?

There is no direct withholding for Utah taxes on royalties, but small business corporations (S- corporations) must pay 5% of the amount of Utah source income allocable to non-resident shareholders, who have the option of filing no Utah return or of fiiling a Utah return and receiving a credit for the amount paid on their behalf by the corporation. U.S. income tax withholding may apply at different rates depending upon the circumstances.

16. What are the rates on interest for withholding taxes?

There is no direct withholding for Utah taxes on interest, but small business corporations (S- corporations) must pay 5% of the amount of Utah source income allocable to non-resident shareholders, who have the option of filing no Utah return or of fiiling a Utah return and receiving a credit for the amount paid on their behalf by the corporation. U.S. income tax withholding may apply at different rates depending upon the circumstances.

17. What are the rates of withholding tax on profits realized by a foreign corporation?

There is no special withholding for profits realized by a foreign corporation, but small business corporations (S-corporations) must pay 5% of the amount of Utah source income allocable to non- resident shareholders, who have the option of filing no Utah return or of fiiling a Utah return and

www.lexmundi.com Page 449 © 2012 Lex Mundi receiving a credit for the amount paid on their behalf by the corporation. U.S. income tax withholding may apply at different rates depending upon the circumstances.

18. Please list any other rates on withholding taxes that we should be aware of.

Any withholding for Utah is done at a 5% rate. I am not able to adequately discuss the federal withholding possibilities.

Tax Returns and Compliance

19. What is the taxable reporting period?

The same period used on the Federal Income Tax, usually a calendar year, but certain businesses can elect a year ending with any calendar month (or near the end of a calendar month if using the "year of 52/53 weeks" method.

20. What are the due dates for the filing of tax returns?

Most corporate returns are due on the 15th day of the third month following the end of the year. Individuals, trusts and partnerships file on the 15th day of the fourth month following the end of the year. Exempt corporations file on the 15th day of the fifth month following the end of the year.

21. What are the key compliance requirements?

All entities having income from sources in Utah, holding property in Utah, or acting in Utah should consult with a tax advisor regarding their liability to file Utah tax returns. In addition, any person (including individuals) who have employees working in Utah must register with the state to comply with employment tax, withholding and reporting obligations related to the employees. Questions can also be directed to the Utah State Tax Commission, which will normally respond within a day or two.

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

Having probably the most complex tax rules in the world, it is impossible to describe all of the federal tax issues that can be encountered.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Utah has several transaction taxes

24. How does it operate? Is it a VAT or a sales tax?

Most taxes related to transactions are basically sales taxes.

25. How is the taxable base determined?

The basic rule is that retail sales to final consumers or users are taxed based on the sales price with several exceptions. However, some taxes such as gasoline and tobacco taxes use flat tax rates, and are collected at the wholesale level.

26. What are the applicable rates?

Rates vary depending upon the location of sales with most combined rates in the range of 6-7%. However, there are special taxes such as transient or restuarant taxes that can add to this amount. For up to date information go to http://www.tax.utah.gov/sales/rates.html and select the appropriate charts.

27. Are there any exemptions?

There are numerous exemptions, the most significant of which are sales for resale, sales to charitable entities and numerous special cases involving sales to businesses.

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

No.

PARAFISCAL CONTRIBUTIONS

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

At the federal level, yes. At the State level, unemployment and worker's compensation fees can apply.

30. How do they operate?

For the most part, the fees are based on the amount of wages paid, with different definitions of wages and maximum limits depending upon the levy involved.

31. How is the taxable base determined?

The taxable base for Social Security is essentiall all remuneration for services up to a limit of $106,800 for 2009. For Medicare, there is no upper limit. For Unemployment Taxes, the federal base is the first $7,000 in wages. The state base is recalculated each year depending upon experience. Employers are also required to have Workers Compensation insurance, with is also variable depending on the industry and experience of the employer.

32. What are the applicable rates?

Social Security is 6.2% on EACH of the employer and employee. Medicare is 1.45% on EACH of the employer and employee. Federal Unemployment is 6.2%, but most employers receive a credit of up to 5.4% for contributions paid to states. State Unemployment rates vary each year. Worker's Compensation premiums vary each year.

33. Are there any exemptions?

Each tax or levy has its own definition of wages or method of compensation, and each has limited exceptions, particularly for domestic help for individuals. A full discussion of the exceptions can not be given here.

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

Utah has no inheritance, gift or Wealth Tax. There are federal taxes on gifts and inheritances, which are triggered by making gifts or by death. Gifts to qualified charities and governmental entities are excluded, and there is an annual exclusions on gifts of $13,000 per donee per donor per year in 2009. Couples can treat gifts given by one spouse as if given one-half by each. The base is the fair market value of the gift (in many cases determined using standard tables when gifts are other than outright gifts of present interests) with rates ranging from 18% for the first $10,000 of taxable gifts up to 45% for the portion of the gifts exceeding $1,500,000. Also, taxable gifts are accumulated each year, and there is a lifetime credit of $345,800, which prevents actual payment of tax until total gifts have exceeded $1,000,000. Thus the effective tax rate is 41% for the first $250,000 of taxable gifts over $1,000,000; 43% on the next $250,000 of taxable gifts; and 45% of the all additional gifts. These rates will lower in 2010, and increase in 2011, unless expected changes are enacted.

Inheritance taxes are based on the value of the assets owned by the decedent at death with several adjustments including additon of lifetime taxable gifts, property not owned by the decedent, but previously owned by the decedent in some cases, and beneficial interests. There is an unlimited marital and charitable deduction for qualifying property or interests in property passing to a spouse or qualified charity, and certain other deductions for debts and certain costs and expenses of the estate.. For 2009, the effective tax rate is 45% of the taxable estate in excess of $3,500,000, in 2010 the rate is zero, and in 2011 taxes will be imposed on taxable estates over $1,000,000 at rates going up to 55% unless expected changes are enacted. There is also a generation skipping tax which replaces the income tax in certain cases where assets pass from the decedent/donor to persons more than one generation younger than the donor. A full discussion of these rules or of the gift and estate tax rules can not be given here.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes

Utah follows the federal rules, which have all of the above stated rules.

Utah has no separate tax treaties. The Federal tax treaties are too numerous and varied for an adequate response.

Robert Lunt Van Cott, Bagley, Cornwall & McCarthy [email protected] 36 South State Street Suite 1900 Salt Lake City, Utah 84111 USA

Tel 1.801.532.3333 Fax 1.801.534.0058 http://www.vancott.com

Tax Desk Book

Venezuela Prepared by Lex Mundi member firm Hoet Pelaez Castillo & Duque

Introduction

1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.)

-Direct Taxes:

a. Income Tax.

b. Economic Activities Tax.

c. Inheritance and Donation Tax.

-Indirect Taxes:

a. Value Added Tax.

-Others: Special Contributions.

INCOME TAXES – AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS

Calculation of Income/ Profit Taxes

2. How is the taxable base determined?

The taxable base of the income tax is the net income earned within a fiscal year. The net income is determined by the patrimony increase resulting from the subtraction of the costs and deductions from the gross income.

3. What revenues are included?

Income obtained in the country by persons residents and/or domiciled or not in the country is taxed, as well as the income obtained abroad for those considered as resident or other parties domiciled in Venezuela.

As a consequence of the previous territorial system, the Law applies the principle of “equivalent of causes” by which it suffices that one of the elements of a transaction occurs within the Venezuelan territory to consider it as a Venezuelan source income.

Among others, the following are considered Venezuelan source income:  Royalties, rights of use of trademarks and other similar benefits derived from the exploitation in Venezuela of industrial or intellectual property.  Income obtained from permanent establishments or fixed places of businesses located in Venezuelan territory. www.lexmundi.com Page 454 © 2012 Lex Mundi  Considerations for all types of services, credits or any other type of work or capital compensation performed, benefited from or used in Venezuela.  Income derived from production and distribution of films and similar items for cinema and television.  Income derived from shipment of goods in consignment from foreign countries.  Income of insurance or reinsurance companies not domiciled in the country and without a fixed place of business in the country.  Income derived from real property located in Venezuela, or from rights or liens imposed on real property.  Revenue from personal property values, issued by companies incorporated or domiciled in Venezuela, or by foreign companies with a fixed place of business in Venezuela, money, goods, rights or other personal assets invested or located in Venezuela.  Likewise, revenue from derivatives of such personal property values shall be considered as derived from a territorial source, except ADRs, GDRs, ADSs and GDSs.  Revenue from all types of patrimonial elements located in Venezuela.

4. What deductions are allowed?

Business Entities

In principle, all expenses which normal and necessary for the production of the income and not attributable to cost, are deductible. Such expenses are as follows:  Any compensation paid for services rendered to the taxpayer.  Interests on capital received as loans and invested in the production of the income.  Taxes paid with relation to economic activities or to goods that produce the income, except taxes authorized by this Law.  Indemnities paid to workers pursuant to the Law or work contracts.  A reasonable amount to cover the depreciation of permanent assets and the amortization of the cost of other elements used in the production of the income.  Losses suffered on goods destined to the production of the income.  Expenses incurred for the transfer of new employees, including expenses for the spouse.  Losses from non recoverable debts whenever the following conditions are met:  The debt results from regular business operations of the company.  The amount has been taken in consideration in the computation of the declared gross income, except in cases of loss of capital loaned by credit institutions, or losses resulting from loans granted by companies to their workers.  The losses have been declared in the taxable year, due to insolvency of the debtor and his guarantors or because the amount does not justify the collection expenses.  Reserves made by insurance and capitalization companies as required by Law.  Cost of constructions made by the taxpayer.  Administration and conservation expenses actually paid for leased real property, provided that the taxpayer supplies in the income declaration all data required for tax control.  Installments or quotas corresponding to the lease of goods destined to the production of the income.  Transportation expenses, caused or paid within the taxable year, made for the benefit of the taxpayer making the payment, in order to produce the income.  Commissions to intermediaries in the sale of real property.  Rights for the exhibition of films and similar items for the movie or television industries.  Royalties and other similar participation as well as considerations, fees and similar payments for technical assistance or technological services used in the country.  Expenses for ordinary repairs of goods destined to the production of the income.  Insurance premiums that cover risks to goods and persons other than the taxpayer, individually considered, used in the production of the income and other risks of the business regarding such goods, or due to actions or omissions of such persons, such as fire and www.lexmundi.com Page 455 © 2012 Lex Mundi related risks, civil responsibility risks, risks related to personnel during works and risks to such personnel pursuant to collective work agreements.  Advertising and publicity expenses caused or paid within the taxable year, made for the benefit of the taxpayer making the payment.  Research and development expenses actually paid within the taxable year, made for the benefit of the taxpayer making the payment.  Payments made by companies to their directors, managers, administrators or other employees as a reimbursement of representation expenses, provided that such expenses are individually supported by the respective vouchers and are made for the benefit of the company making the payment.  All other caused or paid expenses, as the case may be, normal and necessary, made in the country in order to produce the income

Individuals

 Amounts paid to educational institutes in the country, for the education of the taxpayer and the descendants of the taxpayer under twenty five (25) years of age. Such age limit shall not be applied to the cases of special education.  Amounts paid by the taxpayer to companies domiciled in the country for health and medical insurance premiums.  Amounts paid for medical, dental and hospitalization services, rendered in the country to the taxpayer and any persons under the care of the taxpayer, specified in Article 62.  Amounts paid for interest installments in the cases of loans obtained by the taxpayer for the acquisition of his main residence or any amount paid for the lease of the house that is his permanent place of residence. The authorized reduction may not be higher than one thousand Tax Units (1,000 T.U.)for each year in the case of interest installments for loans obtained by the taxpayer for the acquisition of his main residence or eight hundred Tax Units (800 T.U.) for each year for the case of amounts paid for the lease of the house that is his permanent place of residence.

5. What are the major expenses that are not deductible?

Business Entities

In the particular case of Permanent Establishments (branches amongst others), payments made to a related party regarding royalties, professional fees, technical assistance or any analogue payment concerning the use of patents or any other right or, any payment considered a commission, may not be deducted from the taxable basis

6. What are the applicable federal rates?

Business Entities

Taxable Income (in Tax Units) Tax Rate Less than 2,000 15.00% From 2,000 to 3,000 22.00% More than 3,000 34.00%

Individuals

www.lexmundi.com Page 456 © 2012 Lex Mundi Taxable Income (in Tax Units) Tax Rate Up to 1,000 6.00% From 1,000 to 1,500 9.00% From 1,500 to 2,000 12.00% From 2,000 to 2,500 16.00% From 2,500 to 3,000 20.00% From 3,000 to 4,000 24.00% From 4,000 to 6,000 29.00% Over 6,000 34.00%

* Tax Unit (U.T. for its acronym in Spanish) 2008=Bs. 46.00 (US$ 21.4)

7. What are the applicable state and/ or other local rates?

Not applicable.

8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc?

Dividends are subject to income tax when the gross income exceeds the taxed net income, such portion will be the taxable basis of the income tax. A proportional 34% rate applies.

9. How are operating losses handled?

Business Entities

Operating losses may be pushed forward for three fiscal periods.

Individuals

Not applicable.

10. How are capital losses handled?

Business Entities

Capital losses may only be pushed forward to the next fiscal period.

Individuals

Not applicable.

Territorial Rules

11. What are the residence rules?

Business Entities

Individuals

Every individual, whether a resident of Venezuela or domiciled in Venezuela, shall pay taxes on income from any origin, whether the cause or source of the income is located inside or outside the country. Non-resident or non domiciled individuals shall be subject to income tax when the source or cause of their income is in or occurs within the country. Individuals domiciled in or residents of foreign countries with a permanent establishment or fixed place of business in the country, shall be taxed exclusively with respect to income of a national or foreign source attributable to such permanent establishment or fixed place of business

12. Is worldwide income taxed?

Yes, as long as the individual and corporations are considered Venezuelan tax resident.

13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others?

Business Entities

Yes, the Income Tax Law establishes that any entity taxable in Venezuela may deduct from the payable income tax in the country, the income tax paid abroad. However, if the amount paid abroad exceeds the payable amount in Venezuela, the amount paid in excess will not be credited.

Withholding Taxes

14. What are the rates on dividends for withholding taxes?

A proportional 34% paid over the difference between the net taxable profit and the gross income.

15. What are the rates on royalties for withholding taxes?

The withholding rate could be up to 34% of 90% of the gross income generated by the royalty.

16. What are the rates on interest for withholding taxes?

For loans granted by financial institutions the withholding rate is 4.95%.

The interest paid to entities different from financial institutions not domiciled in Venezuela from capital invested in the production of income, is subject to a withholding rate which will be calculated by applying the formula in IB(1).

17. What are the rates of withholding tax on profits realized by a foreign corporation?

The same rules for rate calculation as for local companies apply.

18. Please list any other rates on withholding taxes that we should be aware of.

None.

19. What is the taxable reporting period?

Business Entities

The Venezuelan Income Tax Law establishes that the estimated tax return must be filed, when applicable, 6 months after the beginning of the fiscal year and; the definitive income tax return must be filed within 3 months after the closing of the tax payer’s fiscal year.

Individuals

Within the first 3 months of the fiscal year which ends by December 31st

20. What are the due dates for the filing of tax returns?

Business Entities

Companies’ fiscal year is established in their by-laws and income tax return must be filed within 3 months after the fiscal year’ closing, for this reason, there’s no specific due date for filing of tax return.

Individuals

Tax return must be filed before March 31st.

21. What are the key compliance requirements?

The return must be filed before an authorized official at a National Funds Reception Offices (Oficinas de Recepción de Fondos Nacionales).

22. Are there any other requirements that we should be aware of regarding tax returns and compliance?

None.

INDIRECT TAXES

23. Are there any indirect taxes in your jurisdiction?

Yes.

24. How does it operate? Is it a VAT or a sales tax?

It is a Value Added Tax for real estates transfers, services provision and imported goods.

25. How is the taxable base determined?

Real Estate: The taxable base of the VAT is the invoiced price of the real property.

Tobacco and Alcohol: The taxable base of the VAT is the selling price of the tobacco or alcohol.

Imported Goods: The taxable base of the VAT is the custom’s value of the imported good.

Service Provision: The taxable base of the VAT is the invoiced price of the service provision.

26. What are the applicable rates?

The applicable rate is 9%.

27. Are there any exemptions?

Yes, the Law establishes the following exemptions:  Exempt imports:  Imports of exempt goods  Imports made by consuls and diplomats  Imports made by international organizations in which Venezuela is part  Imports made by exempt institutions that have signed a international treaty  Imports made by passengers in transit  Imports made by immigrants under a special law  Imports of foreign donations  Imports of bills and coins made by the Central Bank of Venezuela  Imports of medical equipment and supplies made by public institutions  Imports made in specific free ports

 Exempt selling goods:  Food and products for human consume, such as seeds, chickens, eggs, among others  Fertilizers  Medicines and its components  Fuel and its additives  Medical supplies such as wheelchairs, prosthesis, artificial organs, among others  Newspapers and its paper  Books and magazines and its paper  Corn used in food production for humans and animals  Oils for human consume  Concentrate food for animals  Soy

 Exempt provision of the following services:  Non air transportation  Ground transportation of some exempt goods  Private education  Students, elderly and handicap accommodation  National parks, zoos and museum tickets  Health, dental, surgery and hospitalization services  Show tickets with a price lower than 2 U.T. (Bs.F 92,00)  Cafeteria food service for education, workers and employees.  Residential electricity supply  Public phones service  Residential gas supply  Fuel transportation service

28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction?

No.

29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)?

Yes, there are contributions for social security and, science and technology.

30. How do they operate?

Social Security contribution: It is to be paid monthly to the Venezuelan Institute of Social Security (IVSS for its acronym in Spanish). Science Technology and Innovation contribution: The return must be filed on the same date as the income tax return before the National Observatory of Technology through their web-site.

31. How is the taxable base determined?

Social Security contribution: The employee’s monthly payment. Science Technology and Innovation contribution: The company’s gross income for the prior fiscal period.

32. What are the applicable rates?

Social Security contribution: 4% for the employee and between 9% and 13% to the employer.

Science Technology and Innovation contribution: Rates may vary between 0.5% and 2% depending on the company’s activities.

33. Are there any exemptions?

No.

INHERITANCE AND GIFT TAXES

34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.?

Yes.

35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base.

The income received by the beneficiary due to the inheritance or donation.

Taxable base is calculated by taking the value of the assets minus the amount of the pending obligations, prior to the death of the benefactor.

OTHER MATTERS

36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.?

Yes there are.

www.lexmundi.com Page 461 © 2012 Lex Mundi 37. If so, please indicate if there are any of the following: anti-deferral regimes; transfer pricing provisions; tax avoidance measures like legislated General Anti-Avoidance Rules, etc.; controlled foreign companies regulations; thin capitalization rules

There are no anti-deferral regimes.

There are transfer pricing provisions. Venezuela Income Tax Law sets forth that related parties must determine their income and expenses derived from cross border operations in compliance with the arms length conditions regime.

There are tax avoidance measures.

There are no controlled foreign companies regulations.

There are thin capitalization rules. Article 118 of the Venezuelan Income Tax Law sets forth a limitation of the deductibility of interest paid to related parties to the extent that debts assumed between related parties that exceed from the annual media net equity will be considered as part of the net equity for income tax purposes.

Germany, Barbados, Belgium, Canada, Cuba, China, Korea, Denmark, Spain, United States, France, Indonesia, Iran, Italy, Kuwait, Norway, Netherlands, United Kingdom, Portugal, Check Republic, Switzerland, Sweden and Trinidad & Tobago

Country Technical Assistance Technological Services Royalties Dividends Interests Effective tax rate Effective tax rate 17% Effective tax rate 34% /amount 10,2 % (appox) (appox) 15 % - 34% on 30,6% (appox) exceeding net taxed Venezuela 15 % - 34% on 30% 50% Gross income 15 % - 34% on 90% income 4,95 % - 34% Gross income Gross income 5% When 15% Capital Germany Taxed EB Up to 5 % Up to 5 % Up to 5 % 15% other cases

5% When 5% Capital 5% Financial Institutions Barbados Up to10 % Up to10 % Up to10 % 10% other cases 15% other cases

5% When 25% Capital Belgium Taxed as EB Taxed as EB Up to 5 % Up to10 % 15% other cases

10% When 25% Capital Canada Up to 5 % Up to 5 % Up to10 % Up to10 % 15% other cases

5% When 10% Capital 5% Financial Institutions China Up to10 % Up to10 % Up to10 % 10% other cases 10% other cases

5% When 10% Capital 5% Financial Institutions Korea Up to10 % Up to10 % Up to10 % 10% other cases 10% other cases

10% When 25% Capital 5% Financial Institutions Cuba Up to10 % Up to10 % Up to10 % 15% other cases 10% other cases

5% When 25% Capital Denmark Up to 5 % Up to10 % Up to10 % Up to 5 % 15% other cases Exempted When 25% 4,95 % Financial Spain Taxed as EB Up to 5 % Up to 5 % Capital Institutions 10% other cases 10% other cases 5 % When 10% Capital United States Taxed as EB Up to 10 % Up to 5 % Up to 10 % 15% other cases Exempted When 20% France Taxed as EB Taxed as EB Up to 5 % Capital Up to 5 % 5 % other cases 10% When 10% Capital Indonesia Up to 10 % Up to 20 % Up to 20 % Up to10 % 15% other cases www.lexmundi.com 5 % When 15% Capital Page 462 Iran Up to 5 % Up to 5 % Up to 5 % Up to 5 % © 2012 Lex Mundi 10% other cases

Italy Up to 10 % Up to 10 % Up to 7 % Up to 10 % Up to 10 %

5 % When 10% Capital 5% Financial Institutions Norway Up to 9 % Up to12 % Up to12 % 15% other cases 15% other cases

Exempted When 25% Netherlands Up to 5 % Up to 5 % Up to 10 % Capital Up to 5 % 10 % other cases

Portugal Up to10 % Up to12 % Up to12 % Up to10 % Up to10 %

Exempted When 10% U. Kingdom Up to 5 % Up to 5 % Up to 7 % Vote Rights Capital Up to 5 % 10 % other cases 5 % When 25% Capital Sweden Up to 7 % Up to 7 % Up to 10 % Up to 10 % 10% other cases

5 % When 25% Capital Switzerland Taxed as EB Up to 5 % Up to 10 % Up to 5 % 15% other cases

5 % When 25% Capital Trinidad /Tob Up to10 % Up to10 % Up to10 % Up to 15 % 10% other cases

Contact Information:

Francisco Castillo Hoet Pelaez Castillo & Duque [email protected] Centro San Ignacio, Torre Kepler Av. Blandín, La Castellana Caracas, 1060 Venezuela

Tel 58.212.201.8611 Fax 58.212.263.7744 http://www.hpcd.com