ICLGThe International Comparative Legal Guide to: Corporate Tax 2018 14th Edition A practical cross-border insight into corporate tax work

Published by Global Legal Group, with contributions from:

Arqués Ribert Junyer Advocats Maples and Calder Avanzia Taxand Limited Mayer Brown International LLP Baker Tilly Klitou and Partners MIM Law Business Services EOOD Nagashima Ohno & Tsunematsu Blackwood & Stone LP P+P Pöllath + Partners Blake, Cassels & Graydon LLP SBH Law Office Boga & Associates Schindler Attorneys Cases & Lacambra Sele Frommelt & Partners Attorneys at Law Ltd. Čipčić-Bragadin and Associates Slaughter and May in cooperation with Tax Advisory TUK Ltd. SMPS Legal Concern Dialog law firm SSH Advisors Dobrinescu Dobrev SCA Stavropoulos & Partners Law Office Domański Zakrzewski Palinka T. P. Ostwal & Associates LLP, Chartered Accountants Greenwoods & Herbert Smith Freehills Tirard, Naudin K&D Law Firm Totalserve Management Limited Lenz & Staehelin VdA Vieira de Almeida LEX Law Offices Wachtell, Lipton, Rosen & Katz Ludovici Piccone & Partners Waselius & Wist The International Comparative Legal Guide to: Corporate Tax 2018

General Chapters:

1 Fiscal State Aid: the Kraken Wakes? – William Watson, Slaughter and May 1

2 The Implications for UK Taxpayers of BEPS Actions 2 (on Hybrid Mismatches), 4 (on Interest Deductibility) and 6 (on Treaty Access) – Sandy Bhogal & Kitty Swanson, Mayer Brown International LLP 6

Contributing Editor Country Question and Answer Chapters: William Watson, Slaughter and May 3 Albania Boga & Associates: Alketa Uruçi & Andi Pacani 12

Sales Director 4 Andorra Arqués Ribert Junyer Advocats: Daniel Arqués i Tomàs & Florjan Osmani Mireia Ribó i Bregolat 17

Account Director 5 Angola VdA Vieira de Almeida: Samuel Almeida & Joana Lobato Heitor 24 Oliver Smith 6 Armenia Concern Dialog law firm: Rustam Badasyan 30 Sales Support Manager Toni Hayward 7 Australia Greenwoods & Herbert Smith Freehills: Adrian O’Shannessy & Tony Frost 35 Editor 8 Austria Schindler Attorneys: Clemens Philipp Schindler & Martina Gatterer 44 Nicholas Catlin Senior Editors 9 Belarus SBH Law Office: Anastasiya Malakhova & Evgeniya Starosotnikova 52 Suzie Levy 10 Bulgaria Baker Tilly Klitou and Partners Business Services EOOD: Svetla Marinova Caroline Collingwood & Svetlana Dermendjieva 59 Chief Operating Officer 11 Canada Blake, Cassels & Graydon LLP: Zvi Halpern-Shavim & Shavone Bazarkewich 65 Dror Levy Group Consulting Editor 12 Croatia Čipčić-Bragadin and Associates in cooperation with Tax Advisory TUK Ltd.: Alan Falach Silvije Čipčić-Bragadin & Edo Tuk 71 Publisher 13 Cyprus Totalserve Management Limited: Petros Rialas & Marios Yenagrites 75 Rory Smith 14 Finland Waselius & Wist: Niklas Thibblin & Mona Numminen 81 Published by Global Legal Group Ltd. 15 France Tirard, Naudin: Maryse Naudin & Jean-Marc Tirard 87 59 Tanner Street 16 Germany P+P Pöllath + Partners: Michael Best & Nico Fischer 95 London SE1 3PL, UK Tel: +44 20 7367 0720 17 Greece Stavropoulos & Partners Law Office: Ioannis Stavropoulos & Fax: +44 20 7407 5255 Vasiliki Koukoulioti 103 Email: [email protected] URL: www.glgroup.co.uk 18 Iceland LEX Law Offices: Garðar Víðir Gunnarsson & Guðrún Lilja Sigurðardóttir 110

GLG Cover Design 19 India T. P. Ostwal & Associates LLP, Chartered Accountants: T. P. Ostwal & F&F Studio Design Siddharth Banwat 116

GLG Cover Image Source 20 Ireland Maples and Calder: Andrew Quinn & David Burke 123 iStockphoto 21 Italy Ludovici Piccone & Partners: Paolo Ludovici & Stefano Tellarini 129 Printed by Ashford Colour Press Ltd 22 Japan Nagashima Ohno & Tsunematsu: Shigeki Minami 136 November 2017 23 Kazakhstan SSH Advisors: Safkhan Shahmammadli & Jahangir Juraev 144 Copyright © 2017 Global Legal Group Ltd. 24 Kosovo Boga & Associates: Andi Pacani & Fitore Mekaj 151 All rights reserved No photocopying 25 Liechtenstein Sele Frommelt & Partners Attorneys at Law Ltd.: Heinz Frommelt 156

ISBN 978-1-911367-83-3 26 Malta Avanzia Taxand Limited: Walter Cutajar & Mary Anne Inguanez 162 ISSN 1743-3371 27 Mexico SMPS Legal: Ana Paula Pardo Lelo de Larrea & Alexis Michel 170 Strategic Partners 28 Mozambique VdA Vieira de Almeida: Samuel Almeida & Ana Raquel Costa 177

29 Nigeria Blackwood & Stone LP: Kelechi Ugbeva 183

30 Poland Domański Zakrzewski Palinka: Joanna Wierzejska & Tomasz Leszczewski 188

31 Portugal VdA Vieira de Almeida: Samuel Almeida & Bárbara Miragaia 195

32 Romania Dobrinescu Dobrev SCA: Luisiana Dobrinescu 201

33 Serbia MIM Law: Tanja Ungura 207

Continued Overleaf

Further copies of this book and others in the series can be ordered from the publisher. Please call +44 20 7367 0720

Disclaimer This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.

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Country Question and Answer Chapters:

34 Spain Cases & Lacambra: Ernesto Lacambra & Marc Montserrat 212

35 Switzerland Lenz & Staehelin: Pascal Hinny & Jean-Blaise Eckert 218

36 Turkey K&D Law Firm: Murat Bal & Ezgi Kumas 228

37 United Kingdom Slaughter and May: Zoe Andrews & William Watson 235

38 USA Wachtell, Lipton, Rosen & Katz: Jodi J. Schwartz & Swift S.O. Edgar 244

EDITORIAL

Welcome to the fourteenth edition of The International Comparative Legal Guide to: Corporate Tax. This guide provides the international practitioner and in-house counsel with a comprehensive worldwide legal analysis of the laws and regulations of corporate tax. It is divided into two main sections: Two general chapters, offering an insight into fiscal state aid from an EU perspective, and the implications of the BEPS Actions for the UK. Country question and answer chapters. These provide a broad overview of common issues in corporate tax laws and regulations in 36 jurisdictions. All chapters are written by leading corporate tax lawyers and industry specialists and we are extremely grateful for their excellent contributions. Special thanks are reserved for the contributing editor William Watson of Slaughter and May for his invaluable assistance. Global Legal Group hopes that you find this guide practical and interesting. The International Comparative Legal Guide series is also available online at www.iclg.com.

Alan Falach LL.M. Group Consulting Editor Global Legal Group [email protected] Chapter 1

Fiscal State Aid: the Kraken Wakes?

Slaughter and May William Watson

Introduction Why is State Aid Relevant to Tax?

The international tax arena has become increasingly fraught, for Article 107(1) of the Treaty on the Functioning of the European multinationals in particular. The OECD’s “BEPS” project is the Union provides that “any aid granted by a Member State or through most obvious example of this trend, encouraging the introduction State resources in any form whatsoever which distorts or threatens of new restrictions and anti-avoidance measures in most major to distort competition by favouring certain undertakings or the jurisdictions outside the US; see the next piece for a discussion of production of certain goods shall, in so far as it affects trade between some of the more significant rules brought in by the UK. But I Member States, be incompatible with the internal market”. should like to use this article to examine a rather different challenge, Cash subsidies are an obvious example, but aid can also involve the full extent of which is only beginning to be appreciated. the state foregoing revenue to which it would otherwise be entitled, I refer to the burgeoning enthusiasm of the European Commission for example through tax exemptions and reliefs. A Member State’s for the application of “state aid” principles to the tax legislation and tax practices can fall foul of the state aid regime in a number of tax rulings of EU Member States. The establishment of a Task Force ways, most commonly through (a) legislative measures that favour on Tax Planning Practices in 2013 appears to have triggered a step particular economic sectors, categories of undertakings or regions, change in enforcement, but it was only with the “Luxleaks” in late or (b) discretionary tax rulings that favour individual undertakings. 2014 (see further below) that the issue really came to prominence. Recent decisions and trends relating to these two forms of fiscal aid Under the energetic direction of Margrethe Vestager, the EU are discussed separately below. commissioner in charge of competition policy, the Commission has Case law of the EU courts has established that there is unlawful state now challenged legislation or rulings in multiple Member States aid, including unlawful fiscal aid, if: and has ordered tax authorities to recover many millions (or in one ■ an economic advantage is provided to an undertaking; case billions) of euros’ worth of back taxes from taxpayers who are ■ it is provided by a Member State and financed through state said to have benefited from unlawful state aid. And while cross- resources; border activity is not a necessary element of any state aid enquiry, in practice multinationals have been the target. ■ it is “selective” in favour of a particular undertaking or category of undertakings or in favour of a particular category This is not in fact an entirely new development. Although Member of goods; and States are meant to enjoy sovereignty over the design of their direct ■ it distorts or threatens to distort competition and affects trade taxation systems, there have over the years been a few instances between Member States. in which particular legislative features have fallen foul of the In cases of alleged state aid concerning legislative measures or prohibition on state aid. But a trickle is threatening to turn into rulings in the tax sphere, it is the selectivity and economic advantage a flood. Taxpayers (and tax authorities) would certainly say that requirements, respectively, that cause the most difficulty. The recent decisions of the Commission, and of the EU courts on second and fourth elements tend to be uncontroversial. Legislative appeal, are widening the ambit of state aid and encroaching on fiscal measures and tax rulings are, by definition, provided by the state autonomy. The Commission has been accused of treating its state and financed out of state resources (whether at national or local aid investigations as a tax policy tool – part of a coordinated EU- level); and if they are selective, they will invariably strengthen the wide response to perceived corporate tax avoidance – rather than a position of one category over another with the potential to distort means of enforcing existing state aid rules. And to American eyes competition. the more aggressive approach can look very like a tax grab by the EU. For cases involving discretionary rulings, the pertinent issue is often whether tax authorities have provided an individual undertaking Fiscal state aid also presents new challenges for advisers. They with an advantage that diverges from the “normal” practice of the must have expertise in both big-ticket tax litigation and, of course, Member State, thereby providing an “economic advantage”. In in the principles of state aid – usually the province of a competition cases involving legislative measures such as tax reliefs, the measure lawyer. But detailed knowledge of the relevant domestic tax system clearly exists to convey some sort of economic advantage and the is rather less important, indeed Slaughter and May is currently case typically turns on whether that advantage is “selective” in favour advising from London on a case that has no connection with UK tax. of any sufficiently clear and definable category of undertakings.

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specified activity, in a particular EU jurisdiction. Many Member Investigations and Appeals Process States have introduced such regimes over the years in the name of tax competition. Member States are required to notify the Commission of any proposal to grant aid that may be incompatible with EU state aid One notable example is Belgium. It gave favourable treatment to rules, and to wait for the Commission’s approval before putting “Belgian Coordination Centres” until a state aid challenge forced any such proposal into effect. Notification triggers a preliminary it to scrap the regime. It then brought in the “notional interest investigation period during which the Commission has two months deduction”, but that has been of limited value in an era of very low to determine whether the proposal constitutes state aid, and if so, interest rates, and it also has an “excess profit” exemption. whether the aid is nonetheless compatible with EU rules because The last of these could be seen as favouring (and designed to its positive effects outweigh the distortion of competition. If favour) Belgian companies that are part of multinational groups. serious doubts remain as to the compatibility of the measure, the The Commission announced in January 2016 that it regarded the Commission must open an in-depth investigation. exemption as providing a selective tax advantage that amounted If the Commission becomes aware of aid having been granted without to unlawful state aid. Belgium has therefore been told to recover its prior approval, it will follow a similar investigation procedure the exempted tax from the groups concerned. In response, it has and may issue a negative decision ordering the Member State to introduced retrospective legislation aimed at doing just that and this recover the unpaid amount, plus interest, from the beneficiaries of is now being challenged by the relevant taxpayers. the aid. State aid can be recovered up to 10 years after it has been The UK has also been an enthusiastic tax competitor and, just as the awarded, and this clock can be “paused” by certain acts taken by the finishing touches were being added to this article, the Commission Commission, such as requests for information. announced that it was launching an in-depth investigation into an A negative decision can be appealed by the Member State to which aspect of the UK’s regime for taxing controlled foreign companies it is addressed or any interested person (such as a beneficiary of the (“CFCs”). As part of a complete overhaul of this regime a few years aid) by application to the EU courts for annulment. An application ago, the UK brought in a “partial finance company exemption” can be made, for example, on grounds of error of law or manifest which can effectively exempt from the CFC charge 75% of the error of facts, and will be considered by the General Court (the court interest paid to an offshore subsidiary by another member of the of first instance) and/or the Court of Justice (“CJEU”) (the highest group, so long as the payer is also offshore. The Commission says it “has doubts” as to whether this exemption complies with state EU court). (Decisions of the General Court are denoted with the aid rules. prefix “T-” and decisions of the CJEU are denoted with the prefix “C-”, with the suffix “P” if they are appeals from the General Court.) As an aside, I would note that escaping the prohibition on state aid is However, applying for annulment of a Commission decision does one of the benefits cited by fervent supporters of Brexit. Somehow I not automatically release the Member State from its obligation do not expect this particular example to loom large in their rhetoric. to implement the recovery order. For the beneficiary company, therefore, the financial consequences of a negative Commission GFKL decision are potentially severe. Competitive tax regimes may be the obvious target but it is becoming Tax Legislation as a Form of State Aid clear that the Commission believes the state aid principle has a broader remit in the tax sphere. The recent case of GFKL (T 620/11) As noted, investigations which concern legislative measures suggests that it has the potential to catch legislative measures that usually turn on whether the advantage granted by such legislation is are commonplace in many Member States. “selective” in favour of any sufficiently clear and definable category GFKL concerns a state aid challenge to a provision of German of undertakings. In determining whether a particular legislative law that was designed to support companies in financial difficulty. measure is “selective”, the Commission generally applies a three- Under German law, losses incurred in previous tax years can be step test: carried forward to future tax years (the “Carry Forward Rule”). To ■ First, it identifies the “system of reference”. This is the discourage loss-buying (the purchasing of loss-making companies “normal” tax position in the relevant Member State. to access their historic losses), German law also states that a loss- ■ Second, it determines whether the relevant measure making company will automatically forfeit its ability to carry “derogates” from the system of reference in favour of a forward fiscal losses if it is subject to a significant change in control certain category of undertakings or goods as compared to (the “Forfeiture Rule”). However, there is an exception to the other undertakings or goods that are in a similar factual and Forfeiture Rule to permit the acquisition and rescue of companies legal situation. If a derogation exists, the Commission will in financial difficulty. Losses can be carried forward in spiteof draw the conclusion that the measure is prima facie selective. a significant change of control if the company in question isin ■ Third, it determines whether the derogation is nevertheless “distress” (the “Restructuring Clause”). justified by the nature or general scheme of the system of In applying the three-stage test, the General Court identified the Carry reference. Only objectives inherent to the tax system (such as Forward Rule, rather than the Forfeiture Rule, as the correct scheme preventing fraud, tax evasion or double taxation) can be relied of reference. It found that all companies which have undergone upon to justify a prima facie selective tax measure. Extrinsic objectives (such as maintaining employment) cannot form a a change of control, whether in financial distress or not, are in a basis for possible justification. comparable factual and legal situation, but that the Restructuring Clause derogated from the system of reference in favour only of those companies in financial distress. The General Court also Special tax regimes confirmed that supporting companies in financial difficulty was not an objective intrinsic to a tax system (it sought to achieve a different The obvious target would be a tax regime which encourages policy objective from that of merely ensuring the implementation corporate taxpayers to establish themselves, or to carry on some of the tax system itself) and therefore did not justify the derogation.

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GFKL is currently under appeal to the CJEU and will be of concern problematic in themselves, tax rulings can constitute unlawful state to Member States across the EU, many of which have tax measures aid when they confer an economic advantage and are not approved in place designed to assist companies facing insolvency; the UK, for by the Commission prior to being issued. example, gives preferential treatment under its “loan relationship” (corporate debt) rules to companies in distress. It is also difficult The “Luxleaks” to see how the Restructuring Clause can be described as “selective” when most, if not all, companies are clearly capable of being in financial distress. Tax rulings granted to major multinationals have been attracting considerable public and political attention in recent years, especially The CJEU has never been sympathetic to that argument. It does not against the backdrop of constrained public budgets. The controversy matter how broad the favoured category of undertakings or goods was amplified by the leaking, on 5 November 2014, of several is: if a measure is not available to all types of business, it is likely to hundred tax rulings issued by the Luxembourg tax authorities in contravene state aid rules. Thus in the seminal case of Adria-Wien respect of over 300 companies. Since then the Commission has Pipeline (C-143/99), the CJEU held that a rebate from energy taxes concluded several in-depth investigations, targeting tax rulings entailed selective aid to the entire manufacturing sector because issued by Ireland (to Apple), the Netherlands (to Starbucks) and it was available only to undertakings whose activity consisted Luxembourg (to Fiat and, most recently, Amazon). The largest claim primarily of the production of goods. Similarly in Gibraltar to date relates to Apple: in August 2016, the Commission ordered (C-106/09 P), it was held that a proposed new tax regime which Ireland to recover up to €13 billion, plus interest, from Apple. favoured offshore companies was selective aid even though the Ireland has not done so and on 4 October 2017 the Commission offshore sector comprised over 99% of undertakings in Gibraltar. referred it to the CJEU for failure to implement the recovery order. Most of the Commission’s tax ruling investigations have concerned Santander/World Duty Free transfer pricing arrangements. Thus in Apple, Fiat, Starbucks and Amazon, the Commission is contending that the rulings endorsed In fact, the CJEU has now confirmed that the state aid rules may intra-group pricing that departed from the conditions that would apply even to those measures that are, in principle, open to all have prevailed between independent operators; in other words, the companies. This emerged from its decision at the end of 2016 in Commission is saying that the pricing does not comply with the the joined cases of Santander (C-20/15 P) and World Duty Free arm’s-length principle. In its case law, the CJEU has held that if (C-21/15 P). The cases concerned a Spanish tax provision which the method of taxation for intra-group transactions does not comply gave Spanish companies acquiring a shareholding of at least 5% with the arm’s-length principle, it provides an economic advantage of a non-Spanish company a tax deduction for amortisation of to one company. goodwill. No such tax relief was available for a Spanish company Of course national tax administrations have long taken an interest in acquiring a shareholding in a local company. The General Court multinationals’ cross-border pricing arrangements, and in this respect had found that the tax relief was not selective, and not therefore there is an intriguing angle to the Amazon case. The Commission state aid, because it was not restricted to a particular category of has told Luxembourg to reclaim €250m relating to what it says business or the production of any particular category of goods, but was an unlawful tax ruling given in 2003 (then confirmed in 2011) was potentially available to all Spanish companies that wanted to which concerned a royalty payable by a Luxembourg subsidiary. acquire shareholdings of at least 5% in foreign companies. Meanwhile, the Internal Revenue Service (“IRS”) has launched a The CJEU, however, overturned this decision and referred the conventional inquiry into the US end of the same arrangements; it case back to the General Court. It held that, in demonstrating the lost at first instance but in September 2017 it filed an appeal. The selectivity of a legislative measure, it was not necessary for the IRS is claiming more than four times as much as the Commission Commission to identify a particular category of undertakings that has said should be repaid by Amazon to Luxembourg. But the exclusively benefited from that measure. The relevant measure was media is more focused on Margrethe Vestager’s perceived crusade “selective” simply by virtue of discriminating between undertakings against US-headed multinationals, so to date it is the Commission’s which hold 5% of a foreign company and undertakings which hold demand that has made the news. 5% of a Spanish company, when those undertakings are otherwise in a comparable factual and legal situation. Santander and World Duty Free essentially merged the three-step analysis into one question: McDonald’s and Engie does the measure place the recipient in a more favourable position than entities in a comparable factual and legal situation in light of The Commission’s two most recent investigations are of particular the general goals of the reference system? This in turn raises another interest because they imply a broadening of the Commission’s important question: to what extent are different situations factually enforcement efforts in the area of tax rulings, similar to that seen and legally “comparable”? On this question, both the Commission with legislative measures. and the CJEU seem clear in their view that this is always a decision On 3 December 2015, the Commission opened a formal investigation for the EU rather than individual Member States. into two tax rulings given by Luxembourg to McDonald’s. It considered that one of them constituted unlawful state aid because Tax Rulings as a Form of State Aid it exempted the US branch of McDonald’s Luxembourg subsidiary from local tax under the US/Luxembourg double tax treaty, despite While these challenges to tax legislation are perhaps the most such profits also being exempt from US tax under US law. The concerning, at least from a UK perspective, it is the Commission’s profits were derived from royalties paid by European franchisee pursuit of tax rulings given by Member State tax authorities that has restaurants to the Luxembourg subsidiary for the right to use captured the headlines. the McDonald’s brand and associated services. They were then transferred internally to Luxco’s US branch. Tax rulings are common practice throughout the EU. They are effectively comfort letters which give the requesting companies This is the first time the Commission has challenged a Member clarity on how their tax liabilities will be calculated. Although not State’s application of a double tax treaty under the state aid rules.

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A key issue will be whether McDonald’s economic advantage arose legislation that is, in principle, open to all companies. It is also out of a unilateral act of Luxembourg (thus constituting state aid), moving beyond the focus on transfer pricing, with challenges to tax or was the result of a disparity between the Luxembourg and US rulings that have been relied on for intra-group financing (Engie) tax regimes. and the structuring of IP holdings (McDonald’s). Then on 19 September 2016, the Commission launched an investigation into tax rulings given by Luxembourg to Engie Implications (formerly GDF Suez) in respect of certain intercompany zero- interest convertible loans. According to the Commission, the rulings All seven of the Commission’s investigations into tax rulings treated the convertible loans inconsistently, as both debt and equity, commenced in the last four years, so it is unlikely that the risk of a which gave rise to double non-taxation and hence an economic state aid challenge was fully evaluated when relevant transactions advantage that was not available to other groups subject to the same were entered into. Multinationals in particular will be taking national taxation rules in Luxembourg. The rulings allowed the another look at historic tax rulings and, alongside BEPS, the state borrowers to make provision in their accounts for interest payments aid regime will be an important factor in determining their future (without actually paying any interest) and to deduct such imputed arrangements. It is perhaps noteworthy that Apple, Amazon, Apple, amounts as expenses, while at the same time lenders could avoid Fiat and McDonald’s have all built up their operations in the UK tax on their profits because income on equity investments (which since investigations began. In 2014, Starbucks moved its European the loans would convert into) was exempt from taxation under head office from Amsterdam to London and Fiat merged into Fiat Luxembourg law. Chrysler, with headquarters in the UK. Amazon and Apple have The Commission claimed that the Luxembourg tax authority “failed both unveiled plans for new offices in London and, in late 2016, to invoke established accounting principles”, yet there seems little McDonald’s announced that it was unwinding its Luxembourg tax doubt that, in fact, the accounting used by debtor and creditor structure and returning its European royalties business to the UK. complied fully with the applicable principles. The McDonald’s and Engie investigations are a reminder that state Legitimacy aid enquiries are not limited to rulings on transfer pricing. Affected areas could include, for example, rulings on the qualification of There is also a fundamental question of tax policy and fairness here. hybrid entities (transparent or opaque), hybrid instruments (debt or The Commission’s state aid investigations are taking place in the equity, as in Engie), and other perceived “mismatch” arrangements. context of a global push against perceived corporate tax avoidance Rulings are more likely to be challenged if they involve some sort by multinationals; many commentators argue that, at least in some of factual determination by the tax authorities and especially if they instances, multinationals are not paying enough taxes and are concern structures with potential for what the tax world now knows exploiting mismatches between national tax laws to lower their tax as base erosion and profit shifting. bill. I would query, however, whether state aid is an appropriate tool Significantly, in Engie, the Commission also suggested that a for dealing with such mismatches. Member State could contravene state aid rules without making a There are several obvious objections. Seeking retroactive recovery tax ruling at all: it was enough in that case that Luxembourg failed of unpaid taxes strikes a serious blow to the principle of certainty to challenge the relevant transactions under its general anti-abuse in law. Moreover, it is not clear why the Commission should be rule (“GAAR”). It remains to be seen whether the Commission will intervening in the allocation of multinationals’ profits between pursue, or indeed the CJEU will accept, the proposition that merely countries, when the countries themselves are not. For example, accepting a company’s tax return could amount to unlawful state neither Ireland nor the US welcomed the Apple investigation. The aid. The charge of “selectivity” is also surprising given that, at the US government has made no secret of its opposition to the decision time, Luxembourg had only invoked its GAAR once in the 60 or and, despite the prospect of a €13 billion windfall, Ireland is more years since its introduction. appealing the Commission’s recovery order. The Irish government recognises that Ireland’s allure for foreign investors is based to a Conclusion significant extent on a tax system that is both competitive and predictable and, to quote the then Irish Finance Minister, “to do The application of the EU state aid regime to tax is a rapidly anything else [but appeal] would be like eating the seed potatoes”. developing area and many unknowns remain. There is a clear trend, For maximum legitimacy, reform in this area should be transparent however, towards greater European interference in the tax regimes and forward-looking, and come through consensus-building at the of Member States and this warrants close scrutiny. The Commission international level. That is of course exactly what the BEPS project has expanded the application of state aid rules to encompass tax seeks to achieve.

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William Watson Slaughter and May One Bunhill Row London, EC1Y 8YY United Kingdom

Tel: +44 20 7090 5052 Email: [email protected] URL: www.slaughterandmay.com

William joined Slaughter and May in 1994 and became a partner in the Tax Department in 2004. His practice covers all UK taxes relevant to corporate and financing transactions. Particular areas of interest include real estate and the oil & gas sector; however, William also has extensive experience more generally of mergers & acquisitions, demergers and other corporate structuring, debt and equity financing and tax litigation. William is listed as a leading individual in the Tax section of Chambers UK, Chambers Europe and Chambers Global, 2017. He is also listed in the International Tax Review’s ‘Tax Controversy Leaders Guide 2017’ and is recommended for corporate tax in The Legal 500, 2017.

Slaughter and May is a leading international law firm with a worldwide corporate, commercial and financing practice. Our highly experienced Tax group deals with the tax aspects of all corporate, commercial and financial transactions. We provide pan-European tax advice via the Best Friends Tax Network.* Alongside a wide range of tax-related services, we advise on: ■■ structuring of the biggest and most complicated mergers & acquisitions and corporate finance transactions; ■■ development of innovative and tax-efficient structures for the full range of financing transactions; ■■ documentation for the implementation of transactions, to ensure that it meets tax objectives; ■■ tax aspects of private equity transactions and investment funds from initial investment to exit; and ■■ tax investigations and disputes from initial queries to litigation or settlement. “Stellar UK practice utilising its broad European ‘best friends’ network of firms to provide cross-border tax advice. Provides sophisticated expertise on high-profile M&A and financing transactions. Growing presence in contentious tax issues. Also offers tax consultancy advice, with particular strength in transfer pricing matters, as well as tax litigation.” – Chambers Europe 2017 “Slaughters has always been exceptional. They consistently produce not only very able but also very commercial people.” – Chambers UK 2017 *The Best Friends Tax Network comprises BonelliErede (Italy), Bredin Prat (France), De Brauw Blackstone Westbroek (the Netherlands), Hengeler Mueller (Germany), Slaughter and May (UK) and Uría Menéndez (Spain and Portugal).

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The Implications for UK Taxpayers of BEPS Actions 2 (on Hybrid Mismatches), 4 (on Interest Deductibility) and 6 Sandy Bhogal (on Treaty Access)

Mayer Brown International LLP Kitty Swanson

1 Background 2 BEPS Action 2: Hybrid Mismatch Rules

The UK’s implementation of sweeping changes to its domestic tax The UK’s hybrid mismatch rules under Part 6A of the Taxation system in response to the Base Erosion and Profit Shifting (“BEPS”) (International and Other Provisions) Act 2010 (“TIOPA”) derive Project launched by the Organisation for Economic Cooperation from BEPS Action 2, which proposed that rules should be developed and Development (“OECD”) in 2013 forms part of a broader to “neutralise the effect (e.g. double non-taxation, double deduction, trend towards tackling perceived tax avoidance by large businesses long-term deferral) of hybrid instruments and entities”, and are a operating cross-border. In light of increased media scrutiny of complicated set of prescriptive rules determining the counteraction multinationals’ tax affairs, and a public perception that such steps to be taken in respect of a broad range of transactions and businesses are not paying their fair share of tax in the jurisdictions structures involving hybrid entities or instruments. in which they operate, the UK has made a number of changes to its There is no escaping the fact that the relative complexity and tax system in recent years to increase the profits in respect of which widely-drawn features of the legislation can result in a significant UK tax is payable (either by denying deductions or by increasing the compliance burden for affected taxpayers. In particular, the rules sums to be brought into the charge to tax), and has been an active require UK corporation taxpayers to understand the tax treatment of participant in the OECD’s BEPS programme, taking responsibility their arrangements in both the UK and overseas jurisdictions, based for leading workstreams and persistently seeking to be one of the on whether it is “reasonable to suppose” that a mismatch may arise. first jurisdictions to implement the OECD’s recommendations. This is particularly true for the rules on “imported mismatches”, The UK appears to be continuing to wage war on BEPS and other which are designed to ensure that hybrid mismatches between tax-avoidance measures, notwithstanding increasing international two jurisdictions without effective hybrid mismatch rules can be tax competition and the perceived risk of damage to the UK’s counteracted in the UK where they form part of wider arrangements attractiveness to business – both issues that are likely to be of involving a UK party (e.g. back-to-back financing arrangements), increasing concern in the challenging climate that exists as a result and therefore need to be considered carefully in relation to of the UK’s intended departure from the EU (“Brexit”). Although international structures. not the only country invested in tackling BEPS, the UK has moved In reality, the potential impact of these rules may be more a reflection ahead of the concerted OECD effort, with domestic legislation of the UK’s “first-mover” status in relation to BEPS Action 2 than being implemented while global discussions regarding best practice a desire to police the hybrid effects of non-UK transactions, in that are ongoing, and has also moved ahead of the EU’s efforts to tackle they very much hinge on whether the relevant hybrid mismatches are BEPS under its two anti-tax avoidance directives (the “ATAD” counteracted elsewhere – over time, it can perhaps be expected that finalised in July 2016 and “ATAD II” finalised in June 2017). the impact and role of the “imported mismatch” rules should diminish, This has been particularly apparent in the context of the UK’s although in the short term there is a definite risk that the UK’s implementation of the recommendations of BEPS Actions 2 and 4, implementation of these rules will result in increased finance costs key components of the BEPS Project seeking to reduce base erosion under a number of traditional inbound financing/investment structures. via deductions against taxable profits, which respectively aim to In the meantime, these rules theoretically impose a limitless “neutralise the effect of hybrid instruments and entities” and “limit requirement to assess whether hybrid mismatches arise and escape base erosion via interest deductions and other financial payments”. counteraction in other jurisdictions before being “imported” into Although this chapter focuses on the anti-hybrids rules introduced the UK, which will be a source of significant concern for many in response to BEPS Action 2 and the corporate interest restriction UK-inbound investment structures, especially private equity and (“CIR”) rules introduced in response to BEPS Action 4, which are other fund structures with UK portfolio investments. The nature both likely to have a significant effect on financing costs for large of such structures is that it will often be extremely difficult to businesses operating in the UK, a brief review of the implications establish whether particular investors are required to treat payments of BEPS Action 6, which aims to “prevent the granting of treaty as taxable income under their domestic tax laws and on what basis benefits in inappropriate circumstances”, has been included as (especially in “fund of funds” structures). The position is likely this also has potentially adverse consequences for UK-inbound to be even worse in “open ended” or listed fund structures, where financing structures. it is virtually impossible to establish tax treatment in relation to a constantly changing investor base. Advisors and professional bodies have raised objections along these lines with HMRC, but so far calls for clarification and reform have largely gone unanswered.

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The hybrid mismatch rules generally may lead to unexpected in its approach to implementing the treaty-related outcomes of consequences and sometimes target transactions that do not fit BEPS Action 2, making a reservation in respect of part of Article 3 within the classical interpretation of hybridity for tax purposes. An of the Convention (concerning transparent entities) and not opting example of this can be found in HMRC’s guidance, which indicates into any of the choices presented by Article 5 of the Convention that the hybrid mismatch rules may require counteraction where (application of methods for elimination of double taxation). The a debt is released and the lender’s jurisdiction permits the lender UK has, however, committed to measures to prevent treaty abuse, a tax deduction in respect of the impaired debt but the borrower’s which may have the effect of restricting treaty access for hybrid jurisdiction does not treat the release as giving rise to taxable income entities and structures. of the borrower (for example, treating it as a non-taxable equity These treaty-related measures will not come into effect until the contribution by the lender to the borrower owing to the relationship Convention is ratified by the required number of jurisdictions, between those entities). and even then only in relation to tax treaties where both parties Similarly, the new rules may lead to unexpectedly harsh treatment have ratified the Convention and made compatible choices. Itis in certain scenarios involving hybrid entities. For example, where therefore important to be aware that the impact of BEPS Action 2 a US investment management business has a UK subsidiary that for taxpayers resident in, or dealing with, the UK is still developing provides sub-advisory services to the US parent and has elected to and is unlikely to be certain for some time to come. be disregarded for US tax purposes, the UK’s hybrid mismatch rules would operate to deny deductions for ordinary business expenses because they would be deductible in both jurisdictions but would 3 BEPS Action 4: Interest Deductibility not be set against dual-inclusion income for the purposes of the rules Rules – notwithstanding that the sub-advisory fees are paid out of profits taxed in the hands of the US parent and the only reason the sub- advisory fees would not be “included” for US tax purposes (and thus Overview do not constitute dual-inclusion income for these purposes) is that they are disregarded because they are treated for US tax purposes as The UK’s proposed CIR rules, intended to be introduced as a new payments between two parts of a single taxpayer. Part 10 TIOPA, derive from BEPS Action 4, which proposed that This leads to another significant concern with the rules, being the jurisdictions should have rules to “limit base erosion via interest absence of a general purpose, UK tax benefit or motive test, which deductions and other financial payments”. This is confirmed potentially brings commercially motivated transactions within the by HMRC’s draft guidance published on 4 August 2017 (the scope of counteraction. It is worth noting that the new rules will “Guidance”), which states the aim of the CIR rules is to combat replace the UK’s “avoidance involving tax arbitrage” rules with attempts to obtain excessive tax relief for net interest and similar effect for accounting periods beginning on or after 1 January 2017. financing costs, by restricting a group’s deductions to an amount As the arbitrage rules operated by reference to a tax avoidance which is commensurate with the extent to which its activities are purpose, a number of structures that were not within scope of those subject to UK corporation tax, taking into account how much the rules may be caught by the new hybrid mismatch rules. group borrows from third parties. In a similar vein, although attempts have been made to restrict the Notwithstanding that they have not yet been finalised, the rules are application of the new rules to parties that are in some way related intended to apply from 1 April 2017 to all companies within the or connected or otherwise to “structured arrangements”, it can be charge to corporation tax (with accounting periods straddling that argued that they do not go far enough in this respect. In particular, date being treated as two notional periods for these purposes, the the fact that parties may be deemed to be “related” based on a broad earlier of which will remain subject to the worldwide debt cap under “25% investment” test arguably ignores commercial reality, as that Part 7 of TIOPA while the later period is subject to the CIR). would be considered by many to be too low a threshold to afford The rules apply on a worldwide group basis (based on IFRS any degree of meaningful influence over another person’s affairs. consolidation rules) for each accounting period of the ultimate Moreover, the “structured arrangement” concept arguably does not parent of the group, with a reporting company being nominated to filter out only tax-motivated transactions. file on behalf of all UK entities in the group (which includes UK A number of questions therefore remain as regards the operation branches of overseas entities). The Guidance indicates that the CIR of the rules. With many of these questions, taxpayers will have to regime is applied after most other tax rules, such as transfer pricing look to HMRC guidance for further insight, if indeed there is any and anti-hybrids rules, but before the new loss restriction rules. to be found. The essence of the CIR regime is to restrict a group’s interest Turning to how the UK’s anti-hybrids rules sit in the context of deductions for corporation tax purposes to 30% of its UK tax- implementation of BEPS Action 2 more generally, the first point to EBITDA. All groups are permitted a de minimis allowance of note is that, since the ATAD anti-hybrids rules were expanded and £2 million per annum, with groups having interest expense not updated by ATAD II in 2017 and the implementation date delayed exceeding this threshold being outside the scope of the rules, accordingly, the anticipated timeline for Brexit is such that the UK including for reporting purposes (although the Guidance indicates is no longer expected to be required to comply with the EU’s anti- they can appoint a reporting company and file an interest restriction hybrids rules (although this does not prevent differences between return if they so wish). To the extent that a disallowance arises ATAD II and the UK’s domestic regime being relevant to EU pursuant to the CIR, this will be allocated pro rata among group taxpayers engaged in cross-border transactions involving the UK). entities unless the reporting company elects otherwise (subject to It is, however, also worth noting the UK’s position on the anti-hybrids the requirement that a company’s interest restriction cannot exceed aspects of the OECD’s Multilateral Convention to Implement Tax its net tax-interest expense). Treaty Related Measures to Prevent BEPS (the “Convention”), The rules apply to a group in any period where its aggregate net tax- which the UK signed on 7 June 2017. Although the UK has been interest expense exceeds its interest capacity for that period (subject a “first mover” in relation to domestic implementation of BEPS to the de minimis rule). “Aggregate net tax interest expense” Action 2, and has gone beyond the best practice recommendations comprises, broadly, loan relationship debits and other forms of arising out of that workstream, it has proved surprisingly cautious financing expense brought into account for corporation tax purposes

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in the relevant period, less corresponding credits and income, and The exemption applies in any period where a company is a specifically excludes debits in respect of foreign exchange loss, qualifying infrastructure company (“QIC”), i.e. a company fully impairment loss or ordinary course hedging contracts. “Interest taxed in the UK, having all or most of its income deriving from capacity” is calculated using either the fixed ratio rule or, where the either qualifying infrastructure activities (“QIA”) or shares in or group’s reporting company so elects, the group ratio rule. loan relationships with another QIC, and deriving all or most of Fixed ratio rule the value of its assets on each day of the period from tangible or financial assets related to QIA or related activities (treated as met The fixed ratio rule limits interest deductions to the lower of: on any day of the period where it has no assets recognised in its (i) 30% of the group’s tax-EBITDA for the period (where “tax- balance sheet), and has elected into the special regime (which EBITDA” broadly represents the UK taxable earnings of the election is irrevocable for five years). group, before deductions for interest, capital allowances, amortisation and other specified adjustments); and QIA include the provision (via acquisition, design, upgrade, repair or (ii) the “fixed-ratio debt cap”, which is essentially an accounting- decommissioning) of, or any activity ancillary to or which facilitates based measure of the worldwide group’s net external interest the provision of, a public infrastructure asset (“PIA”). A PIA is expense found by totalling the adjusted net group-interest either: (i) a tangible asset forming part of the infrastructure of the UK expense (“ANGIE”) of the group for the period (broadly, (which includes everything from utilities and telecommunications to the group’s finance expenses less related income, subject to court or prison facilities) and meeting a public benefit test; or (ii) a specific adjustments to align the measure more closely with building that is part of a UK property business and let on a short- the type and timing of amounts included in net tax-interest) term basis to unrelated parties. In either case, the PIA must have an plus any excess debt cap brought forward from the preceding expected economic life of at least 10 years (including time under period (with excess debt cap arising in a period where there previous ownership) and be shown in the balance sheet of a member is an interest disallowance not owing to the group’s debt cap of the group that is fully taxed in the UK. and being the amount by which the debt cap exceeds 30% of aggregate tax-EBITDA). The effect of the QIC election is to disregard certain amounts which Group ratio rule would otherwise be tax-interest expense amounts subject to the CIR and treat the QIC as having nil tax-interest income, nil tax-EBITDA Alternatively, the reporting company may elect (for any given and nil group-EBITDA. If a QIC is part of a worldwide group, period) to apply the group ratio rule. This aims to protect the interest the de minimis provision for interest capacity will generally be deductions of UK companies which operate as part of a group with disapplied; however, the rules provide that, where this would result high overall borrowing for commercial reasons and restricts interest in the group’s deductions falling below the de minimis amount, the deductions to the lower of: rules in the public infrastructure chapter are “switched off” and the (i) the group ratio percentage (being the group’s qualifying net group’s interest capacity is taken to be the de minimis amount. group-interest expense (“QNGIE”) (essentially ANGIE, subject to certain adjustments) for the period divided by A special rule allows a joint venture with both QIC and non-QIC group-EBITDA (the sum of the group’s profit before tax investors to elect for proportionate exemption. and net group-interest expense, with a depreciation and Specific regimes amortisation adjustment), capped at 100% and set at 100% As proposed in the consultation document, special rules will apply where the calculation yields a negative or zero result), subject to a cap at the group’s net qualifying group-interest expense; to companies operating in the banking, insurance, and oil and gas and industries, as well as to REITS, Lloyd’s members, shipping companies subject to tonnage tax, co-operatives, charities and certain leasing (ii) the group ratio debt cap (being the sum of QNGIE and any excess debt cap brought forward from the previous period). arrangements. A worldwide group may also make a group ratio (blended) election, Further limitations allowing it to access a higher group ratio percentage based on The CIR rules include an anti-avoidance rule to counteract tax the blended group ratios of its investors. An alternative debt cap advantages that may arise from avoidance arrangements with a calculation applies where this election is made. main purpose of securing a tax advantage. Avoidance arrangements Carry-forward include the leaving out of or bringing into account of any tax-interest expense amounts. Tax advantage is defined broadly and includes a Given the volatility a group may experience in its finances, carry- relief or increased relief from tax, the avoidance or reduction of tax, forward rules are included to even out the impact of the CIR rules and the deferral of tax. Where the tax advantage is neutralised under over the business cycle – any unused interest allowance in a period other tax rules, this anti-avoidance rule will not apply. may be carried forward to future periods beginning up to five years after the originating period began, after which point unused interest allowance expires. Similarly, where a group’s net tax-interest Comment expense is greater than its interest capacity for a particular period such that the excess has been restricted, the restricted tax-interest Although the CIR rules were withdrawn from the Finance Bill 2017 may be carried forward indefinitely to be reactivated in a later period when the “snap” general election was called, the UK government if excess capacity is available. There is no provision for carry back has subsequently announced that they will be reintroduced of either interest capacity or interest expense. following the summer recess without change to the effective date Public Infrastructure Exemption of 1 April 2017, notwithstanding that this will effectively result in retrospective legislation (generally considered contrary to good tax In line with the “public benefit project” exclusion proposed in the practice as it contravenes the principle of certainty). This clearly government’s 2016 consultation document, the CIR rules provide poses significant challenges to taxpayers, who find themselves an exemption for companies providing public infrastructure assets, obliged to apply these rules to the current accounting period (and in recognition of the interest restriction risk posed by the typically potentially apply appropriate restrictions when calculating their high gearing of such companies and the desire not to deter private quarterly instalment payments), notwithstanding that the rules are investment in these activities. (The Guidance also notes the OECD’s highly complex and still in draft. view that such companies commonly present little or no BEPS risk.)

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Taxpayers are also having to grapple with the fact that a number that there is no obvious policy motive for distinguishing between of practical issues remain unresolved – for example, there are these two types of taxpayers where they are engaged in similar uncertainties regarding how the rules are to be applied where a activities, and the BEPS Action 4 report certainly contemplated that company transfers from one worldwide group to another during all businesses would be affected by its recommendations (although the course of an accounting period, including the extent to which it is fair to say that most jurisdictions do not subject resident and any elections made under the CIR rules continue to apply and how non-resident corporates to different taxes). However, although allowances/disallowances are to be apportioned, which contributes not exclusively for this reason, the UK government is consulting uncertainty and complexity to M&A activity. on bringing non-UK resident companies within the scope of UK As a matter of policy, it is not clear why the government is pursuing corporation tax, perhaps as early as 1 April 2018, which would the introduction of the CIR rules so aggressively, not least because result in these companies becoming subject to the CIR rules in the there are a number of potential disadvantages in being a “first mover” same way as resident companies. As real estate companies of this in relation to such a significant change in tax practice. It seems nature are likely to be highly leveraged, this proposed change could likely that this will only be compounded by an impending Brexit have a significant impact on overseas investors in UK real estate and where other EU Member States (likely to be competing with the UK reduce the attractiveness of the UK to inbound investment, unless for business activity) are working to the more protracted timetable real estate investments can be structured to fall within the public (and far less complex rules) permitted by the ATAD. It also remains infrastructure exemption (as outlined above). unclear why the UK needs to add to its existing (and very extensive) suite of interest deductibility restrictions (or why, having concluded 4 BEPS Action 6: Treaty Access that the old worldwide debt cap rules would no longer be required when the CIR was introduced, the UK government subsequently BEPS Action 6 proposed a series of treaty provisions and/or domestic decided to go beyond the BEPS Action 4 recommendations and rules to “prevent the granting of treaty benefits in inappropriate incorporate a modified debt cap into the CIR) and, in particular, why circumstances”, with particular emphasis on combatting treaty it feels the need to apply restrictions to bona fide third-party bank shopping. A key outcome of the final report on BEPS Action 6 is debt which presents no risk of BEPS. the consensus on a minimum standard in this regard, to be satisfied Given the dubious benefits of acting ahead of competitor by the inclusion in tax treaties of one of: (i) a principal purpose test; jurisdictions and the challenges for taxpayers of attempting to (ii) the combination of a principal purpose test and a (simplified or apply extremely complex rules that have not yet been finalised, it detailed) limitation on benefits provision; or (iii) a detailed limitation is surprising that the UK government has not heeded requests to on benefits provision supplemented by an anti-conduit rule. delay implementation of the CIR to 1 April 2018 at the earliest; even Although these provisions, expected to be incorporated into large more so since there have been calls since the consultation stage for numbers of tax treaties as a result of countries signing up to the implementation of the CIR to be delayed to 2018 or later in order to Convention, are intended to restrict access to treaty benefits, there allow the rules to be introduced in such a way as to allow taxpayers is a concern that they may have an excessive impact on traditional sufficient time to understand the detail of the rules and apply them financing structures that have been established for commercial appropriately. Many commentators have also advocated a delay to reasons, including in situations where other BEPS measures have enable the UK to introduce the CIR in a manner which is consistent already been engaged. Take, for example, the common situation with the approach being adopted in other (less hasty) jurisdictions. of a Luxembourg holding company funded by hybrid equity from For such time as the UK remains in the EU, there also remain its US parent (which may be a standalone entity or a fund using concerns that there are substantive differences between the proposed the Luxembourg company as an investment holding vehicle), which CIR rules and the ATAD provisions addressing the outcomes then lends funds to a UK subsidiary using “plain vanilla” debt – of BEPS Action 4. Although the ATAD takes a more generous in addition to the UK subsidiary being denied interest deductions approach in many respects (including in respect of grandfathering under the imported mismatch provisions of the anti-hybrids rules and in allowing the carry back of restricted interest), complications (on the assumption that Luxembourg has not yet introduced rules will arise where the ATAD takes a different approach which to counteract the mismatch in Luxembourg), there is also a risk potentially produces a worse result than the domestic legislation, that withholding tax would be imposed on payments of interest to as more generous rules on the part of the UK would in principle the Luxembourg parent company on the basis that it might not be amount to an infringement of EU law – an example of this might be considered to be the true beneficial owner of that interest as a result the UK’s extension of the public infrastructure exemption to leased of the back-to-back financing or that treaty benefits are denied under property, which is not within the ATAD version of the exemption a principle purpose test or other anti-treaty shopping rule. In this (and is arguably not in the spirit of the exemption proposed under example, the UK would therefore effectively be taking tax twice in BEPS Action 4, since it is difficult to see the public benefit inherent respect of the same payment, which would also be subject to tax on in such arrangements). There also seems to be a risk that this receipt in Luxembourg. extension of the public infrastructure exemption to the real estate This is also a particular concern for non-CIV funds, which may investment industry could constitute unsanctioned state aid on the struggle to demonstrate that they qualify for treaty benefits in part of the UK, since it appears to provide selective benefits to a respect of their investments, whilst also being at a substantial risk particular class of taxpayers. of suffering additional tax charges as a result of the application of Like the anti-hybrids rules discussed earlier in this chapter, the CIR hybrid mismatch rules (for example, as a result of fund vehicles rules do not include a general purpose, UK tax benefit or motive being treated as hybrid entities for these purposes). Although the test, meaning all UK corporation taxpayers are within scope of UK is proposing to adopt the principal purpose test only, which the CIR, regardless of whether their finance arrangements have is arguably the more flexible approach since it only denies treaty been commercially motivated or negotiated on arm’s length terms. benefits where it is reasonable to conclude that obtaining the benefit However, as anticipated from the 2016 consultation, there is a quirk was one of the principal purposes of the arrangement or transaction in the CIR rules that means they apply for corporation tax only, in question and granting the benefit would not be in accordance with meaning they do not apply to non-UK resident companies subject to the object and purpose of the relevant treaty provision, it is unlikely UK income tax (e.g. non-resident landlords). This is surprising, given to be able to agree this with all treaty counterparties (including,

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notably, the USA, which is insisting on detailed limitation on of the new rules before they become effective, particularly in the benefits clauses in its treaties). context of the CIR which is supposedly already in effect (with very Taxpayers with existing UK-inbound investment and financing limited grandfathering) notwithstanding that the legislation has not structures should therefore monitor developments in this area to yet been finalised. ensure that BEPS Action 6 is not going to contribute to increased Although it remains to be seen whether and how the UK’s approach financing costs. In particular, they should consider the likely to tax policy changes as a result of Brexit, it is worth noting that the increasing need to be able to demonstrate substance in a jurisdiction BEPS Actions 2 and 4 measures discussed in this chapter form part in order to qualify for treaty benefits, whilst being aware of the of a broader suite of significant amendments to the UK corporation related implications of BEPS Action 7 (preventing the artificial tax regime which are apparently intended to ensure the UK has the avoidance of permanent establishment status). most attractive corporate tax regime in the G20; although some of these, such as the broadening of the substantial shareholding exemption, the continuing reduction in the corporation tax rate, and 5 Conclusion some aspects of the revised loss relief rules, may have a positive impact on the UK’s attractiveness to inbound investment, others, The pressure on UK taxpayers shows no sign of abating, as the UK such as the anti-hybrids rules and the CIR, will have at best a tax continues to progress its anti-BEPS programme by implementing neutral result for businesses operating in the UK (and especially complex new rules with far-reaching consequences (notwithstanding large multinationals). its wider competitiveness concerns deriving from an impending Taxpayers would therefore be advised to monitor developments Brexit) and is not showing any signs of decreasing the pace of change. and review their impact on an ongoing basis, especially where The anti-BEPS measures discussed in sections 2 and 3 of this they are involved in cross-border arrangements involving hybrids chapter are imposing a significant compliance burden on a wide (regardless of whether these are tax-driven or involve a UK party) range of taxpayers, including taxpayers not intentionally engaged and particularly in light of the changing requirements for access to in BEPS activities, as they are based on purely mechanical tests treaty benefits as a result of BEPS Action 6. and may thus capture arrangements and structures that have been established solely for commercial reasons, thus increasing both Note compliance costs and actual tax costs for affected businesses. The challenge for taxpayers is only exacerbated by the fact that they The position described in this chapter is accurate as at 24 August are being given limited opportunity to assimilate the requirements 2017.

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Sandy Bhogal Kitty Swanson Mayer Brown International LLP Mayer Brown International LLP 201 Bishopsgate 201 Bishopsgate London EC2M 3AF London EC2M 3AF United Kingdom United Kingdom

Tel: +44 20 3130 3645 Tel: +44 20 3130 3431 Fax: +44 20 3130 8951 Fax: +44 20 3130 8951 Email: [email protected] Email: [email protected] URL: www.mayerbrown.com URL: www.mayerbrown.com

Clients appreciate his “wealth of experience”, and say that he “delivers Kitty Swanson is a senior associate in the Tax practice of Mayer advice in an efficient manner and is always around to help us work Brown’s London office. through issues” – Chambers UK 2016. Kitty has advised on the tax aspects of a wide range of domestic Sandy Bhogal heads Mayer Brown’s Tax group in London. His and cross-border matters and transactions, including mergers and experience ranges from general corporate tax advice to transactional acquisitions, fund structuring, domestic and international reorganisations, advice on matters involving corporate finance, banking, capital markets, real estate transactions, employment-related matters, banking and asset finance and property. He also has significant experience with structured finance, and insurance matters. corporate tax planning, as well as with advising on the development of Kitty is an International Tax Affiliate of the Chartered Institute of domestic and cross-border tax-efficient structures. Taxation. In the five years prior to joining Mayer Brown in 2005, Sandy was Education associated with Ernst & Young LLP and with a leading international legal practice. ■■ Chartered Institute of Taxation – Advanced Diploma in International Taxation (with distinction). Education ■■ Kaplan Law School, LPC. ■■ BPP Law School, Legal Practice Course. ■■ Kaplan Law School, Graduate Diploma in Law. ■■ University of Bristol, LL.B., Honours, LL.M. (International Law), ■■ University of Cambridge, MA Modern & Medieval Languages – 1998. French & Italian. Admissions Admissions ■■ England and Wales. ■■ England and Wales. Activities ■■ Member of the Alternative Investment Management Association Tax Committee. ■■ Law Society of England and Wales. ■■ Member of Law Society Tax Committee. ■■ Chairman of the Law Society Sub-Committee on International Taxes.

Mayer Brown is a global legal services provider advising clients across the Americas, Asia and Europe and the Middle East. Our geographic strength means we can offer local market knowledge combined with global reach. We are noted for our commitment to client service and our ability to assist clients with their most complex and demanding legal and business challenges worldwide. We serve many of the world’s largest companies, including a significant proportion of the Fortune 100, FTSE 100, CAC 40, DAX, Hang Seng and Nikkei index companies and more than half of the world’s largest banks. We provide legal services in areas such as: banking and finance; corporate and securities; litigation and dispute resolution; antitrust and competition; US Supreme Court and appellate matters; employment and benefits; environmental; financial services regulatory and enforcement; government and global trade; intellectual property; real estate; tax; restructuring, bankruptcy and insolvency; and wealth management.

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Albania Alketa Uruçi

Boga & Associates Andi Pacani

1 Tax Treaties and Residence 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates?

1.1 How many income tax treaties are currently in force in your jurisdiction? VAT was first introduced in 1995. In 2015, the legislation was harmonised with the EU Directive on VAT. The standard rate of VAT is 20%, which applies to all persons (companies and Albania has concluded tax treaties with 41 countries, of which 40 entrepreneurs) having an annual turnover exceeding ALL 5 million are currently in force. (approx. EUR 35,000). Exceptionally, persons carrying out certain specific categories of activity (such as economists, auditors, doctors 1.2 Do they generally follow the OECD Model Convention and dentists and similar professions except for lawyers) are VAT or another model? taxpayers irrespective of their annual turnover (i.e. there is no VAT threshold). Only accommodation in tourism facilities is subject to Albanian tax treaties follow the OECD model. a reduced rate of 6%. Exports of goods, goods in passenger baggage, the international 1.3 Do treaties have to be incorporated into domestic law transport of goods and passengers and related services, and services before they take effect? to international intra-governmental organisations, are subject to VAT at 0% (benefiting from VAT exemption but with a right of The Albanian Constitution requires treaties to be ratified by deduction). Parliament. 2.3 Is VAT (or any similar tax) charged on all transactions 1.4 Do they generally incorporate anti-treaty shopping or are there any relevant exclusions? rules (or “limitation on benefits” articles)? VAT regulations provide for supplies exempt from VAT without a The treaties do not incorporate anti-treaty shopping rules. right of deduction. The most important are as follows: ■ Lease and sale of land. 1.5 Are treaties overridden by any rules of domestic ■ Sale of buildings, unless the seller opts for VAT applicability. law (whether existing when the treaty takes effect or ■ Long lease of buildings (when the lease duration exceeds two introduced subsequently)? months), unless the lessor opts for VAT applicability. ■ Financial services. A treaty prevails over domestic law regardless of whether the ■ Certain services rendered by not-for-profit organisations. domestic legislation existed previously or is introduced subsequently. ■ Educational services rendered by private and public educational institutions. 1.6 What is the test in domestic law for determining the ■ Postal services. residence of a company? ■ Materials used for the production and packaging of medicines. ■ Supply of newspapers, magazines and books of any kind. Entities that are established in Albania or have their place of effective management in Albania are considered resident. ■ Supply of advertising in electronic and written media but only when the advertising services are provided directly from the media (and not through intermediaries). 2 Transaction Taxes ■ Supply of services performed outside Albania by a taxable person whose place of activity or residence is in Albania. ■ Supply of services relating to gambling activities, casinos and 2.1 Are there any documentary taxes in your jurisdiction? hippodromes.

No, there are no documentary taxes in Albania.

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loans and funding from related parties, the “net interest expense” 2.4 Is it always fully recoverable by all businesses? If not, will be considered deductible up to 30% of EBITDA (Earnings what are the relevant restrictions? Before Interest, Tax, Depreciation and Amortisation). The taxpayer has the right to carry forward the non-deducted part of the interest Generally, taxpayers registered for VAT are entitled to recover and claim its tax deductibility in the subsequent periods, except the input VAT, provided that the VAT is charged in relation to when the taxpayer’s ownership has changed by more than 50%. their taxable activity. VAT cannot be reclaimed on recreation and accommodation expenses, passenger vehicles, fuel under certain limits, or any expenses related to the above-mentioned expenses. 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? Albania 2.5 Does your jurisdiction permit “establishment only” There is no such provision in Albanian legislation. VAT grouping, such as that applied by Sweden in the Skandia case? 3.6 Would any such rules extend to debt advanced by a There is no VAT grouping available in Albania, and “establishment third party but guaranteed by a parent company? only” is not permitted. The debt-to-equity ratio is calculated without taking into consideration the source of the financing or relevant guarantees. In 2.6 Are there any other transaction taxes payable by regard to net interest expense as percentage of EBITDA, there are companies? no explicit rules stipulating the inclusion of third-party loans in the calculation. There is a fee on the transfer of an ownership right on real estate, payable by legal entities in case of sale or donation of real estate. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non-resident? 2.7 Are there any other indirect taxes of which we should be aware? Interest in excess of the annual average bank interest rate is non- deductible for tax purposes. Except for VAT and excise, carbon and circulation tax is levied on the production and importation of certain combustible goods (including fuel) in Albania. 3.8 Is there any withholding tax on property rental payments made to non-residents?

3 Cross-border Payments Property rental payments made to non-residents are subject to final withholding tax at a rate of 15%.

3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 3.9 Does your jurisdiction have transfer pricing rules?

Dividends and profit distribution paid to non-residents are subject to The recently changed legislation on transfer pricing is based on the a final withholding tax at a rate of 15%, unless a double tax treaty Transfer Pricing Guidelines 2010 of the Organisation for Economic provides for a lower rate. Cooperation and Development (OECD). However, in case of conflicts between the OECD Guidelines and provisions ofthe Albanian legislation on this matter, the local legislation provisions 3.2 Would there be any withholding tax on royalties paid will prevail. by a local company to a non-resident? The new legislation lays down the transfer pricing methods to be used by taxpayers when performing a controlled transaction, depending Royalties paid to non-residents are subject to a final withholding tax on the specifics of the transaction. The methods described are: at a rate of 15%, unless a double tax treaty provides for a lower rate. ■ the comparable uncontrolled price method; ■ the resale price method; 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? ■ the “cost plus” method; ■ the transactional net margin method; and Interest paid to non-residents is subject to a final withholding tax at ■ the profit split method. a rate of 15%, unless a double tax treaty provides for a lower rate. The method chosen by the taxpayer depends on, and should take into account, different circumstances. However, the legislation 3.4 Would relief for interest so paid be restricted by provides the option for the taxpayer to choose another transfer reference to “thin capitalisation” rules? pricing method, if the taxpayer proves that none of the methods listed in the legislation can be used in a reasonable way to apply the The only thin capitalisation rule limits the tax deduction for interest market principles in the controlled transactions. paid on a loan (for corporate income tax purposes) to the portion of Taxpayers performing controlled transactions, as defined above, interest paid on the loan not exceeding four times the company’s which exceed the amount of ALL 50,000,000 (approximately EUR net assets (i.e. a debt-to-equity ratio of 4:1). The rule applies to all 360,000), should present to the tax authorities (i.e. the General or loans taken, except for short-term loans (payable within less than Regional Tax Directorate where the taxpayer has been registered) one year). It does not apply to banks, finance leases or insurance an Annual Controlled Transactions Declaration, as per the format companies. Additionally, effective from 1 January 2018, in case of provided in the respective Instruction on Transfer Pricing.

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In addition, in the case that the tax authorities of a country with according to their use and are taxed at rates ranging from ALL 5 which Albania has signed a double tax treaty make a transfer pricing to 200 per m2. Buildings in villages which are tourist destinations adjustment that results in the taxation of the profit for which the are taxed at ALL 400 per m2. “Terrain” (defined in law as land taxpayer has already been taxed in Albania, the Albanian taxpayer available for building upon) is taxed at ALL 0.14 to 20 per m2. A may submit a written request to the General Tax Directorate on the 50% tax credit is available for the tax due on buildings located in respective adjustment to be made to the profit tax in Albania. The rural areas. The local municipality may modify the tax rates set by requested transfer pricing adjustments may be refused or granted law. In addition, it decides on the payment schedule of the tax and fully/partially within three months of the date of the submission of on reductions for immediate payment of tax. the request by the taxpayer. In addition, there are a variety of national and local taxes. These include the tax on new constructions, hotel tax, royalty tax, Albania 4 Tax on Business Operations: General advertising tax, etc.

4.1 What is the headline rate of tax on corporate profits? 5 Capital Gains

Corporate profits are taxed at a rate of 15%. 5.1 Is there a special set of rules for taxing capital gains and losses? 4.2 Is the tax base accounting profit subject to adjustments, or something else? There are no specific capital gains taxes for corporate income tax subjects. As a general rule, capital gains are included in the business Yes, the taxable profit that results from the financial statements profit of the entity and are taxed at the same rate of 15%. prepared under and pursuant to accounting standards, is adjusted as provided for and required by the tax regulation. 5.2 Is there a participation exemption for capital gains?

4.3 If the tax base is accounting profit subject to Tax legislation does not provide for a participation exemption for adjustments, what are the main adjustments? capital gains.

The main adjustments consist of the following: depreciation 5.3 Is there any special relief for reinvestment? allowances; restrictions related to thin capitalisation of loan interests and other expenses (e.g. thresholds of tax deductions for There is no rollover relief available in Albania, or any other relief. representation and sponsorship expenses); bad-debt requirements; penalties; provisions (except for banks and insurance companies); impairment and revaluation of assets, etc. 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local assets/shares? 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas There is no withholding tax on the proceeds of the sale of interest in subsidiaries? assets/shares, but the seller must declare and pay the tax on income generated from the transaction. No, there are no tax grouping rules.

4.5 Do tax losses survive a change of ownership? 6 Local Branch or Subsidiary?

If, during a taxable period, direct and/or indirect ownership of stock 6.1 What taxes (e.g. capital duty) would be imposed upon capital or voting rights of a person changes by more than 50% in the formation of a subsidiary? value or number, the losses incurred in the previous years cannot be used against the profit of the year; neither can they be carried There are no taxes payable upon the formation of subsidiaries. forward.

6.2 Is there a difference between the taxation of a local 4.6 Is tax imposed at a different rate upon distributed, as subsidiary and a local branch of a non-resident opposed to retained, profits? company (for example, a branch profits tax)?

No, there is no difference in this regard. There are no such differences in taxes or fees specifically designed for subsidiaries. The taxable income of branches is subject to profit tax at the same rate (15%) as any Albanian entity. 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the occupation of property? 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? Property tax is levied annually on all residents and non-residents who own agricultural land, buildings and “terrain” in Albania. Branches are taxed only on taxable income from an Albanian Agricultural land is classified into 10 groups and is taxed at rates source. Taxable income is determined in the same manner as for varying from ALL 700 to 5,600 per hectare. Buildings are classified resident companies.

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6.4 Would a branch benefit from double tax relief in its 9 Anti-avoidance and Compliance jurisdiction?

9.1 Does your jurisdiction have a general anti-avoidance Branches are considered permanent establishments; hence they may or anti-abuse rule? benefit from double tax relief. Albanian fiscal legislation does not provide for a general anti- 6.5 Would any withholding tax or other similar tax be avoidance rule. However, it gives the tax authorities the right to use imposed as the result of a remittance of profits by the alternative methods of tax assessment when verifying the lack of branch? economic substance in a transaction. Albania

Transfers or repatriation of profits by the branch are not subject to 9.2 Is there a requirement to make special disclosure of any tax in Albania. avoidance schemes?

7 Overseas Profits Under current legislation, there are no requirements to disclose any avoidance scheme.

7.1 Does your jurisdiction tax profits earned in overseas branches? 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax Foreign-sourced income is taxable in Albania. However, tax credit avoidance? is allowable for the amount of income tax paid overseas for the income derived abroad up to the amount that would have been Albanian legislation does not have specific rules to target parties payable in Albania on Albanian-sourced income. other than the taxpayer committing the tax avoidance.

7.2 Is tax imposed on the receipt of dividends by a local 9.4 Does your jurisdiction encourage “co-operative company from a non-resident company? compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? Receipt of dividends is tax-exempt income in Albania. The Tax Procedure Law requires co-operative compliance before 7.3 Does your jurisdiction have “controlled foreign the tax audit commences. Taxpayers are entitled to review the tax company” rules and, if so, when do these apply? returns before a tax audit takes place; this results in lower penalties.

No, there are no “controlled foreign company” rules. 10 BEPS and Tax Competition

8 Taxation of Commercial Real Estate 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? The Albanian Government has indicated that the additional thin Non-residents are taxed on the disposal of real estate in Albania, at capitalisation rule, i.e. net interest expense to EBIDTA, will be a rate of 15% of the realised profit. introduced in response to OECD’s project (BEPS).

8.2 Does your jurisdiction impose tax on the transfer of 10.2 Does your jurisdiction intend to adopt any legislation an indirect interest in commercial real estate in your to tackle BEPS which goes beyond what is jurisdiction? recommended in the OECD’s BEPS reports?

Current legislation does not provide for indirect interest taxation. Except from the above-mentioned rule, there are no publicly expressed intentions to adopt any other legislation against BEPS, either within or beyond the OECD’s recommendations. 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent? 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? Under current legislation, there is no special tax regime for REITs or their equivalent in Albania. There is no support for Country-by-Country Reporting in Albania.

10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box?

There are no preferential regimes in Albania.

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Alketa Uruçi Andi Pacani Boga & Associates Boga & Associates Ibrahim Rugova Str. Ibrahim Rugova Str. P.O. Box 8264 P.O. Box 8264 Tirana Tirana Albania Albania

Tel: +355 4 225 1050 Tel: +355 4 225 1050 Fax: +355 4 225 1055 Fax: +355 4 225 1055 Email: [email protected] Email: [email protected] URL: www.bogalaw.com URL: www.bogalaw.com Albania Alketa is a Partner at Boga & Associates, which she joined in 1999. Andi is a Senior Associate at Boga & Associates, which he joined in 2006. Alketa practises in the areas of concession and energy, where she manages energy assignments on regulatory, corporate and His practice is focused on accounting, tax and regulatory matters. commercial matters, including international arbitration proceedings. Over several years, Andi has gained ample experience in the application She has extensive experience in providing regular tax advice to of accounting regulations (national and international standards), commercial companies in corporate tax, VAT and employee taxation corporate tax law and other fiscal laws. These assignments involve matters, and is involved in the management of several tax aspects of regular assistance to local and international clients in both the Albania mergers and acquisitions transactions, tax planning and restructuring. and Kosovo jurisdictions. In addition, Alketa has performed a number of tax and legal due Andi graduated in Business Administration from the University of diligence assignments and managed legal consultancy to international Tirana, Albania in 1999. clients. She has also assisted foreign clients during international He has been a member of the Approved Accountants Association arbitration proceedings and is active as a tax litigator in the Albanian since 2005. courts. Alketa chairs the tax and legal committee of the American Chamber of Commerce in Albania. Andi is fluent in English and Italian. Alketa graduated in Law at the Law Faculty, University of Tirana, Albania in 1999 and in Finance at the Faculty of Economy, University of Tirana, Albania in 2004. Alketa is fluent in English and Italian.

Boga & Associates, established in 1994, has emerged as one of the premier law firms in Albania, earning a reputation for providing the highest quality of legal, tax and accounting services to its clients. The firm also operates in Kosovo (Pristina), offering a full range of services. Until May 2007, the firm was a member firm of KPMG International and the Senior Partner/Managing Partner, Mr. Genc Boga was also a Senior Partner/Managing Partner of KPMG Albania. The firm’s particularity is linked to the multidisciplinary services it provides to its clients, through an uncompromising commitment to excellence. Apart from the widely consolidated legal practice, the firm also offers the highest standards of expertise in tax and accounting services, with keen sensitivity to the rapid changes in the Albanian and Kosovo business environment. The firm delivers services to leading clients in major industries, banks and financial institutions, as well as to companies engaged in insurance, construction, energy and utilities, entertainment and media, mining, oil and gas, professional services, real estate, technology, telecommunications, tourism, transport, infrastructure and consumer goods. The firm is continuously ranked as a “top tier firm” by The Legal 500, by Chambers and Partners for Corporate/Commercial, Dispute Resolution, Projects, Intellectual Property and Real Estate, as well as by IFLR in Financial and Corporate Law. The firm is praised by clients and peers as a “law firm with high-calibre expertise”, “the market-leading practice” with “a unique legal know-how”, distinguished “among the elite in Albania” and described as “accessible, responsive and wise”.

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Andorra Daniel Arqués i Tomàs

Arqués Ribert Junyer Advocats Mireia Ribó i Bregolat

purpose of taking advantage of the treaty provisions, particularly in 1 Tax Treaties and Residence the treaties signed with France and Spain. Usually, double taxation treaties signed by Andorra also have specific provisions that limit the 1.1 How many income tax treaties are currently in force in application of benefits provided to dividends, royalties and interest. your jurisdiction? 1.5 Are treaties overridden by any rules of domestic Andorra has signed seven international double taxation treaties, with law (whether existing when the treaty takes effect or France, Liechtenstein, Luxembourg, Malta, Portugal, Spain and the introduced subsequently)? United Arab Emirates. All of them are currently in force. Andorra is also negotiating double taxation agreements with Austria, Belgium, According to the Andorran Constitution, treaties are incorporated Italy and the Netherlands. into the Andorran legislation by means of publication in the Butlletí Andorra has signed tax information exchange agreements, on request, Oficial del Principat d’Andorra, and they cannot be modified or with Argentina, Australia, Austria, Belgium, the Czech Republic, overridden by domestic laws. Denmark, the Faroe Islands, Finland, France, Germany, Greenland, Iceland, Italy, Korea, Liechtenstein, Monaco, the Netherlands, Norway, 1.6 What is the test in domestic law for determining the Poland, Portugal, San Marino, Spain, Sweden and Switzerland. residence of a company? In June 2014, Andorra joined the OECD Declaration which commits countries to the automatic exchange of information in tax matters. According to the Law on Corporate Tax (hereinafter IS), entities Andorran Law 19/2016 on Automatic Exchange of Information in considered tax-resident in the Principality of Andorra must fulfil one Tax Matters entered into force on 1 January 2017. of the following requirements: On 5 November 2013, Andorra also signed the Convention on ■ be established under Andorran laws; Mutual Administrative Assistance in Tax Matters amended by the ■ have their registered office in the Principality of Andorra; 2010 Protocol. This multilateral Convention entered into force on ■ have their place of effective management in the Principality of 1 December 2016. Andorra (where the headquarters for management are based, or from which they exercise general management and control 1.2 Do they generally follow the OECD Model Convention of the entire production process and business activities); or or another model? ■ have moved their residence to the Principality of Andorra.

Andorra’s double taxation treaties are mainly based on the OECD Model Convention on Income and Capital. 2 Transaction Taxes

1.3 Do treaties have to be incorporated into domestic law 2.1 Are there any documentary taxes in your jurisdiction? before they take effect? Stamp duty is only charged on written documents presented by the Treaties have to be passed by the Parliament (hereinafter the applicant in legal proceedings, and depends on the amount of the Consell General) and be published in the Andorran Official Gazette claim. (hereinafter the Butlletí Oficial del Principat d’Andorra), before Equally, granting, presenting and issuing certain kinds of document being incorporated into the Andorran legislation. may require the payment of taxes. This is the case for applications addressed to the Government or to the Comú (Municipality). 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? Andorra has incorporated “limitation of benefits” rules in the double taxation treaties signed, especially with reference to the concept of The VAT Act (hereinafter IGI) came into force on 1 January 2013, “beneficial owner” and also denying the granting of treaty benefits and substituted all indirect taxes applicable up until that point. The concerning income if related payments are effected mainly for the applicable rates of IGI are:

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■ A super-low rate (0%) for hospitals and health care services The rate varies between 1% and 15% of the increase in value, in public centres, public education services and leases of although transfers of properties which were bought more than 10 housing. years earlier are subject to a 0% rate. This tax is deductible from ■ A reduced rate (1%) for food, books and newspapers. the payment of IS. ■ A special rate (2.5%) for passenger transport, art objects and tickets for parks, private libraries, theatres, exhibitions and 2.7 Are there any other indirect taxes of which we should similar cultural and social activities. be aware? ■ A general rate (4.5%) for almost all deliveries of goods and services, and for the transmission of real estate or the The main indirect taxes of note are: establishment and assignment of rights in rem over them

Andorra by a company, a professional or someone who carries out ■ special taxes, on the manufacture and importation of tobacco, economic activities, if the real property is connected to that alcoholic products and fuels; and professional/economic activity. ■ local taxes, the most significant being property tax, tax on ■ An increased rate (9.5%) for banking and financial services. rental income, and tax on location of commercial, business and professional activities. On the other hand, the activity of reinsurance operations is taxed under the Indirect Tax on the Provision of Services (hereinafter ISI), at the rate of 4%. ISI consists of a modular system based on 3 Cross-border Payments calculating the total added value of services provided inside the Principality and insurance companies use a formula to calculate the amount of ISI to file in a rebate. 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident?

2.3 Is VAT (or any similar tax) charged on all transactions Andorran legislation does not tax dividends and other income from or are there any relevant exclusions? equity participation in entities fiscally resident in Andorra, paid to non-residents. Specifically, the Law on Income Tax for Fiscal Non- The most relevant exclusions from the IGI tax are, among others, residents (hereinafter the IRNRF Law) considers that dividends paid the transmission of assets belonging to a company that can be to a non-resident, individual or company are exempt. considered a separate unit of business, the transmission of share capital and the provision of public services or those of general interest. Export of goods is also excluded from IGI. 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident?

2.4 Is it always fully recoverable by all businesses? If not, The IRNRF Law states that royalties are taxed at a rate of 5%, and what are the relevant restrictions? also provides the duty of the local paying company to withhold this percentage to the non-resident payee, be they a natural person or IGI is only recoverable by IGI taxpayers. The amount refunded company. by the tax administration at the end of the natural year will be the There is no withholding in cases where certain double taxation difference between input IGI and output IGI. Input IGI is only treaties are enforceable. deductible for supplies of goods and services related to the activity. Insurance companies cannot recover IGI because, as we mentioned in question 2.2, they are ISI taxpayers. 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? Regarding financial entities, they are only able to recover 10% of input IGI related to financial activity. This limitation is not Andorran legislation does not impose withholding tax on the applicable to real estate transactions. payment of interest by resident companies to a non-resident. The If a non-resident company or professional is taxed IGI in Andorra, interest paid by a local company to a non-resident is exempt, and so the law establishes the possibility to recover this input IGI, according not withheld, according to the IRNRF Law. to a procedure established by the IGI Regulation.

3.4 Would relief for interest so paid be restricted by 2.5 Does your jurisdiction permit “establishment only” reference to “thin capitalisation” rules? VAT grouping, such as that applied by Sweden in the Skandia case? Andorran legislation does not contain any “thin capitalisation” rules.

Andorran legislation does not have a special VAT grouping regime; services between the parent company and the branch are always 3.5 If so, is there a “safe harbour” by reference to which taxed IGI. tax relief is assured?

Please see question 3.4. 2.6 Are there any other transaction taxes payable by companies? 3.6 Would any such rules extend to debt advanced by a The capital gains tax on real estate transfers (hereinafter IPTPI) third party but guaranteed by a parent company? taxes the increase in the value of real estate property resulting from the transfer of said property, or the establishment or assignment of Please see question 3.4. rights in rem over the same. The tax is payable by the transferor.

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The following entities benefit from an 80% reduction on the IS tax 3.7 Are there any other restrictions on tax relief for interest base, if they fulfil the requirements set by the law: payments by a local company to a non-resident? ■ companies carrying out international exploitation of intangible assets; Not beyond those mentioned above. ■ companies involved in international trade; and ■ intra-group financial management and investment companies. 3.8 Is there any withholding tax on property rental If the economic activity is carried out by a natural person, he can payments made to non-residents? benefit from a minimum non-taxable exemption amount of EUR 24,000 (increased to EUR 40,000 if the taxpayer’s spouse or long-term Legal entities and individuals with tax residence in the Andorran

partner has no income from employment, from economic activities Andorra territory which develop economic activities have a duty to withhold or from real estate property). This minimum exemption applies to and to make payments on account with regard to any income subject the sum of all incomes of the personal income tax (hereinafter IRPF) to IRNRF that they pay to non-residents, unless they have a permanent general base (that means income from employment, income from establishment (hereinafter PE) in Andorra. The withholding, in the economic activities and income from real estate). case of leases, will be done at a general rate of 10%. However, when Negative tax bases can be offset against positive tax bases concluded the payment of the tax by the taxpayer has been credited, it is not in the next 10 years. necessary to perform the withholding or the payment on account. The IS and IRPF Laws provide a special and voluntary regime If an Andorran company has withheld the non-resident, the latter does of objective determination of the tax base for taxpayers with a not need to liquidate the IRNRF to the Andorran Tax Administration. turnover of the immediately preceding year that does not exceed When the taxpayer has been withheld he can claim or request, to the EUR 300,000, or EUR 150,000 if they have professional activities. Ministry of Finance, the return of the excess amount. The petition That means that the reduction is: 80% of the turnover deducted as will be made through the relevant tax statement or through an expenses in commercial activities; 2% (IS) and 3% (IRPF) of the amendment of the said statement, depending on the case. turnover as expenses on board of directors’ activities; and 40% on The general rate of IRNRF, including for property rental payments, other activities. Taxpayers must apply this scheme to the Minister is 10%, but for these payments there is a 20% deduction of the tax of Finance during the year before it has to be in force and maintain base, so it is in the interest of the non-resident taxpayer to liquidate it for three years. the IRNRF by himself. 4.3 If the tax base is accounting profit subject to 3.9 Does your jurisdiction have transfer pricing rules? adjustments, what are the main adjustments?

Andorran regulations on business income tax (IS and IRPF) provide The main tax adjustments to be made on the accounting profit are: that the operations carried out between related persons or entities, or ■ The depreciation of assets (amortisation) is limited to an under the market price or for free, must be valued at an arm’s length annual maximum depending on the type of asset. value, that is, their normal market value, being understood as the ■ Provisions for the insolvency of debtors are normally tax- one that independent persons or entities would have agreed under deductible if six months have passed since the maturity date conditions of free competition. or from when the debtor has been declared bankrupt. In the case of debts with a specific guarantee, a legal claim must be It should be noted that financial expenses incurred by fiscally resident made in order to be able to make the deduction. entities relating to operations carried out, directly or indirectly, with ■ Losses from deterioration in equity securities in entities not related non-resident persons or entities, are not considered tax- listed in a regulated market, and losses from deterioration in deductible expenses, unless the taxpayer provides evidence that the debt securities listed in regulated markets, are tax-deductible, financing has been done in accordance with normal market value. within limits. ■ The contributions from promoters to welfare schemes, 4 Tax on Business Operations: General whenever the legal requirements are met, are tax-deductible. ■ Certain expenses are not deductible for tax purposes (e.g. those representing equity compensation, donations, fines, etc.). Nor 4.1 What is the headline rate of tax on corporate profits? are payments to employees in the form of equity instruments.

The general IS rate is 10%. 4.4 Are there any tax grouping rules? Do these allow Nevertheless, collective investment institutions regulated by Law for relief in your jurisdiction for losses of overseas 10/2008 of 12 June on the Regulation of Collective Investment subsidiaries? Undertakings under Andorran Law, are subject to a rate of 0%. Also, the regulations provide for a rate of 5%, applicable up to the Andorran regulations provide for the possibility of tax consolidation base of EUR 50,000, during the first three years of activity, for new in companies forming part of a tax group. In order to be able to companies, as long as their income is below EUR 100,000 per year. adhere to the income tax consolidation system, it is necessary to fulfil the following requirements: i) that the parent company holds directly or indirectly at least 75% of the capital of the other 4.2 Is the tax base accounting profit subject to companies or their voting rights, without interruption and during the adjustments, or something else? whole tax period; ii) that all the companies in the group are subject to and not exempt from the tax; iii) that all the companies agree to The tax base is calculated by adjusting the accounting profit, join the tax group and consolidate their accounts; iv) that the tax determined according to the rules provided in Law 30/2007 of period for all the companies in the group matches with that of the 20 December on Business Accounts and the Andorran General parent company; and v) that the parent company communicates this Accounting Plan.

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option to the Ministry of Finance before the beginning of the tax ■ that the non-resident participant company is subject to period in which the tax consolidation system will be applicable. and not exempted from a tax of a similar nature to the Companies which, at the end of the fiscal year, are in a position Andorran IS. If it is a resident entity, that it has paid of suspension of payments or bankruptcy, or have negative equity, the IS; cannot form part of the tax group. ■ that the percentage of participation, whether direct or indirect, in the capital, own assets, equity or voting The tax base is determined individually for each company of the rights of the resident or non-resident entity, is equal to group. The eliminations and incorporations that the law sets up are or greater than 5%; and added to the individual bases. Negative tax bases of any company ■ that the participation has been held without interruption pending offsetting at the time of incorporation into the tax group can for a year, prior to the day on which the profit is payable, be offset in the tax base of the tax group.

Andorra the participation is transferred, or withdrawal or winding-up occurs. The time in which related persons 4.5 Do tax losses survive a change of ownership? have held the participation is counted for this purpose. b) Income obtained overseas through a PE located outside A change of ownership of a company never implies the extinction of Andorra, if this PE has been subject to a tax with similar characteristics to those of the Andorran IS. the tax losses; furthermore, the negative tax base of a company can be compensated with the next 10 years’ positive tax bases. The regulations provide, equally, for a special system applicable to companies holding foreign securities, in which dividends and participations in profits received from non-resident companies, 4.6 Is tax imposed at a different rate upon distributed, as as well as the transfer of these participations, benefit from opposed to retained, profits? exemption, on the terms set by the law. Concession of the special system for companies holding Corporate tax is imposed at the same percentage (10%), whether foreign securities is dependent on prior application to, and profits are distributed to shareholders or retained. authorisation from, the Ministry of Finance. 2. If the capital gain is obtained by an individual resident in Andorra, a minimum exemption of EUR 3,000 applies in the 4.7 Are companies subject to any significant taxes not IRPF. This exemption is for all the incomes of the net taxable covered elsewhere in this chapter – e.g. tax on the savings income (that means income from capital and capital occupation of property? gains and losses).

Andorran legislation does not include tax on the occupation of property, but there is a local tax for carrying out economic activities 5.3 Is there any special relief for reinvestment? by companies and also by individuals. This annual tax (impost de radicació d’activitats comercials, empresarials i professionals) is Andorran legislation does not provide any tax incentive for based on the area in square metres of the premises where the activity reinvestment. is performed, multiplied by the tax rate of the activity carried out Nevertheless, there are tax incentives for contracting workers, if 2 (between EUR 1 and 100 per m ) and also considering the importance the taxpayer increases the average in permanent annual staff, (EUR of the street in the Parish. This tax only applies to areas greater than 3,000 per worker), and for new investments (5% of the investment 2 20m and the maximum tax is EUR 300,000. price). There are no other significant taxes apart from those discussed above.

5.4 Does your jurisdiction impose withholding tax on the 5 Capital Gains proceeds of selling a direct or indirect interest in local assets/shares?

5.1 Is there a special set of rules for taxing capital gains The capital gains tax on real estate property provides a withholding and losses? tax when the transferor is a non-resident individual or company, at 5% of the total amount of the transaction. There are no special rules for taxing capital gains and losses incurred If a non-resident company owns more than 25% of the share capital by companies; these will be incorporated into the tax base of this tax of an Andorran company for a period of more than one year, and (IS) and therefore pay a general rate of 10%. sells its participation to another Andorran entity or professional, the The capital gains and losses obtained by an individual resident in second one will withhold the capital gains tax, at the rate of 10%. Andorra are taxed IRPF, on the terms and within the limits set by the There is no withholding in cases where certain double taxation IRPF Law. The general rate is also 10%. treaties are enforceable. If the gains come from the transfer of real property, by individuals or companies, they are subject to IPTPI, mentioned in question 2.6 above. 6 Local Branch or Subsidiary?

5.2 Is there a participation exemption for capital gains? 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? 1. The following are exempt from tax, on the terms and within the limits set by the IS: Branches in Andorra of a non-resident company are considered a) Dividends or participations in profits from entities resident permanent establishments and are therefore subject to IRNRF. On or non-resident in Andorra, and also income obtained from the other hand, subsidiaries pay tax through the IS. Both pay tax at share transfers, winding up a company or withdrawal as a the rate of 10%. shareholder, if the following requirements are fulfilled:

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The incorporation of a subsidiary or PE is not subject to the payment is exempt from tax if that branch has been subject to a tax of a of taxes. Nevertheless, the contribution of real estate property similar nature to the Andorran IS. involves the payment of the property transfer tax, consisting of 4% If, in previous tax periods, the branch has obtained negative income of the value of the contributed property, or will be taxed IGI at 4.5% which was included in the entity’s tax base, the exemption is only if the contribution is made by a company, a professional or someone applied to the positive income obtained thereafter, from the time who carries out economic activities and the real estate is connected when the amount of the negative income is exceeded. to that professional/economic activity and cannot be considered a separate unit of business. 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident Andorra company (for example, a branch profits tax)? Dividends received by Andorran companies from fiscally non- resident entities are exempt from tax in Andorra, on the terms stated in question 5.2 above. There are no significant differences between the taxation ofa subsidiary and a branch of a non-resident company. The tax base is determined in both cases by the profits obtained by the branch or the 7.3 Does your jurisdiction have “controlled foreign subsidiary and specific tax adjustments are applied, as indicated in company” rules and, if so, when do these apply? previous sections. There is no specific branch profits tax. Nevertheless, in the taxation of the branch there are limitations Prevailing legislation provides that the difference between the on the deduction of tax for specific expenses. The main ones are normal market value and the accounting or tax value of the following summarised below: assets and liabilities must be included in the IS tax base: ■ Payments made by the branch to the parent company, or to ■ Those that are the property of an entity which is fiscally the other related branches or entities, as royalties, interest and resident in Andorra but which transfers its residence overseas, commission, paid in return for technical assistance services unless they remain attached to a PE located in Andorra. or for the use or assignment of property or rights, are not ■ Those that are the property of an entity resident in Andorra deductible. which transfers its effective headquarters outside of Andorra ■ Interest paid by foreign bank branches to the parent company and, in accordance with an international treaty, could be or other branches, for carrying out their activity, are deductible. considered a tax resident in the other state, unless they are ■ The reasonable parts of the expenses of directors and general attached to a PE located in Andorra. management relating to the branch, which belong to the use ■ Those transferred to a PE overseas, when the asset or liability of factors, are deductible. has been attached to the headquarters of an entity fiscally It must be taken into consideration that the operations between the resident in Andorra. branch or the subsidiary and the parent company, as related entities, must be valued at their normal market value, on the terms stated in 8 Taxation of Commercial Real Estate question 3.9.

6.3 How would the taxable profits of a local branch be 8.1 Are non-residents taxed on the disposal of determined in its jurisdiction? commercial real estate in your jurisdiction?

Please see question 6.2. The disposal of commercial real estate by non-resident entities is taxed IRNRF, with the profits of the PE, at the rate of 10% in the terms set out in question 6.2. 6.4 Would a branch benefit from double tax relief in its jurisdiction? 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your A branch, which is a PE in Andorra as mentioned in question 6.1, jurisdiction? would benefit from tax treaty provisions.

Also, a branch of an Andorran company established abroad can Andorran law (specifically, the IPTPI Law) taxes the transfer of the benefit from the exemption in the terms mentioned in question 5.2. shares of a mercantile company, as well as the granting or assignment of in rem rights over the mentioned shares, when at least 50% of the 6.5 Would any withholding tax or other similar tax be assets of the said company are real estate or in rem rights over real imposed as the result of a remittance of profits by the estate (commercial or not commercial) and, as a result of the transfer branch? of the shares or the assignment of the in rem rights, the acquirer holds a fifth of the company’s share capital or voting rights. This transfer The remittance of profits to the parent company is not subject to of indirect real estate is taxed as described in question 2.6. withholding tax or the payment of any tax in Andorra.

8.3 Does your jurisdiction have a special tax regime 7 Overseas Profits for Real Estate Investment Trusts (REITs) or their equivalent?

7.1 Does your jurisdiction tax profits earned in overseas Andorran legislation does not recognise trusts or equivalent real branches? estate investment as foundations which have the objective of preserving and/or protecting assets and real estate owned by one Income obtained overseas through a branch located outside Andorra or several people, or family assets, or those tending to establish a

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system for managing the said asset or family assets or to regulate than 12 months. This possibility is not available if the tax authorities transfers thereof. have informed the taxpayer of the opening of a review or investigation Nevertheless, Law 11/2008 of 12 June on Foundations recognises so- procedure. In this case, the regularisation of the taxpayer does not called private foundations and public sector foundations, whenever exclude liability in respect of the facts before the payment. they have legal objectives of general interest and their activities benefit generic groups of people. These non-profit foundations, 10 BEPS and Tax Competition which must be promoted by Andorrans or legal residents in Andorra, with tax residence in Andorra, are subject to the IS, at the general rate of 10%. Although these foundations are partially exempt from IS 10.1 Has your jurisdiction introduced any legislation for: i) income from carrying out activities constituting their specific in response to the OECD’s project targeting Base Andorra objective; ii) income from acquisitions and transfers for profit, Erosion and Profit Shifting (BEPS)? whenever these are carried out to fulfil their specific objective, in accordance with their own legislation; and iii) income that derives Andorra committed to BEPS on 15 October 2016 and, as a from transfers for a consideration of assets linked to carrying out the member of the BEPS Inclusive Framework, has committed itself specific objective, if the total product obtained is intended for new internationally to adapt its internal regulations to the provisions set investments related to this specific objective, under the conditions forth in the BEPS Action Plans. regulated by the law. Foundations are totally exempt if their incomes for the activities not exempted are less than EUR 10,000 per year. 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports? 9 Anti-avoidance and Compliance The Andorran Law on automatic exchange of information in tax 9.1 Does your jurisdiction have a general anti-avoidance matters 19/2016 entered into force on 1 January 2017, and at present or anti-abuse rule? the Consell General is discussing the draft Law on the Amendment of the Corporate Tax Law to adapt Andorran legislation to the Andorran regulations on business income tax (IS and IRPF) rule minimum standards of BEPS. that operations carried out between persons or related entities must be valued at their normal market value, as referred to in question 10.3 Does your jurisdiction support public Country-by- 3.9 above. Country Reporting (CBCR)?

9.2 Is there a requirement to make special disclosure of The draft Law on the Amendment of the Corporate Tax Law, now on avoidance schemes? discussion at the Consell General, mentioned in question 10.2, shall include Country-by-Country Reporting. The tax regulations enable the Andorran tax authorities to verify the transactions carried out by taxpayers according to the legal nature of 10.4 Does your jurisdiction maintain any preferential tax the act or business, the circumstances and the real facts, irrespective regimes such as a patent box? of the form or name used by the parties. The use of legal and economic resources by taxpayers that are not As was exposed in question 4.2, the current Andorran corporate tax set up under the normal or usual legal framework, in order just to law sets up some special tax regimes, consisting in an 80% reduction obtain tax benefits, is also considered an abuse of the tax regulations. on the tax base of the incomes, in the terms provided in the law, for: ■ Intangible asset exploitation companies: for the use of concessions or authorisations, transfer or licence rights, 9.3 Does your jurisdiction have rules which target not only transmission of assets, goods or rights and the provision of taxpayers engaging in tax avoidance but also anyone services. who promotes, enables or facilitates the tax avoidance? ■ International trade companies. Andorran tax regulation (Llei 21/2014 de Bases de l’Ordenament ■ Intra-group financial management and investment companies. Tributari) considers jointly and severally liable with taxpayers, These companies must have their premises located in Andorra, of anyone who collaborates actively to commit a tax infringement. a minimum of 20m2, and have at least one part-time employee to This person will be also liable for the sanction. carry out their activity. And, in the case of intra-group financial Under the Andorran Penal Code, a tax offence can be committed by management and investment companies, also have a minimum stock action or omission. capital of EUR 250,000. The IS law also provides a special regime for holding companies whose only object is to hold shares of foreign companies. These 9.4 Does your jurisdiction encourage “co-operative companies will have an exemption of all the dividends received compliance” and, if so, does this provide procedural from the participated companies and for capital gains obtained in benefits only or result in a reduction of tax? the transmission of this participation.

Andorran tax legislation encourages taxpayers to regularise their Companies must apply to the Ministry of Finance in advance for irregular tax situation voluntarily. If this is the case, there will not be these special regimes. any liability in tax offences; and also the taxpayer will benefit from a At present, as mentioned in question 10.2, the amendment to the reduction in the surcharge, depending on the time elapsed between the Corporate Tax Law will probably eliminate those special regimes for date on which the tax should have been paid and the day the taxpayer international trade companies and intra-group financial management effectively pays. The rate is 2% for two months of delay, 5% for and investment companies, and will change the requirements for the between two months and 12 months of delay, and 10% if it is more other special regimes mentioned above, to meet the BEPS standard.

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Daniel Arqués i Tomàs Mireia Ribó i Bregolat Arqués Ribert Junyer Advocats Arqués Ribert Junyer Advocats C/ Bra. Armengol, 6-8 C/ Bra. Armengol, 6-8 Ed. Crèdit Centre, 4art. Ed. Crèdit Centre, 4art. Andorra la Vella Andorra la Vella Andorra Andorra

Tel: +376 809 000 Tel: +376 809 000 Fax: +376 861 924 Fax: +376 861 924 Email: [email protected] Email: [email protected] Andorra Daniel Arqués i Tomàs is a Managing Partner of the firm Arqués Ribert Mireia Ribó joined the firm Arqués Ribert Junyer Advocats in 1995. She Junyer Advocats. He obtained his degree in Law at the University has experience in advising companies and individuals within the area of Navarra (Spain) and joined the firm in 1989, of which he is today of tax. She graduated in Law at the University of Barcelona (1994), responsible for the area of mercantile and tax. His professional training has a postgraduate degree in Andorran Law (2002), a Master’s degree also includes the certificate of Trademark Agent (Government of in tax and tributary management from the Polytechnic University of Andorra – 1996), a module on international taxation (ESADE – 2000), Catalonia and the School of Business Administration (2005), and and a postgraduate degree in financial management (Uda and UdL – undertook a postgraduate course in financial management provided 2007/8). Mr Arqués served on the Governing Board of the Andorran by the universities of Andorra and Lleida (2008). She also took a Bar from 1995 to 2002 and has been a contributing professor to the course on International Tax Planning at the University of Andorra postgraduate course in Andorran Law since 2002. He speaks Catalan, and the Center for Financial Studies (2016). She speaks Catalan, Spanish and English. Spanish, English and French.

Arqués Ribert Junyer Advocats was established in Andorra la Vella in 1964 by attorney Josep Maria Arqués Campillo. The firm is run by three managing partners and has a team of 16 lawyers and legal advisors. The firm has been ranked yearly by Chambers Global and Chambers Europe as the leading company in General Business Law since 2006, with its three managing partners ranked likewise. The firm mainly advises companies and family assets, and provides them with advice in the Corporate, Tax, Mercantile, Town Planning, Labour, IP, Financial and Corporate Finance areas. Among the international clients of the firm are banks, financial institutions and multinational corporations with interests in the Principality, as well as other law firms which act on behalf of their clients. The firm also has an office in Barcelona (Spain), staffed by five lawyers.

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Angola Samuel Almeida

VdA Vieira de Almeida Joana Lobato Heitor

be due provided that the contract/agreement is submitted in Angola 1 Tax Treaties and Residence for any legal purpose (e.g. notarisation, foreign exchange licensing or enforcement). 1.1 How many income tax treaties are currently in force in your jurisdiction? 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? Angola has not entered into any double tax treaties, but is reportedly in negotiations with Portugal and the Netherlands. Angola has no Value Added Tax, although it has adopted a monophasic tax called Consumption Tax (“Imposto de Consumo”). 1.2 Do they generally follow the OECD Model Convention Consumption Tax is levied on, inter alia: the importation of goods or another model? into Angola; local production of goods and merchandise; the provision of certain services, including consultancy services and This is not applicable in Angola. hotel services; lease of machines or other equipment not qualified as a royalty for Investment Income Tax purposes; and the hiring out of vehicles. Consumption Tax rates may vary from 5% up to 30%. 1.3 Do treaties have to be incorporated into domestic law before they take effect? 2.3 Is VAT (or any similar tax) charged on all transactions This is not applicable in Angola. or are there any relevant exclusions?

The supply of goods to final consumers is not subject to Consumption 1.4 Do they generally incorporate anti-treaty shopping Tax. Moreover, only services specifically listed – e.g. consultancy rules (or “limitation on benefits” articles)? services, water supply, telecommunications, port services, tourism services provided by travel agencies, etc. – are subject to taxation. This is not applicable in Angola.

2.4 Is it always fully recoverable by all businesses? If not, 1.5 Are treaties overridden by any rules of domestic what are the relevant restrictions? law (whether existing when the treaty takes effect or introduced subsequently)? Consumption Tax is a monophasic tax, and as such not recoverable, although corporate entities subject to Industrial Tax – the Corporate This is not applicable in Angola. Income Tax in Angola – may deduct such cost in determining their annual net income for corporate tax purposes. 1.6 What is the test in domestic law for determining the residence of a company? 2.5 Does your jurisdiction permit “establishment only” VAT grouping, such as that applied by Sweden in the A company is deemed to be resident for tax purposes in Angola, Skandia case? provided that the head office or its effective place of management is located in Angola. This is not applicable in Angola.

2 Transaction Taxes 2.6 Are there any other transaction taxes payable by companies?

2.1 Are there any documentary taxes in your jurisdiction? Yes. A 2% Property Transfer Tax (locally called “SISA”) and a 0.3% Stamp Duty on the transfer of real estate located in Angola are Stamp Duty (“SD”) is a tax levied on acts, contracts, agreements, also payable by companies. financing operations and other contracts entered into or signed in Angolan territory. For contracts signed outside Angola, SD will still

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

There are no other indirect taxes in Angola. This is not applicable in Angola.

3 Cross-border Payments 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- resident? 3.1 Is any withholding tax imposed on dividends paid by Angola a locally resident company to a non-resident? There are no other restrictions on tax relief for interest payments by a local company to a non-resident in Angola. Dividends paid by an Angolan resident company to its foreign shareholder – either individuals or corporate entities – are subject 3.8 Is there any withholding tax on property rental to a 10% Investment Income Tax withholding which is their final payments made to non-residents? tax liability in Angola. Tax must be withheld and delivered to the Angolan Tax Authorities by the resident company. Angola has neither All tenants are required to keep accounting records (e.g. companies any double tax treaties in force, nor a comprehensive participation resident or with a PE in Angola), and will have to withhold Urban exemption regime applicable to foreign investors. Said withholding Property Tax on rents paid to Angolan residents or non-resident tax is also applicable in the allocation of profits between a permanent establishment (“PE”) located in Angola and its foreign head office. landlords (the effective withholding tax rate is 15%). Additionally, there is a supplementary tax over dividends which was created by Law No. 14/15, of 11 August 2015: the new Private 3.9 Does your jurisdiction have transfer pricing rules? Investment Law. The supplementary tax is applicable whenever the amount of dividends distributed exceeds the shareholder Yes, transactions between related parties must comply with the contribution on the company’s own capital, as detailed below: “arm’s length” principle and the tax authorities may adjust the i) 15%, up to 20%. taxable profits of a taxpayer whenever there is a breach of such ii) 30%, between 20% and 50%. principle. The Angolan transfer pricing regime is still quite incipient – at least in its enforcement – but basically follows the main rules, iii) 50%, when it exceeds 50%. methods and guidelines of the OECD. The supplementary tax is not applicable whenever the dividends are Major taxpayers – i.e. corporate entities with an annual turnover reinvested in Angola. over Kz 7,000,000,000 – are required to prepare, on an annual basis, proper transfer pricing documentation. 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? 4 Tax on Business Operations: General Royalties paid by an Angolan company to a non-resident entity are subject to a 10% Investment Income Tax withholding, which is the 4.1 What is the headline rate of tax on corporate profits? final tax liability of beneficiaries in Angola. Please note that the definition of royalty also encompasses the lease of industrial and The headline rate of tax on corporate profits is 30% of Corporate commercial equipment. Income Tax (locally called “Imposto Industrial” – Industrial Tax).

3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? 4.2 Is the tax base accounting profit subject to adjustments, or something else? Interest paid under a shareholder’s loan to a foreign shareholder is Yes. Industrial Tax is a general tax over profits obtained by resident subject to a 10% Investment Income Tax withholding which is the entities in Angola or with a PE therein, based on the annual profits final tax liability of the foreign shareholder in Angola. Any other as computed for accounting purposes with specific tax adjustments. interest derived from other loans or credit facilities paid by a local Income subject to tax shall be that corresponding to the balance company to a non-resident entity is subject to a 15% Investment shown in the yearly income statement or profit and loss account Income Tax withholding. drawn up in accordance with sound accounting standards, and shall consist of the difference between all gains or revenues made during 3.4 Would relief for interest so paid be restricted by a given fiscal year and the costs and losses incurred during the same reference to “thin capitalisation” rules? year. Angola has also adopted most of the International Financial Reporting Standards (“IFRS”) for accounting purposes. There are no thin capitalisation rules, but interest paid from shareholders’ loans are not eligible as a deductible cost for Industrial Tax purposes for Angolan paying entities. 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments?

3.5 If so, is there a “safe harbour” by reference to which When computing the taxable profits for Industrial Tax purposes, tax relief is assured? taxpayers should bear in mind some specific tax adjustments; notably, among others: This is not applicable in Angola. i) Losses computation.

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ii) Provisions. the sale of equity participation may trigger Investment Income Tax). iii) Depreciation and amortisation of fixed assets. Further, a 1% Stamp Duty is due on receipts issued by Angolan iv) Transfer pricing. taxpayers for payments for the supply of goods or services. Additionally, some costs are not deductible for Industrial Tax purposes: 5 Capital Gains i) Undocumented costs. ii) Interest paid under shareholders’ loans. 5.1 Is there a special set of rules for taxing capital gains iii) Urban Property Tax, Personal Income Tax and Investment and losses? Income Tax. Angola iv) Social security contributions on the amount payable by the Capital gains arising from the disposal of shares in an Angolan employee. resident company may trigger either Industrial Tax or Investment v) Penalties and charges applied under infringement procedures. Income Tax, depending on the residency status of the seller and vi) Indemnities paid for events whose risk is insurable. whether the shareholder is a resident corporation or an individual. vii) Certain maintenance costs whenever the same are already As a general rule, capital gains obtained by resident corporations deductible for Urban Property Tax purposes. in the normal course of their business shall be treated as business viii) Adjustments to taxable income of previous years. profits and included in their annual tax return, which is subject to a 30% Industrial Tax. Conversely, non-resident shareholders ix) Costs of life insurance policies whose benefits are not attributable to the majority of employees. (irrespective of whether they are a corporation or an individual) are subject to a 10% Investment Income Tax. Capital gains obtained by resident entities or those with a PE 4.4 Are there any tax grouping rules? Do these allow in Angola from the disposal of real estate are subject to a 30% for relief in your jurisdiction for losses of overseas subsidiaries? Industrial Tax.

Yes. Major taxpayers may opt to be taxed under a special group 5.2 Is there a participation exemption for capital gains? taxation regime. The application of this regime is subject to the following This is not applicable in Angola. requirements: ■ The companies must be deemed major taxpayers for Angolan 5.3 Is there any special relief for reinvestment? tax purposes. ■ The companies must be resident and have their effective This is not applicable in Angola. place of management in Angola. ■ The parent company must hold, directly or indirectly, at least 90% of the share capital of other companies and more than 5.4 Does your jurisdiction impose withholding tax on the 50% of the voting rights, for a minimum holding period of proceeds of selling a direct or indirect interest in local two years. assets/shares?

Yes. The positive difference, determined annually, between capital 4.5 Do tax losses survive a change of ownership? gains and losses resulting from disposal of equity interests or other instruments generating income subject to Investment Income Tax Yes. For mergers or demergers, a tax incentive may be granted for are subject to a 10% withholding tax (provided that such income has corporate restructuring by way of a deduction of tax losses incurred not been subject to Industrial Tax or Personal Income Tax). by the merged or demerged companies, provided the surviving company or the new company has taxable profits for six tax years in a row and subject to prior authorisation by the Minister of Finance. 6 Local Branch or Subsidiary?

4.6 Is tax imposed at a different rate upon distributed, as 6.1 What taxes (e.g. capital duty) would be imposed upon opposed to retained, profits? the formation of a subsidiary?

There is no tax regime for retained profits. Dividends paid to an The incorporation of a local company in Angola is subject to 0.1% Angolan entity are subject to a 10% Investment Income Tax. An Stamp Duty, assessed over the real value of assets contributed by internal participation exemption regime may apply for minimum the shareholders, deducted of any costs borne as a result of such stakes of 25% held for a minimum holding period of one year. contributions.

4.7 Are companies subject to any significant taxes not 6.2 Is there a difference between the taxation of a local covered elsewhere in this chapter – e.g. tax on the subsidiary and a local branch of a non-resident occupation of property? company (for example, a branch profits tax)?

There are specific taxes over certain categories of income, such as Local companies are subject to a 30% Industrial Tax for profits Urban Property Tax (rents) and Investment Income Tax (capital obtained on a worldwide basis. Local branches are subject to a 30% income). Whenever these specific taxes are applicable, no Industrial Industrial Tax on profits attributable to the PE located in the country. Tax shall be due (e.g. the sale of a property or other movable assets may generate a taxable capital gain for Industrial Tax purposes, but

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Profits distributed to non-resident shareholders, as well as repatriation of profits attributable to the local branch of non-resident 8 Taxation of Commercial Real Estate entities, are subject to a 10% Investment Income Tax withholding – known as Branch Remittance Tax. 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? No. No tax is levied on capital gains obtained from the disposal of real estate by non-resident entities with no PE in Angola. Foreign companies operating in Angola through a PE (such as a local branch) are subject to a 30% Industrial Tax on profits attributable to 8.2 Does your jurisdiction impose tax on the transfer of Angola activity in the country. Angolan tax laws further provide that any an indirect interest in commercial real estate in your profits earned (i) resulting from sales in Angola of goods similar jurisdiction? to or of the same kind as those sold by its PE in Angola, or (ii) generated by other business activities carried out in Angola that are Yes. A 2% SISA tax is levied on the acquisition of shares/quotas similar to or of the same nature as those activities carried out by the in a company owning real estate whenever the acquirer becomes PE in Angola, are subject to Industrial Tax, since those activities can the owner of at least 50% of the issued share capital, and it may be still be attributed to the Angolan branch under a so-called “PE force deemed that such operation was driven with the main purpose of of attraction principle”. Apart from this particularity, taxable profits acquiring the properties held by the company in Angola. are accounted for and assessed pursuant to the same provisions as resident corporations. 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their 6.4 Would a branch benefit from double tax relief in its equivalent? jurisdiction? There is a special regime for Collective Investment Vehicles No, a branch would not benefit from double tax relief in Angola. (“CIVs”). The Angolan tax regime for CIVs, set up in the form of a fund or investment company, was approved by Presidential Legislative Decree No. 1/14, of 13 October 2014. 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the A CIV is subject to Industrial Tax on its annual profit obtained on a branch? worldwide basis in compliance with the accounting rules, including rent from real estate and investment income. Capital gains and The allocation of the annual profits by a local branch to its foreign losses that are not realised are not taxed. The CIT rate is 7.5% for head office is subject to a 10% Branch Remittance Tax (Investment investment CIVs and 15% for real estate CIVs. Income Tax). A CIV is exempt from any other income tax, namely Investment Income Tax and Urban Property Tax. A CIV is also exempt from Stamp Duty and Consumption Tax on bank commissions, and 7 Overseas Profits Stamp Duty on capital increases. Additionally, opened real estate funds are also exempt from Property Transfer Tax and Stamp Duty 7.1 Does your jurisdiction tax profits earned in overseas on the acquisition of any properties. branches? 9 Anti-avoidance and Compliance Yes, resident corporations are subject to a 30% Industrial Tax, assessed on a worldwide basis. 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? There are no general anti-avoidance or anti-abuse rules in Angola. Dividends paid to an Angolan entity by its foreign shareholder are subject to a 10% Investment Income Tax. Tax must be reported 9.2 Is there a requirement to make special disclosure of and assessed directly by the resident parent company (this is not a avoidance schemes? withholding mechanism). Dividends subject to Investment Income Tax are not subject to Industrial Tax (the Angolan parent company is There is no such requirement in Angola. entitled to a full deduction in the amount of the dividends received – although not being expressly contemplated in the law, the fact of these dividends being originated from a foreign source does not 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also seem to exclude the deduction, as no distinction is made between anyone who promotes, enables or facilitates the tax Angolan-sourced dividends or dividends from a foreign source). avoidance?

7.3 Does your jurisdiction have “controlled foreign There are no such rules in Angola. company” rules and, if so, when do these apply?

Angola has no “controlled foreign company” rules.

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9.4 Does your jurisdiction encourage “co-operative 10.2 Does your jurisdiction intend to adopt any legislation compliance” and, if so, does this provide procedural to tackle BEPS which goes beyond what is benefits only or result in a reduction of tax? recommended in the OECD’s BEPS reports?

“Co-operative compliance” is not encouraged in Angola. This is not applicable in Angola.

10 BEPS and Tax Competition 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? Angola 10.1 Has your jurisdiction introduced any legislation Country-by-Country Reporting is not supported in Angola. in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box? Please note that Angola is not an OECD Member State. In addition to this, we are not aware of any initiative from the Angolan Tax Authorities regarding this subject. There are no preferential tax regimes in Angola.

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Samuel Almeida Joana Lobato Heitor VdA Vieira de Almeida VdA Vieira de Almeida Rua Dom Luis I, 28 Rua Dom Luis I, 28 1200-151 Lisbon 1200-151 Lisbon Portugal Portugal

Tel: +351 21 311 3485 Tel: +351 21 311 3400 Email: [email protected] Email: [email protected] URL: www.vda.pt URL: www.vda.pt Angola Samuel Almeida joined VdA in 2015, and is a partner in the Tax Joana Lobato Heitor is a senior associate in the Tax practice, where practice. He has extensive experience in tax litigation, representing a she has been actively involved in tax litigation issues, international tax significant number of domestic and foreign companies before judicial planning and international tax consultancy. and arbitral tribunals, the Court of Justice of the European Union and As a senior associate in VdA’s Tax practice and focusing on tax even the Tax Authority, in both the non-contentious and contentious litigation, she has represented major Portuguese and international stages (tax inspections, legal assistance) as well as the judicial stage. clients in more than 200 tax proceedings before the Portuguese tax Samuel is a tax arbitrator at the Administrative Arbitration Centre. authorities, the tax courts, the arbitration court and the European Court of Justice. She counsels major Portuguese corporations in the course Samuel has also advised relevant Portuguese and international of their tax inspection procedures, enforced collection procedures and business groups in terms of restructuring, mergers and acquisitions, tax claims. tax audits, transfer pricing, securities and real estate funds, and tax issues related to regulated industries, such as telecommunications She focuses mainly on disputes regarding CIT, VAT, Stamp Duty and and insurance. Alongside this, Samuel has broad experience in regulatory/municipal charges. tax consulting and international tax planning, particularly in Angola, As a tax litigator, she was involved in several relevant disputes, such as: Mozambique and Cape Verde, having actively advised oil & gas representing a major Portuguese insurance group before Portuguese sector companies, particularly on LNG projects, submission of foreign tax courts regarding its income tax in what concerns so-called unit investment projects, multijurisdictional tax structuring investments, linked insurances; representing Dutch Pension Funds in tax litigation elimination of double taxation and structuring remuneration packages proceedings for recovery of tax paid on dividends obtained in Portugal; for expatriates. representing a major Portuguese telecommunications company before Samuel is recommended as a Tax Controversy Leader by the Portuguese tax courts in proceedings regarding income tax, Value International Tax Review and is also ranked in Chambers Europe, Best Added Tax, regulatory and municipal charges; and disputes with Lawyers and Who’s Who Legal as a Tax Expert. Tax Authorities and judicial litigation on Corporate Income Taxation of insurance companies, banks, pension funds, telecommunication He is the author of various books on tax and articles in specialised companies, oil companies and multinational sportswear manufacturers. journals, namely: She holds a postgraduate degree in Accounting Rules (Lisbon ■■ ‘Portugal – Law & Practice’, in Chambers and Partners, 2016; University) and in Tax Law (ISG Institute). ■■ ‘Breves notas introdutórias sobre a reforma do IRC’, in A Reforma Joana is a member of the Portuguese Bar Association and the do IRC, Vida Económica, October 2014; Portuguese Tax Association. ■■ ‘Breve Enquadramento do Regime de Preços de Transferência nos Países de Língua Oficial Portuguesa’, in Cadernos Preços de Transferência 2013, Almedina, 2013; ■■ ‘Primeiras Reflexões sobre a Lei de Arbitragem em Matéria Tributária’, in Estudos em Memória do Prof. Doutor J. L. Saldanha Sanches, Vol. V, Coimbra Editora, 2011; ■■ ‘A eliminação da dupla tributação económica dos dividendos e o Imposto Sucessório por avença no Orçamento do Estado para 2002’, in Fiscalidade n. 11, July 2002; and ■■ ‘Portugal: New Transfer Pricing Regime’, co-authored by Paulino Brilhante Santos, in Tax Planning International Transfer Pricing, Volume 3, Number 2, BNA International, February 2002.

Vieira de Almeida (VdA) is a leading independent law firm with more than 40 years of experience in international legal practice and with a strong presence in various sectors. The recognition of VdA’s work is shared with our team and clients, and is reflected in the awards achieved, such as: the “Financial Times 2015 Game Changing Law Firm in Continental Europe”; the “Financial Times Innovative Lawyers in Continental Europe 2013, 2016 and 2017”; the “Most Active Law Firm” awarded to VdA by Euronext for six consecutive years, including 2017; the “Portuguese Law Firm of the Year 2015 and 2016” awarded by the IFLR; the “Portuguese Law Firm of the Year 2016” and “Client Service Law Firm of the Year 2017” awarded by Chambers & Partners; the “Iberian Firm of the Year 2017” awarded by The Lawyer; the “International Firm of the Year 2017” awarded by Legal Business and the “Portuguese Law Firm of the Year in 2017” awarded by Who’s Who Legal. VdA, through its VdA Legal Partners (which designates the network of lawyers and independent law firms associated with Vieira de Almeida for the provision of integrated legal services), is actively present in 11 jurisdictions, including all African members of the Community of Portuguese-Speaking Countries (“CPLP”), as well as Timor-Leste and several francophone African countries. Angola – Cape Verde – Congo – Democratic Republic of the Congo – Equatorial Guinea – Gabon – Guinea-Bissau – Mozambique – Portugal São Tomé and Príncipe – Timor-Leste

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Armenia

Concern Dialog law firm Rustam Badasyan

1 Tax Treaties and Residence 1.6 What is the test in domestic law for determining the residence of a company?

1.1 How many income tax treaties are currently in force in your jurisdiction? All companies duly registered in Armenia are regarded as resident.

There is a wide network of international treaties for the avoidance 2 Transaction Taxes of double taxation and the prevention of tax evasion. Such treaties have been concluded between 46 countries (please find the list at the following link: http://taxservice.am/Content.aspx?itn=TLIntern 2.1 Are there any documentary taxes in your jurisdiction? ationalTreaties). There are no documentary taxes in Armenia. 1.2 Do they generally follow the OECD Model Convention or another model? 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? They usually follow the OECD Model Convention. The VAT rate is 20 per cent which is applicable to the taxable 1.3 Do treaties have to be incorporated into domestic law turnover. before they take effect? 2.3 Is VAT (or any similar tax) charged on all transactions International treaties come into force only after being ratified or or are there any relevant exclusions? approved. International treaties not complying with the Constitution cannot be ratified. Prior to the ratification of an international VAT is an indirect tax, which is applicable when carrying out treaty, the Constitutional Court determines the compliance with the transactions, such as the supply of goods, rendering of services, Constitution of the commitments stipulated therein. The National importation of goods, and free or partially free consumption. Assembly ratifies international treaties.

2.4 Is it always fully recoverable by all businesses? If not, 1.4 Do they generally incorporate anti-treaty shopping what are the relevant restrictions? rules (or “limitation on benefits” articles)? VAT paid for the importation of goods and for acquired goods LOB articles are not incorporated into the international treaties. As or services in the territory of RA can be deducted from the VAT an example of such an article, see the treaty between Great Britain derived from VAT-taxable transactions. VAT derived from zero- and Armenia; according to Article 22, no relief shall be available rated transactions or overpaid VAT amounts may be refunded if the main purpose or one of the main purposes of any person after an exploration or tax check carried out by the tax authorities. concerned with the creation or assignment of the rights in respect of Other VAT debit amounts which have not been used for deduction which the income is paid, was to take advantage of this Article by purposes can be refunded starting from year 2018, when the Tax means of that creation or assignment. Code of RA shall come into force. VAT debit amounts may not be refunded if an entity loses its status as a VAT-payer. In this case, 1.5 Are treaties overridden by any rules of domestic such amount may be regarded as losses for the purposes of Profit law (whether existing when the treaty takes effect or Tax. There are some limitations on reorganisation; there is a lack introduced subsequently)? of legal regulation regarding the transfer of debit amounts in case of reorganisation, which may result in the restriction of such right. International treaties are a constituent part of the legal system of This lack of regulation has been overridden by the Tax Code of RA. the Republic of Armenia (“RA”). If a ratified international treaty stipulates norms other than those stipulated in the laws, the norms of the treaty shall prevail.

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deductible). Interest to be paid on loans received by financial 2.5 Does your jurisdiction permit “establishment only” organisations is not deductible if it exceeds double the equity VAT grouping, such as that applied by Sweden in the capital; in the case of non-financial organisations, such interest is Skandia case? not deductible if it exceeds nine times the equity capital. Interest to be paid on loans received by financial organisations is not deductible A practice in Armenia which is similar to VAT grouping is applicable if the received loan is granted to a third party without interest, or if only in the case of joint ventures, where one of the members of a the amount of interest is less than it would have been, had the loan group is deemed a responsible party for calculation and payment of been received from a financial organisation. VAT. Not being regarded as an independent legal person, the branch cannot be considered as a party to a joint venture; only the parent 3.5 If so, is there a “safe harbour” by reference to which company can be a member of such agreement. In this case, only Armenia an Armenian-resident company may be defined as the responsible tax relief is assured? party for the purposes of VAT, and any service provided by a parent company in connection with the joint venture will be regarded as a There is no “safe harbour” to assure tax relief (deduction). VAT-taxable transaction. 3.6 Would any such rules extend to debt advanced by a 2.6 Are there any other transaction taxes payable by third party but guaranteed by a parent company? companies? No such extension is set by law. Turnover tax is a special type of tax replacing VAT and Profit Tax for companies. The turnover tax rate is 5 per cent for service and supply 3.7 Are there any other restrictions on tax relief for of goods, excluding expenses. interest payments by a local company to a non- resident?

2.7 Are there any other indirect taxes of which we should be aware? No other restriction is available.

Excise tax is applicable in case of production or import of some 3.8 Is there any withholding tax on property rental special goods (for example, benzene, some alcohol products, payments made to non-residents? cigarettes, etc.). Excise tax rates were increased by the Tax Code of RA and shall be applicable from 1 January 2018. Rental payments paid to non-residents shall be taxed at the rate of 10 per cent. 3 Cross-border Payments 3.9 Does your jurisdiction have transfer pricing rules?

3.1 Is any withholding tax imposed on dividends paid by According to the Tax Code of RA (coming into force on 1 January a locally resident company to a non-resident? 2018), transfer pricing rules are applicable for taxpayers who pay VAT and/or Profit Tax and/or royalties for the use of natural resources. Dividends paid to foreign corporate shareholders shall be taxed at Transactions between interconnected taxpayers who fall into the the rate of 10 per cent. above-mentioned categories are regarded as supervised transactions. If the amount of all supervised transactions of a taxpayer exceeds 3.2 Would there be any withholding tax on royalties paid AMD 200,000,000 for the current year, transfer pricing rules may by a local company to a non-resident? apply. In principle, a transfer price should match either what the seller would charge an independent “arm’s length” customer, or what Royalties paid to a non-resident shareholder shall be taxed at the the buyer would pay an independent “arm’s length” supplier. rate of 10 per cent. 4 Tax on Business Operations: General 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? 4.1 What is the headline rate of tax on corporate profits? Interest paid to a non-resident shall be taxed at the rate of 10 per cent. According to the Law on Profit Tax, the amount of the Profit Tax in respect of the taxable profit shall be calculated at a rate of 20 per cent. This rate is not changed by the Tax Code of RA. 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? 4.2 Is the tax base accounting profit subject to Thin capitalisation rules are not intended for foreign affiliates but adjustments, or something else? are of a general nature. Some maximum amounts are set, above which the deduction of paid interest is not allowed, according to According to the Law on Profit Tax, when determining taxable the Law on Profit Tax. The deduction of paid interest for the use profit, deductions from gross income are allowed as mentioned of loans or credits in an amount exceeding double the bank interest above (expenses, losses and other deductions). The amount of the rate established by the Central Bank of RA, is not allowed (currently same deductions may be deducted from gross income only once. the rate is 12 per cent, so the amount exceeding 24 per cent is not The same approach is set in the Tax Code of RA.

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taxable income for residents also includes any income received 4.3 If the tax base is accounting profit subject to overseas, such relief may be granted for any losses attributable to adjustments, what are the main adjustments? the income received overseas if such income is not taxed in the other State. We shall deal with double taxation treaties for these cases. 1. The main adjustments are as follows: a) the outflow and decrease of assets, or the growth of liabilities within the reporting year which leads to the 4.5 Do tax losses survive a change of ownership? decrease of the equity capital of a taxpayer, shall be considered as expenses; and In cases of change of ownership (change of shareholders), tax b) expenses incurred by a taxpayer exclusively and directly losses will survive, and are attributable to the same legal person. If ownership changes as a result of reorganisation of the company, Armenia on: the production of goods; the provision of services; progress and/or realisation in the goods (service) market; there might be some difficulties, as the article states that tax liabilities consulting and legal services; correction of shortcomings shall be transferred to the new entity, although there is no mention found in the course of the accompanying activities; of losses; nevertheless, bearing in mind many other regulations, tax guarantee control and exploitation; the preparation, losses will survive a change of ownership. mastering and conservation of production (construction); the safety of property; the training of staff; as well as other expenses related to and necessary for the receipt of 4.6 Is tax imposed at a different rate upon distributed, as income, shall be considered as necessary expenses. opposed to retained, profits? 2. Expenses shall include, in particular: a) material expenses; Tax is imposed at the rate of 20 per cent for taxable income notwithstanding the distributed or retained profits. Only one b) labour costs and other payments deemed equal thereto; exception is intended in the Tax Code of RA. The distribution of c) mandatory social insurance payments; dividends will become taxable for individuals in 2018 at the rate of d) depreciation allowances; 5 per cent; legal persons are deemed as tax agents for shareholders. e) insurance premiums; In the case of reinvesting the distributed dividends in the charter f) non-refundable (non-credited) taxes, duties and other capital of the legal person, no tax will be applicable. obligatory payments;

g) interest on loans and other borrowings; 4.7 Are companies subject to any significant taxes not h) payments on guarantees, letters of guarantee, letters covered elsewhere in this chapter – e.g. tax on the of credit and bank, insurance and lending organisation occupation of property? services; i) advertisement expenses; Fixed land and property taxes are set at different rates based on j) representative expenses; the type and size of the property. A taxpayer shall pay royalties k) business trip expenses; on the utilisation of natural resources; there are some other natural utilisation payments. Taxes for environmental protection are also l) court expenses; set by the law. m) compensation for the damage caused; n) fines, penalties and other proprietary sanctions, with the exception of cases defined in article 16, clause “g”, 5 Capital Gains paragraph 1 of this law; o) expenses arising from staff recruitment; 5.1 Is there a special set of rules for taxing capital gains p) expenses arising from audit, legal and other consulting, and losses? information and administrative services; q) expenses arising from factoring and trust operations; According to the Law on Profit Tax, the difference between r) reduced expenses revealed in the reporting year for the distributed and nominal value of shares shall not be deemed as three directly preceding years; and income and thus is not taxable. Capital gains received from the s) current expenses incurred on fixed assets. alienation of property or other assets are taxable for non-residents. Natural and other losses are also deducted from gross income. According to the Law on Profit Tax, there is also a definition of 5.2 Is there a participation exemption for capital gains? “Income not recognised as such”. Such types of income are not calculated for tax purposes, and are not calculated on gross income. No such exemption is prescribed.

4.4 Are there any tax grouping rules? Do these allow 5.3 Is there any special relief for reinvestment? for relief in your jurisdiction for losses of overseas subsidiaries? There is no special relief for reinvestment.

Tax grouping rules are intended for joint ventures. Two different legal persons can act based on a joint venture agreement without 5.4 Does your jurisdiction impose withholding tax on the forming a new legal person. In this case, one of the members shall proceeds of selling a direct or indirect interest in local assets/shares? be responsible for the calculation and payment of taxes, but both members are jointly and severally liable for tax purposes. There are no special rules for relief of losses of overseas subsidiaries. As Withholding tax is imposed at the rate of 10 per cent.

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law. Artificial deferral of tax by using low-tax offshore areas may 6 Local Branch or Subsidiary? qualify as tax evasion and lead to criminal liability.

6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? 8 Taxation of Commercial Real Estate

No such taxes are applicable. 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident Non-residents have to pay VAT on the disposal of commercial real Armenia company (for example, a branch profits tax)? estate. An Armenian-resident VAT-payer shall act as a tax agent in this case, and shall calculate and pay VAT at the rate of 20 per A local subsidiary of a non-resident is a legal person which is deemed cent. According to the legislation currently in force, if the Armenian as resident. A local branch of a non-resident company is deemed as counter-agent is not regarded as a VAT-payer, there is no mechanism a Permanent Establishment in Armenia; it may be registered and for payment of VAT either by the non-resident or by the counter- have a Taxpayer Number. A local branch is not deemed as a separate agent. This gap was eliminated by the Tax Code of RA, which will legal entity; the parent company may deduct losses attributable to come into force on 1 January 2018; if the Armenian counter-agent the branch. is not regarded as a VAT-payer, the foreign company shall calculate and pay VAT on its behalf. The income received by the non-resident from the disposal of commercial real estate is also subject to 6.3 How would the taxable profits of a local branch be withholding tax at the rate of 20 per cent. determined in its jurisdiction?

A local branch shall submit tax returns on its income and losses 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your on general conditions. The parent company must register separate jurisdiction? accounting for the income and losses of the branch.

This matter will be regulated according to question 5.4. 6.4 Would a branch benefit from double tax relief in its jurisdiction? 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their If a tax treaty includes a special provision that some type of income equivalent? shall be taxed only in another State, the branch will be exempted from paying taxes on such income in Armenia. No such regime is intended.

6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the 9 Anti-avoidance and Compliance branch?

9.1 Does your jurisdiction have a general anti-avoidance It will be regarded as a transfer within one legal entity and not be or anti-abuse rule? taxed. These rules are generated in the chapter of the Tax Code of RA 7 Overseas Profits which sets out responsibility for breaching tax provisions. Criminal liability is intended by the Criminal Code of RA for tax evasion. Tax evasion is described as entering obviously false data into tax 7.1 Does your jurisdiction tax profits earned in overseas returns or not providing tax returns which result in bringing damage branches? to the State in large amounts.

Branches are not regarded as a legal person; they form a part of parent company. Taxable income is derived both from Armenian 9.2 Is there a requirement to make special disclosure of avoidance schemes? sources and from overseas. In the case that income attributable to the branch is taxed in another State, such income may be exempted from tax in Armenia according to the tax treaties. No such requirement is provided by law.

7.2 Is tax imposed on the receipt of dividends by a local 9.3 Does your jurisdiction have rules which target not only company from a non-resident company? taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax avoidance?

Dividends received by the company which pays Profit Tax are deemed According to the Criminal Code of RA, anyone who promotes, as deductible from the gross income, and are therefore not taxed. enables or facilitates tax avoidance can be regarded as a “Helper” and may be liable for promoting tax evasion. Please also note that 7.3 Does your jurisdiction have “controlled foreign a cross-checking procedure may be implemented if, during the tax company” rules and, if so, when do these apply? audit procedure, there is evidence that the counter-agent of the taxpayer being audited is engaged in unlawful actions relating to There are no controlled foreign company rules specifically set in the tax evasion.

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9.4 Does your jurisdiction encourage “co-operative 10.4 Does your jurisdiction maintain any preferential tax compliance” and, if so, does this provide procedural regimes such as a patent box? benefits only or result in a reduction of tax? The legislation provides a possibility of forming a free economic Recently the system of a “law-abiding taxpayer” was implemented. zone. The plan and aims of setting up such zone have been Taxpayers may apply for and receive special reference under this provided to the Government of RA, which shall adopt a decision system, which enables them to be qualified as low-risk. This means on its formation. The supply of goods and rendering of services that tax audit procedures cannot be imposed more than once in a are free from VAT for organisations operating in such zones; five-year period. In order to be qualified as such, a taxpayer must profit is exempted from Profit Tax entirely. Currently, a company operating in the IT sector manufacturing mobile and other electronic Armenia submit all tax returns on time, in order not to be held liable for breaching tax legislation. equipment, is working under a free economic zone regime. A horizontal monitoring system was introduced in the Tax Code of There is also an incentive whereby start-up IT companies may apply RA. This enables large taxpayers to cooperate with the tax authorities. for a tax certificate exempting them from all applicable taxes (VAT, All the data relating to transactions is visible to the tax authorities Profit Tax). The income of the employees is taxed at the rate of 10 per by means of a special electronic system. A taxpayer may also apply cent (in general income tax rates, these are 24.4 per cent for income not for a tax ruling via this system, and the tax authorities shall provide exceeding AMD 120,000 and 26 per cent for amounts exceeding this). the answer within the time limits set by law. For the duration of the agreement, taxpayers shall not be included in the high-risk group (this means that a tax audit cannot be implemented for each year). Rustam Badasyan Concern Dialog law firm 10 BEPS and Tax Competition 1 Charents str., office 207 Yerevan Armenia

10.1 Has your jurisdiction introduced any legislation Tel: +374 94 910017 in response to the OECD’s project targeting Base Email: [email protected] Erosion and Profit Shifting (BEPS)? URL: www.dialog.am

No such legislation has been introduced. The Minister of Finance of RA has signed the Multilateral Convention to Implement Tax Treaty Rustam Badasyan is a Junior Partner at Concern Dialog law firm and is responsible for the firm’s Tax Law practice. Rustam Badasyan has Related Measures to Prevent Base Erosion and Profit Shifting, on previous work experience in the public sector, in the Pre-Investigation behalf of Armenia. The necessary legal basis will be developed and Legal departments of the State Revenue Committee of the after ratification of the treaty. Republic of Armenia. Rutstam Badasyan has also been involved in consultancy on tax optimisation matters relating to the acquisition of a major mining 10.2 Does your jurisdiction intend to adopt any legislation company in Armenia and on tax consequences relating to the issuance to tackle BEPS which goes beyond what is of Eurobonds by one of the major financial organisations. This also recommended in the OECD’s BEPS reports? included consulting on the implementation of tax treaties. Rustam Badasyan has significant experience in the representation See question 10.1 above. of entities in tax cases during administrative procedures and in court. Successful cases include representation of a mining company in connection with the interpretation of the legislation concerning 10.3 Does your jurisdiction support public Country-by- the payment of royalties for the usage of natural resources, and Country Reporting (CBCR)? representation of a branch of an international entity concerning VAT- taxable transactions implemented by the parent company in Armenia This system has not yet been incorporated. and attributed to the branch by the tax authorities. Rustam Badasyan is member of the Chamber of Advocates of the Republic of Armenia.

Concern Dialog law firm is a full-service law firm founded in 1998, providing litigation, administrative representation, and legal advice to individual and corporate clients in Armenia, as well as international arbitration and public international law services worldwide. Concern Dialog law firm specialises in the following fields of law: corporate; competition; contract; customs; labour; property and tax law; litigation and dispute resolution; debt collection; electronic communications; mining; energy; gambling; banking and finance and other regulatory issues; legal compliance; legal consulting to public entities; legislation and policy development; migration issues; support for non-profit and charity organisations; and representation and defence in criminal proceedings, with an emphasis on white-collar crime and victim protection. The company is a member of several prominent legal networks such as TAGLaw and Nextlaw by Dentons, and is also an active member of several business associations including the American Chamber of Commerce in Armenia, the German Business Association in Armenia, and the French- Armenian Chamber of Industry and Commerce. Recently the company and leading practitioners were ranked by Chambers and Partners (Europe and Global) and The Legal 500 (Europe and Global).

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Australia Adrian O’Shannessy

Greenwoods & Herbert Smith Freehills Tony Frost

1 Tax Treaties and Residence 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)?

1.1 How many income tax treaties are currently in force in your jurisdiction? Australia’s tax treaties traditionally did not incorporate anti-treaty shopping rules. However, limitation of benefits articles are included in some of Australia’s more recently negotiated treaties, including Australia has comprehensive income tax treaties with 45 countries, its treaties with the US, Japan and Germany. Other new treaties including the US, UK, most Western European countries, most East contain specific provisions within the dividend, interest, and royalty and South-East Asian countries and New Zealand. articles. In addition, Australia’s domestic general anti-avoidance Australia has also concluded Tax Information Exchange Agreements rules and the new diverted profits tax (see question 9.1 below) may with a number of countries, including many low-tax jurisdictions apply to prevent treaty shopping. such as the Cayman Islands. It is a signatory to the Multilateral Australia’s treaty with Germany includes a simplified anti-treaty Convention to Implement Tax Treaty Related Measures to Prevent shopping rule that incorporates a BEPS-style principal purpose test. Base Erosion and Profit Shifting (MLI), and to the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (Common Reporting Standard or 1.5 Are treaties overridden by any rules of domestic CRS). Australia has entered into a “Model 1” intergovernmental law (whether existing when the treaty takes effect or agreement with the US and enacted domestic legislation to give introduced subsequently)? effect to the US Foreign Account Tax Compliance Act (FATCA). Yes, occasionally. The Agreements Act gives treaties the force of Australian law. To the extent that a treaty provision conflicts 1.2 Do they generally follow the OECD Model Convention with domestic legislation, the treaty provision takes precedence. or another model? However, specific override provisions can also be found in the Agreements Act. These include the preservation of Australia’s Australia’s income tax treaties generally follow the OECD model. general anti-avoidance rule. However, the US treaty follows the US model and some differences exist in some other treaties. Australia’s treaties vary as to the allocation of rights to tax alienation of interests in land-rich entities. 1.6 What is the test in domestic law for determining the residence of a company? The US, UK, Finnish, New Zealand, Norwegian, Japanese, French, South African, Swiss and German treaties provide withholding concessions and exemptions for interest paid to unrelated financial A company is tax-resident in Australia if it is incorporated in institutions and dividends paid to holding companies and significant Australia, or if it carries on business in Australia with central corporate shareholders. For details, see questions 3.1 and 3.3. management and control in Australia or its voting power controlled by shareholders resident in Australia. Most of Australia’s tax treaties Australia’s most recently signed double tax treaty – its treaty with include a tie-breaker for dual residency, usually by reference to the Germany, signed in November 2015 – largely gives effect to the place of effective management. OECD’s Base Erosion and Profit Shifting (BEPS) recommendations. The Tax Office flagged in a recent draft ruling (TR 2017/D2) that it is refining its approach to these tests, following 2016 Australian 1.3 Do treaties have to be incorporated into domestic law High Court decisions in Bywater Investments and Hua Wang Bank. before they take effect?

Treaties must be incorporated into Australia’s domestic law before 2 Transaction Taxes they take effect. Each time a treaty is concluded, the International Tax Agreements Act 1953 (Agreements Act) is amended to give 2.1 Are there any documentary taxes in your jurisdiction? force of law to the treaty.

Yes. Stamp duty is a documentary tax.

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Stamp duty is levied by the various Australian States and Territories. a foreign company (whether or not it has an Australian branch) can Although largely aligned, the duty regimes differ between the States join an Australian GST group. and Territories.

Stamp duty is levied on transfers of interests in land (including 2.6 Are there any other transaction taxes payable by on the value of plant and equipment transferred with land), the companies? creation of beneficial interests in land, transfers of shares and units in landholder entities, motor vehicle transfers and insurance Various States impose minor licensing fees. contracts at rates of up to 5.95%. Victoria, New South Wales and Queensland have introduced a foreign purchaser surcharge of up to 8% on foreign purchases of residential land; a similar surcharge is 2.7 Are there any other indirect taxes of which we should

Australia also proposed in South Australia and Western Australia. be aware? Queensland, Western Australia and the Northern Territory also levy duty on transfers of business assets such as goodwill. Yes. Australia also imposes the following indirect taxes: A nominal amount of duty also applies to some documents e.g. trust Excise duty deeds in New South Wales and Victoria. Excise duty is levied on some goods manufactured in Australia, While stamp duty was historically a documentary tax, avoidance- including alcohol, tobacco and petroleum. type rules can also apply duty to transactions effected without Land tax documents. Land tax is imposed by each State and the Australian Capital Territory on the value of commercial real estate. Agricultural land is 2.2 Do you have Value Added Tax (or a similar tax)? If so, excluded. Broadly, the liability for land tax rests with the landowner at what rate or rates? and the rates differ depending on the jurisdiction. The maximum rate is 3.7% per annum for land values in excess of A$1.176 million Goods and services tax (GST) is imposed on supplies that are in South Australia. connected with Australia and on goods imported into Australia. The Queensland, Victoria and New South Wales have each introduced a GST rate is 10%. GST is similar in scope and operation to the Value surcharge for foreign owners of residential property at rates of up to Added Tax systems of European Union Member States. 1.5% per annum. Customs duty 2.3 Is VAT (or any similar tax) charged on all transactions Goods imported into Australia may be subject to customs duty. or are there any relevant exclusions? Major bank levies

Supplies that are classified as “GST-free” do not attract GST. These A UK-style levy on Authorised Deposit-taking Institutions (ADIs) supplies include education, health-related services, most basic with licensed entity liabilities of at least A$100 billion commenced types of food, exports (of goods and services), and the supply of a on 1 July 2017. Currently only five Australian banks have liabilities business as a going concern. of that magnitude. The levy rate is 0.015% per quarter. Other supplies that do not attract GST are known as “input-taxed” The State of South Australia commenced a parallel levy (also at a supplies. These include financial supplies such as a transfer of rate of 0.015% per quarter) on South Australia’s share (6.06% for shares in a company, residential rent and the sale of previously 2017–18) of the liabilities subject to the Commonwealth levy. occupied residential premises. The distinction is important because while neither class of supply is 3 Cross-border Payments subject to GST, input tax credits cannot be claimed for GST included in the price of acquisitions that relate to input-taxed supplies. 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? Dividends are subject to a 30% dividend withholding tax, unless the rate is reduced under an applicable treaty (generally to 15%). An entity is broadly entitled to claim input tax credits for things However, Australia operates under an “imputation system”, acquired in the course of its business, except to the extent that the whereby dividends paid by an Australian resident company out of acquisition relates to input-taxed supplies (for example, financial post-tax profits may carry a franking credit (essentially a tax credit) supplies such as money lending or other dealings with debt or equity for the tax already paid by the company. “Fully franked” dividends interests). Input tax credits are offset against the taxpayer’s own GST are exempt from dividend withholding tax. liabilities so that only a net GST amount is payable. Apportionment for “mixed use” acquisitions is required. Reduced input tax credits Under the US, UK, Japanese, Finnish, New Zealand, Norwegian, are available for some transactions that would otherwise be input- Swiss and German treaties (each a recently concluded or taxed supplies (for example, transaction banking and funds transfer renegotiated treaty), dividend withholding tax is also reduced to services, securities brokerage and trustee and custodial services). nil where certain beneficially entitled companies (generally, listed companies, or companies that are wholly or mainly owned by a listed company or listed companies) hold at least 80% of the voting 2.5 Does your jurisdiction permit “establishment only” power in the company paying the dividends, and a 5% rate applies VAT grouping, such as that applied by Sweden in the where any beneficially entitled company holds at least 10% of the Skandia case? voting power. The second concession also applies under the French, Chilean, South African and Turkish treaties, which are also recently No. Both the head office of a company and its branch office are renegotiated treaties. treated as a single entity for Australian GST purposes. However,

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Finally, dividends will not be subject to dividend withholding tax De minimis exemptions where they are paid out of “conduit foreign income”. Conduit foreign Exemptions from the thin capitalisation rules apply to: income is essentially foreign income of the Australian company that ■ taxpayers with interest deductions of less than A$2 million; is not subject to Australian tax (for example, non-portfolio dividends and – please refer to question 7.2 below) and is paid on to a foreign resident as a dividend rather than accumulated in Australia. ■ outward investors whose Australian assets make up 90% or more of total assets by value. Dividends that are effectively connected with an Australian branch of a non-resident are taxed in Australia on an income tax assessment Maximum allowable debt tests rather than a withholding tax basis. Thin capitalisation rules will not deny any portion of an entity’s interest deductions provided that the entity’s debt is within the

maximum allowable amount. Australia 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? Entities that are not ADIs are allowed a “safe harbour” debt-to-equity ratio of 1.5:1. The safe harbour may be exceeded if a higher level of Royalties are subject to a 30% royalty withholding tax. If a treaty debt could reasonably be borrowed by the entity from commercial applies, royalty withholding tax is usually reduced to 10%. Royalty lenders. However, this “arm’s length debt” level is judged according withholding tax is reduced to 5% under the US, UK, New Zealand, to strict statutory criteria (parent company support is disregarded). Finnish, South African, Japanese, Norwegian, French, Swiss and Investors that are not ADIs are also allowed gearing of their German treaties. Australian operations at up to 100% of the overall group’s worldwide The term “royalty” is broadly defined in Australia’s domestic gearing. legislation and includes fees paid for the use or supply of commercial Significantly higher debt levels are afforded to financial institutions, property and rights. The term “royalty” is also defined in Australia’s including a 15:1 safe harbour. ADIs are allowed gearing levels treaties and can differ from Australia’s domestic legislation. In referable to their regulatory prudential capital requirements. those cases, the treaty definition prevails. More recently negotiated treaties exclude natural resource payments 3.6 Would any such rules extend to debt advanced by a and equipment royalties from royalty withholding tax. However, third party but guaranteed by a parent company? interest withholding tax applies to rental payments to non-residents under arrangements in which cross-border leases are structured as hire-purchase arrangements. The thin capitalisation rules apply to all debt interests, including debt advanced by related and unrelated parties, whether Australian Royalties derived by a resident of a country with which Australia has or foreign-resident, and in the case of debt advanced by an unrelated concluded a comprehensive income tax treaty, that are effectively party, whether or not it is supported by a related party. connected with an Australian branch, are treated as business profits and are taxed in Australia on an income tax assessment rather than a withholding tax basis. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- resident? 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? Any interest withholding tax due on interest payments by a local company to a non-resident must be remitted to the Tax Office before Interest is generally subject to a 10% interest withholding tax. This the local company is entitled to a tax deduction for the interest rate may be reduced under an applicable treaty. payments. Exceptions apply to interest paid on debentures and other debt Australia’s transfer pricing rules (see question 3.9 below) also instruments (such as Eurobonds) offered publicly. Under Australia’s require Australian operations to have an arm’s length capital recently concluded and renegotiated treaties (e.g. the US, UK, structure and can therefore also restrict interest deductions beyond French, Japanese, Finnish, New Zealand, Norwegian, South African, Swiss and German treaties), interest paid to an unrelated the restrictions imposed by the thin capitalisation rules. financial institution is also exempt from withholding tax. Interest that is effectively connected with an Australian branch of 3.8 Is there any withholding tax on property rental a non-resident is taxed in Australia on an income tax assessment payments made to non-residents? rather than a withholding tax basis. Generally, no. Income derived by non-residents from real property located in Australia is subject to tax in Australia on an income tax 3.4 Would relief for interest so paid be restricted by assessment basis. However, there are two significant exceptions. reference to “thin capitalisation” rules? Net rental income distributed by an Australian managed investment fund (i.e. an Australian REIT – please refer to question 8.3 below) Australia’s thin capitalisation rules apply to foreign-controlled is subject to 15% or 30% withholding tax depending on the country Australian groups (inward investors) and Australian groups that of residence of the investor. In addition, rent paid to a non-resident invest overseas (outward investors). The rules restrict interest for the use of industrial, scientific or commercial equipment can deductions when the amount of debt used to finance the Australian constitute a royalty subject to the withholding tax regime (with operations exceeds specified limits (see question 3.5 below). some treaty-based exceptions as described in question 3.2 above).

3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? 3.9 Does your jurisdiction have transfer pricing rules?

Safe harbours are provided under de minimis exemptions and Australia has transfer pricing rules that are modelled on the OECD maximum allowable debt tests. Transfer Pricing Guidelines. The rules are contained in Australia’s

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domestic legislation and its tax treaties. The rules apply to “non- arm’s length” cross-border transactions. Guidance on what is 4.3 If the tax base is accounting profit subject to considered “arm’s length” is provided by the Tax Office via a adjustments, what are the main adjustments? number of public rulings. Taxable income often differs from commercial accounting profit The rules give the Tax Office the discretion to adjust non-arm’s because of: length pricing of transactions to increase taxable income in Australia. Conversely, treaties can require Australia to reduce taxable income. ■ different tax depreciation rates for plant and equipment; The preferred methods applied in Australia to determine the ■ differences in the timing of recognition of income and deductions for tax purposes compared to revenue and appropriate arm’s length pricing of cross-border transactions are: expenses for accounting purposes;

Australia ■ the Comparable Uncontrolled Price method; ■ tax concessions which allow greater than 100% depreciation ■ the Resale Price method; for certain research and development expenditure; ■ the Cost Plus method; ■ recognition of some taxable capital gains not recognised for ■ the Profit Split method; and accounting purposes; ■ the Transactional Net Margin method. ■ capitalisation of some expenses for tax purposes; To confirm that international prices are arm’s length, taxpayers can ■ in the case of consolidated groups (see question 4.4 below), apply for an advanced pricing agreement with the Tax Office. different calculations of the tax cost of assets; and Legislation enacted in 2012 also allows taxation of profits on an ■ elimination from taxable income of impairment, fair value and mark-to-market type adjustments made for commercial independent entity basis, having regard to OECD principles, rather accounting purposes. than on a purely transaction-by-transaction basis.

4.4 Are there any tax grouping rules? Do these allow 4 Tax on Business Operations: General for relief in your jurisdiction for losses of overseas subsidiaries?

4.1 What is the headline rate of tax on corporate profits? Special grouping rules apply in respect of income tax and GST. Income tax consolidated group The headline rate of company tax is currently 30%. A reduced 27.5% tax rate applies to companies with annual turnover of up to An Australian resident head company may irrevocably elect to form A$10 million from the 2016–17 income year. The A$10 million an income tax consolidated group. A consolidated group consists threshold rises to A$50 million in the 2018–19 income year. of a head company and all its wholly-owned Australian subsidiary However, legislation before the Australian Parliament will deny companies, trusts and partnerships. The consolidated group is taxed the lower tax rate to companies with at least 80% of their turnover as a single entity and intra-group transactions are ignored. The head comprising passive income such as dividends, interests, royalties company is primarily liable for the group income tax and subsidiaries and rent. may be jointly and severally liable if it fails to pay. Broadly, the tax consolidation regime allows group restructuring, pooling of losses Companies are generally required to pay tax under a “Pay As You and other tax attributes and movement of assets within the group, Go” (PAYG) collection system which requires large companies without tax consequences. The tax costs of a subsidiary member’s (and most other large taxpaying entities) to pay monthly or quarterly assets are set at the time of joining the group and the tax costs of instalments of estimated tax, calculated by reference to the amount shares in the subsidiary are set on leaving the group. of income derived during that period. Any difference in tax payable from the estimate is due, in the case of a company, five months after Losses made by overseas subsidiaries cannot be brought onshore. the year’s end. This is the case irrespective of income tax consolidation. First-tier Australian companies in a wholly-owned multinational corporate group that has multiple entry points into Australia may 4.2 Is the tax base accounting profit subject to adjustments, or something else? irrevocably elect to form a “Multiple Entry” consolidated (MEC) group for income tax purposes. Australian taxpayers broadly are taxed on their worldwide “taxable GST Group income”, typically for the year ending 30 June. As a separate election, groups with 90% common ownership may Taxable income comprises “assessable income”, as defined by be registered as a GST group. A GST group must nominate a statute, less allowable tax deductions. The amount of assessable representative member who is responsible for the GST liabilities of income and tax deductions often varies from the amount of income the whole group. Supplies and acquisitions made within the group and expenses recognised for accounting purposes. Tax adjustments are ignored for GST purposes. often therefore produce differences between a company’s taxable income and its reported profits. 4.5 Do tax losses survive a change of ownership? Australia also has complex rules to attribute certain underlying income earned by foreign entities to Australian owners. Generally, Companies and stock exchange listed trusts can utilise losses active business income earned by a controlled foreign company is following a change of majority ownership if they continue to carry not attributed to the Australian controller, and profit distributed to on substantially the same business and do not undertake a new the Australian controller as a dividend is exempt from tax. Active business or transactions of a kind not undertaken before the change. foreign business income derived directly by an Australian resident Unlisted trust losses do not survive a change of ownership. company from the operation of a foreign permanent establishment (branch) is also generally exempt – see question 7.1 below.

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for the gain reductions (“CGT discounts”) available to individuals 4.6 Is tax imposed at a different rate upon distributed, as and complying superannuation funds. opposed to retained, profits?

Australian tax is generally imposed on company profits, regardless 5.2 Is there a participation exemption for capital gains? of distributions. In addition, “conduit foreign income” rules allow the active foreign business income and foreign non-portfolio Different exemptions from capital gains tax apply to non-resident dividends of an Australian resident company to be passed on to and resident investors. foreign investors (as dividends) free of Australian tax. Non-resident investors Non-residents are broadly only subject to capital gains tax on assets

4.7 Are companies subject to any significant taxes not that are “taxable Australian property”, as defined. It includes direct Australia covered elsewhere in this chapter – e.g. tax on the and indirect interests in Australian real property and the business occupation of property? assets of Australian branches. A non-resident investor is not subject to capital gains tax on a sale of shares in an Australian company, Fringe benefits tax unless the investor’s shareholding exceeds 10% of the company and the Australian company’s value is mostly attributable to Australian Fringe benefits tax (FBT) is a tax on employers on the value of non- real property. cash “fringe benefits”, provided to their employees. Fringe benefits typically include the provision of motor vehicles, expense payments Resident investors and low-interest loans. Employees are not taxed on these benefits. Australian resident companies are prima facie subject to Australian The FBT rate is currently 47% of the “grossed-up” value of benefits tax on their worldwide income. However, a capital gain or loss (that is, grossed-up so that the tax payable is equivalent to the tax made by a resident company on shares in a foreign company may that would be payable on an equivalent amount of salary). be reduced (in some cases to nil) under a “participation exemption”. The resident company must have held a 10% or greater direct voting Petroleum resource rent tax interest in the foreign company for a continuous period of 12 months Petroleum resource rent tax is imposed on income from the recovery in the last two years. In that case, the capital gain or loss is reduced of petroleum products from offshore petroleum projects and, since 1 by the value of the foreign company’s active business assets as a July 2012, also from onshore petroleum projects. percentage of the value of its total assets. Various other natural resource royalties are also applied by the Federal Government and the States. 5.3 Is there any special relief for reinvestment? Luxury car tax Luxury car tax is levied at 33% of the excess over A$65,094 Relief for reinvestment is not available in Australia per se. However, (indexed; A$75,526, indexed, for specified fuel-efficient cars) of the the CGT provisions contain some “replacement asset” rollovers retail value of a new car sold in or imported into Australia. which allow deferral of tax on capital gains. They are generally Wine equalisation tax targeted at restructures and takeovers. A commonly used rollover (“scrip-for-scrip” rollover) is available for scrip exchanges where the Wine equalisation tax is levied at 29% of the wholesale value of bidder acquires at least 80% of the shares in the target company. A wine for consumption in Australia. limited reinvestment rollover is available where the ownership of a Payroll tax capital asset ends due to compulsory acquisition by the Government. Payroll tax is a tax imposed by each State and Territory, on aggregate wages, salaries and other employee benefits above threshold 5.4 Does your jurisdiction impose withholding tax on the amounts ranging from A$625,000 to A$2 million, at rates of up to proceeds of selling a direct or indirect interest in local 6.1%. assets/shares?

Since 1 July 2016, purchasers of Australian real property or interests 5 Capital Gains in land-rich entities must withhold 12.5% of the purchase price if payable to a non-resident vendor. This is a non-final withholding 5.1 Is there a special set of rules for taxing capital gains tax, and does not apply to transactions valued at less than A$750,000 and losses? or on-market securities transactions. Non-resident vendors can provide purchasers with Tax Office clearance certificates confirming A comprehensive set of statutory rules within the income tax that tax need not be withheld. legislation includes capital gains (after netting off capital losses) in An Australian agent can also be required to answer for tax payable assessable income. by a non-resident principal on profits derived through the agent, These rules also contain capital gains tax exemptions and and the Commissioner can by notice require any person controlling concessions, including the ability to index cost bases until 19 money belonging to a non-resident to account for tax due by the September 1999 and, alternatively, reductions of taxable gains made non-resident. by individuals, trusts, life insurance companies and complying superannuation funds (but not companies) on assets held for at least 12 months. The reduction does not apply to gains accrued 6 Local Branch or Subsidiary? after 8 May 2012 by foreign individuals, either directly or as trust beneficiaries. However, non-residents are only taxable on gains 6.1 What taxes (e.g. capital duty) would be imposed upon from real property interests (see question 5.2 below). the formation of a subsidiary? The rate of tax imposed on capital gains made by a company is the same 30% tax rate imposed on income. Companies are not eligible There is not any tax imposed on the formation of a subsidiary. A

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nominal administrative charge is levied by the Australian corporate Australian resident companies are able to deduct financing costs regulator (ASIC) on incorporation of a company and also applies to incurred to derive foreign income not subject to Australian the registration of a branch of a foreign company. tax, subject to the thin capitalisation limits and transfer pricing requirements discussed in questions 3.4 to 3.6 above.

6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident 7.2 Is tax imposed on the receipt of dividends by a local company (for example, a branch profits tax)? company from a non-resident company?

Australia’s tax rules generally do not differentiate between A “non-portfolio” dividend paid by a foreign company to an conducting Australian operations through a subsidiary or a branch. Australian resident company not acting in the capacity of a trustee Australia Both forms of operation are subject to the same 30% corporate tax is not subject to Australian tax, whether received directly or through rate. an interposed partnership or trust. A non-portfolio dividend is a However, an Australian resident subsidiary with offshore dividend from a company in which one holds at least 10% of the investments would prima facie pay Australian corporate tax on its voting power. The exemption is restricted to dividends paid on worldwide income (subject to a participation exemption for the shares that are “equity” under Australian tax law. Dividends on income of a foreign branch or subsidiary as mentioned in question legal form shares that are “debt” under Australian tax law, such as 5.2 above and questions 7.1 and 7.2 below, and the conduit foreign some redeemable preference shares, are not exempt. income rules mentioned in question 3.1 above), whereas a branch Other dividends received from non-resident companies are taxed in of a non-resident company would be taxed only on its Australian- Australia, subject to a credit for any foreign income tax paid. sourced income. Subsidiary company profits on which tax has been paid in Australia are able to be repatriated as dividends free of Australian dividend 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? withholding tax, and Australia does not impose a branch profits tax.

Australia does have “controlled foreign company” rules that 6.3 How would the taxable profits of a local branch be attribute to Australian resident companies shares of income earned determined in its jurisdiction? or gains made by foreign companies they control, even though the foreign income or gains may not be distributed. A foreign company with an Australian branch is taxed on its A foreign company is a “controlled foreign company” if: Australian-sourced income that is attributable to that branch. Arm’s length transfer pricing rules apply to transactions between a branch ■ a group of five or fewer Australian entities, each individually controlling at least 1% of the company, collectively controls and its offshore head office or other foreign branches. at least 50% of the company shares; ■ a single Australian entity (and its associates) controls 40% 6.4 Would a branch benefit from double tax relief in its or more of the company, unless it is controlled by another jurisdiction? person or group; or ■ a group of five or fewer Australian entities (either alone Generally yes, but Australia’s tax treaties broadly allow full taxing or together with their associates) otherwise controls the rights to the source country where a treaty resident company carries company. on business through a permanent establishment in Australia. The Attributable taxpayers are 1% interest holders within a group of five treaties invariably require arm’s length principles to be applied in controllers, and other 10% interest holders. determining the taxable income of the branch. In these respects, Australia’s treaties broadly follow OECD treaty principles. However, the branch of a non-resident generally would not be able 8 Taxation of Commercial Real Estate to take advantage of Australia’s treaties with a third country.

8.1 Are non-residents taxed on the disposal of 6.5 Would any withholding tax or other similar tax be commercial real estate in your jurisdiction? imposed as the result of a remittance of profits by the branch? Yes. Gains on the disposal of Australian real estate are currently subject to tax on an income tax assessment basis. In addition, as There is not any withholding tax or other tax imposed on the mentioned in question 5.4 above, a non-final 12.5% withholding remittance of profits by a branch. tax applies to the proceeds of substantial real estate sales by non- residents. 7 Overseas Profits 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate located 7.1 Does your jurisdiction tax profits earned in overseas in your jurisdiction? branches? Yes, capital gains tax applies to these sales, and the 10% non- Income derived by an Australian resident company in carrying resident withholding tax mentioned in questions 5.4 and 8.1 above on business at or through a permanent establishment in a foreign also applies to them. country generally will not be subject to Australian tax. Likewise, a capital gain or loss made by an Australian resident company on An indirect interest is an interest in a resident or non-resident entity an asset used in carrying on business at or through a permanent with more than 50% of its assets comprising Australian real estate, establishment in a foreign country generally will be disregarded. held either directly or indirectly. However, only indirect interests

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of at least 10% held for 12 of the past 24 months are subject to tax. In May 2016, the Australian Government announced the intro- Treaty relief may also be available for residents of Germany. duction of a UK-style, 40% diverted profits tax (DPT). This A revenue account gain on transfer of an indirect interest in tax commenced on 1 July 2017 and also applies to groups with Australian real property is also subject to tax in Australia if sourced worldwide income in excess of A$1 billion. in Australia, applying common-law source-of-income rules. 9.2 Is there a requirement to make special disclosure of avoidance schemes? 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent? Australia does not have a special disclosure rule imposing a requirement to disclose avoidance schemes to the Tax Office in Australia Yes, Australia applies “managed investment trust” (MIT) advance of the company’s tax return being submitted. However, terminology. These trusts (or their managers) are required to be large company tax returns filed after 30 June 2012 are required to regulated by Australian managed fund laws, to be sufficiently report any tax position that is only “as likely as not to be correct”, widely held (there are varying thresholds for retail and wholesale or which is both uncertain and disclosed in the company’s or a funds) and to satisfy non-trading conditions. related party’s financial statements e.g. pursuant to the US Fin 48 accounting rule. In addition, the Australian Government announced Distributions to non-residents of MIT rental income and capital in May 2016 that it will introduce rules to require tax advisors (and gains are subject to a final withholding tax of 30%, or 15% if the some taxpayers) to report “aggressive tax arrangements”. non-resident is a resident of a country with which Australia has Taxpayers may seek a Tax Office ruling for assurance about the concluded an information exchange agreement. (Distributions tax treatment of a potentially contentious transaction. Rulings are of interest and dividends are subject to interest and dividend binding on the Tax Office. withholding taxes.) An MIT can also make an election for gains on property to be taxed on capital account rather than revenue account. New rules that came into effect on 1 July 2016 allow the income of 9.3 Does your jurisdiction have rules which target not MITs with a single unitholder class or that are registered with (and only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax therefore regulated by) the Australian Securities and Investments avoidance? Commission, to be taxed on an “attribution” rather than distribution basis. Withholding tax still applies to income that is attributed, and Australian law prohibits an adviser or another person promoting so retained by the fund rather than distributed, but the new regime a scheme for the dominant purpose of a tax benefit that is not effectively eliminates penalty rates of tax that would otherwise reasonably arguable (a “tax exploitation” scheme), or promoting any apply to retained income. scheme on the basis of its conformity with a Tax Office “product” ruling if the scheme is materially different to the scheme ruled on. 9 Anti-avoidance and Compliance 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural 9.1 Does your jurisdiction have a general anti-avoidance benefits only or result in a reduction of tax? or anti-abuse rule?

The Tax Office applies a “risk-differentiation framework” to assess Australia has a general anti-avoidance rule, contained in Part IVA taxpayer compliance risk. The framework is designed to identify of the tax legislation. It supplements other, more specific anti- the likelihood of tax positions being taken that the Tax Office avoidance rules dealing with, for example, franking credit streaming disagrees with. It takes into account the Tax Office’s perception of and dividend stripping. taxpayer behaviour, its approach to business (e.g. risk appetite), its The provisions of Part IVA are extremely broad and extend to governance, and its past compliance with tax laws. schemes entered into with the sole or dominant purpose of obtaining The assessment outcomes determine the intensity of application of a tax benefit. A tax benefit is essentially a reduction of assessable Tax Office resources to monitoring ongoing taxpayer compliance. income, an increase in allowable tax deductions (including tax Higher-risk taxpayers are subject to continuous review, typically deferral beyond what would be reasonably expected), a reduction including comprehensive audit and intensive risk analysis. in withholding tax or access to a tax credit. The application of In addition, the new DPT applies a 40% tax rate in lieu of the 30% Part IVA is dependent on the Commissioner’s discretion, which is general company tax rate, with an express intention that taxpayers generally reserved for schemes that the Commissioner considers conform to cross-border tax positions that the Tax Office considers artificial or contrived. Part IVA prevails over other provisions of acceptable and therefore avoid DPT assessments. the Australian tax legislation and Australia’s tax treaties. Where it is applied, the tax benefits are denied and administrative penalties are generally imposed. 10 BEPS and Tax Competition Part IVA has seen significant change. It was strengthened in 2013 following a number of Tax Office losses before the Courts. Internal 10.1 Has your jurisdiction introduced any legislation group restructures, for example, can no longer escape application in response to the OECD’s project targeting Base of Part IVA on the basis that, absent the tax benefit, the restructure Erosion and Profit Shifting (BEPS)? would not have proceeded. In December 2015, the “Multinational Anti-Avoidance Law” Australia has taken a number of initiatives directed at base erosion extended the application of Part IVA to schemes for the avoidance and profit shifting. of Australian permanent establishments. It applies from 1 January As mentioned in question 9.1 above, legislation was enacted in 2016 to groups with worldwide income in excess of A$1 billion. December 2015 to extend Australia’s general anti-avoidance law to

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schemes for the avoidance of Australian permanent establishments. As also mentioned in question 9.1 above, legislation was enacted 10.3 Does your jurisdiction support public Country-by- in June 2017 to introduce a DPT, and Australia has also introduced Country Reporting (CBCR)? Country-by-Country Reporting requirements (discussed below) with effect from 1 January 2016. Yes, Australia has signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports, and In May 2016, the Australian Government announced that it will in December 2015 enacted legislation to introduce a CBCR regime. introduce anti-hybrid rules with effect from the later of 1 January 2018 or six months after enabling legislation has been passed. These Multinational entities with worldwide income in excess of A$1 rules are to be modelled on the OECD’s BEPS recommendations. billion are required to comply with CBCR requirements for income years commencing on or after 1 January 2016. Statements In June 2017, the Australian Government signed the Multilateral Australia corresponding to the Local file, Master file and Country-by-Country Convention to Implement Tax Treaty Related Measures to Prevent reports outlined in the OECD’s BEPS recommendations are required Base Erosion and Profit Shifting. within 12 months of year-end.

10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is 10.4 Does your jurisdiction maintain any preferential tax recommended in the OECD’s BEPS reports? regimes such as a patent box?

In addition to the measures discussed in questions 9.1, 9.2 and Australia maintains a preferential tax regime for “offshore banking 10.1 above, the Australian Government has promoted a new tax units” (OBUs). An OBU is a “unit” or notional division of (usually) transparency code (i.e. voluntary public disclosure of income and a bank that conducts offshore banking activities. In broad terms the taxation statistics) for taxpayers with an annual turnover in excess taxable profit of an OBU is effectively taxed at 10%, rather than the of A$100 million. standard 30% company tax rate. Since a May 2016 Australian Government directive, Australia’s Foreign Investment Review Board is also now actively imposing tax (e.g. capitalisation) conditions on approval of significant foreign investment into Australia.

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Adrian O’Shannessy Tony Frost Greenwoods & Herbert Smith Freehills Greenwoods & Herbert Smith Freehills 101 Collins Street ANZ Tower, 161 Castlereagh Street Melbourne VIC 3000 Sydney NSW 2000 Australia Australia

Tel: +61 3 9288 1723 Tel: +61 2 9225 5982 Fax: +61 3 9288 1828 Fax: +61 2 9221 6516 Email: [email protected] Email: [email protected] URL: www.greenwoods.com.au URL: www.greenwoods.com.au

Adrian’s practice involves advising public and multinational companies Tony is Managing Director of Greenwoods & Herbert Smith Freehills. Australia on all aspects of domestic and international tax planning, with a focus Prior to joining the firm as a Director in 2003, he was a tax partner with on corporate issues such as capital raisings and structured finance, a major international accounting firm and worked at a major Australian mergers & acquisitions and corporate restructures, and employee bank. share and dividend reinvestment plans. A qualified lawyer and chartered accountant with more than 30 years’ Key areas of practice include: experience, Tony is renowned for his expertise, particularly in relation to financial services organisations and transactions. He advises ■■ domestic and offshore debt capital raising, dividend and capital clients on a range of matters, including innovative financial products, return strategies; mergers & acquisitions, cross-border dealings, transfer pricing, tax ■■ superannuation and life insurance taxation; audits and negotiations with the Australian Taxation Office. Tony’s ■■ capital gains tax and other reorganisation issues associated with career highlights include working on the world’s first simultaneous mergers & acquisitions and corporate restructures; Advance Pricing Agreement which involved cross-border transfer pricing across five countries. ■■ the taxation of public and private trusts and alternative structures such as stapled vehicles, partnerships and unincorporated joint Tony has had significant involvement in tax reform and has written or ventures; coordinated many submissions for the banking industry. He regularly authors articles and seminar papers, as well as speaking at industry ■■ employee share and option plans; events and conferences. Tony also spent 15 years as a lecturer in the ■■ structuring for inbound investment into Australia, particularly from Master of Laws program at the University of Sydney. the United States, and structuring for outbound investment; and Tony is recognised as a Pre-eminent Tax Lawyer in NSW in Doyles ■■ tax litigation. Guide 2017.

Greenwoods & Herbert Smith Freehills is a team of highly experienced taxation specialists, focused on developing deep relationships with clients to fully understand their business needs. The firm’s philosophy is for Directors to be actively involved in matters, thereby ensuring the highest standards of technical expertise and providing the experience necessary for creative, yet highly practical, solutions. The success of Greenwoods’ approach has resulted in the firm being consistently recognised in league tables, tax guides, and industry-related awards, including: Doyles Guide | 2017 ■■ Tier 1 firm for tax law in NSW, Victoria and Western Australia. International Tax Review – Asia Tax Awards | 2017 ■■ Winner: Litigation and Disputes Australia. Legal 500 Asia Pacific | 2017 ■■ Tier 1 firm. Best Lawyers, Australia | 2017 ■■ Best law firm for Tax in Australia and top listed firm in Sydney for Tax. International Tax Review – World Tax | 2016 ■■ Tier 1 firm. Financial Review Client Choice Awards | 2015 ■■ Best Tax Services Firm, Best Law Firm (revenue under $50m) and Best Accounting Firm (revenue under $50m).

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Austria Clemens Philipp Schindler

Schindler Attorneys Martina Gatterer

could override treaty law as “lex posterior”, but Austria has not 1 Tax Treaties and Residence enacted any tax treaty override legislation so far. However, Austrian tax authorities take the view that tax treaty law does not limit the 1.1 How many income tax treaties are currently in force in application of domestic anti-abuse provisions. your jurisdiction? 1.6 What is the test in domestic law for determining the Austria has an extensive network of income tax treaties, with 89 residence of a company? treaties currently in force (as of 1 January 2017). In addition, Austria has concluded seven tax information exchange agreements A corporation will be deemed tax-resident in Austria if either its legal with Andorra, Gibraltar, Guernsey, Jersey, Mauritius, Monaco and seat (place which is designated as such in its articles of association) St. Vincent & the Grenadines. Furthermore, the Convention on or its place of management is situated in Austria. The place of Mutual Administrative Assistance in Tax Matters is applicable. management is defined as the centre from which the activities of the company are effectively directed from a management perspective; 1.2 Do they generally follow the OECD Model Convention whereas in the past the focus was mainly on where the relevant or another model? decisions are taken (usually proven by board meeting minutes), the tax authorities now increasingly also take into account where such Austrian tax treaties generally follow the OECD Model Convention, decisions are communicated and implemented by the management. with certain minor modifications. Double taxation of dividends, Resident companies are subject to unlimited taxation in Austria on interest and royalties is mostly eliminated by the credit method under their worldwide income. Austrian tax treaties, while double taxation of other income is avoided Based on the tax treaties concluded by Austria, a company is by the exemption method. Some of the tax treaties contain tax-sparing considered to be resident in the state in which the place of its provisions for different types of income, such as royalties and interest. effective management is located. In practice, the domestic term “place of management” is understood in the same way as “place of 1.3 Do treaties have to be incorporated into domestic law effective management”. before they take effect? 2 Transaction Taxes After ratification by the Austrian Federal President and the two chambers of Austrian parliament, tax treaties apply directly without further incorporation into domestic law. 2.1 Are there any documentary taxes in your jurisdiction?

1.4 Do they generally incorporate anti-treaty shopping The Austrian Stamp Duty Act (Gebührengesetz – “GebG”) contains rules (or “limitation on benefits” articles)? an exhaustive list of legal transactions that are subject to Austrian stamp duty provided that a signed written deed is executed and a Austria has no general policy to include anti-avoidance rules in tax nexus to Austria exists. Legal transactions such as, inter alia, lease treaties that go beyond the rules in the OECD Model Convention, agreements, assignments, suretyships and mortgages are covered but Austrian courts rely on the general anti-abuse rules (see question by the stamp duty provisions at rates of between 0.8% and 1% of 9.1 for further details). On the request of the tax treaty partner, a few the contract value. Stamp duty is levied neither on share transfer treaties incorporate such rules. For example, the tax treaty concluded agreements, nor on loan and credit agreements signed after 31 with the United States includes a limitation-on-benefits clause. December 2010. Signing a written deed on a stamp-dutiable transaction in Austria 1.5 Are treaties overridden by any rules of domestic will trigger stamp duty. Due to a broad interpretation of the term law (whether existing when the treaty takes effect or “signed written deed”, even if the contract is not signed in Austria, introduced subsequently)? bringing a written deed originally signed outside Austria into Austria may result in the necessary nexus to Austria for a stamp- In general, the tax treaty provisions prevail over domestic law as dutiable transaction. In addition, any written reference to the “lex specialis”. Technically, a provision introduced subsequently contract/transaction that is signed by only one of the parties to the

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transaction but is then handed over (sent) to another party or (in If an entrepreneur renders both VAT-able and VAT-exempt supplies, certain circumstances) to a third party, could provide sufficient only the input VAT attributable to the VAT-able supplies can be evidence of the transaction to give rise to stamp duty. The term recovered. Input VAT deduction is only allowed if an invoice that “written deed” comprises even email communication carrying an fulfils certain formal requirements has been provided by the supplier. electronic or digital signature (details are disputed), which gives It should be noted that holding companies (including acquisition evidence of a stamp-dutiable transaction (e.g. mentioning of a lease vehicles) are usually not entitled to claim credit for input VAT, unless or assignment agreement by a party thereto). they also provide VAT-able services, in which case input VAT may be claimed for the related expenses. Accordingly, holding entities 2.2 Do you have Value Added Tax (or a similar tax)? If so, often provide such VAT-able services (e.g. accounting, procurement

at what rate or rates? or IT services) to other (group) entities, to recover some input VAT. Austria

VAT is levied at all levels of the supply of goods and services with 2.5 Does your jurisdiction permit “establishment only” the right to deduct input VAT to the extent the recipient thereof VAT grouping, such as that applied by Sweden in the qualifies as an entrepreneur. Austria’s VAT Act is based on the EU Skandia case? Council Directive on the common system of Value Added Tax. The standard rate is 20%. A reduced rate of 10% applies, inter The Austrian Value Added Tax Act provides that the effects of a alia, to food, books, newspapers and periodicals, passenger VAT tax group are limited to the Austrian parts of the company. transport and renting of residential immovable property. As of 1 Therefore, it is possible, under current legislation, to include a January 2016, a second reduced rate of 13% has been introduced permanent establishment of a foreign company (but not the entire (including accommodation in hotels (as of 1 May 2016), and various company) into an Austrian VAT tax group. Services between the recreational and cultural services). foreign head office and the domestic permanent establishment are thus taxable. The Austrian tax authorities interpret the provisions in place in line with the Skandia case. 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? 2.6 Are there any other transaction taxes payable by There are two types of exemption from VAT: an exemption under companies? which credit for input VAT is not possible; and an exemption which entitles the taxpayer to credit for input VAT. Real estate transfer tax is levied on every acquisition of domestic The first type of exemption includes banking, finance and insurance- real estate and, in some cases, also if shares in corporations or related transactions, the disposal of shares, the leasing or letting interests in partnerships that directly own real estate are transferred. of immovable property for commercial purposes, the supply of In particular, the transfer of buildings and land, building rights and land and buildings, health and welfare services, and supplies by buildings on third-party land falls within the scope of the Austrian charitable organisations. For most of these transactions, there is an real estate transfer tax, whereas the transfer of machinery and plants option for standard VAT treatment (i.e. VAT has to be charged, but is not subject to real estate transfer tax. with the benefit that credit for input VAT may be claimed). For the In short, the real estate transfer tax is 3.5% (reduced rates apply rental of land and buildings for commercial purposes, the option to between specific family members and in the case of a transfer of charge VAT is only applicable if the tenant uses the object to render shares in corporations or interests in partnerships or reorganisations) services that are subject to VAT. and it is irrelevant whether it is acquired by an Austrian or a foreign The second type of exemption includes exports, intra-community citizen or resident. supplies, the supply of services consisting of work on movable In sale and purchase transactions, the tax base of the real estate property acquired or imported for the purpose of undergoing such transfer tax is the amount of consideration for the transfer (fair work, and the supply of services when these are directly linked to market value) – at least the value of the real estate. In the absence the transit or the export of goods. of a consideration (e.g. if shares are transferred), special rules The supply of services and the delivery of goods of an entrepreneur, determine the relevant tax base. In general, taxation is based on the who operates his business domestically and whose turnover does fair market value of real estate property, introduced by the recent not exceed an amount of EUR 30,000 p.a. (regime for small tax reform. entrepreneurs – Kleinunternehmerregelung), are exempt from VAT In addition to real estate transfer tax, a registration duty for the land without credit for input VAT. register at a rate of 1.1%, also based on the purchase price or the fair market value, is levied if a new owner is registered (i.e. not if shares are transferred, as the owner of the real estate does not change in 2.4 Is it always fully recoverable by all businesses? If not, such case). what are the relevant restrictions?

A deduction or refund for input VAT is available to both resident 2.7 Are there any other indirect taxes of which we should and non-resident entrepreneurs, if the respective supplies are used to be aware? render supplies that are not VAT-exempt under the first type (without the entitlement to claim credit for input VAT), with financial Austrian Capital Duty (a 1% tax on equity contributions by the institutions being the most relevant example. An entrepreneur direct shareholder) has been abolished as of 1 January 2016. Due to is any person (individual or legal entity) conducting a business EU legislation, such capital duty cannot be reintroduced. independently in order to realise earnings (though not necessarily Austrian Insurance Tax applies on the payment of insurance profits), regardless of nationality or residence. premiums for several types of insurance contracts.

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loans provided by related parties to an Austrian company may 3 Cross-border Payments be considered “hidden” equity and thus not be treated as debt if the Austrian corporation is too thinly capitalised (taking into 3.1 Is any withholding tax imposed on dividends paid by account debt provided by unrelated parties). In such case, interest a locally resident company to a non-resident? payments are reclassified as dividends for Austrian tax purposes, and accordingly are not deductible and are subject to withholding Dividends paid to a non-resident are subject to a withholding tax tax. However, an interest barrier rule is foreseen under the Anti- of 27.5%. BEPS Directive (national implementation is expected closer to the implementation deadline). A reduction or relief from withholding tax might be available based

Austria on a tax treaty or the EU Parent-Subsidiary Directive. According to the Austrian rules implementing the EU Parent-Subsidiary 3.5 If so, is there a “safe harbour” by reference to which Directive, there is no withholding tax on dividends if (i) the parent tax relief is assured? company has a form listed in the EU Parent-Subsidiary Directive, (ii) the parent company owns (directly or indirectly) at least 10% of While there is no official “safe harbour” rule, the Austrian tax the capital in the subsidiary, and (iii) the shareholding has been held authorities generally accept debt-to-equity ratios of around 4:1 to continuously for at least one year. 3:1. However, this can only serve as guidance and the adequate debt- Provided that certain documentation requirements (including a tax to-equity ratio has to be analysed on a case-by-case basis. Having residence confirmation for the foreign recipient, which needs to be said that, higher debt-to-equity ratios have also been accepted. issued by the foreign tax authorities on a special tax form) are met, a reduction or relief can be granted at source. No relief at source is 3.6 Would any such rules extend to debt advanced by a granted in cases of potential tax avoidance, e.g. in case of holding third party but guaranteed by a parent company? companies with little or no substance in the state of residence (i.e. if the recipient is a company that does not have an active trade or No. However, debt provided by unrelated parties is to be taken into business, employees and business premises). If no reduction or relief account when determining the debt-to-equity ratio. was granted at source, companies can apply for a refund. In the course of the refund procedure, the company has to provide evidence that the interposition of the foreign company does not constitute an 3.7 Are there any other restrictions on tax relief for abusive arrangement. If such refund procedure was successful, a interest payments by a local company to a non- resident? simplified procedure is applied in the three following years. As a further option, a refund of withholding tax on dividends No, there are no other restrictions on tax-deductibility of interest can also be claimed by a foreign corporation resident in the EU paid to third (i.e. unrelated) parties. In cases of interest payments to to the extent that the Austrian company is not relieved from its related parties, limitations apply to avoid base erosion if the interest withholding obligation, so long as the tax withheld is not creditable income is not sufficiently taxed abroad (see question 10.1). in the recipient’s home state under a double taxation treaty. Although not limited to cross-border payments in other jurisdictions, one should note that Austria, as of today, has no interest barrier rule. 3.2 Would there be any withholding tax on royalties paid Accordingly, interest payments made to third (i.e. unrelated) parties by a local company to a non-resident? are always tax-deductible. However, as a result of the OECD BEPS project, it is worth noting that the Anti-BEPS Directive provides Royalties paid to a non-resident are subject to a withholding tax of for such interest barrier rule to be implemented by the EU Member 20%. States before and applied as of 1 January 2019. The national A reduction or relief from withholding tax might be available implementation is expected closer to the implementation deadline. based on a tax treaty or the EU Interest and Royalties Directive. According to the Austrian rules implementing the EU Interest and 3.8 Is there any withholding tax on property rental Royalties Directive, there is no withholding tax on royalties if (i) the payments made to non-residents? parent company has a form listed in the EU Interest and Royalties Directive, (ii) the parent company owns directly at least 25% of the Such payments would not be subject to withholding tax, but the capital in the subsidiary, and (iii) the capital holding has been held rental payments that relate to domestic real estate would be subject continuously for at least one year. to limited taxation and the non-residents would be obliged to file a The procedures for the application of reduction or relief, as well as tax return for the rental payments. for refund, are the same as for dividends.

3.9 Does your jurisdiction have transfer pricing rules? 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? Austria has generally adopted the OECD Transfer Pricing Guidelines. The Austrian Ministry of Finance has issued transfer Interest paid to non-resident corporations is generally not subject to pricing guidelines as well, which are based on the OECD Guidelines. withholding tax. Therefore, transactions between related corporations, as well as profit attributions to permanent establishments, must be at arm’s 3.4 Would relief for interest so paid be restricted by length. There is also an obligation to prepare documentation for reference to “thin capitalisation” rules? transfer prices in inter-group transactions. Under Austrian procedural law, a formalised advance ruling Despite the fact that there are no Austrian statutory rules on thin procedure can be filed to determine the applicable transfer prices. capitalisation, as a matter of administrative practice and case law,

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Furthermore, there are provisions about documentation obligations attributed at all). Losses attributed to the Austrian parent company (as mentioned below at question 10.3). in the past have to be recaptured in Austria if the non-resident group member offsets the losses with its own income in subsequent years (or fails to do so despite being entitled to) or if the non-resident 4 Tax on Business Operations: General group member exits the Austrian tax group. The foreign losses have to be calculated on the basis of Austrian tax law, but they can only be offset to the extent a loss also exists according to foreign tax 4.1 What is the headline rate of tax on corporate profits? law. Special rules for the recovery of losses apply in case of the liquidation of a non-resident group member. Additionally, foreign Generally, Austrian corporations are subject to the corporate income losses shall be deductible only to the extent of 75% of the total profit tax levied over their profits, at a rate of 25%. Austria generated by all domestic group members and the parent company. There is an annual minimum corporate income tax (i.e. which In general, write-offs on participations in group members are not applies irrespective of the actual income and thus also in a loss tax-deductible (the rationale is that losses can be offset from other situation) of EUR 500 p.a. for a limited liability company in the first profits anyway). For shares acquired in an Austrian target that five years after incorporation and EUR 1,000 p.a. during the next became a group member, a goodwill amortisation over a period five years. Thereafter, the minimum corporate income tax is raised of 15 years (capped at 50% of the purchase price) was applied, to EUR 1,750 p.a. The minimum corporate income tax for a stock leading to an additional tax deduction. For shares acquired after corporation amounts to EUR 3,500 p.a. 28 February 2014, this option is no longer available. Goodwill amortisations from transactions before that date can be continued, 4.2 Is the tax base accounting profit subject to if the goodwill amortisation influenced the purchase price of the adjustments, or something else? shares. In this context, it should also be noted that the restriction of this goodwill amortisation to domestic targets violated EC law, Companies are obliged to keep books according to the commercial according to case law. law rules; the accounting profits based on Austrian generally accepted accounting principles (“GAAP”) then serve as the basis for 4.5 Do tax losses survive a change of ownership? determining the tax base. The accounting profits are then adjusted for certain positions as per the below section. The tax loss carry-forwards of a corporation are, in general, not affected by a change of ownership. However, there are two 4.3 If the tax base is accounting profit subject to exemptions. adjustments, what are the main adjustments? Loss carry-forwards can expire if the “economic identity” of the company is no longer given in connection with an acquisition of The main adjustments include: the shares for consideration (Mantelkauf). The law specifies that ■ tax-exempt income (e.g. income from dividends and capital the “economic identity” is lost if there is a significant change of the gains subject to the participation exemption); shareholder structure, the organisational structure and the business structure of the company. Generally, all three criteria have to be ■ non-deductible expenses (e.g. profit distributions, certain met cumulatively in order to apply, taking into account not only expenses in relation to company cars, certain representation expenses, directors’ fees exceeding EUR 500,000, expenses the time of the acquisition, but also the following months (up to in connection with tax-free income, interest or royalties paid approximately one year). to related parties in low-tax jurisdictions); and Furthermore, loss carry-forwards can expire in a reorganisation if ■ differences in the calculation of provisions, in depreciation the business unit that caused the losses does not exist anymore or is rates and regarding valuation (impairment) rules for other reduced in such a way that it cannot be considered comparable to the assets and liabilities. business unit in which the losses occurred.

4.4 Are there any tax grouping rules? Do these allow 4.6 Is tax imposed at a different rate upon distributed, as for relief in your jurisdiction for losses of overseas opposed to retained, profits? subsidiaries? No. Both retained and distributed profits are taxed at the same rate According to the Austrian group taxation regime, a group parent at the level of the corporation (i.e. only corporate income tax), but company can form a tax group with a subsidiary if the parent additional taxes may apply at the shareholder level when the profits company exercises financial control over the subsidiary (i.e. the are then distributed. By comparison, in the case of a partnership, the parent owns more than 50% of the capital and voting power in the profits are immediately taxed at the progressive income tax rate if the subsidiary). partner is an individual or 25% corporate income tax if the partner is a corporation, irrespective of whether or not they are distributed, so Eligible group members include both resident companies and non- that no further tax is triggered upon distribution to the partners. It is resident companies; in case of the latter, however, only if they noteworthy that, in the campaign for the recent elections, proposals are resident in an EU Member State or in a third state with which were made for undistributed profits to be exempt from corporate Austria has concluded a comprehensive administrative assistance income tax until their actual distribution, or at least for a number agreement regarding the exchange of information. of years. With regard to Austrian group members, 100% of the profit/loss of the company is attributed to and taxed at the level of the parent company (i.e. irrespective of the participation held), while losses 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the of non-resident group members are only attributed to the group occupation of property? parent to the extent of the direct participation of the lowest resident group member in the non-resident group member (profits are not An annual real estate tax on all domestic immovable properties is

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levied at a basic federal rate, multiplied by a municipal coefficient local branch of a non/resident company. In particular, there is no on assessed value of real estate for tax purposes (Einheitswert). branch profit tax in Austria. The basic federal rate is usually 0.2% and the municipal coefficient Transactions between the subsidiary and the foreign parent have ranges up to 500%. to comply with the “arm’s length” principle. On the other hand, a permanent establishment cannot conclude contracts with the head 5 Capital Gains office, as both are considered to be one legal entity. Therefore, it can be more burdensome in practice to determine and allocate an appropriate profit to the permanent establishment, as compared to a subsidiary. 5.1 Is there a special set of rules for taxing capital gains and losses? Austria 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? Capital gains and losses derived from the sale or other disposal of business property are taxed as ordinary business income of a For the calculation of the taxable profit, a permanent establishment company at normal rates (in the case of individuals, reduced rates will be treated as a notional “independent enterprise”. A functional apply to certain capital gains). analysis has to be conducted, which is based on “significant people functions”. Functions, risks and assets, as well as an appropriate 5.2 Is there a participation exemption for capital gains? amount of capital, have to be allocated to the permanent establishment to determine the arm’s length profit of the permanent establishment. Capital gains derived from the sale of shares in a foreign corporation Besides a transfer pricing concept, there is also a requirement to may be exempt under the International Participation Exemption (see have separate tax accounts for the permanent establishment (while, question 7.2). By comparison, there is no exemption for capital according to the prevailing view in legal writing, there is in general gains derived from the sale of shares in a domestic corporation. no such obligation under commercial law).

5.3 Is there any special relief for reinvestment? 6.4 Would a branch benefit from double tax relief in its jurisdiction? No, there is no rollover relief available for companies in relation to capital gains. It should, however, be noted that the regime The branch as such would not be entitled to tax treaty benefits, as it applicable to Austrian private foundations, which often are the is not a legal person. Only the head office would be able to claim shareholders of Austrian companies, provides for such relief if the treaty protection. However, the branch can, in fact, in many cases private foundation reinvests within a period of 12 months. benefit from treaty relief as a consequence of the anti-discrimination clauses contained in most Austrian tax treaties or on the basis of EC law. 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local assets/shares? 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the branch? There is a withholding tax of 27.5% on proceeds from shares sold over a securities account at an Austrian credit institution. This does not apply to the sale of limited liability companies. There is no such taxation in Austria. For the sale of Austrian real estate, a withholding tax of 30% is levied. 7 Overseas Profits

6 Local Branch or Subsidiary? 7.1 Does your jurisdiction tax profits earned in overseas branches?

6.1 What taxes (e.g. capital duty) would be imposed upon Austrian companies are taxed on their worldwide income, including the formation of a subsidiary? income from overseas branches. In most cases, such income will be exempt in Austria based on an applicable double tax treaty (only On 1 January 2016, the former capital duty of 1% levied on equity very few Austrian treaties foresee the credit method for business contributions was abolished, therefore no taxes are due upon profits). If there is no treaty in place with the respective country, formation. relief from double taxation is granted via unilateral measures under certain circumstances. 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident 7.2 Is tax imposed on the receipt of dividends by a local company (for example, a branch profits tax)? company from a non-resident company?

A branch will be taxed as a permanent establishment of the foreign Austrian legislation grants a participation exemption for the dividends head office, while a subsidiary is a separate taxable entity. The profits received from a domestic corporation. An exemption also applies to (subject to corporate income tax) of a permanent establishment can dividends received from a foreign corporation, as well as to capital be remitted to the head office without any tax consequences. In gains thereof, which are also exempt from taxation (unless the parent contrast, the taxed profits of a subsidiary have to be distributed as company opts for taxation) if the following conditions are fulfilled: a dividend (subject to withholding tax). Besides that, there are no further differences between the taxation of a local subsidiary and a ■ the participation amounts to at least 10%;

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■ the participation is held uninterruptedly for at least one year; resident individual is taxed on the disposal of real estate located in ■ the foreign corporation is comparable to an Austrian Austria at a special tax rate of 30%. corporation (or an entity enumerated in the Annex to the EU Parent-Subsidiary Directive, in which case this is met in 8.2 Does your jurisdiction impose tax on the transfer of almost all cases); and an indirect interest in commercial real estate in your ■ the anti-abuse provision is not applicable. jurisdiction? Under the anti-abuse provision, the international participation exemption regime will not be applicable if there are reasons to The transfer of an indirect interest in real estate does not trigger suspect tax avoidance or tax abuse. Subsequently, the “switch-over” (corporate) income tax, but could trigger transfer tax. However,

clause will be applicable, i.e. the income is fully taxable with a tax real estate transfer tax is triggered if 95% of the shares of a Austria credit for the foreign corporate tax paid by the subsidiary. company that directly holds Austrian real estate are consolidated Tax avoidance or tax abuse is presumed by law if the following two in the hands of one shareholder (Anteilsvereinigung) or a group of shareholders within the meaning of the Austrian group taxation conditions are cumulatively fulfilled: regime. Furthermore, if within a period of five years 95% or more ■ the foreign subsidiary generates predominantly interest of the partnership interests of a partnership that directly holds income, income from the letting of moveable tangible or real estate are transferred, this triggers real estate transfer tax intangible assets (e.g. rental income and royalties) and/or (under the scope of this rule, this can include several transactions income from the sale of participations (sources of income referred to as “passive income”); and with different purchasers). In each case, the real estate transfer tax amounts to 0.5% of the fair market value of the real estate. ■ the income of the foreign subsidiary is not subject to a tax that Shares held by trustees are to be attributed to the trustor for the is comparable to the Austrian corporate income tax (due to purposes of calculating the 95% threshold. If Austrian real estate is either a lower applicable tax rate or a reduced tax base (“low taxation”)). If the effective tax rate is 15% or lower, low transferred in the course of a reorganisation (Umgründung) under taxation is deemed to occur. the Umgründungssteuergesetz (UmgrStG), the real estate transfer tax will likewise be 0.5% of the fair market value of the real estate. Furthermore, portfolio dividends (i.e. dividends from a participation under 10%; no minimum percentage or holding period is required) received from either a foreign corporation listed in the Annex to 8.3 Does your jurisdiction have a special tax regime the EU Parent-Subsidiary Directive, or from a foreign corporation, for Real Estate Investment Trusts (REITs) or their which is comparable to an Austrian corporation, either resident in equivalent? an EU Member State or resident in a jurisdiction which has a broad exchange of information clause in its double tax treaty with Austria, A REIT that is established based on the Austrian Real Estate will be exempt from Austrian income tax as well. It should be noted Investment Fund Act is subject to a special tax regime. Such special that this exemption only applies to dividends, thus capital gains tax regime may also be applicable to REITs established under foreign from a participation of under 10% are always taxable. law (Sec 42 of the Austrian Real Estate Investment Fund Act). The REIT itself is not treated as a taxable entity. Rather, it is treated as The above-mentioned portfolio dividends exemption is denied if a transparent entity where the income earned is attributed to the unit the distributing corporation is “low-taxed” (i.e. if the effective rate owner, regardless of whether it is distributed or not (comparable to a of corporate income tax paid is below 15%) or if it benefits from partnership). Besides income from the renting of property, interest substantial tax exemptions. There is no requirement that the foreign on liquid reserves and profit distributions from Austrian real estate corporation earn (active) business rather than passive income, as companies, the profit of an Austrian REIT also includes valuation is the case for the International Participation Exemption. Where gains from the annual revaluation of the real estate properties of income is low-taxed, a “switch-over” clause will be triggered. the funds, regardless of whether they are realised or not. Profits The participation exemption will not apply if the dividend distributed from a REIT or from the sale of the REIT certificates are generally to the Austrian company is tax-deductible by the foreign corporation subject to withholding tax at a rate of 27.5% as of 1 January 2016. in its home jurisdiction. This is now also the standard under the EU Please note that several major Austrian real estate companies are not Parent-Subsidiary Directive. established as fund-type vehicles based on the Austrian Real Estate Investment Fund Act, but rather as non-transparent corporations It is worth noting that interest expenses directly related to the debt subject to the ordinary tax regime. financing of the acquisition of a participation are deductible even if the income is exempt under the participation exemption, if applicable. 9 Anti-avoidance and Compliance 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? There are no statutory CFC rules in Austria. However, the Austrian general anti-avoidance rules can have a similar effect in certain Sec 22 of the Austrian Federal Fiscal Code (Bundesabgabenordnung cases (see question 9.1). – “BAO”) provides that tax liability cannot be avoided by an abuse of legal forms or methods offered by civil law (“abuse of law”). 8 Taxation of Commercial Real Estate This is assumed in cases where transactions are entered into, or entities are established, solely for the purpose of obtaining special tax advantages. If such an abuse has been established, the tax 8.1 Are non-residents taxed on the disposal of authorities may compute the tax as if such abuse had not occurred. commercial real estate in your jurisdiction? Generally, tax abuse is only assumed in a multi-step situation (i.e. the taxpayer takes more than one step to avoid or reduce the tax). A non-resident company is taxed on the disposal of real estate Furthermore, if a taxpayer can demonstrate substantial business located in Austria at a corporate income tax rate of 25%. A non- reasons for a structure chosen, tax abuse may be rebutted.

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Additionally, Sec 23 BAO provides that an act or transaction not expenses or royalties are no longer deductible from the tax base of seriously intended by the parties (“sham transaction”) but performed an Austrian corporation in the case that, cumulatively: only to cover up facts that are relevant for tax purposes will be ■ the interests or royalties are paid to an Austrian company or a disregarded, and that taxation will be based on the facts the taxpayer foreign company that is comparable to an Austrian company; sought to conceal. ■ the interests or royalties are paid to a company which is Furthermore, Sec 24 BAO provides specific provisions in directly or indirectly part of the same group of companies or connection with the attribution of business assets, in particular with is influenced directly or indirectly by the same shareholder; regard to security ownership, trusteeship, beneficial ownership and and joint ownership. This provision says that in general, assets are to ■ the interest or royalty payments in the state of residence of the receiving company are: (i) not subject to tax because of

Austria be attributed to their beneficial owner. Here the “substance over form” principle applies. This is the case if a person is in a position a personal or objective exemption; (ii) subject to tax at a rate lower than 10%; or (iii) subject to an effective tax at a rate to exercise those rights which are distinctive for ownership such as lower than 10% due to any available tax reduction. the use, consumption, amendment, pledge and sale of the assets, and if such person is simultaneously entitled to exclude any third party It is not relevant whether the tax at a rate lower than 10% is based on on a permanent basis from having an impact on the assets. the domestic law of the state of residence of the receiving company or the applicable double taxation treaty concluded between Austria and the respective state of residence. 9.2 Is there a requirement to make special disclosure of avoidance schemes? If the receiving entity is not the beneficial owner, the respective conditions have to be investigated at the level of the beneficial owner (e.g., in certain back-to-back refinancing scenarios). No, there is no specific disclosure requirement for avoidance schemes. The new regulation is effective to all payments carried out since 28 February 2014, irrespective of when the corresponding contract was concluded. 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also Furthermore, hybrid structures have been substantially limited: the anyone who promotes, enables or facilitates the tax participation exemption will not apply if the dividend distributed to avoidance? the Austrian company is tax-deductible by the foreign corporation in its home jurisdiction. This is now also the standard under the EU No, there are no special rules with regard to anyone who promotes, Parent-Subsidiary Directive. enables or facilitates tax avoidance. However, tax evasion (Abgabenhinterziehung) and tax fraud (Abgabenbetrug) are subject 10.2 Does your jurisdiction intend to adopt any legislation to criminal prosecution pursuant to the Austrian Fiscal Criminal Act to tackle BEPS which goes beyond what is (Finanzstrafgesetz). In the course of such criminal proceedings, recommended in the OECD’s BEPS reports? persons who assist tax evasion and tax fraud are also subject to penalties. No, currently there are no legislative plans which go beyond what is recommended in the OECD’s BEPS reports. With regard to the 9.4 Does your jurisdiction encourage “co-operative BEPS Directive, further amendments in legislation are expected. compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? No, Austria does not encourage “co-operative compliance” and, therefore, there are no procedural benefits or reduction of tax The Austrian legislator adopted the Transfer Pricing Documentation provided. Act, which includes documentation and reporting obligations for a multinational group of companies (CBCR). These obligations 10 BEPS and Tax Competition essentially apply for business years starting from 1 January 2016.

10.4 Does your jurisdiction maintain any preferential tax 10.1 Has your jurisdiction introduced any legislation regimes such as a patent box? in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? No, there is no preferential tax regime such as a patent box. In this context, however, it should be noted that there are various tax As a reaction to the BEPS project, a new provision was introduced incentives for research and development activities. by the Austrian Tax Amendment Act 2014, stating that interest

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Clemens Philipp Schindler Martina Gatterer Schindler Attorneys Schindler Attorneys Tuchlauben 13 Tuchlauben 13 1010 Vienna 1010 Vienna Austria Austria

Tel: +43 1 512 2613 Tel: +43 1 512 2613 Email: clemens.schindler@ Email: martina.gatterer@ schindlerattorneys.com schindlerattorneys.com URL: www.schindlerattorneys.com URL: www.schindlerattorneys.com Austria Clemens Philipp Schindler is a Founding Partner of Schindler Martina Gatterer is a Senior Associate at Schindler Attorneys and Attorneys. Before establishing the firm, Clemens spent six years focuses on the areas of individual and corporate tax law, reorganisation as a Partner at Wolf Theiss, where he led some of the firm’s most tax law and accounting law, where she advises corporations as well prestigious transactions and headed its Brazil operations. Prior to as private clients. Before joining Schindler Attorneys, Martina worked that, he practised with Haarmann Hemmelrath in Munich and Vienna, for Wolf Theiss and Schönherr and started her career at Deloitte & as well as with Wachtell, Lipton, Rosen & Katz in New York. Touche. Martina holds a law degree from the University of Vienna and is admitted in Austria as an attorney-at-law. In his work, Clemens focuses on corporate and tax advice in relation to public and private mergers and acquisitions, private equity and corporate reorganisations (such as mergers, spin-offs and migrations), most of which have a cross-border element. Furthermore, he specialises in international holding structures, including charter financing and leasing operations, as well as private client work. In addition to law degrees from the University of Vienna (Dr. iur.) and the New York University School of Law (NYU Law) (LL.M.), Clemens holds degrees in business administration from the Vienna University of Economics and Business Administration (Dr. rer. soc. oec.). He is admitted in Austria both as an attorney-at-law and as a certified public tax advisor. Mr. Schindler is ranked by international legal directories such as Chambers Global, Chambers Europe, The Legal 500, IFLR1000, Best Lawyers and Who’s Who Legal. The German legal directory JUVE lists him as one of Austria’s top 20 corporate and M&A lawyers, whereas the Austrian business magazine TREND named him among Austria’s top 10 lawyers in both the corporate as well as the tax section. Besides their Austrian listings, Chambers Global and Chambers Europe acknowledge his Brazilian expertise in a special ranking on outstanding expertise in foreign jurisdictions.

Schindler Attorneys is a leading Austrian law firm for structuring and transactional work, with a particular focus on private equity and extensive experience in the fields of corporate, employment, finance, real estate, tax and securities law. Based on our international expertise, we are continually involved in cross-border matters and coordinate multi-jurisdictional teams. Due to our particularly close connections to Central, Eastern and South Eastern Europe and Brazil, we maintain a dedicated desk for these regions. In addition, our firm has a private client team that advises high-net-worth individuals, trusts and foundations, family offices and private banks. Having one of the most international and accomplished tax practices among Austrian law firms enables Schindler Attorneys to provide high-end integrated legal and tax advice over the whole course and on all aspects of a project – not only on a national but also on an international level. Our tax practice focuses on transactional work, intra-group reorganisations as well as international tax structuring. In addition, we offer a broad range of tax services including fiscal criminal law and tax litigation, but also special issues such as taxation of financial products or real estate, VAT and sophisticated transfer tax matters. Our tax team also regularly works on private client matters.

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Belarus Anastasiya Malakhova

SBH Law Office Evgeniya Starosotnikova

2) If it cannot be determined (there is no such place) or the 1 Tax Treaties and Residence place of registration is inactive, a company is considered as residing at the place where its supreme management body, such as a general meeting of shareholders, is supposed to 1.1 How many income tax treaties are currently in force in meet, under the constituent documents of the company. your jurisdiction? 3) If such a supreme management body is not formed or is inactive, a company is considered resident at the place where There are 67 income tax treaties in force at the time of writing. its permanent executive body conducts its activities (the law gives examples of “an administration, a board of directors, a 1.2 Do they generally follow the OECD Model Convention governing board, a centralised accounting body or another or another model? body conducting day-to-day financial management of the company”). The majority of double tax treaties follow the OECD Model Tax If a permanent executive body is not formed or is inactive, a Convention; however, there are also treaties based on the UN Model company is considered resident: at the place where the decisions Tax Convention, for example the treaty with Qatar. on the incorporation or restructuring of a company, or decisions on the changes to the list of shareholders, increases or decreases of statutory (authorised) capital, acquisition or disposal of the property 1.3 Do treaties have to be incorporated into domestic law of a company or other substantial issues related to the operations before they take effect? of a company are made; at the place where the main accounting documents of a company are kept; or at the place of residence of the Yes, this is done by passing a new law. company’s director, founder or shareholder.

1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? 2 Transaction Taxes

Usually treaties do not incorporate a limitation of benefits article. 2.1 Are there any documentary taxes in your jurisdiction? The Tax Code provides that where the treaties or the law grant defence from double taxation to beneficial owners, a foreign The following are examples of documentary taxes in Belarus: enterprise may be required to submit proof of such beneficial ownership to receive defence. 1. Stamp duty is collected for the issue or transfer of promissory notes or for the presentation for payment of notes. The rate (0.1%, 15%, 20%, 25%) depends on the type of transfer 1.5 Are treaties overridden by any rules of domestic and the person. In general, the tax base is defined as a fixed law (whether existing when the treaty takes effect or amount. introduced subsequently)? 2. Various state fees are collected for issuance of documents and administrative services performed by the state, etc. There are International tax treaties prevail over domestic law. However, if 62 objects of taxation. The tax rate is defined in basic units domestic law grants more extensive privileges to taxpayers than an (one basic amount is approximately 11 US dollars) or as a international treaty, the domestic law provisions apply instead of percentage of the claim amount (documents filed in court). the treaty. 3. Patent fees are set in basic amounts as well (more than 80 objects of taxation).

1.6 What is the test in domestic law for determining the residence of a company? 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? There is a multi-tier test: 1) Prima facie, a company is considered a resident in the place Yes. VAT is charged on the sale turnover of goods, works, services of its registration. and property rights. The general VAT rate of 20% is charged on the majority of VAT-taxable transactions. Additionally:

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1. A 0% rate applies to: 9. Financial services and operations by financial institutions, a. Export of goods and related logistical services. payment services providers and exchanges; the majority of financial and insurance transactions. b. Processing of foreign feedstock for export. There is a list of transactions not considered objects of taxation c. Services related to maintenance, repair, upgrading of aircraft and their engines, or units of railway rolling stock, (Clause 2 Article 93 of the Tax Code); for example, the following: performed for foreign organisations or individuals. 1. Privatisation of state assets. d. Other (Article 102 of the Tax Code). 2. Capital contributions and distributions in joint ventures; 2. A 10% rate applies to: compensation of expenses according to joint venture agreements. a. Sales of most agricultural, animal industry and fishing products. 3. Assignment by the initial creditor of rights arising from Belarus contracts for goods, works and services, provided that the b. Sales of certain products designated for children pursuant value of rights assigned does not exceed the value of the to the list approved by Presidential Decree. initial obligation under this contract. 3. A 25% rate applies to telecommunication services. 4. Transactions with company equity and transactions with 4. Adjusted rates of 9.09% (10/110 × 100%) and 16.67% financial instruments. (20/120 × 100%) apply to the calculation of VAT on retail 5. Transactions involving goods, works and services related sales of relevant goods. to international aid programmes, provided that certain Besides that, there is also VAT imposed on goods imported into requirements are met. Belarus (VAT rate: 20%). VAT is payable by importers at the time of the customs clearance of the goods. 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? In general, VAT paid in Belarus is recoverable. Still, some circumstances should be noted. The general rule is that VAT is charged on all transactions which First of all, except for certain types of input VAT, companies are take place on the territory of the Republic of Belarus (domestic entitled to recover it within the limits of the output VAT for the transactions), except for transactions listed in Article 94 of the Tax respective tax period; the remainder is carried over the next tax Code and certain other regulations. period subject to the same limitation. Certain types of input VAT are It is a general rule that Belarus is considered the place of realisation subject to full recovery, i.e., if these amounts added to the regular of goods if the goods are shipped to the buyer from the territory of input VAT exceed the output, the excess will be compensated. Belarus. Second, certain types of input VAT cannot be recovered due to their It is a general rule that Belarus is considered the place of realisation economic nature and interaction with other taxes; for example, the of works, services, property rights or information in cases where: following types (Clause 19 Article 107 the Tax Code): ■ the works and services directly related to the property are 1. Input VAT which companies are required to consider as a located on the territory of Belarus; cost, thereby increasing their deductions applicable to the ■ the services are actually rendered on the territory of the profit tax base. This mainly applies to VAT on goods, works Republic of Belarus in the sphere of culture, art, physical and services used for the production and distribution of goods education, tourism, recreation and sports or training; and services, which are not subject to VAT taxation. ■ the provider of the services operates on the territory of Belarus 2. Companies may also freely opt to charge input VAT to the and/or its location (place of residence) is Belarus (except some price of purchased goods and services. This also results in services, for example: transfer of intellectual property rights; VAT becoming a component in profit tax deductions. providing audit, consulting, marketing, legal, accounting, 3. VAT that is charged as a cost in transactions for the sale or engineering, advertising, information processing, information redemption of securities (e.g. broker services). provision, or design services; lease of movable property, 4. VAT on sales of goods where buyers calculate their VAT tax except for vehicles; services (works) for the development of base as a difference between the acquisition and resale price. programs for electronic computers and databases, etc.). The lists of turnovers exempted from VAT are generally long 2.5 Does your jurisdiction permit “establishment only” and very detailed (there are more than 40 group exceptions); for VAT grouping, such as that applied by Sweden in the example, the following domestic transactions: Skandia case? 1. Certain determined medical goods and services. 2. Works and services performed by residents related to the Belarusian legislation does not allow two or more independent legal production of movies or television broadcasts. persons to be treated as a single taxable person for VAT purposes. 3. Advertising services and the transfer of intellectual property Hence, there are no legal provisions in Belarus similar to VAT by non-resident companies to resident cultural institutions grouping rules in EU. and media broadcasting companies. 4. Goods, works and services produced with the involvement of 2.6 Are there any other transaction taxes payable by disabled persons subject to certain requirements. companies? 5. Gemstones, metals and related services, provided that certain requirements are met. This does not include jewellery. Yes, offshore duty is such a transaction tax. The object of taxation 6. Duty-free retail. is the transfer of funds from a resident of the Republic of Belarus to 7. Various works and services related to scientific and a non-resident registered in an offshore haven or to another person technological research, subject to certain requirements. under a contract with an offshore resident or to the account opened 8. Certain educational and local tourism services. in an offshore haven. The tax base is the transferred amount of

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funds, the tax rate 15%. A list of jurisdictions considered offshore However, only the following debts are considered as controlled: havens is contained in a Presidential Decree. ■ those on borrowed funds; ■ those on engineering services, marketing services, consulting 2.7 Are there any other indirect taxes of which we should services, information services, intermediary services, search be aware? and/or recruitment services, hiring of personnel, providing personnel for carrying out activities in the Republic of Belarus, and remuneration for the transfer (provision) of The other indirect tax, besides VAT, is excise. Excise is collected on property rights in respect of objects of industrial property certain commodities and consumer goods such as alcohol, tobacco, rights; and fuel and natural gas. The rate of excise is specific for each type of ■ those on penalties and amounts of compensation for losses

Belarus excisable product and is calculated as a fixed amount. There are due to violation of contractual obligations. also certain rules for deductions of this tax. If the Controlled Debt is three times greater than the difference between the assets of the debtor and its total liabilities to the CNR, 3 Cross-border Payments plus those to a local associated enterprise of the CNR, plus those to another entity secured by CNR or a local associated enterprise of the CNR (“Equity”), relief is capped at a value determined by dividing 3.1 Is any withholding tax imposed on dividends paid by the interest accrued in the respective period by the following quotient: a locally resident company to a non-resident?

Yes, the rate is 12% unless more preferential treatment is established by an international treaty to which the Republic of Belarus is a party. Where: The tax rate is 5% if the source of payment of dividends is a resident Principal Controlled Debt is the value of the principal of all of the High-Tech Park. Controlled Debt for the relevant period; and The taxable base is calculated according to the following formula: Qualified Equity is that part of Equity which is proportionate to the CNR’s direct or indirect participation in the debtor’s share capital.

Shareholder’s Dividends: the dividends accrued to the non- 3.5 If so, is there a “safe harbour” by reference to which resident company. tax relief is assured? Profit Distributed: the total amount of profit distributed by the resident company. Thin capitalisation rules do not apply to banks, insurance companies or companies whose major source of revenue in the relevant tax Company’s Dividend Income: the amount of dividends received period are operations related to leasing (including financial leasing) by the resident company in a relevant period. For the purposes of of property (over 50% of operating revenue). taxable base calculation, the Company’s Dividend Income value cannot exceed the value of Profit Distributed. 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company? 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? Thin capitalisation rules extend to such debt. Yes, the rate is 15%. The tax rate is 5% if the source of payment of royalties is a resident of the High-Tech Park. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- resident? 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? If a treaty or local law limits protection from double taxation to beneficial owners of income, a non-resident will be required to prove Yes, the rate is 10%. There is a list of interests exempt from taxation; its “beneficial owner” status by providing the respective documents. for example, interests under syndicated loans from foreign banks. A 0% rate applies on interest received by foreign organisations from the placement of securities issued for the purpose of granting loans 3.8 Is there any withholding tax on property rental to Belarusian organisations. payments made to non-residents?

Yes. These payments are qualified as royalties and are taxable at a 3.4 Would relief for interest so paid be restricted by 15% rate. reference to “thin capitalisation” rules?

Thin capitalisation rules apply to determine the amount of interest 3.9 Does your jurisdiction have transfer pricing rules? that may be included as expenses for calculation of profit tax. The amount is restricted in respect of certain Controlled Debt. Yes. Regarding some types of deal, the tax authorities are entitled Controlled Debt is that which is outstanding from a local debtor to verify and adjust the taxable base for profit tax if the price of to (1) a non-resident which controls directly or indirectly 20% the deal differs substantially from the market price; for example, or a greater percentage of the local debtor (“CNR”), (2) a local transactions with real estate, and transactions amounting to over associated enterprise of the CNR, or (3) another entity secured by approx. 50,000 US dollars per year with one party if it corresponds CNR or the entity named in (2). to specified provisions (e.g. being registered in an offshore zone, mutual dependence, etc.).

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Land tax 4 Tax on Business Operations: General This tax is calculated based on the cadastral value of the land in the ownership, sustained or permanent use of legal and natural persons 4.1 What is the headline rate of tax on corporate profits? (it is not relevant to the use of land under a lease agreement). The tax rates are established pursuant to the annex to the Tax Code Generally, the rate is 18% of gross profits. There are also various depending on region and zoning. preferential rates favouring certain activities in the field of high Ecological tax technologies (for example, information technology or locally This is essentially a pollution tax. The tax rates are established pursuant manufactured high-technology goods); such profits are mostly taxed to the annex to the Tax Code depending on the type of pollution.

using the 10% tax rate. Profits relating to dividends are taxed at Belarus 12%. Banks and insurance companies pay profit tax at the rate of Tax for extraction (removal) of natural resources. The tax base is 25%. Residents of free economic zones are exempted from profit the amount of extracted natural resources according to the annex to tax. the Tax Code. The rates depend on the type of extracted resource. Special tax regimes

4.2 Is the tax base accounting profit subject to There are several special tax regimes applicable to certain industry adjustments, or something else? sectors and categories of taxpayers. Most of them replace the regular business operations tax and many make the payment of VAT The taх base for corporate profit tax (taxable profit) is the gross optional. The most noteworthy special regimes include: profit of the company that is calculated as sales profit plusnon- ■ The simplified tax system, which may be chosen by small and operating gains less non-operating expenses. Taxable profit is based medium-sized businesses. Professional services companies on the accounting profit with adjustments that are determined by the and small retailers often use it. Tax Code. ■ Gambling tax. ■ Agricultural producers’ tax. 4.3 If the tax base is accounting profit subject to ■ Interactive electronic games tax. adjustments, what are the main adjustments? ■ Unified tax on imputed income for vehicle maintenance stations. The main adjustments are deferred tax liabilities and deferred Mandatory Social Insurance Contributions tax assets that may appear because of taxable and deductible Although this is not a tax, the applicable regulations place a substantial temporary differences or transfer of unused tax losses. There are financial burden on employers. Employers are required tomake also permanent differences that lead to permanent tax liabilities and payments up to 34% of their total salary to the Social Insurance Fund. permanent tax assets. Permanent differences appear when some earnings or expenses that are booked for accounting purposes are not taken into account for taxation purposes or vice versa. 5 Capital Gains

4.4 Are there any tax grouping rules? Do these allow 5.1 Is there a special set of rules for taxing capital gains for relief in your jurisdiction for losses of overseas and losses? subsidiaries?

There are special rules, but they are a part of the profit tax system. No, there are no such rules.

5.2 Is there a participation exemption for capital gains? 4.5 Do tax losses survive a change of ownership?

There is no such exemption for companies, but there is a Yes. Tax losses survive a change of ownership. The company participation exemption for private persons. For example, there is a has the right to transfer the losses for the future, notwithstanding relief from personal income tax for income received (1) from a sale ownership changes. of equity in the share capital of a Belarusian company if such equity was acquired after January 1, 2014 and belongs to the taxpayer for 4.6 Is tax imposed at a different rate upon distributed, as not less than three years continuously, and (2) from a sale of shares opposed to retained, profits? issued by Belarusian companies that belong to the taxpayer for not less than three years continuously. No. The rates are the same. 5.3 Is there any special relief for reinvestment? 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the There is no tax relief for reinvestment. occupation of property?

Other taxes that are not mentioned elsewhere in this chapter include: 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local Immovable property tax assets/shares? This tax is calculated and paid annually based on the capital value of immovable property. The regular rate of the tax is 1% of the Yes. Withholding tax (applicable for non-resident companies) is cadastral value. A special rate of 2% applies to capital investments imposed on the proceeds of selling local immovable property and in incomplete and overdue construction of immovable property. shares. The tax rate is 15% for income from the sale of immovable

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property and 12% for income from shares. The amount of income may be reduced on the amount of acquisition expenses. Another 7 Overseas Profits tax rate may be determined by a bilateral agreement on avoidance of double taxation and the prevention of tax evasion with respect to 7.1 Does your jurisdiction tax profits earned in overseas taxes on income and property. branches?

Yes, for Belarusian companies. A Belarusian company may deduct 6 Local Branch or Subsidiary? taxes paid abroad when it determines the tax base for profit tax.

Belarus 6.1 What taxes (e.g. capital duty) would be imposed upon 7.2 Is tax imposed on the receipt of dividends by a local the formation of a subsidiary? company from a non-resident company?

The only tax is the state duty for registration of a local company. Yes. The dividends that are received by a local company from a At the time of writing, it is equal to one basic rate. In addition, non-resident are taxed as non-operating income as a part of gross the registration of the share issue during the incorporation of a revenue for profit tax. company by shares requires payment of a state duty (generally, in the amount of 0.2% of the nominal value of the shares issued, but not exceeding 300 basic units). Note that the basic unit is subject to 7.3 Does your jurisdiction have “controlled foreign regular revision by the Council of Ministers. company” rules and, if so, when do these apply?

No. There are no “controlled foreign company” rules that set 6.2 Is there a difference between the taxation of a local the obligation to provide information about foreign controlled subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? companies to tax authorities. However, there are thin capitalisation rules. Thin capitalisation rules limit the amount of debt owed to a foreign controlling company that may be discounted during the A locally formed subsidiary under Belarusian law, being a separate calculation of profit. legal entity, shall pay all taxes and fees applicable to its activity in Belarus and abroad. A branch of a foreign (non-resident) company is obliged to pay profit tax if its activity has the attributes ofa 8 Taxation of Commercial Real Estate permanent establishment for tax purposes.

8.1 Are non-residents taxed on the disposal of 6.3 How would the taxable profits of a local branch be commercial real estate in your jurisdiction? determined in its jurisdiction?

Non-residents are taxed on the disposal of real estate in Belarus There are 3 (three) possible methods of taxable profit calculation: unless a double tax treaty provides otherwise. The tax rate for a ■ the general method that is applied to the local legal entity; non-resident company is 15%. Charges for acquisition may be ■ the accounting method that is based on the application of the discounted. coefficient to the gross profit of a foreign company; and ■ the method of analogy with companies that undertake similar activities. 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your jurisdiction? 6.4 Would a branch benefit from double tax relief in its jurisdiction? There are no specific rules for taxation of indirect interest in commercial real estate located in Belarus (meaning a transaction Branches of foreign companies are not considered “Belarusian with stocks and shares of a legal entity owning commercial real organisations” and, as such, would not normally be qualified by the estate). The transfer is taxable as a transfer of stocks and shares (see tax authorities as local residents. the rules applicable to capital gains).

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

Withholding tax would not be imposed. A branch of a non-resident No, Belarusian law does not contain the concept of a REIT. company that is recognised as a permanent establishment of a company in Belarus shall pay all taxes before remittance of profits. Withholding taxes may be imposed when a local company pays the 9 Anti-avoidance and Compliance branch and the activity of the branch does not create a permanent establishment for profit tax. 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule?

There are some anti-avoidance and anti-abuse rules in Belarusian legislation. There is criminal and administrative responsibility for tax avoidance. There is the Register of commercial companies and

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individual entrepreneurs with a higher risk of committing offences in the economic sphere. Controlling authorities are entitled to declare 10.2 Does your jurisdiction intend to adopt any legislation the nullity of a document containing misreporting information to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports? about a business transaction if they have evidence and apply special taxation rules for operation of the business which are stated in the misreporting documents. Belarusian law provides the following rules aimed at preventing the illegal reduction of tax obligation sums: ■ a Register of commercial companies and individual 9.2 Is there a requirement to make special disclosure of entrepreneurs with a higher risk of committing offences in avoidance schemes? the economic sphere is kept;

■ the inspection bodies have the right to take a decision on the Belarus There is no requirement to make special disclosure of avoidance invalidity of the documents with which the transaction is schemes. The taxpayer is obliged to provide any information with executed; and reference to tax base calculation upon the request of the tax authority. ■ special rules for taxation of transactions recognised as having no legal effect are established. 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also 10.3 Does your jurisdiction support public Country-by- anyone who promotes, enables or facilitates the tax Country Reporting (CBCR)? avoidance?

Belarus is going to join the Standard for Automatic Exchange of If a legal entity is involved in tax avoidance, the shareholders, CEO Financial Account Information in Tax Matters. The tax information and accounting manager of that company may be obliged to pay exchange procedure is now regulated by bilateral tax treaties. Such the tax debts of such legal entity in case they promote, enable or provisions are prescribed either in new treaties or in addendums to facilitate tax avoidance (subsidiary responsibility on tax debts). In the concluded ones. Exchange rules prescribe an obligation on the the case that the tax avoidance is considered a criminal offence, the tax authorities of one country to provide requested information to person who promotes, enables or facilitates the tax avoidance may those of another. The scope of information that may be requested be also charged as one who assists in committing the offence. is extended.

9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural 10.4 Does your jurisdiction maintain any preferential tax benefits only or result in a reduction of tax? regimes such as a patent box?

Belarusian law does not have special rules on “co-operative The Belarusian High Technologies Park (HTP) provides a special compliance”. It is expected that legal provisions about tax consultants tax regime for its residents. For example, residents of the HTP will be adopted. are exempted from profit tax and VAT on sales within the territory of Belarus. There is also a special tax regime for members of the Scientific and Technological Association, Infopark. For example, 10 BEPS and Tax Competition members of Infopark are exempted from VAT with regard to earnings from information technology sales.

10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)?

No special legislation has been introduced in response to BEPS. However, there are rules of thin capitalisation, rules that provide benefits of taxation treaties only for beneficiary owners of income, transferring pricing rules, and permanent establishment taxation rules.

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Anastasiya Malakhova Evgeniya Starosotnikova SBH Law Office SBH Law Office Krasnoarmeiskaya str. 20a/1 Krasnoarmeiskaya str. 20a/1 Minsk Minsk Belarus Belarus

Tel: +375 17 327 53 77 / 327 43 01 Tel: +375 17 327 53 77 / 327 43 01 Email: anastasiya.malakhova@ Email: evgeniya.starosotnikova@ sbh-partners.com sbh-partners.com URL: www.sbh-partners.com/en URL: www.sbh-partners.com/en Belarus Anastasiya Malakhova is a Partner at SBH Law Office. Evgeniya Starosotnikova is a Senior Associate at SBH Law Office. One of her main fields of activity is tax law. She advises principally Anastasiya has extensive experience in legal consultancy to both on tax planning for companies and private individuals, including international and local clients. Her areas of specialisation are tax international tax law, cross-border investments and general corporate law, real estate and construction, intellectual property, insurance and transactions, and draws up documentation for transactions in respect contract law. of possible tax risks. Being the best analyst of the firm, Anastasiya can provide a Evgeniya has been practising since 2011. She graduated from the comprehensive and complex legal assessment of the proposed Law faculty of the Belarusian State University. She speaks Belarusian, solutions to specific business tasks. She possesses such personal Russian and English. qualities as erudition, competence, giving strong and sound recommendations and providing client-oriented services. Anastasiya received her law diploma from the Law faculty of the Belarusian State University. Anastasiya is a member of the Minsk Regional Bar Association. She speaks Belarusian, Russian and English.

SBH Law Office is one of the leading Belarusian law offices, combining high-level skills, expertise and a staunch commitment to the principles of the legal profession to drive continuous innovative development and provide the highest value to our clients. Our partners and senior legal professionals have been advising clients for over 20 years – practically since the inception of the legal system of Belarus as an independent state. SBH Law Office has offices in Minsk and Kiev, with strategic alliances in Russia and the Baltic states. Our lawyers and attorneys provide foreign and Belarusian companies and entrepreneurs, as well as national governments, with detailed and groundbreaking advice in various fields of business and commercial activities, working on cases and transactions which have shaped Belarusian law and business practice. Importantly, not only are the lawyers at SBH Law Office competent to advise clients on Belarusian issues; they also provide cross-border legal support for local and international companies.

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Bulgaria Svetla Marinova

Baker Tilly Klitou and Partners Business Services EOOD Svetlana Dermendjieva

NB: DTTs do not apply automatically in Bulgaria. In order for 1 Tax Treaties and Residence taxpayers to benefit from the provisions of a DTT, they have to follow a specific procedure set in the local legislation. This 1.1 How many income tax treaties are currently in force in procedure includes the collecting of some documents evidencing tax your jurisdiction? residency and real beneficiary status. Preliminary approval from the Bulgarian tax authorities is needed for a DTT application for income To date, 68 Double Tax Treaties (DTTs) have been signed by exceeding BGN 500,000 (approximately EUR 256,000) accrued on Bulgaria and are already in force. Those include DTTs with all EU an annual basis to a single foreign person. Member States. 1.6 What is the test in domestic law for determining the 1.2 Do they generally follow the OECD Model Convention residence of a company? or another model? Under the Bulgarian Corporate Income Taxes Act, local corporate Yes, generally the Bulgarian DTTs follow the OECD Model tax residents (legal entities) are: Convention. However, some of the oldest treaties with developing ■ legal entities established in accordance with Bulgarian law; countries signed before 1990 are based on the UN model, while ■ companies incorporated under Council Regulation (EC) No the DTT with the USA is based on the US Model Income Tax 2157/2001, and cooperative societies incorporated under Convention. Council Regulation (EC) No 1435/2003, where the registered office thereof is situated in the country and they are entered into a Bulgarian register. 1.3 Do treaties have to be incorporated into domestic law before they take effect? 2 Transaction Taxes No, after their ratification by the Bulgarian Parliament and publication in the State Gazette, DTTs become applicable and prevail over the provisions of the Bulgarian domestic legislation. 2.1 Are there any documentary taxes in your jurisdiction? There is no need for their explicit incorporation into domestic law. Bulgaria does not have stamp duty or other documentary taxes. However, notary fees or court fees might be imposed for notarisation 1.4 Do they generally incorporate anti-treaty shopping of documents, transfer of shares or of immovable property, court rules (or “limitation on benefits” articles)? filings, intellectual property registration, etc.

Usually DTTs to which Bulgaria is a party do not incorporate For the existing Bulgarian transaction taxes, please refer to question separate “limitation of benefits” articles. Treaty abuse, especially 2.6 below. for passive income, is usually addressed by “beneficial ownership” clauses following the OECD model. Nevertheless, in some of the 2.2 Do you have Value Added Tax (or a similar tax)? If so, DTTs in force for Bulgaria there are such “limitation of benefits” at what rate or rates? articles; these being the DTTs with Israel, Singapore, the UK, USA and Uzbekistan. Yes, Bulgaria has Value Added Tax (VAT). The Bulgarian VAT system follows and is, to great extent, harmonised with the EU VAT 1.5 Are treaties overridden by any rules of domestic legislation. law (whether existing when the treaty takes effect or Bulgarian VAT rates are as follows: introduced subsequently)? ■ standard rate: 20%; ■ reduced rate: 9% on accommodation provided in hotels No, the treaties cannot be overridden by domestic law. In case of and similar establishments and on the letting of places for contradiction between domestic law and a DTT, the provisions of camping or caravans; and the DTT shall prevail, except when domestic law provides for more favourable tax treatment for the taxpayer.

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■ 0% on: the export of goods outside the EU; international transport of passengers/ goods; supplies linked to international 2.5 Does your jurisdiction permit “establishment only” transport/goods traffic; supplies for the handling of goods; VAT grouping, such as that applied by Sweden in the supplies of gold for central banks; supplies linked to duty-free Skandia case? trade; supplies of services provided by agents, brokers and other intermediaries linked to supply of the abovementioned Bulgaria does not apply any kind of VAT grouping. zero-rated supplies; supplies by virtue of international treaties, agreements, accords, conventions or similar, to which the Republic of Bulgaria is a party, ratified and promulgated 2.6 Are there any other transaction taxes payable by accordingly; supplies of goods and services whose recipients companies? are armed forces of other countries which are parties to Bulgaria the North Atlantic Treaty; supplies of services linked to There is Bulgarian transaction tax on the alienation of immovable importation, such as commissions, packing, transport and properties and vehicles. The tax rate varies between 0.1% and 3% insurance shall be liable to tax at the zero rate where their as per the acts of the local municipal authorities where the property value is included in the taxable amount; EU intra-community is registered. The tax base for the calculation of the tax amount is: supplies, except the exempted ones, where the recipient is a taxable person or a non-taxable legal person which is not ■ For immovable properties – the sale price or the tax value, registered for VAT purposes in another Member State; and whichever is higher. EU intra-community supplies of new means of transport, ■ For vehicles – the insurance value. including by natural persons.

2.7 Are there any other indirect taxes of which we should 2.3 Is VAT (or any similar tax) charged on all transactions be aware? or are there any relevant exclusions? Excise duties on certain types of goods, including: Under Bulgarian law, VAT is chargeable on any supply of goods or ■ Alcohol. services made by a tax-liable person (defined as any person engaged ■ Tobacco products. in independent economic activity) and has its place of supply in ■ Electricity and energy products (motor fuels, coal, etc.). Bulgaria, as well as supplies subject to a zero VAT rate and made by a tax-liable person, unless the VAT Act explicitly provides Generally, the Bulgarian excise duties system follows the EU excise otherwise. taxation system. Supplies explicitly provided by the Bulgarian legislation as VAT- Customs duties apply on imported goods from outside the EU. exempt include: deliveries related to healthcare, social care and There is also a 2% tax on insurance premiums. insurance, education, physical training, sport, culture, religion; not- for-profit deliveries; deliveries of financial and insurance services; deliveries related to land and buildings; and gambling. 3 Cross-border Payments Under the VAT Act, any of the following shall not be regarded to be supply of goods or services (and thus remaining outside the scope 3.1 Is any withholding tax imposed on dividends paid by of the VAT system): company transformation (merger, demerger, a locally resident company to a non-resident? spin-off, etc.) under Chapter XVI of the Commerce Act; transfer of business; transformation of enterprises owned or funded by the Under domestic legislation, dividends paid by a locally resident state or municipalities; in-kind contributions to a company’s equity; company to non-EU/EEA residents or to any non-resident and the state or municipalities granting privately or foreign-owned individuals are subject to 5% withholding tax (WHT). WHT on schools or kindergartens the right to use property. dividends might be reduced under the provisions of a relevant DTT. Under the general rule, a taxable person shall be obliged to register Dividends paid by a locally resident company to a legal entity for VAT purposes in Bulgaria upon reaching total turnover of BGN resident in another EU/EEA Member State, if it is not the case of 50,000 (approximately EUR 25,500) of taxable supplies in Bulgaria hidden profit distribution, are exempt from WHT. for 12 consecutive months.

3.2 Would there be any withholding tax on royalties paid 2.4 Is it always fully recoverable by all businesses? If not, by a local company to a non-resident? what are the relevant restrictions? Royalties paid by a locally resident company to non-EU residents In general, any taxpayer registered for VAT purposes is entitled to or to EU-resident individuals are subject to 10% WHT. WHT for recover the input VAT on purchased goods/services as long as those royalties might be reduced under the provisions of a relevant DTT. goods/services are used for making taxable supplies. Royalties paid by a locally resident company to a related party Input VAT on goods/services used for both taxable and exempt which is a legal entity or permanent establishment resident in supplies is partially recoverable. another EU Member State are exempt from WHT, subject to certain VAT input on purchased goods or services used for exempt supplies requirements being met. or for non-business purposes, on purchased cars or motorcycles (subject to some exceptions), goods and services on the maintenance, 3.3 Would there be any withholding tax on interest paid repair and use of cars and vehicles, entertainment goods/services is by a local company to a non-resident? not recoverable. Improperly charged VAT is not recoverable. The right to VAT recovery can be exercised within the month of the Interest paid by a locally resident company to non-EU residents or supply or within any of the following 12 months. to EU-resident individuals is subject to 10% WHT. WHT on interest might be reduced under the provisions of a relevant DTT.

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Interest paid by a locally resident company to a related party which Arm’s length prices are determined following the five transfer is a legal entity or permanent establishment resident in another EU pricing methods provided in the OECD guidelines, as the Bulgarian Member State is exempt from WHT, subject to certain requirements tax authorities still give preference to the traditional methods. being met. 4 Tax on Business Operations: General 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? 4.1 What is the headline rate of tax on corporate profits? WHT relief for interest is not restricted by “thin capitalisation” rules.

Bulgaria applies a unified flat rate of 10% corporate income tax on Bulgaria companies’ tax profits. 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? 4.2 Is the tax base accounting profit subject to Please see the comment under question 3.4 above. adjustments, or something else?

The tax base is the accounting profit which is subject to adjustments 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company? for tax purposes (add-backs and deductions).

Please see the comment under question 3.4 above. 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments?

3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- The adjustments are in two categories – add-backs that increase the resident? taxable amount, and deductions decreasing it: Main add-backs: Interest accrued/paid to a non-resident related party should be at ■ Any non-business-related expenses. arm’s length. Any interest paid to related party at a rate higher than ■ Any insufficiently documented expenses. the arm’s length rate could be regarded as hidden profit distribution ■ Accounting depreciation and amortisation. (dividend) subject to 5% WHT without option for relief under a DTT, and would be subject to an additional 20% penalty. ■ Any expenses that are not sufficiently documented as per the meaning of the accountancy and tax legislation. Furthermore, any interest payments charged (unless the conditions ■ Penalties for violation of regulations and interest on overdue of the loan are agreed in conformity with requirements provided public debts. for in a statutory instrument) where at least three of the following ■ Withholding tax paid/covered on behalf of non-resident conditions are fulfilled would be also classified as hidden profit vendors. distribution: ■ Expenses as a result of hidden distribution of profits. (a) the loan exceeds the owners’ equity of the payer of the income on the 31st day of December of the last preceding year; ■ Expenses resulting from shortage and waste of inventories and from impairment of assets. (b) the repayment of the loan or the payment of interest thereon is not limited by a fixed period; ■ Excess interest expenses in case of thin capitalisation. (c) the repayment of the loan or the payment of interest thereon ■ Provision expenses. depends on the existence or on the amount of profits accruing ■ Salary expenses accrued but not paid till the end of the to the payer of the income; and/or respective calendar year. (d) the repayment of the loan depends on satisfaction of the ■ Donations under certain conditions. claims of other creditors or on the payment of dividends. Main deductions: ■ Tax depreciation and amortisation. 3.8 Is there any withholding tax on property rental ■ Income resulting from revaluation of assets. payments made to non-residents? ■ Dividend income received from a Bulgarian or other EU/ EEA tax-resident entity. Property rental payments paid by a locally resident company to non-residents are subject to 10% WHT. Any income from rent or other usage of property, including an undivided interest in property 4.4 Are there any tax grouping rules? Do these allow shall be considered property rental payment and therefore subject for relief in your jurisdiction for losses of overseas subsidiaries? to WHT.

Bulgarian legislation does not contain provisions related to grouping 3.9 Does your jurisdiction have transfer pricing rules? for tax purposes.

The effective Bulgarian legislation generally provides that all 4.5 Do tax losses survive a change of ownership? transactions of a company with related parties should be at arm’s length. Based on an explicit provision in the Bulgarian Tax and Taxable persons have the right to carry forward the tax loss in the Social Security Procedure Code, in case of a tax audit the company case of change of the shareholder(s). is obliged to prove that its transfer prices are at arm’s length or to set out its argument for any deviations from the arm’s length principle.

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Upon corporate reorganisation, the acquiring companies or newly formed companies may not carry forward tax losses of the acquired/ 5.2 Is there a participation exemption for capital gains? merged companies. Upon the sale of an enterprise, the transferee may not carry forward No participation exemption for capital gains is provided by tax losses formed by the transferor. Bulgarian tax law.

4.6 Is tax imposed at a different rate upon distributed, as 5.3 Is there any special relief for reinvestment? opposed to retained, profits? There is no specific relief for reinvestment. However, under the

Bulgaria The distributed profits are subject to 5% WHT (with some options state aid rules there are some options for non-payment of corporate for WHT relief as mentioned above), while retained profits are not tax as long as the retained amount is invested in an asset, subject to subject to WHT. certain conditions being met.

4.7 Are companies subject to any significant taxes not 5.4 Does your jurisdiction impose withholding tax on the covered elsewhere in this chapter – e.g. tax on the proceeds of selling a direct or indirect interest in local occupation of property? assets/shares?

4.7.1 Tax on expenses levied on the following types of expenses: Only capital gains are subject to tax. Please refer to question 5.1 1. Representative expenses. above. 2. Social expenses provided in kind, including social insurance, health or life insurance and food vouchers. 6 Local Branch or Subsidiary? 3. Expenses in kind related to the company’s assets available for personal use by staff or management. 4.7.2 Alternative taxes: 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? 1. Tax on gambling activity. 2. Tax on publicly financed enterprises’ income. There are no specific taxes imposed upon the formation ofa 3. Tax on activities related to the operation of vessels. subsidiary in Bulgaria. 4.7.3 Personal income tax: Companies have to withhold personal income tax on salaries 6.2 Is there a difference between the taxation of a local accrued to natural persons. subsidiary and a local branch of a non-resident 4.7.4 Local taxes: company (for example, a branch profits tax)? 1. Immovable property tax. 2. Gift tax. The same corporate tax rules apply to local subsidiaries and to local 3. Tax on onerous acquisition of property. branches of non-resident companies. 4. Transport vehicle tax. 4.7.5 Other public levies: 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? 1. Social insurance and health insurance in case of employees and, in some cases, subcontracted individuals. The accounting profit realised by a local branch would be subject to 2. Garbage collection fee in case of ownership of property. upward and/or downward adjustments for tax purposes (the same as that which is applicable for a local subsidiary) in order to establish 5 Capital Gains the taxable profit.

5.1 Is there a special set of rules for taxing capital gains 6.4 Would a branch benefit from double tax relief in its and losses? jurisdiction?

Capital gains of locally resident companies (from the disposal of Under all double tax treaties concluded by Bulgaria following the fixed assets, vehicles, branches of activity, а whole business, etc.) OECD Model Convention, if a non-resident enterprise carries on are treated and respectively taxed as ordinary business income. The business in Bulgaria through a permanent establishment (such as same applies for capital gains from alienation of non-listed shares. a branch) situated therein, the profits that are attributable to the permanent establishment may be taxed in Bulgaria. Normally, the Capital gains derived by local residents from the alienation of shares double tax treaty would provide for the methods for eliminating and or bonds listed on regulated markets (regulated stock exchange) double taxation (in Bulgaria and in the jurisdiction of the non- are excluded from taxation. resident enterprise) with respect to such profits. The provisions of Bulgarian-sourced capital gains of non-residents are taxed WHT the relevant double tax treaty should be analysed on a case-by-case at 10% except if derived from Bulgarian-sourced financial assets basis. listed on regulated markets which are exempted from taxation. The capital gain WHT rate for non-residents might be reduced under the provisions of a relevant DTT.

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closed-ended type under the provisions of the Collective Investment 6.5 Would any withholding tax or other similar tax be Schemes and Other Undertakings for Collective Investment Act, are imposed as the result of a remittance of profits by the exempt from the levy of corporate income tax. branch? Special purpose investment companies under the Special Purpose Investment Companies Act are exempt from the levy of corporate The after-tax profit remittance by a local branch is not regarded as income tax. dividend, and is not subject to withholding tax.

7 Overseas Profits 9 Anti-avoidance and Compliance Bulgaria 9.1 Does your jurisdiction have a general anti-avoidance 7.1 Does your jurisdiction tax profits earned in overseas or anti-abuse rule? branches?

Yes. The Bulgarian Corporate Income Tax Act provides that: Yes, resident companies are taxed on their worldwide income. Therefore, profits earned in overseas branches are taxed at the 10% “Where one or more transactions, including those between corporate tax rate. unrelated persons, have been effected under conditions which lead to tax avoidance, the taxable basis shall be determined The ordinary tax credit exemption method is applied against without taking into consideration the said transaction, or corporate tax paid overseas on the branch’s profits if a DTT does not certain conditions thereof, and what is taken into consideration provide for a different double taxation elimination method. shall be the taxable basis that would have been achieved if a customary transaction of the respective type had taken place at arm’s length prices and was aimed at achieving the same 7.2 Is tax imposed on the receipt of dividends by a local economic result, without leading to tax avoidance.” company from a non-resident company?

Dividends received by local companies from EU/EEA tax residents 9.2 Is there a requirement to make special disclosure of are excluded from taxation. Dividends received by local companies avoidance schemes? from non-resident companies outside the EU/EEA are considered part of the general worldwide income and are subject to corporate There is no requirement to make special disclosure of avoidance income tax under the general rules. schemes. However, there is an option to disclose hidden profit distribution in the annual tax return, thus discharging the penalty of The ordinary tax credit exemption method is applied against WHT 20% of the distributed amount. paid on dividends abroad if the respective applicable DTT does not provide for a different method. 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also 7.3 Does your jurisdiction have “controlled foreign anyone who promotes, enables or facilitates the tax company” rules and, if so, when do these apply? avoidance?

Bulgaria does not have “controlled foreign company” rules. Legal provisions exist that aim to engage third persons’ personal responsibility for a company’s unpaid taxes and social security 8 Taxation of Commercial Real Estate instalments. Such third persons include: the company’s managing director(s), members of managing bodies, procurators and any person authorised to perform the managing director’s rights and 8.1 Are non-residents taxed on the disposal of obligations. The third person’s personal responsibility could be commercial real estate in your jurisdiction? engaged under the following conditions: (a) they have concealed facts or circumstances and, as a result Capital gains of non-residents from the disposal of commercial thereof, the company’s tax and social security liabilities real estate in Bulgaria are subject to WHT at 10%. The taxable cannot be settled; or amount is the positive difference between the selling price and the (b) they have disposed of the company’s assets for free or at documented cost of acquisition of the property. prices below the market rate and, as a result thereof, the company’s property has decreased, thus leaving unsettled tax and social security liabilities. 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your Furthermore, majority shareholders’ personal responsibility could be jurisdiction? engaged under scenario (b) above when the disposals have followed their decisions. Majority shareholders (who control the company or Bulgarian legislation does not impose tax on the transfer of an own 15% or more of its shares) in a company that becomes liable for indirect interest. taxes and social security may be held liable for those liabilities if, after the public levies’ due dates, they have disposed of their shares in bad faith. Bad faith is presumed if certain conditions set in law 8.3 Does your jurisdiction have a special tax regime are met. for Real Estate Investment Trusts (REITs) or their equivalent? Hidden shareholders are jointly liable with an insolvent company for the latter’s unpaid taxes and social security instalments. Collective investment schemes which have been admitted to public offering in Bulgaria, and licensed investment companies of the

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9.4 Does your jurisdiction encourage “co-operative 10.3 Does your jurisdiction support public Country-by- compliance” and, if so, does this provide procedural Country Reporting (CBCR)? benefits only or result in a reduction of tax? At the time of writing, Bulgaria had not publicly announced its Bulgaria has not adopted a co-operative compliance programme. position regarding public Country-by-Country Reporting.

10 BEPS and Tax Competition 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box?

Bulgaria 10.1 Has your jurisdiction introduced any legislation There are tax preferences of a limited scope upon the employment in response to the OECD’s project targeting Base of certain disabled or previously unemployed persons, such as the Erosion and Profit Shifting (BEPS)? granting of scholarships, as well as under the rules of state aid; namely, tax preferences for investing in municipalities with a high Country-by-Country Reporting has been introduced into Bulgarian unemployment rate, tax preferences in the form of regional aid, and legislation. tax preferences in the form of state aid for farmers.

10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports?

At the time of writing, there was no publicly available information on the introduction of legislation to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports.

Svetla Marinova Svetlana Dermendjieva Baker Tilly Klitou and Partners Baker Tilly Klitou and Partners Business Services EOOD Business Services EOOD 104 Akad. Ivan E. Geshov Blvd. 104 Akad. Ivan E. Geshov Blvd. Entrance A, 7th Floor Entrance A, 7th Floor Sofia 1612 Sofia 1612 Bulgaria Bulgaria

Tel: +359 2 958 0980 Tel: +359 2 958 0980 Email: [email protected] Email: [email protected] URL: www.bakertillyklitou.bg URL: www.bakertillyklitou.bg

Svetla Marinova holds a Master’s degree in Law from the University of Svetlana Dermendjieva has a Master’s degree in Economics and Sofia and an ACCA Diploma in Financial Management. She is fluent in Accounting from the University of National and World Economy, English and Bulgarian, and also uses Russian and French in her work. Sofia. Svetlana is the Tax Supervisor at Baker Tilly Bulgaria, mostly Svetla Marinova has more than 12 years of diverse tax consulting specialised in direct and indirect taxation (VAT, corporate tax, experience with the “Big Four” in Bulgaria, including four years as a transfer pricing and withholding taxes) and in tax audit procedures. Senior Tax Manager with Ernst & Young. Her consulting experience She has 22 years of tax experience, including as a tax inspector in was supplemented with the business perspective gained during four National Revenue Agency, Head of the in-house accounting and years as head of the in-house Tax Department of the largest Bulgarian tax compliance department of a private company and consultant in telecommunications company. In the period 2007–2011 Svetla outsourcing company for tax and accounting services. Svetlana is Marinova was honoured with membership of the EU Joint Transfer specialised mainly in the following industries: Real Estate; IT; Services; Pricing Forum under the auspices of the European Commission. She Manufacturing; Wholesale; Retail; Pharmaceuticals; and Foods and joined Baker Tilly Bulgaria in 2013 as Tax Director, subsequently also Beverages. taking over the legal service line. Svetla Marinova has been a speaker at a number of tax conferences and seminars, both in Bulgaria and abroad.

Baker Tilly in Bulgaria is an independent member of Baker Tilly International – the UK-based, ninth-largest worldwide accountancy and business advisory network. Our highly educated and experienced professionals in the areas of tax consulting and tax compliance services, transfer pricing, VAT, corporate finance, legal services, audit and other business advisory services work together under the same umbrella, sharing their knowledge and expertise to offer outstanding service. A vast range of services is offered through a single point of contact to ensure a quick, proactive response to our Bulgarian and non-Bulgarian clients operating across various industries. Through excellent links with our strong international network we can help clients no matter where in the world they do business, offering seamless service, all through a single point of contact. The Bulgarian practice of Baker Tilly forms part of the Baker Tilly Klitou corporate group of business advisors, accountants and auditors operating through offices in Bulgaria, Greece, Cyprus, Romania and Moldova. For more information visit: www.bakertillyklitou.bg.

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Canada Zvi Halpern-Shavim

Blake, Cassels & Graydon LLP Shavone Bazarkewich

1 Tax Treaties and Residence 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced subsequently)? 1.1 How many income tax treaties are currently in force in your jurisdiction? While domestic legislation generally does not override treaties, treaties are subject to the provisions of the Income Tax Conventions Canada currently has 93 treaties that are in force, four treaties that Interpretation Act (Canada) which, among other things, provides are signed but not yet in force, and seven treaties that are either that the general anti-avoidance rule in the Income Tax Act can apply under negotiation or re-negotiation. In addition, Canada currently to eliminate treaty benefits if it is determined that a tax treaty has has 22 tax information exchange agreements that are in force, two been abused. Canada’s tax treaties are generally also subject to a that are signed but not yet in force, and six under negotiation. general tax benefit rule (expressly included in many of Canada’s tax treaties) whereby a tax treaty will not be applied to deprive a 1.2 Do they generally follow the OECD Model Convention taxpayer of a benefit otherwise available under domestic tax law. or another model? Similarly, and as mentioned above, the principal purpose test that Canada will adopt for treaties covered by the MLI may operate Canada’s tax treaties generally follow the OECD model. to deny treaty benefits in certain circumstances. The MLI also contains a number of other provisions which would modify such 1.3 Do treaties have to be incorporated into domestic law treaties in order to implement other tax treaty measures contained before they take effect? in the BEPS Project.

Treaties take effect once Parliament enacts legislation incorporating 1.6 What is the test in domestic law for determining the them into domestic law. residence of a company?

1.4 Do they generally incorporate anti-treaty shopping A corporation will be resident in Canada if it is incorporated under rules (or “limitation on benefits” articles)? the laws of Canada or a province, or if central management and control of the corporation is exercised in Canada, subject to the Canada’s tax treaty with the U.S. has a specific limitation on benefits application of certain deeming and tie-breaker rules contained in rule that is derived from the limitation of benefits rule in the U.S. Canada’s treaties and domestic law. model treaty. Additionally, some of Canada’s treaties have narrow limitation on benefits provisions, e.g., benefits are not available to 2 Transaction Taxes certain types of entities. On June 7, 2017, Canada signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion 2.1 Are there any documentary taxes in your jurisdiction? and Profit Shifting (MLI) which contains certain measures intended to address “treaty shopping”. Through the MLI, Canada’s tax There are no documentary taxes in Canada. treaties which are covered by the MLI will be amended, among other things, to incorporate (a) a stated intention for tax treaties to 2.2 Do you have Value Added Tax (or a similar tax)? If so, eliminate double taxation without creating opportunities for non- at what rate or rates? taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements), and (b) a Federal goods and services tax (GST) is a VAT that applies at a rate principal purpose test, which will operate to deny treaty benefits in of 5%. Some provinces have harmonised their provincial sales tax certain circumstances where a principal purpose of an arrangement base with the federal GST, resulting in a harmonised sales tax (HST) or transaction was to obtain a treaty benefit. with rates varying by province between 13%–15%. The province of Canada has also indicated that, where appropriate, it may seek Quebec imposes its own provincial VAT in addition to the 5% GST to negotiate on a bilateral basis a detailed limitation on benefits at a rate of 9.975%. provision with its treaty partners.

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2.3 Is VAT (or any similar tax) charged on all transactions 3.2 Would there be any withholding tax on royalties paid or are there any relevant exclusions? by a local company to a non-resident?

VAT applies to nearly all supplies of property and services, but there Canada levies a 25% withholding tax on royalties paid by Canadian are exceptions. Financial services are exempt from VAT, as are residents to non-residents. There are a number of domestic healthcare services, certain educational services, and most supplies exemptions, the most significant of which is for royalties or similar by registered charities. payments in respect of copyright in respect of the production or reproduction of dramatic, musical and artistic works. Additionally, Canada’s treaties generally reduce the withholding tax on royalties 2.4 Is it always fully recoverable by all businesses? If not, Canada what are the relevant restrictions? to 10% where such royalties are paid to beneficial owners who are entitled to benefits under the relevant treaty, and in some cases eliminate withholding tax entirely for royalties paid for the use of VAT is fully recoverable by a business to the extent that it is itself computer software. engaged in a commercial activity (i.e., generally, an activity that leads to making VAT taxable supplies). To the extent that the Domestic tax law includes certain anti-avoidance rules which business is engaged in exempt activities, such as making supplies of may impose additional withholding obligations in respect of financial services, its recovery of VAT on its input costs is restricted. certain “back-to-back” or “character substitution” arrangements, that reduce or eliminate the withholding tax that would otherwise apply to a royalty either by interposing an intermediary between a 2.5 Does your jurisdiction permit “establishment only” Canadian resident payor and the ultimate non-resident recipient, or VAT grouping, such as that applied by Sweden in the by substituting for the royalty an economically similar payment that Skandia case? attracts less withholding tax. No, Canada does not permit “establishment only” VAT grouping. 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? 2.6 Are there any other transaction taxes payable by companies? Canada levies a 25% withholding tax on interest paid or credited by a Canadian resident to a non-resident. However, interest payments Yes. The provinces of British Columbia, Saskatchewan and made by a Canadian resident to an arm’s length non-resident are Manitoba impose provincial sales and use taxes, primarily on sales generally exempt from withholding tax unless the interest is and leases of tangible property to end users but also on certain computed by reference to commodity price, cash flow, or certain services. similar amounts (i.e., the interest is “participating interest”). In addition, a non-arm’s length payment of interest (that is not 2.7 Are there any other indirect taxes of which we should participating interest) is exempt from withholding tax under the be aware? Canada-U.S. tax treaty, and Canada’s other tax treaties typically reduce the withholding tax rate on interest to 10%, in each case Insurance premiums are financial instruments and exempt from where such dividends are paid to beneficial owners who are entitled VAT; however, it is useful to be aware of the excise and provincial to benefits under the relevant treaty. taxes applicable to them. Certain provinces also impose taxes and/ As with royalty payments, domestic tax law includes certain or penalties on insured persons who contract with insurers that are anti-avoidance rules which may impose additional withholding not licensed in the jurisdiction. Other taxes can apply to specific obligations in respect of certain “back-to-back” or “character goods. For example, there are excise taxes on alcohol and tobacco, substitution” debt arrangements. provincial fuel and gasoline taxes, and more recently, carbon taxes.

3.4 Would relief for interest so paid be restricted by 3 Cross-border Payments reference to “thin capitalisation” rules?

Canada permits the deduction of interest if the amount borrowed 3.1 Is any withholding tax imposed on dividends paid by is used for the purpose of producing income or constitutes the a locally resident company to a non-resident? unpaid purchase price of property used for the purpose of producing income. There are a number of limitations on interest deductibility, Canada levies a 25% withholding tax on the gross amount of including thin capitalisation rules which may limit the deduction of dividends paid by a Canadian-resident corporation to a non- interest paid to specified non-residents (including, in broad terms, resident shareholder. The 25% withholding tax may be reduced by non-residents that hold 25% or more, by votes or by fair market treaty. Canada’s treaties typically reduce the withholding tax rate value, of all of the issued and outstanding stock of the Canadian- on dividends to 15% where such dividends are paid to beneficial resident corporate borrower), and treat the excess interest as a owners who are entitled to benefits under the relevant treaty, and to dividend subject to withholding tax. 5% in the case of corporate shareholders that own or control more than 10% of the voting shares of the Canadian-resident corporation where such shareholder is the beneficial owner and is entitled to 3.5 If so, is there a “safe harbour” by reference to which benefits under the relevant treaty. tax relief is assured?

The thin capitalisation rules limit interest deductibility on interest payments made to specified non-residents if the debtor’s debt-to- equity ratio exceeds 1.5 to one. Any interest denied by the rule

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cannot be carried forward or otherwise applied, and as noted above, will be treated as a dividend subject to withholding tax. 4 Tax on Business Operations: General The equity side of the debt-to-equity ratio in respect of Canadian resident corporations is comprised of: (a) the company’s 4.1 What is the headline rate of tax on corporate profits? retained earnings at the beginning of the year, determined on an unconsolidated basis; (b) the average of the company’s contributed The net federal corporate tax rate is generally 15% for income earned surplus at the beginning of each calendar month that ends in the in any province of Canada. In addition to the federal corporate tax year, counting only amounts that were contributed by specified non- rate, each province levies a similar corporate tax at rates that range residents; and (c) the average of the company’s paid-up capital at the from 11% to 16%. beginning of each calendar month that ends in the year, excluding Canada the paid-up capital of shares that are not owned by specified non- 4.2 Is the tax base accounting profit subject to resident shareholders. adjustments, or something else? The debt side of the formula is the average of all amounts, each of which is, in respect of a calendar month that ends in the year, the The tax base upon which the corporate tax is levied is determined greatest total amount at any time in the month of the company’s in accordance with specific statutory rules. The starting point outstanding debts to specified non-residents (certain debts are for the calculation is the company’s profit, as determined under excluded for this purpose). general commercial principles. After profit is determined, specific adjustment rules in the Income Tax Act for both income inclusions 3.6 Would any such rules extend to debt advanced by a and expense deductions apply to determine income for tax purposes. third party but guaranteed by a parent company? 4.3 If the tax base is accounting profit subject to Withholding tax on interest payments and the thin capitalisation adjustments, what are the main adjustments? rules will apply to certain debt advanced by a third party that is advanced as part of a “back-to-back” loan arrangement (which for A corporation’s tax profit will often differ significantly from its this purpose includes certain “back-to-back” loans and loans secured financial statement income. For example, no “reserve” amounts are by property where the third party has a right to use that property). permitted unless specifically authorised in the Income Tax Act, and there are very few reserves so provided. Additionally, depreciation 3.7 Are there any other restrictions on tax relief for and depletion rates for assets and mineral, timber and oil and gas interest payments by a local company to a non- properties differ significantly from financial statement depreciation resident? and amortisation. These are only a few of the examples of the differences between commercial accounts and tax accounts. There are no additional rules that specifically target the deduction of interest payable by a Canadian-resident company to a non- 4.4 Are there any tax grouping rules? Do these allow resident. However, there are a number of other rules applicable to for relief in your jurisdiction for losses of overseas certain taxpayers that may limit interest deductions. For example, subsidiaries? interest expense relating to the construction of a building may not be deductible and instead may be required to be capitalised as part Under current law, there is no consolidation or tax grouping of the cost of the building. regime. Instead, in-group tax relief is effected by way of “loss consolidation” transactions, using interest expense or un-deducted 3.8 Is there any withholding tax on property rental depreciation expenses. These transactions are well understood and payments made to non-residents? are not generally considered abusive by the tax authorities.

There is a withholding tax of 25% on the gross amount of rental 4.5 Do tax losses survive a change of ownership? payments made by residents of Canada to non-residents for the use of any property (including real property) in Canada. In some The Income Tax Act contains rules aimed at limiting loss trading. circumstances, taxpayers can elect to report rental income on real Generally, losses incurred before a change of control cannot property in Canada on a separate Canadian tax return and have the be deducted from income in years after the change of control. income taxed on a net basis under regular Canadian income tax Similarly, losses incurred after the change of control cannot be rules. deducted from income in years before the change of control. However, provided certain conditions are met, non-capital losses 3.9 Does your jurisdiction have transfer pricing rules? arising from a particular business prior to a change of control can be carried forward to offset taxable income of the same business in the Canada has transfer pricing rules that include contemporaneous years after the change of control. documentation rules, and penalties that apply if an adjustment exceeds a de minimis threshold, and/or when contemporaneous 4.6 Is tax imposed at a different rate upon distributed, as documentation requirements have not been met. The transfer opposed to retained, profits? pricing rules adopt the arm’s length standard, and the OECD transfer pricing guidelines are considered relevant, but not determinative, in A corporation’s tax rate is the same regardless of whether profits assessing arm’s length price, terms and conditions. are distributed or retained. Note that certain corporations pay an additional tax on portfolio and investment income, which currently is refundable when dividends are paid. These rules are not relevant to most non-resident investors.

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4.7 Are companies subject to any significant taxes not 6.2 Is there a difference between the taxation of a local covered elsewhere in this chapter – e.g. tax on the subsidiary and a local branch of a non-resident occupation of property? company (for example, a branch profits tax)?

Companies are no longer subject to federal capital tax in Canada, Subsidiaries incorporated in Canada are generally deemed to be other than companies that are financial institutions. resident in Canada and as such subject to income tax in Canada on their worldwide income. Dividends paid by a Canadian subsidiary to a non-resident shareholder would generally be subject to Canadian 5 Capital Gains withholding tax as discussed above. Canada On the other hand, a non-resident company which carries on 5.1 Is there a special set of rules for taxing capital gains business in Canada is generally subject to income tax in Canada only and losses? on the income from the business carried on in Canada, or on gains realised on the disposition of certain “taxable Canadian property”. Canada provides a base preference for capital gains. That is, one- Somewhat like profits of a Canadian subsidiary that are distributed half of a capital gain is included in income and is taxed at ordinary as dividends, profits of a branch that are considered withdrawn from rates. Capital losses may only be used to offset capital gains, and Canada may be subject to a “branch tax” of 25% of such profits. may be carried back three years and forward indefinitely. Amounts reinvested in Canada as determined by detailed statutory and regulatory rules may reduce the amount of branch profits that are considered withdrawn from Canada. 5.2 Is there a participation exemption for capital gains?

Canada does not have a participation exemption for capital gains. 6.3 How would the taxable profits of a local branch be determined in its jurisdiction?

5.3 Is there any special relief for reinvestment? The taxable profits of a local branch of a foreign company are generally determined in the same manner as a Canadian-resident The Income Tax Act provides a rollover for certain voluntary and company. involuntary dispositions of capital property where “replacement property” (within the meaning of the Income Tax Act) is acquired within a prescribed period following the time the property is deemed 6.4 Would a branch benefit from double tax relief in its to have been disposed of. The rollover provisions for voluntary jurisdiction? dispositions are more limited than the provisions governing involuntary dispositions. Among other things, a “voluntary” rollover Under the federal Income Tax Act, the branch tax rate is generally is only available for property that was used for the purpose of gaining reduced where the corporation is a resident of a country that has or producing income (other than rental property) and is real or a tax treaty with Canada which reduces withholding tax rates immovable property. on dividends. The applicable rate is that which applies where a non-resident corporation owns all of the shares of a Canadian- resident company (this will often be 5%). In addition, under 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local some of Canada’s tax treaties, the first $500,000 of a non-resident assets/shares? corporation’s Canadian-source income may be exempt from the branch tax base, and/or the non-resident corporation may not be Capital gains tax (and reporting and withholding obligations) arise subject to the branch tax unless it has a permanent establishment where a non-resident person disposes of “taxable Canadian property”. in Canada, in each case provided such corporation qualifies for This includes, for example, shares of a private company (Canadian benefits under the relevant treaty. or not, but not mutual fund corporations, as defined for Canadian tax purposes) and interests in trusts (but not mutual fund trusts, as defined 6.5 Would any withholding tax or other similar tax be for Canadian tax purposes) and partnerships that in the previous 60 imposed as the result of a remittance of profits by the months have derived more than 50% of their value from real property branch? and/or certain types of resource and timber properties situated in Canada. Shares of companies listed on certain stock exchanges, There is no other tax that would be imposed as a consequence of mutual fund corporations and mutual fund trusts that so derive their remitting profits by the branch to the head office. value will constitute taxable Canadian property only if the taxpayer and persons not dealing at arm’s length with the taxpayer owned 25% or more of the entity in the previous 60 months. Certain asset 7 Overseas Profits dispositions will also be subject to withholding tax on disposition by a non-resident, such as dispositions of real property in Canada. 7.1 Does your jurisdiction tax profits earned in overseas branches? 6 Local Branch or Subsidiary? Canadian residents are liable to Canadian tax on their worldwide income. Consequently, a Canadian-resident company will be 6.1 What taxes (e.g. capital duty) would be imposed upon subject to Canadian tax on profits earned from overseas branches. the formation of a subsidiary? The Income Tax Act allows a foreign tax credit for foreign taxes paid. This credit is limited to the Canadian tax otherwise payable No stamp, capital or wealth duties are imposed on the formation of in respect of foreign source income and is computed on a country- a subsidiary.

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by-country basis, so that credits for foreign tax paid to one country disposed of constitutes “taxable Canadian property”. This includes cannot be used to reduce Canadian tax on foreign-source income shares of a private company (Canadian or not, but not mutual fund from another country. In addition, foreign tax credits are computed corporations) and interests in trusts (but not mutual fund trusts) and separately in respect of business income and non-business income. partnerships that in the previous 60 months have derived more than 50% of their value from real property and/or certain types of resource and timber properties situated in Canada. Shares of companies listed 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? on certain stock exchanges, mutual fund corporations and mutual fund trusts that so derive their value will generally constitute taxable Canadian property only if the taxpayer and persons not dealing at Dividends received from non-resident companies are included arm’s length with the taxpayer owned 25% or more of the entity in in a Canadian resident’s income for Canadian tax purposes. That Canada the previous 60 months. said, the Income Tax Act effectively exempts dividends received by a Canadian-resident corporation from “foreign affiliates” if the dividends are derived from active business profits earned by a 8.3 Does your jurisdiction have a special tax regime foreign affiliate that is resident in a country with which Canada has for Real Estate Investment Trusts (REITs) or their a tax treaty or a tax information and exchange agreement, and the equivalent? profits are earned by the affiliate through a permanent establishment in such a country. The foreign affiliate rules are complex, and are Yes. In general terms, REITs are treated as pass-through entities linked with Canada’s controlled foreign corporation rules (discussed provided they are structured to comply with certain “specified below). investment flow-through” trust rules.

7.3 Does your jurisdiction have “controlled foreign 9 Anti-avoidance and Compliance company” rules and, if so, when do these apply?

Canadian-resident taxpayers that own shares of a “controlled 9.1 Does your jurisdiction have a general anti-avoidance foreign affiliate” at the end of a taxation year of the affiliate ending or anti-abuse rule? in a taxation year of the taxpayer, are required to include certain types of passive income and certain capital gains (“foreign accrual Canada has had a statutory general anti-avoidance rule since 1988. property income”) in computing the taxpayer’s income for the year. There is now a substantial amount of jurisprudence considering Where the taxpayer is a Canadian-resident corporate taxpayer, the the application of the rule. Note that Canada also has a number of foreign accrual property income rules work in concert with the targeted anti-avoidance rules. foreign affiliate rules mentioned above. It should be noted that investments made in a “foreign affiliate” by 9.2 Is there a requirement to make special disclosure of a Canadian company that is controlled by a non-resident company avoidance schemes? will generally be subject to the so-called “foreign affiliate dumping rules”. These rules are complex. Among other things, in certain The federal Income Tax Act and the Quebec income tax act require situations, the amount of any such investment by a Canadian the reporting of certain types of tax avoidance transactions if certain company will be deemed a dividend paid by the Canadian company conditions are met. to its non-resident shareholder and the deemed dividend will be subject to Canadian withholding tax. 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also 8 Taxation of Commercial Real Estate anyone who promotes, enables or facilitates the tax avoidance?

8.1 Are non-residents taxed on the disposal of The federal Income Tax Act provides that penalties can be levied commercial real estate in your jurisdiction? on third parties (such as tax preparers, lawyers or accountants, as applicable) who, in general terms, knowingly or in circumstances Yes, non-residents are generally taxed on any gain realised on amounting to culpable conduct make or participate in the making disposition of real property situated in Canada. Whether or not the of false statements or omissions in respect of another person’s tax gain is taxed as a capital gain (one-half of the gain is subject to tax affairs. at ordinary rates) or as income (the entire gain on income account is subject to tax at ordinary rates) depends on the application of principles developed by the courts. 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural The purchaser of the property may withhold 25% (or 50% in certain benefits only or result in a reduction of tax? cases) of the purchase price under the federal Income Tax Act (and separate withholding may be effected under the laws of the province The OECD’s cooperative compliance pillars underlie some recent of Quebec where applicable), unless the seller has obtained a clearance compliance initiatives and priorities of the Canadian tax authorities. certificate from the relevant tax authorities on a timely basis. These broadly include: (1) commercial awareness; (2) impartiality; (3) proportionality; (4) openness; and (5) responsiveness. Canadian 8.2 Does your jurisdiction impose tax on the transfer of tax authorities view the final pillar, responsiveness, as a two-way an indirect interest in commercial real estate in your street, involving reciprocal transparency between Canadian tax jurisdiction? authorities and taxpayers. Canada also has a voluntary disclosure programme which promotes Canada will tax an indirect transfer of real property if the interest compliance with tax laws by encouraging taxpayers to voluntarily

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correct previous errors or omissions in their tax affairs. Taxpayers border surplus stripping, including rules targeting “back-to-back” are required to pay any additional taxes owing as a result of the loan and royalty arrangements and reorganisations undertaken by correction or an error or omission; however, relief from interest, non-residents of Canadian subsidiaries. In addition, the government prosecution and penalties may be provided under the programme. has recently affirmed Canada’s commitment to combatting offshore tax evasion. 10 BEPS and Tax Competition 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base

Canada Canada supports country-by-country reporting. Canada has Erosion and Profit Shifting (BEPS)? passed final legislation to impose country-by-country reporting requirements for large MNEs the ultimate parent entity of which Final legislation was passed in Canada on December 15, 2016 to or (in certain cases) a constituent member of which is resident in implement country-by-country reporting requirements for large Canada. This measure will only apply to MNEs with total annual multinational enterprises (MNEs), as noted further below, based on consolidated group revenue of at least €750 million. Canada will the recommendations of the BEPS project. exchange country-by-country reports with other countries that have The 2017 Federal Budget indicated that the government had begun enacted similar legislation and with which Canada has an agreement to implement the OECD’s BEPS recommendation that certain forms to exchange tax information. The new reporting requirement of tax rulings be automatically exchanged between tax authorities. applies to reporting fiscal years of MNE groups that began on or In addition, Canada became a signatory to the MLI on June 7, 2017. after January 1, 2016. The MLI is now subject to domestic approval and may enter into force as early as January 1, 2019 (for withholding taxes) and for 10.4 Does your jurisdiction maintain any preferential tax taxable periods beginning after June 1, 2019 (for all other taxes). regimes such as a patent box?

10.2 Does your jurisdiction intend to adopt any legislation Canada does not have any federal preferential tax regimes such as to tackle BEPS which goes beyond what is a patent box. That said, Canada has a number of incentives built recommended in the OECD’s BEPS reports? into the Income Tax Act designed to encourage investment in certain sectors, such as natural resources and research and development. Canada has not introduced any legislation to tackle BEPS which Patent box regimes have been proposed or enacted in certain specifically goes beyond what is recommended in the OECD’s BEPS provinces (for instance, Saskatchewan) which would provide relief reports. That said, Canada has introduced a number of anti-avoidance in respect of the applicable provincial component of corporate tax. rules aimed at curtailing what it perceives as impermissible cross-

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Zvi’s practice involves all areas of commodity tax, with a focus on Shavone’s practice focuses on a broad range of Canadian domestic planning and advising clients in connection with the goods and and international income tax law issues. Prior to joining Blakes, services tax, the harmonised sales tax, provincial sales tax, insurance Shavone completed a J.D./M.B.A. at the University of Toronto, where premium tax, customs valuation, tariff classification, import/export she focused on the impact of domestic and international tax policy to restrictions, and various aspects of the North American Free Trade business strategy and decision-making. Agreement and Canada’s other bilateral trade agreements. Zvi also represents taxpayers at all levels in the tax audit and appeal process. Zvi is recognised as a leading lawyer in International Tax Review’s Indirect Tax Leaders 2017 (6th Edition).

Blakes tax lawyers are recognised globally as leaders in all areas of tax. We have one of the leading tax practices in Canada, with offices in Montréal, Toronto, Calgary and Vancouver. Our transactional practice covers all areas of corporate income tax, focusing particularly on cross-border transactions, international reorganisations, investment funds, private equity, energy, corporate finance and structured finance. With a dedicated team of tax controversy & litigation lawyers, we also assist a wide range of public and private clients in resolving tax disputes, whether in the course of the audit process, through administrative appeals or negotiated settlements, or, where necessary, in court. We also have a specialised team of lawyers that advises on commodity tax, customs and trade law, including sales taxes, GST and customs. Whether an issue is local or multi-jurisdictional, practice-area specific or interdisciplinary, Blakes handles transactions of all sizes and levels of complexity.

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Croatia Silvije Čipčić-Bragadin

Čipčić-Bragadin and Associates in cooperation with Tax Advisory TUK Ltd. Edo Tuk

1 Tax Treaties and Residence 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates?

1.1 How many income tax treaties are currently in force in your jurisdiction? Yes, the general VAT rate is 25%. For certain products such as bread, milk, books, scientific There are currently 61 tax treaties in force in Croatia. publications, some healthcare products, etc., a rate of 5% applies. For tourist accommodation services, newspapers and magazines, 1.2 Do they generally follow the OECD Model Convention etc., a 13% rate applies. or another model? 2.3 Is VAT (or any similar tax) charged on all transactions Yes, they generally follow the OECD Model. or are there any relevant exclusions?

1.3 Do treaties have to be incorporated into domestic law The most relevant exclusion is in regard to insurance services, before they take effect? credits and loans, credit guarantees, management of investment funds, lotteries, betting and casino games, certain construction Yes, all treaties have to be ratified by the Croatian Parliament. services, postal services, hospital and medical care services, dental services, certain cultural services, certain sports activities, etc.

1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? Generally they do not contain a limitation on benefits article. Restrictions are applicable for all business types, and the most relevant ones are related to vehicle purchase, with its accompanying 1.5 Are treaties overridden by any rules of domestic expenses and the entrepreneur’s cost of representation. law (whether existing when the treaty takes effect or introduced subsequently)? 2.5 Does your jurisdiction permit “establishment only” No, they are not. VAT grouping, such as that applied by Sweden in the Skandia case?

1.6 What is the test in domestic law for determining the No, it does not. residence of a company?

The Croatian Income Tax Act defines a corporate resident as any 2.6 Are there any other transaction taxes payable by companies? legal or natural person whose seat is registered with the Register of Companies or any other register in Croatia, or whose place of effective management of business is in Croatia. Residents are also Yes. These include court fees, stamp duties and, for example, when natural persons registered as entrepreneurs. transactions have to be registered, the land plot conveyance procedure. Such fees vary from HRK 50 to HRK 5,000. 2 Transaction Taxes 2.7 Are there any other indirect taxes of which we should be aware? 2.1 Are there any documentary taxes in your jurisdiction? Companies are subject to: a tax on company name, determined by Yes, certain transactions are subject to mandatory notarisation or the local municipality; a Croatian Chamber of Economy fee; and a solemnisation. Croatian Radio Television fee.

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EUR 401,212). For taxpayers who reach or exceed the threshold, 3 Cross-border Payments CPT is levied at 18%.

3.1 Is any withholding tax imposed on dividends paid by 4.2 Is the tax base accounting profit subject to a locally resident company to a non-resident? adjustments, or something else?

Yes; in the absence of the relevant double taxation treaty, withholding Yes, the tax base is subject to adjustments. tax is levied at a rate of 12%.

4.3 If the tax base is accounting profit subject to Croatia 3.2 Would there be any withholding tax on royalties paid adjustments, what are the main adjustments? by a local company to a non-resident? The tax base is reduced by revenues from dividends and profit Yes; in the absence of the relevant double taxation treaty, withholding shifting, value adjustment of shares and stakes, revenues from tax is levied at a rate of 15%. collected write-off claims, depreciation and tax reliefs for reinvested profit. 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas Yes; in the absence of the relevant double taxation treaty, withholding subsidiaries? tax is usually levied at a rate of 15%. No, there are no such rules. 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? 4.5 Do tax losses survive a change of ownership?

Yes, if the interest is paid to a related company. Yes, they do.

3.5 If so, is there a “safe harbour” by reference to which 4.6 Is tax imposed at a different rate upon distributed, as tax relief is assured? opposed to retained, profits?

Tax relief for accrued interest paid to a relevant company is No, but there are certain tax reliefs for retained profits provided that restricted up to the amount which exceeds four times the amount of certain prerequisites are met. the company’s initial share capital.

4.7 Are companies subject to any significant taxes not 3.6 Would any such rules extend to debt advanced by a covered elsewhere in this chapter – e.g. tax on the third party but guaranteed by a parent company? occupation of property?

Yes, they would. Yes. These include a tourist contribution, a monumental fee and a forest contribution. All three depend on the company’s revenue. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- resident? 5 Capital Gains

No, there are not. 5.1 Is there a special set of rules for taxing capital gains and losses? 3.8 Is there any withholding tax on property rental payments made to non-residents? No, there is not.

No, there is no such tax. 5.2 Is there a participation exemption for capital gains?

3.9 Does your jurisdiction have transfer pricing rules? No, there is not.

Yes, it does. 5.3 Is there any special relief for reinvestment?

4 Tax on Business Operations: General No, there is not.

5.4 Does your jurisdiction impose withholding tax on the 4.1 What is the headline rate of tax on corporate profits? proceeds of selling a direct or indirect interest in local assets/shares? Corporate profit tax (CPT) is levied at a 12% rate for taxpayers whose yearly revenue does not exceed HRK 3,000,000 (approximately No, it does not.

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6 Local Branch or Subsidiary? 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your jurisdiction? 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? No, it does not. No taxes are imposed on subsidiary incorporation. 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their 6.2 Is there a difference between the taxation of a local equivalent?

subsidiary and a local branch of a non-resident Croatia company (for example, a branch profits tax)? REITs conduct business under the same conditions as any other entity in Croatia. However, services paid for managing a REIT are There is no difference between the taxation of a locally formed VAT-exempt. subsidiary and the branch of a non-resident company.

6.3 How would the taxable profits of a local branch be 9 Anti-avoidance and Compliance determined in its jurisdiction?

9.1 Does your jurisdiction have a general anti-avoidance These would be determined in the same way as any other legal entity or anti-abuse rule? in Croatia. General anti-avoidance rules apply. 6.4 Would a branch benefit from double tax relief in its jurisdiction? 9.2 Is there a requirement to make special disclosure of avoidance schemes? No, it would not. No, there is no such requirement. 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the branch? 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax A branch in Croatia is considered a separate legal entity. Therefore, avoidance? no withholding or similar tax may apply between a branch office and its incorporator. Croatia does not have any rules targeting other persons involved in tax avoidance. 7 Overseas Profits 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural 7.1 Does your jurisdiction tax profits earned in overseas benefits only or result in a reduction of tax? branches? Croatia has not adopted “co-operative compliance”. No, it does not.

10 BEPS and Tax Competition 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? 10.1 Has your jurisdiction introduced any legislation Any dividend or profit received by a non-resident company is in response to the OECD’s project targeting Base subject to a withholding tax, depending on double taxation treaty Erosion and Profit Shifting (BEPS)? provisions. If there is no special DTT provision, the tax rate is 12%. Even though Croatia is not a member of the OECD, the BEPS plan will become applicable according to the EU Directives. For 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? example, Action 13 of the BEPS plan has been incorporated into Croatian legislation and is applicable as of the beginning of 2017. This is not applicable in Croatia. 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is 8 Taxation of Commercial Real Estate recommended in the OECD’s BEPS reports?

Such information was not available at the time of publication. 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction?

No. Buyers are obligated to pay tax upon the purchase of a property.

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10.3 Does your jurisdiction support public Country-by- 10.4 Does your jurisdiction maintain any preferential tax Country Reporting (CBCR)? regimes such as a patent box?

Yes, Croatia has implemented CBCR regulations into its laws. No such regimes are maintained.

Croatia Silvije Čipčić-Bragadin Edo Tuk Čipčić-Bragadin and Associates Tax Advisory TUK Ltd. Masarykova 15 Rapska 44 HR-10000 Zagreb Zagreb Croatia Croatia

Tel: +385 1 467 8870 Tel: +385 1 7980 310 Email: [email protected] Email: [email protected] URL: www.cipcic-bragadin.com URL: www.tukiprimorac.hr

Silvije is a partner, primarily in charge of the firm’s vast corporate, Edo is a certified tax advisor with knowledge and experience in various banking and finance and commercial practice. Clients include a roster fields of taxation and finance. He has advised and led various projects of international companies, financial institutions, funds, investment covering various industries, primarily in the tourism, hotel, real estate, managers and public entities. To date, he has counselled on some trade, media and energy sectors. of the biggest transactions and projects in Croatia. His list of clients Edo has performed a number of due diligences and tax reviews, includes some of the leading Fortune Global 500 companies. Silvije mostly on internationally owned companies and groups of companies. is also regularly involved in various complex dispute resolution He advises on market entry, statutory changes such as mergers and proceedings, including arbitration processes. divisions, and executes tax and financial due diligences and reviews. Silvije is one of the founders of the Croatian Private Equity and To date, Edo has prepared numerous transfer pricing studies and Venture Capital Association and Croatian Business Angels Network, provided related advisory services. Furthermore, he has dealt with and the initiator of the establishment of the International Chamber of numerous tax litigation suits, and has prepared appeals and lawsuits Commerce for Croatia. Silvije has also been a member of several against the tax and other relevant authorities. He has advised many working groups responsible for drafting new laws in Croatia, e.g. the international clients, multinational companies, as well as high-profile law on investment funds and an enforcement law (as a representative domestic clients on wide range of day-to-day issues related to their of the Croatian Employers Association). business operations.

Čipčić-Bragadin and Associates is one of the leading legal practices in Croatia, recommended and recognised by many leading international legal guides such as The Legal 500, IFLR1000, etc., serving companies, financial institutions and private clients. With roots dating back to 1928, after years of professional development, we now have more tradition, experience and market presence than almost any other law firm in Croatia. That puts us in a unique position from which we are able to help our clients, not just on law-related issues, but also on almost any business-related matter. At Čipčić-Bragadin and Associates today, the flavour is definitely international. Around 80% of our major clients are international enterprises doing business in Croatia. We work closely with the leading international law firms and consultants, so we’re able to manage complex, cross-border projects and deals seamlessly and successfully.

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Cyprus Petros Rialas

Totalserve Management Limited Marios Yenagrites

The term “management and control” is not specifically defined in 1 Tax Treaties and Residence the legislation, but in practice it generally follows OECD guidelines in relation to the “effective” place of management and control. 1.1 How many income tax treaties are currently in force in your jurisdiction? 2 Transaction Taxes There are currently 62 bilateral double tax agreements, out of which 60 treaties have been ratified and entered into force. The treaties 2.1 Are there any documentary taxes in your jurisdiction? with the USSR, the Socialist Federal Republic of Yugoslavia and the Czechoslovak Socialist Republic are still in force with regards Stamp duty is imposed on documents (contracts, written agreements) to some of their former constituent states. It is noted that Cyprus is relating to assets located in Cyprus and/or things or matters taking considered to have one of the most attractive tax treaties with certain place in Cyprus. Stamp duty is imposed on the value of the non-EU countries like Russia, Ukraine, India and South Africa. agreement at rates between 0.15% and 0.20%, with the first €5,000 document value being exempt, and with a maximum cap of €20,000 1.2 Do they generally follow the OECD Model Convention stamp duty per stampable agreement. or another model? The person legally liable to pay stamp duty is the purchaser. The due date for payment is within 30 days from the day of signing the Cyprus treaties have always followed the OECD Model Convention. agreement. Penalties are imposed for late payment, but the non- Older treaties are continuously being updated to come in line with stamping of a stampable document does not render invalid the legal/ the latest OECD treaty model and guidelines. commercial validity of the document.

1.3 Do treaties have to be incorporated into domestic law 2.2 Do you have Value Added Tax (or a similar tax)? If so, before they take effect? at what rate or rates?

Yes, treaties must first be incorporated into domestic law. Cyprus VAT follows and complies with the EU VAT Directive. VAT is imposed on the provision of goods and services in Cyprus, 1.4 Do they generally incorporate anti-treaty shopping as well as on the acquisition of goods from the European Union and rules (or “limitation on benefits” articles)? the importation of goods into Cyprus. Taxable persons charge VAT on their taxable supplies (output tax) and are charged VAT on goods Generally, no. Nevertheless, certain treaties do contain limitation and services they receive (input VAT). of benefits articles; specifically the treaties with Belgium, Canada, The standard VAT rate is 19%. Certain supplies are subject to the the Czech Republic, France, Germany, the Russian Federation, the reduced rates of 5% or 9%, some are zero-rated, and some are exempt. United Kingdom and the United States. Generally, if the value of annual taxable supplies exceeds or is expected to exceed €15,600, registration is compulsory. The option 1.5 Are treaties overridden by any rules of domestic of voluntary registration exists in case of taxable supplies below law (whether existing when the treaty takes effect or €15,600. introduced subsequently)? VAT returns are submitted quarterly, and payment of VAT must be made by the 10th day of the second month following the month in No. Treaties take precedence over domestic law. which the tax period ends.

1.6 What is the test in domestic law for determining the 2.3 Is VAT (or any similar tax) charged on all transactions residence of a company? or are there any relevant exclusions?

The residence of the company is determined by the place where the Certain supplies are zero-rated, for instance the exportation of management and control is situated/exercised from. goods, the supply/chartering/hiring/repair/maintenance of sea-going

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vessels and of aircraft, the supply of services to meet the direct needs of sea-going vessels and aircraft, and the transportation of 3.3 Would there be any withholding tax on interest paid passengers from Cyprus to other countries and vice versa. by a local company to a non-resident? Further, certain supplies are exempt from the scope of VAT, for Outbound interest paid by a Cypriot resident company to a non- instance the letting of immovable property, most banking, financial resident is not subject to withholding tax in Cyprus. and insurance services, most hospitals, medical and dental care services, certain cultural, educational and sports activities etc. The difference between zero-rated and exempt supplies is that 3.4 Would relief for interest so paid be restricted by businesses making exempt supplies are not entitled to recover the reference to “thin capitalisation” rules?

Cyprus VAT charged on the purchases, expenses or imports. This is not applicable; Cyprus does not have thin capitalisation rules.

2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? Input VAT cannot be recovered in the following cases: Not applicable. ■ Acquisitions used for making exempt supplies. ■ Purchase, import or hire of saloon cars. ■ Entertainment expenses (except for staff entertainment). 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company? ■ Housing expenses of directors. Not applicable. 2.5 Does your jurisdiction permit “establishment only” VAT grouping, such as that applied by Sweden in the Skandia case? 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non-resident? VAT grouping is possible, on an optional basis. The wording of Article 32 of the VAT Law was amended during 2012 to include Interest expense incurred by a Cypriot company, whether payable to the exact wording of Article 11 of the EU VAT Directive. Certain a resident or a non-resident, is tax deductible to the extent that it is criteria need to be met, to prove the existence of a group for VAT incurred for income-generating purposes. grouping purposes. If the interest expense relates to the acquisition of non-business assets which do not produce taxable income, then such interest expense is restricted for tax purposes accordingly. There is a specific 2.6 Are there any other transaction taxes payable by exception where such interest can be tax allowable if it relates to the companies? acquisition of shares in a 100% subsidiary whose assets are used for business purposes. No transaction taxes are payable by companies. In case where interest expense is incurred in relation to back-to-back loans, the interest expense rate should be at arm’s length terms and 2.7 Are there any other indirect taxes of which we should conditions, otherwise the Cyprus tax authorities reserve the right be aware? to impose tax adjustments in order to reflect the deviation from the arm’s length principle. No other indirect taxes.

3.8 Is there any withholding tax on property rental 3 Cross-border Payments payments made to non-residents?

Outbound rental payments made by a Cypriot resident company to a 3.1 Is any withholding tax imposed on dividends paid by non-resident are not subject to withholding tax in Cyprus. However, a locally resident company to a non-resident? notwithstanding the above, Cyprus sourced rental income is taxable in Cyprus accordingly. Outbound dividends paid by a Cypriot resident company towards non-residents (individuals or companies) are not subject to withholding tax in Cyprus. This is a specific provision contained 3.9 Does your jurisdiction have transfer pricing rules? within the domestic legislation. Article 33 of the Cyprus Income Tax Law provides that transactions between related parties need to be carried out at arm’s length terms 3.2 Would there be any withholding tax on royalties paid and conditions. by a local company to a non-resident? In addition, the Ministry of Finance has issued an interpretative Royalties paid by a local company to a non-resident are exempt Circular in June 2017, providing guidance on the tax treatment of from withholding tax, provided that the royalties are earned on intra-group back-to-back financing arrangements. In brief, such rights that are used outside Cyprus. If the rights are used within arrangements should comply with the arm’s length principle, Cyprus, tax is withheld at 10%, except on cinematographic rights, and should be supported by an appropriate transfer pricing study. where the rate is 5%. Simplification measures are provided for companies which carry out a purely intermediary activity (i.e. granting loans to related parties which are refinanced by loans from related entities).

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4 Tax on Business Operations: General 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas subsidiaries? 4.1 What is the headline rate of tax on corporate profits? Companies which belong to the same “group” for tax purposes Tax on corporate profits is charged at a uniform rate of 12.5%. may utilise group loss relief. The tax loss of one company (the However, the effective Cyprus tax may be much lower or even zero “surrendering company”) for a particular tax year can be claimed by due to certain tax exemptions. Refer to question 4.3 below. another company of the group (the “claimant company”) and set off against the taxable profits of that company for that particular year.

Tax losses brought forward from previous years are not taken into Cyprus 4.2 Is the tax base accounting profit subject to account for group relief purposes. adjustments, or something else? Two companies are deemed to be part of a group for loss relief purposes if one is a 75% subsidiary of the other, or if both are 75% Adjustments may be imposed on the tax base accounting profit. subsidiaries of a third company, either directly or indirectly. As of 2015, an entity which is tax resident in another EU Member 4.3 If the tax base is accounting profit subject to State is also eligible to surrender tax losses to a Cypriot group adjustments, what are the main adjustments? company, provided that the surrendering EU company has exhausted all available means for setoff or carry forward of its Incomes losses in its own state of tax residence or in another Member State Certain types of income are exempt from Corporation Tax, such as: where an intermediary holding company is located. ■ Dividend income subject to easy-to-meet conditions (unless Group loss relief is allowed when both the surrendering company claimed as tax deductible by the foreign paying company – and the claimant company are part of the same group for the whole e.g. in the case of certain hybrid instruments). of the year of assessment. In case of a newly incorporated company ■ Profit from sale of shares and other qualifying “titles” (e.g. during the year of assessment, such a company is considered to be options, debentures, bonds). part of the group for the whole of the year of assessment. ■ Interest not arising from the ordinary activities or closely related to the ordinary activities of the company – e.g. bank 4.5 Do tax losses survive a change of ownership? deposit interest (although such interest is subject to Special Defence Contribution at a rate of 30%). Yes, and can be carried forward and utilised against the taxable ■ Profits from an overseas Permanent Establishment (under profits of the next five years, except for the following cases: conditions, and subject to clawback rules). (a) within any three-year period there is a change in the ownership ■ Foreign exchange gains, with the exception of gains from of the shares of the company and a substantial change in the trading in foreign currencies and related derivatives. nature of the business of the company; or ■ Double tax relief by way of credit is unilaterally allowable, (b) at any time since the scale of the company’s activities whereby foreign tax can be deducted from Cyprus tax has diminished or has become negligible and before any resulting from the same income. substantial reactivation of the business there is a change in Expenses the ownership of the company’s shares. Any expenses which have not been incurred wholly and exclusively If any of the above two cases applies, then no loss which has been for the production of (taxable) income are disallowed for the purpose incurred before the change in the ownership of the shares of the of calculating a company’s taxable profit. company shall be carried forward in the years subsequent to such Interest expense incurred for acquisition of non-business assets change. (which do not generate taxable income) is restricted for tax purposes – with the exception of the acquiring of a 100% subsidiary (under 4.6 Is tax imposed at a different rate upon distributed, as conditions). opposed to retained, profits? A notional interest deduction (NID) in the form of a notional expense is allowed annually on new equity introduced in the business as of To the extent that the ultimate beneficial owner is non-resident, then 1 January 2015. This is calculated by applying on the new equity a there is no tax on actually distributed dividends and the below-stated reference rate based on the interest rate of the 10-year government deemed dividend distribution provisions do not apply. bond of the country in which the new equity is invested, or the Actual dividends distributed to Cyprus resident and domiciled equivalent Cyprus bond rate (whichever is the highest), increased individuals are subject to 17% Cyprus tax (special defence by 3%. Benefit is restricted to 80% of the taxable profit before the contribution). This tax is paid at source when the dividend is paid deduction of the NID. Anti-avoidance provisions apply. by a Cyprus company and in cases where it is paid by a foreign For companies falling within the new intellectual property (IP) company then the physical shareholder has the obligation to declare regime, 80% of the qualifying profit earned from qualifying assets the dividend and account for the relevant tax. is allowed as a tax deductible expense (refer to question 10.4 for At the same time, to the extent that the ultimate beneficial owner more details). of a Cyprus resident company is a Cyprus tax resident individual and domiciled in Cyprus for tax purposes, a Cypriot company with Expenses of private motor vehicles (saloon cars) are not allowed, Cyprus resident beneficial shareholders (company or individual) is irrespective of whether the motor vehicles are used in the business deemed to have distributed 70% of its after-tax profits, in the form or not. of dividends to its shareholders, within two years from the end of Business entertainment expenses are restricted if in excess of 1% of the year of assessment, reduced by any relevant actual dividend turnover, or if they are in excess of €17,086 (whichever is the lowest). payments made during this period. Such deemed dividend is subject to the same aforementioned 17% defence tax.

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Anti-avoidance provisions apply. In addition, capital duty of 0.6% is imposed on the authorised share capital, but only on the nominal value (not on the premium).

4.7 Are companies subject to any significant taxes not In case the shares are issued at a premium, a fixed duty of €20 is covered elsewhere in this chapter – e.g. tax on the also payable. occupation of property?

6.2 Is there a difference between the taxation of a local Special Defence Contribution (SDC) is imposed on passive interest subsidiary and a local branch of a non-resident income, (e.g. interest income from bank deposit accounts) at a rate company (for example, a branch profits tax)? of 30%. SDC also applies on rental income at an effective rate of

Cyprus 2.25% (rental income is also subject to Corporation Tax at 12.5%). There is no difference. They would be taxed in the same manner.

5 Capital Gains 6.3 How would the taxable profits of a local branch be determined in its jurisdiction?

5.1 Is there a special set of rules for taxing capital gains In Cyprus, the local branch of a foreign company will be taxed and losses? in the same manner as if it were a company. In the jurisdiction of the foreign company, one would need to look at the applicable Capital Gains Tax (CGT) is imposed on gains from disposal of relevant provisions and in most cases any resulting Cyprus tax could immovable property situated in Cyprus, at a rate of 20%, after be available (e.g. if provided by the relevant double tax treaty) for indexation allowance. However, in case of companies whose double tax relief in that foreign jurisdiction. primary activity is real estate, gains from disposal of immovable property are treated as normal business profits and are subject to Corporation Tax at 12.5%. 6.4 Would a branch benefit from double tax relief in its jurisdiction? CGT is also imposed on the gains from disposal of shares in companies which hold immovable property in Cyprus. Yes, if so provided by the double tax treaty between Cyprus and that In addition, as of 17 December 2015, CGT is also imposed on the particular jurisdiction. disposal of shares in companies which hold, directly or indirectly, shares in companies which have own immovable property in Cyprus and at least 50% of the market value of their shares emanates from 6.5 Would any withholding tax or other similar tax be the market value of that immovable property. imposed as the result of a remittance of profits by the branch? Notwithstanding the above, in case of immovable property that has been acquired between 16 July 2015 and 31 December 2016, the There is no such withholding tax. gain from the subsequent sale of such property shall be exempt from imposition of CGT. 7 Overseas Profits 5.2 Is there a participation exemption for capital gains? 7.1 Does your jurisdiction tax profits earned in overseas The gains from the disposal of shares is specifically tax exempt, branches? except in the case where the company whose shares are being disposed owns immovable property situated in Cyprus (certain Profits of a Cypriot tax resident company which derive froma exceptions apply, e.g. in the case of a publicly listed company) – permanent establishment (PE) situated outside Cyprus are exempt also refer to question 5.1 above. from tax in Cyprus, provided that either of the following two conditions is met: 5.3 Is there any special relief for reinvestment? (a) the PE directly or indirectly engages less than 50% in activities which lead to investment income; or No, there is no special relief for reinvestment. (b) the foreign tax burden on the income of the PE is not substantially lower than the tax burden in Cyprus (in practice, an effective tax rate of at least 6.25% is deemed to satisfy this 5.4 Does your jurisdiction impose withholding tax on the condition). proceeds of selling a direct or indirect interest in local The exemption of PE profits is subject to clawback rules, i.e. if assets/shares? deductions for tax losses of the PE have been allowed in previous years, then an amount of profits equal to the tax losses so allowed No, there is no such withholding tax. shall be included in the chargeable income.

6 Local Branch or Subsidiary? 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company?

6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? Dividend income received by a Cyprus tax resident company from a foreign subsidiary is exempt from Corporation Tax. It is also exempt from Special Defence Contribution (SDC) if either of the Upon registration of a Cypriot company, a fixed amount of €105 is following two conditions apply: payable, irrespective of the amount of share capital.

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(a) the foreign company paying the dividend directly or indirectly engages less than 50% in activities which lead to investment 9.4 Does your jurisdiction encourage “co-operative income; or compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? (b) the foreign tax burden on the income of the foreign entity is not substantially lower than the tax burden in Cyprus (in practice, an effective tax rate of at least 6.25% is deemed to This is not applicable in Cyprus. satisfy this condition). If neither of the above conditions is met, dividend income received 10 BEPS and Tax Competition by the Cypriot entity is subject to SDC at 17%. Cyprus 10.1 Has your jurisdiction introduced any legislation 7.3 Does your jurisdiction have “controlled foreign in response to the OECD’s project targeting Base company” rules and, if so, when do these apply? Erosion and Profit Shifting (BEPS)?

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

10.2 Does your jurisdiction intend to adopt any legislation 9 Anti-avoidance and Compliance to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports?

9.1 Does your jurisdiction have a general anti-avoidance Cyprus intends to follow the recommendations of the OECD, as per or anti-abuse rule? the BEPS Action Plan.

According to Section 33 of the Assessments and Collections Law, the Commissioner reserves the right to disregard any non-genuine 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? or fictitious transactions whose sole purpose is the reduction of the tax base, and to impose tax on the correct amount of taxable income, usually in the form of relevant tax adjustments. Cyprus has adopted and issued the relevant Decree in relation to CBCR, in accordance with the relevant EU Directive.

9.2 Is there a requirement to make special disclosure of avoidance schemes? 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box? There is no such requirement. Cyprus has an Intellectual Property (IP) box regime, which has been amended during 2016, in order to be in line with the 9.3 Does your jurisdiction have rules which target not only recommendations of Action 5 of the BEPS Action Plan. taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax avoidance? Grandfathering provisions exist up to June 2021 for IP assets that have already qualified under the previous IP box regime. This is indirectly covered in the Anti-Money Laundering Law, under “predicate offences”.

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In brief, an amount equal to 80% of the qualifying profits earned intangible asset to qualify for the benefits of the regime, there needs from qualifying intangible assets is allowed as a tax-deductible to be a direct link between the qualifying income and the taxpayer’s expense. A modified nexus approach is followed, whereby for an own qualifying expenses contributing to that income.

Petros Rialas Marios Yenagrites Totalserve Management Limited Totalserve Management Limited Cyprus Totalserve House Totalserve House 17 Gr. Xenopoulou Street 17 Gr. Xenopoulou Street 3106 Limassol 3106 Limassol Cyprus Cyprus

Tel: +357 2586 6000 Tel: +357 2586 6000 Email: [email protected] Email: [email protected] URL: www.totalserve.eu URL: www.totalserve.eu

Petros Rialas is a Director and the Head of the International Tax Marios Yenagrites is a graduate of the London School of Economics, Planning Department of Totalserve Management Ltd. He is a Fellow from which he holds an M.Sc. degree in Accounting and Finance. He Chartered Certified Accountant with many years of experience in is a Fellow Chartered Accountant (FCA) and a Member of the Institute international tax planning, corporate taxation and trusts. His academic of Certified Public Accountants of Cyprus (ICPAC). He has also background includes a Degree from the University of Manchester and served as Secretary of ICPAC’s Corporate Governance, Internal Audit a Master’s degree from City University of London. and Risk Management Committee. He is a member of the Society of Trust and Estate Practitioners (STEP) Prior to joining Totalserve, Marios worked in the tax departments of and the International Tax Planning Association (ITPA). His vocational two Big Four accounting firms for a number of years, thereby gaining background includes a two-year employment in the auditing line of a solid background and experience in all matters relating to Cyprus service in London, and five years in the tax services division of a Big taxation. Four firm in Cyprus. In his current position, Marios is involved in providing tax consultancy Petros is a regular contributor of technical articles to local and foreign services to a wide array of clients, as well as undertaking tax planning industry publications, and has been a frequent speaker at various and tax structuring projects. conferences and seminars in Cyprus and abroad.

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

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Finland Niklas Thibblin

Waselius & Wist Mona Numminen

incorporated outside Finland may not be considered resident in 1 Tax Treaties and Residence Finland by applying the concept of effective place of management (although it could create a permanent establishment in Finland). 1.1 How many income tax treaties are currently in force in your jurisdiction? 2 Transaction Taxes Finland has a fairly extensive treaty network, with approximately 74 income tax treaties currently in force. 2.1 Are there any documentary taxes in your jurisdiction?

1.2 Do they generally follow the OECD Model Convention Please see question 2.6 below regarding transfer tax. or another model? 2.2 Do you have Value Added Tax (or a similar tax)? If so, Finnish tax treaties generally follow the OECD model, with some at what rate or rates? inevitable variation from one treaty to the next. Finnish VAT legislation gives effect to the relevant EC Directives. 1.3 Do treaties have to be incorporated into domestic law There are three rates of VAT: before they take effect? ■ the standard rate of VAT is 24% and applies to any supply of goods or services which is not exempt or subject to the Yes. A tax treaty must be incorporated into Finnish law and this is reduced rate of VAT; done by way of a statutory instrument by Parliament. ■ the reduced rates of VAT are 14% (e.g. foodstuff and restaurant and catering services); and 1.4 Do they generally incorporate anti-treaty shopping ■ 10% (e.g. passenger transportation, hotel services, theatre, rules (or “limitation on benefits” articles)? sporting events, medicine and books).

In general, Finnish tax treaties do not incorporate anti-treaty shopping 2.3 Is VAT (or any similar tax) charged on all transactions rules. However, the treaty with the US contains a “limitation of or are there any relevant exclusions? benefits” clause and the treaties with the UK and Ireland contain a “limitation of relief” clause. Pursuant to case law, domestic anti- The exclusions from VAT are as permitted or required by the avoidance rules can be applied in case of artificial cross-border Directive on the Common System of VAT (2006/112EC) (as arrangements. amended), and some examples of exempt supplies are: ■ the sale and letting of real estate (however, a lessor of real 1.5 Are treaties overridden by any rules of domestic estate may opt for VAT); law (whether existing when the treaty takes effect or ■ medical services; introduced subsequently)? ■ educational services; No, but the Finnish general and special anti-avoidance rules (the ■ insurance services; and “GAAR” and the “SAARs”, discussed in question 9.1 below) can, in ■ banking and other financial services. principle, apply if there are abusive arrangements seeking to exploit particular provisions in a double tax treaty, or the way in which such 2.4 Is it always fully recoverable by all businesses? If not, provisions interact with other provisions of Finnish tax law. what are the relevant restrictions?

1.6 What is the test in domestic law for determining the When goods and services are supplied for a business subject to VAT, residence of a company? input VAT is fully recoverable. If only a part of business is subject to VAT, only the VAT related to this business is recoverable. Certain A company which is incorporated in Finland will automatically goods or services used for entertainment purposes are, however, be resident in Finland. Unlike in some jurisdictions, a company excluded from the general right of deduction.

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2.5 Does your jurisdiction permit “establishment only” 3.2 Would there be any withholding tax on royalties paid VAT grouping, such as that applied by Sweden in the by a local company to a non-resident? Skandia case? Royalties paid to a non-resident are subject to a withholding tax There is some uncertainty around this. Finance and insurance at the rate of either 20% or 30%, unless tax treaty provisions or companies may opt for VAT grouping. The registration is made in the EC Interest and Royalty Directive (2003/49/EC) reduce or the name of the “representative member”, who is responsible for prevent taxation in Finland. Royalties paid to a Finnish permanent completing and submitting a single VAT return and making VAT establishment of a non-resident company are taxed as income of the payments or receiving VAT refunds on behalf of the group. All permanent establishment and no withholding tax is levied.

Finland members of the group remain jointly and severally liable for any VAT debts of the group. However, it is not clear whether a Finnish 3.3 Would there be any withholding tax on interest paid branch must treat its supplies to the overseas head office as taxable by a local company to a non-resident? supplies in circumstances where the overseas head office is VAT- grouped in its jurisdiction. According to domestic Finnish tax laws, interest payments to a non- resident are normally exempt from tax in Finland. 2.6 Are there any other transaction taxes payable by companies? 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? Transfer of shares in Finnish companies and real property located in Finland is subject to transfer tax. The rate of transfer tax is 4% Finland has no thin capitalisation rules, but the deductibility of of the purchase price of real property, 1.6% of the purchase price interest expenses between related parties is limited under a separate of the shares in an ordinary limited liability company and 2% of regime. Under the interest limitation regime, interest expenses the purchase price of the shares in a real estate company (including are fully deductible against any interest income. The potential real estate holding companies and housing companies). The transfer restriction of any interest exceeding the interest income (i.e. net tax base also includes any debt or liabilities of the acquired entity interest expenses) depends on three tests that are applied on a stand- (towards the seller or a third party) assumed by the buyer based on alone Finnish company level: the transfer agreement, provided that the assumption of such debt or 1. Net interest expenses may be fully deducted if the total liabilities accrues to the benefit of the seller. amount of net interest expenses does not exceed EUR 500,000 during the fiscal year. 2.7 Are there any other indirect taxes of which we should 2. Where the above limit is exceeded, net interest may only be aware? be deducted up to an amount equal to 25% of the taxable business profits before interests and depreciations. Received Customs duties are generally payable on goods imported from and paid group contributions are taken into account in the outside the EU. Excise duties are levied on particular classes of calculation of the taxable business profits. Any amount of interest so restricted may be carried forward indefinitely and goods (e.g. alcohol, tobacco, electricity and fuel). Insurance deducted against unused capacity in later years. premium tax is charged on the receipt of a premium by an insurer 3. To the extent that interest is paid to a non-related party, it can under a taxable insurance contract. be deducted even when exceeding the above limits. However, interest expenses paid to a non-related party are taken into 3 Cross-border Payments account when calculating the above EUR 500,000 and 25% limits. Therefore, interest expenses paid to a non-related party are considered first and, provided that the deduction capacity 3.1 Is any withholding tax imposed on dividends paid by under the 25% rule is not exhausted, the remaining amount can a locally resident company to a non-resident? be used to deduct interest expenses paid to a related party.

Dividends paid by a Finnish company to non-residents are, in 3.5 If so, is there a “safe harbour” by reference to which principle, subject to Finnish withholding tax of either 20% or 30%. tax relief is assured? However, in reality, such withholding is prevented or reduced by the provisions of the EC Parent-Subsidiary Directive (90/435/EEC) or Yes. The so-called “safe harbour” rule stipulates that the restrictions an applicable tax treaty. Under most tax treaties, the withholding on interest deductibility are not applied if the borrower company’s tax rate is usually reduced to 0–15% on dividends paid to persons equity ratio (equity vs total balance) is equal to or higher than the entitled to the treaty benefits. same ratio calculated on the basis of a consolidated group of balance Further, dividends paid to a recipient residing in an EEA Member sheets of the ultimate parent (“balance sheet test”). The balance State are also exempt from tax to the extent that a Finnish recipient sheet test can only be applied to consolidated balance sheets that have been prepared in an EU or EEA Member State or a state with would, under corresponding circumstances, be partly or fully which Finland has concluded a tax treaty. exempt from tax. This can grant an exemption from withholding tax (for example, for certain foreign investment funds or charitable entities). The withholding tax relief is based on EU law and may 3.6 Would any such rules extend to debt advanced by a give foreign investors the right to a retroactive tax refund claim. third party but guaranteed by a parent company?

Yes. Third-party debt may be reclassified as a related-party debt; for instance, in circumstances where the third-party debt is secured by a receivable of a related party.

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3.7 Are there any other restrictions on tax relief for interest 4.5 Do tax losses survive a change of ownership? payments by a local company to a non-resident? When more than 50% of shares in a company or its immediate parent In addition to general transfer pricing rules (see question 3.9 below), company change ownership during a tax year, the right to carry the Finnish GAAR may be applied in respect of arrangements that forward tax losses from that year and previous years is forfeited. do not correspond to their actual purpose and meaning, which have The tax authorities may grant a dispensation to allow the utilisation as their main purpose the securing of a tax advantage. of forfeited tax losses.

3.8 Is there any withholding tax on property rental

4.6 Is tax imposed at a different rate upon distributed, as Finland payments made to non-residents? opposed to retained, profits?

Rents paid to a non-resident are considered Finnish-source income No, it is not. and such income must normally be declared in Finland in accordance with the ordinary tax assessment procedure (and taxed accordingly). 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the 3.9 Does your jurisdiction have transfer pricing rules? occupation of property?

Yes. Finnish transfer pricing rules apply to both cross-border and The owner of real estate is required to pay real estate tax equal to domestic transactions between related parties. a fixed percentage of the calculated value of real estate (i.e. the If the Finnish tax authorities do not accept that pricing is at arm’s land area) and the buildings located thereon. The real estate tax length, the applied pricing can be challenged under transfer pricing value differs, as such, from the tax base value, the book value and adjustment rules. the market value of the real estate and the buildings. The rate of real estate tax is set by the municipality in which the real estate is located. However, the minimum and maximum statutory tax rates 4 Tax on Business Operations: General that the municipalities may apply vary between 0.41% and 6%.

4.1 What is the headline rate of tax on corporate profits? 5 Capital Gains

The corporate income tax rate is currently 20%. There are no 5.1 Is there a special set of rules for taxing capital gains planned reductions at the moment, although Finland will closely and losses? monitor the changes in other developed and neighbouring countries. Corporation tax is chargeable on “profits”, which includes both 4.2 Is the tax base accounting profit subject to regular business income and capital gains. There is, however, adjustments, or something else? a separate regime for computing certain capital gains. In circumstances where the participation exemption does not apply, In general terms, tax follows the commercial accounts subject to capital losses can only be used against capital gains and not against adjustments. regular business income.

4.3 If the tax base is accounting profit subject to 5.2 Is there a participation exemption for capital gains? adjustments, what are the main adjustments? Yes. The participation exemption regime allows business- Certain expenses are not deductible for tax purposes and there are conducting companies to dispose of certain shares without a Finnish certain differences between the depreciation of assets for accounting tax charge. Capital gains realised by a Finnish company on the sale and tax purposes; for instance, concerning machinery and buildings. of shares are tax-exempt provided that: There are also some tax-free income items such as tax-free capital (i) the shares belong to the selling company’s fixed assets and gains (see question 5.2 below) and dividends. the shareholding is deemed to be a part of the seller’s business income source (in comparison to the general income source); (ii) the selling company owns at least 10% of the capital of the 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas company being sold; subsidiaries? (iii) the selling company has held such participation for at least one year; and The concept of consolidated income tax returns is unknown in (iv) the disposed shares are not shares in a housing or real estate Finland. However, under the group contribution regime, group company. contributions between two Finnish-resident companies or permanent The company whose shares are sold must, furthermore, reside in establishments are deductible, provided that certain preconditions Finland, in another EU Member State or in a country with which are met. A group contribution is similarly taxable income for the Finland has concluded a tax treaty. Further, private equity investors receiving entity. The group contribution regime does not allow may not benefit from the participation exemption. Where the cross-border loss relief. participation exemption regime applies, any losses incurred from the disposal are non-deductible.

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5.3 Is there any special relief for reinvestment? 7 Overseas Profits

It is possible to make a deduction in relation to (i) insurance 7.1 Does your jurisdiction tax profits earned in overseas compensation received due to the destruction of fixed assets if the branches? new assets are acquired or the old ones are repaired within two years, or (ii) sold business premises if new premises are acquired As a general rule, and subject to tax treaty provisions, Finland within two years. taxes the profits earned in overseas branches of Finnish-resident companies.

Finland 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local 7.2 Is tax imposed on the receipt of dividends by a local assets/shares? company from a non-resident company?

No withholding tax is imposed. However, see question 8.1 below. Foreign dividends and Finnish dividends are treated in the same way. Dividends from foreign subsidiaries are generally exempt 6 Local Branch or Subsidiary? in the hands of a Finnish parent company, whereas portfolio dividends from listed companies are fully taxable if the recipient has an ownership stake of less than 10% in the paying listed entity. 6.1 What taxes (e.g. capital duty) would be imposed upon Dividends derived from non-tax-treaty countries outside the EU are, the formation of a subsidiary? however, fully taxable in Finland.

There are no taxes imposed on the formation of a subsidiary. 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident Under the Finnish CFC rules, the CFC’s income tax is taxable, as company (for example, a branch profits tax)? the shareholders’ income and actual distributions are exempted. A non-resident company controlled by a Finnish tax resident may A Finnish-resident subsidiary would pay corporate tax on its generally be regarded as a CFC, if the CFC is liable to income tax in worldwide income and gains, whereas a Finnish branch (permanent its domicile at a rate less than 60% of the effective Finnish corporate establishment) would be liable to corporation tax only on the net income tax rate (meaning generally that the corporate income tax profit attributable to the branch. There is no separate branch profit rate applicable to a CFC should currently be 12% or less). The CFC tax. regime does not apply to income of a CFC originating mainly from industrial production or shipping if that activity has occurred in the CFC’s country of origin. In addition, an exemption applies to CFCs 6.3 How would the taxable profits of a local branch be in tax treaty countries (subject to certain conditions) and where it is determined in its jurisdiction? proven, on the basis of objective factors, that despite the existence of a tax motive, the CFC is actually established in an EEA country Assuming that the local branch of a non-resident company is within and carries out genuine economic activities there. the Finnish statutory definition of a “permanent establishment” (which, in most circumstances, will be decided by the provisions in an applicable tax treaty), it will, at the outset, be treated for tax 8 Taxation of Commercial Real Estate purposes as though it were a distinct and separate entity dealing independently with the non-resident company. Generally, all branches (permanent establishments) are required to arrange 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? bookkeeping in accordance with Finnish GAAP and are taxed accordingly (subject to certain adjustments). Capital gains derived from the sale of real property (whether commercial or private) located in Finland, as well as gains derived 6.4 Would a branch benefit from double tax relief in its from the sale of shares in Finnish real estate and housing companies jurisdiction? and Finnish limited liability companies, more than 50% of whose assets consist of real estate in Finland, are generally subject to tax in No, apart from non-discriminatory rules (in the case that the branch Finland. Tax treaty exemptions may apply to certain share disposals. forms a permanent establishment).

8.2 Does your jurisdiction impose tax on the transfer of 6.5 Would any withholding tax or other similar tax be an indirect interest in commercial real estate in your imposed as the result of a remittance of profits by the jurisdiction? branch? Yes, see question 8.1 above. No, it would not.

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8.3 Does your jurisdiction have a special tax regime 9.4 Does your jurisdiction encourage “co-operative for Real Estate Investment Trusts (REITs) or their compliance” and, if so, does this provide procedural equivalent? benefits only or result in a reduction of tax?

Yes. However, the Finnish REIT scheme remains limited to The Finnish Tax Administration has recently promoted the use of residential housing only. Under the REIT scheme, to benefit so-called “preliminary discussions” for the clients of the Large from corporate tax exemption, REITs (i.e. Finnish limited liability Taxpayers’ Office, i.e. mainly companies belonging to a larger companies) must be listed on a public stock exchange or a multi- group. Preliminary discussions should be carried out prior to any lateral trading facility (“MTF”) within the EEA, with no single transaction, and the advice given in such discussions is generally shareholder owning, directly or indirectly, more than 9.99% binding on the tax authorities. The preliminary discussions do not Finland of the share capital. At least 80% of the value of the assets of a result in a reduction of tax, but may provide indirect procedural REIT must also consist of real estate that is used primarily for benefits through the “protection of trust” principle. However, if the residential purposes, and the activities of the REIT must be limited subject matter is complex or subject to interpretation, there is a lack to the letting of properties (or activities closely related thereto). of case law, or the parties disagree with respect to the tax treatment The capital structure of a REIT must furthermore be such that its of the transaction, the taxpayer is normally, in the preliminary potential debt financing does not exceed 80% of its balance sheet discussions, advised to apply for an advance tax ruling from the total. Moreover, the REIT must distribute at least 90% of its annual Finnish Tax Administration. profits to shareholders as dividends. 10 BEPS and Tax Competition 9 Anti-avoidance and Compliance

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

Yes. If a transaction has been given a legal form that does not Yes. An updated provision regarding the contents of transfer pricing correspond with its actual nature or meaning or if the legal form of documentation and CBCR requirements (see question 10.3) have the transaction does not correspond to the actual behaviour of the been introduced. Prior to the introduction of the BEPS project, taxpayer, the GAAR or SAARs may be applied and taxes can be Finland had already introduced interest deduction limitation rules reassessed as if the actual form of the transaction had been used. similar to those in BEPS Action 4 (see questions 3.4, 3.5 and 3.6). Case law on the application of the GAAR and SAARs has in several instances covered scenarios where a series of transactions have 10.2 Does your jurisdiction intend to adopt any legislation been subject to re-characterisation, especially where no adequate to tackle BEPS which goes beyond what is commercial reasons have been shown for the transaction. recommended in the OECD’s BEPS reports?

9.2 Is there a requirement to make special disclosure of We are not currently aware of any actions that would go beyond avoidance schemes? what has been recommended.

There is no such requirement. 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone Yes. The Finnish CBCR legislation requires multinational enterprises who promotes, enables or facilitates the tax avoidance? (“MNEs”) to prepare: a master file containing information on all group companies; a local file on material transactions of the Finnish There are no specific rules. However, the Finnish Penal Code taxpayer; and a CBCR report on, among others, the global allocation includes provisions regarding tax crimes that are also applicable to of an MNE’s income and taxes. The provisions on CBCR entered parties promoting or facilitating tax crime. Mere tax avoidance does into force on 1 January 2017. not, as such, constitute a tax crime. 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box?

No such regimes currently exist.

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Niklas Thibblin Mona Numminen Waselius & Wist Waselius & Wist Eteläesplanadi 24 A Eteläesplanadi 24 A 00130 Helsinki 00130 Helsinki Finland Finland

Tel: +358 9 668 95277 Tel: +358 9 668 95211 Email: [email protected] Email: [email protected] URL: www.ww.fi URL: www.ww.fi Finland Niklas Thibblin is the Managing Partner of Waselius & Wist. He has Mona Numminen joined Waselius & Wist in 2017 as an Associate over 15 years of experience from domestic and cross-border tax Lawyer. Her main practice areas include tax and corporate structuring, matters in complex high-profile cases. He has, for instance, advised mergers and acquisitions, and corporate and commercial law. Mona in numerous domestic and multi-jurisdictional group restructurings has previous experience from Roschier Attorneys Ltd., where she and transactions, as well as tax filings relating to such arrangements. worked as an Associate in their tax and structuring practice. He regularly acts as counsel in proceedings before the Finnish tax authorities and administrative courts, including the Supreme Administrative Court.

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

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France Maryse Naudin

Tirard, Naudin Jean-Marc Tirard

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

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

Tax treaties enter into force after the ratification process has been 2.1 Are there any documentary taxes in your jurisdiction? duly accomplished by each contracting state. No documentary taxes per se exist in France. However, the sale 1.4 Do they generally incorporate anti-treaty shopping of shares of French companies and of French or foreign companies rules (or “limitation on benefits” articles)? qualifying as sociétés à prépondérance immobilière are subject to transfer duties under certain conditions. Transfer of goodwill is also The most recently negotiated tax treaties or amendments of existing subject to transfer duties. tax treaties state that anti-treaty shopping rules apply, for example, to dividends and interest. 2.2 Do you have Value Added Tax (or a similar tax)? If so, France also signed, on 7 June 2017, the multilateral instrument at what rate or rates? (“MLI”) covering 68 jurisdictions. Among others, MLI’s main purposes are to limit base erosion profit shifting (“BEPS”) European VAT rules apply in France, which is a member of the through treaty abuse (Action 6 of the BEPS project), improve European Union. The standard VAT rate applicable amounts to dispute resolution, prevent the artificial avoidance of permanent 20%. Three other rates may apply depending on the nature of goods establishment status and neutralise the effects of hybrid mismatch or services (10%, 5.5% and 2.1%). arrangements. The MLI will affect the interpretation of bilateral tax treaties signed 2.3 Is VAT (or any similar tax) charged on all transactions by France and therefore further cross-border transactions. or are there any relevant exclusions?

All European exclusions apply in France. Some activities are

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excluded from the VAT scope, such as, for example, certain banking ■ 21% when paid to residents in a country which is a member and financial transactions, as well as insurance and reinsurance of the EU and EEA; activities. The renting out and sale of residential real estate are also ■ 30% when paid to residents of a country which is not a excluded from the VAT scope under certain conditions. member of the EU or EEA; and ■ 75% when paid to residents of a non-cooperative state (i.e. a state which has not signed an exchange of information treaty 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? with France). However, most tax treaties signed by France provide either a A taxpayer may recover VAT charged on goods and services used reduced rate or a withholding tax exemption.

France to realise the turnover, subject to VAT. The main exception to this Under Directive 90/435/EEC relating to parent and subsidiary principle is VAT on cars. companies (“EU Parent-subsidiary Directive”), dividends are exempt from withholding tax if the recipient is a company resident in an EU country and has held at least 5% of the shares of the French 2.5 Does your jurisdiction permit “establishment only” VAT grouping, such as that applied by Sweden in the subsidiary for at least two years. However, as of 1 January 2016, the Skandia case? EU Directive 2015/121 adopted on 27 January 2015 added an anti- abuse provision to the EU Parent-subsidiary Directive. Under this The concept of VAT grouping does not exist in France. Under certain new provision, withholding tax exemption only applies if the main conditions, companies in the same group may elect to centralise the motivation of the ownership structure was not to benefit from such an payment of VAT. Among other conditions, the “head” company exemption. As a result, ownership structures considered artificial will should hold at least 50% of the share capital of its subsidiaries and no longer benefit from the EU Parent-subsidiary Directive. all companies within the group should have the same tax year period. Finally, the French Administrative Supreme Court recently stated that tax treaty provisions only apply assuming the resident of the other contracting state is effectively taxed in his country of residence. 2.6 Are there any other transaction taxes payable by companies? As a consequence, a person exempted in his country of residence by reason of his legal status or activities should no longer benefit from the provisions of a double tax treaty signed with France. Registration duties are due on the transfer of real estate, “fonds de commerce” (goodwill) or clientele and company shares. This recent interpretation of the tax treaties by the French Administrative Supreme Court entails many difficulties, in the opinion (Sale price of commercial property and/or clientele is subject to of the authors. The French tax authorities will systematically refuse registration duties at a rate of 3% for amounts between €23,000 and to apply tax treaties, while the other contracting states allow their €200,000, and 5% for greater amounts.) residents “tax incentives” in comparison to the French tax treatment Purchases of French real estate are subject to registration duties at suffered by French residents. rates which may vary depending on the location of the real estate. A French notary should be appointed. Registration duties, including the notary’s fees, may reach 7%. 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? The rate of registration duties applicable to the company’s shares varies depending on the nature of the shares transferred: Unless tax treaties state otherwise, royalties are, as a general ■ transfers of shares of a “société par actions simplifiée” (“SAS”) rule, subject to a 33.33% withholding tax. When the recipient is or a “société anonyme” running an industrial or commercial resident in a non-cooperative country, royalties are subject to a 75% activity are subject to transfer duties at a rate of 0.1%; withholding tax. ■ transfers of shares of a “société à responsabilité limitée” (“SARL”) running an industrial or commercial activity are subject to transfer duties at a rate of 3%; and 3.3 Would there be any withholding tax on interest paid ■ transfers of shares of any company (French or foreign) whose by a local company to a non-resident? assets are mainly composed of real estate property located in France (that is more than 50% of their market value) are As a general rule, no withholding tax is levied on interest paid by a subject to transfer duties at a rate of 5%. French company, except of course when the recipient is resident in a non-cooperative country. 2.7 Are there any other indirect taxes of which we should be aware? 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? France is the kingdom of indirect taxes. Numerous indirect taxes apply to goods such as wines and alcoholic Like many other countries, France has legislation providing for beverages, hydrocarbons, cigarettes, sugar, oils, etc. certain limitations on the deduction of interest expenses, including thin capitalisation rules. However, as these different limitation rules apply all together, their articulation may be difficult to deal with. 3 Cross-border Payments French companies liable to corporate tax can only deduct from their annual taxable basis 75% of the net interest expenses occurring 3.1 Is any withholding tax imposed on dividends paid by during the same year, unless the interest amount does not exceed €3 a locally resident company to a non-resident? million (“General interest deductibility limitation”). In addition, the deduction of interest on loans granted by related Unless tax treaties state otherwise, dividends are subject to a French parties is disallowed when the lender is liable to tax on the interest withholding tax of: received from the borrowing company up to an amount which is less

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than a quarter of the French tax burden it would have been subject to, under standard conditions (in most cases if the effective tax rate 3.8 Is there any withholding tax on property rental is less than 8.33%). payments made to non-residents? Interest paid by a French borrowing company can be disallowed for No withholding tax applies on property rental payments. Non- French corporate tax purposes if its amount exceeds, cumulatively, resident companies owning real estate properties located in France the following three ratios: should comply with French accounting obligations and file an ■ 1.5 times the company’s share capital (debt-equity ratio); annual corporate tax return. ■ 25% of the company’s earnings results before tax (interest coverage ratio); and

3.9 Does your jurisdiction have transfer pricing rules? France ■ the amount of interest received from affiliates (net paid interest). France has developed transfer pricing legislation, which states that Once the ratios have been met, the portion of interest which exceeds the correct transfer price for a particular transaction between related the highest of those is not deductible from the taxable results unless parties must be that which the parties would have agreed at arm’s either of the following applies: length. ■ it does not exceed €150,000 per year; or In order to determine the tax owed by companies that depend on or ■ the borrowing company can prove that the overall debt-equity control enterprises outside France, any profits transferred to those ratio of the group to which it belongs exceeds or equals its enterprises indirectly through increases or decreases in purchase own debt-equity ratio. or selling prices or by any other means must be added back into Subject to restrictions, the portion of non-deductible interest from the taxable income shown in the companies’ accounts. The same a year’s taxable results can be deducted from the following fiscal procedure applies to companies that depend on an enterprise or a year’s results at a 5% reduction per financial year as from the second group that also controls enterprises outside France. year. To enforce article 57 of the FTC, the French tax authorities must The deductible interest rate paid to an affiliate company cannot prove both that a dependent relationship existed between the parties exceed a certain percentage, which is published every year (2.03% involved in the transaction under review, and that a transfer of for 2016). profits occurred. Finally, within a French tax consolidation group, the deduction of a French legislation also requires certain companies to provide portion of interest paid by a tax group is disallowed and added back significant documentation to the French tax authorities in relation into the global taxable income when a member company acquires to transfer pricing. the shares of either of the following: ■ a “head” company controlling, directly or indirectly, the purchasing company; that is, the acquiring company and the 4 Tax on Business Operations: General purchased company become members of the same group; or ■ a company controlled directly or indirectly by the “head” 4.1 What is the headline rate of tax on corporate profits? company.

France, as a Member State, will have to implement in its domestic The standard corporate tax rate is 33.33%. However, up until legislation provisions complying with the Anti-Tax Avoidance December 2016, companies having an annual turnover inferior to Directive (“ATA Directive”) by 31 December 2018. As a €7.63 million and fulfilling certain conditions were subject toa consequence, the general limitation of the deduction of interests corporate tax rate of 15% for the fraction of their net profit lower paid by taxpayers (i.e. 30% of the taxpayers’ EBITDA) provided by than or equal to €38,120. the ATA Directive will affect or replace the French General interest deductibility limitation. As from 1 January 2017, small and medium-sized enterprises (“SMEs”) now benefit from a reduced rate of 28% on the fraction of their net profit which does not exceed €75,000. Companies formerly 3.5 If so, is there a “safe harbour” by reference to which eligible for the 15% rate will keep benefiting from this reduced rate, tax relief is assured? and will be subject to the 28% rate only on the fraction of their net profit exceeding €38,120 and lower than or equal to €75,000. Assuming the borrowing company demonstrates that its debt-equity The 28% rate will become the standard corporate tax rate after 1 ratio does not exceed the debt-equity ratio of its group, the thin January 2020. capitalisation rules described below do not apply. French corporate tax is established on a strict territorial basis; that is, it is assessed on French source income and not on a worldwide 3.6 Would any such rules extend to debt advanced by a basis. third party but guaranteed by a parent company? Double tax treaties may, however, allow France, under specific circumstances, to tax certain foreign source income. Thin capitalisation rules also apply in this case; see our answer to question 3.4. As regards the taxation of distributed income, two co-existing parent-subsidiary regimes are applicable, based respectively on French domestic tax law and on EU regulations. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- These regimes allow a qualifying parent company to benefit from resident? reduced taxation on certain transactions on capital gains realised by the parent company on the sale of participations and dividends All general anti-avoidance rules aimed at preventing internal and/or received from its subsidiaries. international tax evasion may also apply (see our answer to question French tax law also provides a tax consolidation regime (“intégration 9.1). fiscale”); see our answer to question 4.4.

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Large companies subject to corporate tax may also be liable to an additional contribution at the rate of 3.3%, assessed on the 4.5 Do tax losses survive a change of ownership? amount of corporation tax due exceeding €763,000. The additional contribution does not apply to companies whose annual turnover For French tax purposes, a change of ownership does not alter the does not exceed €7.63 million, provided that at least 75% of the carrying forward of tax losses, except if the activity of the company company is owned by individuals or by companies that themselves is substantially modified. fulfil these conditions. A consolidated group (see our answer to question 4.4) is liable to pay this additional contribution if its global 4.6 Is tax imposed at a different rate upon distributed, as turnover exceeds €7.63 million. opposed to retained, profits?

France See also our answer to question 4.6 relating to profits distributed by a French company to its shareholders. An additional 3% contribution applies on profits distributed by French corporate tax is pre-paid in four instalments (in March, June, French or foreign companies subject to French corporate tax when September and December). Please note in this respect that a fifth they do not qualify as SMEs. This category of SME is made up of instalment was added for certain entities through the 2017 Finance enterprises which employ fewer than 250 persons and which have Bill. The debit/credit of corporate tax is due/refunded by 15 May an annual turnover not exceeding €50 million and/or an annual the following year. balance sheet total not exceeding €43 million. Losses incurred by a company subject to corporation tax can be NB: The 3% contribution was recently regarded as contrary to the carried forward without time limits. However, the offsetting of EU Parent-subsidiary Directive by the Court of Justice of European losses is limited to 50% of the current year’s profits insofar as Union, which provides an opportunity for taxpayers to make claims the profits exceed €1 million. Any unused losses remain carried in order to obtain the reimbursement of such tax. forward to the following years. 4.7 Are companies subject to any significant taxes not 4.2 Is the tax base accounting profit subject to covered elsewhere in this chapter – e.g. tax on the adjustments, or something else? occupation of property?

The determination of the taxable income is based on the company’s France applies a lot of indirect taxes. Among others, the territorial accounting year, corrected to specific tax adjustments. economic contribution (“TEC”) and the annual 3% tax should be noted. The TEC replaced the former business tax (“taxe professionnelle”) 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? in 2010. This is a local tax levied by the French departments and regions, made up of the following components: The income of companies taxable under corporate tax law is ■ the “cotisation foncière des entreprises”, which is based determined by adjusting accounting profits and losses in conformity on the rental value of the real estate property used for the company’s business; and with specific tax regulations. ■ the “cotisation sur la valeur ajoutée des enterprises”, which The major adjustments involved are the reintegration in the taxable is based on the added value by the business on a yearly basis. income of the corporate tax itself and certain expenses considered The overall amount of TEC due by the company cannot exceed 3% unnecessary or extraneous to the purposes of the company, such as of the annual “added value” produced by the company. grants and subsidies granted to other companies. Some income, however, is subject to special tax provisions (notably, certain long- The annual 3% tax is due by French and foreign companies owning term capital gains, industrial property and trademarks, and income (directly or indirectly) one or more real estate properties located in from subsidiaries). France, the market value of which exceeds that of all other French movable/financial assets owned by the same company. In practice, because there are many legal exemptions, this tax is only due when 4.4 Are there any tax grouping rules? Do these allow the real estate located in France is not used for business and the for relief in your jurisdiction for losses of overseas subsidiaries? identity of the ultimate owners has not been disclosed to the French tax authorities, or one of the intermediary companies involved in the ownership structure is based in a country which has not signed an French tax law provides for a tax consolidation regime, allowing exchange of information treaty with France, or reporting obligations a parent company to be liable for corporate tax (plus an additional have not been completed. contribution) on behalf of its whole group. The consolidated group includes French subsidiaries (foreign subsidiaries are excluded) French tax law also provides that companies which are not subject to which are liable to corporate tax and have a share capital 95% of VAT on less than 10% of their preceding year’s turnover are subject which is held (directly or indirectly) by the parent company. A to a tax on salaries (“taxe sur les salaires”), based on wages paid on subsidiary can also be a part of a consolidated group when more than a progressive scale ranging between 4.25% and 20%. 95% of its share capital is held indirectly by a foreign EU company. Under the tax consolidation regime, profits and losses incurred 5 Capital Gains by all companies of the group are aggregated to determine a tax- consolidated net result. Intra-group transactions are neutralised. As explained in questions 1.6 and 4.2 above, French corporate tax 5.1 Is there a special set of rules for taxing capital gains and losses? is applied on a strict territorial basis, under which neither losses incurred abroad by a company running a business in France nor losses incurred by its overseas subsidiaries can be offset against Capital gains are, as a general rule, included in the corporate tax profits realised in France. basis and then subject to corporate tax as explained in question 4.1.

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However, specific provisions allow one to apply a more favourable Assuming the company (French or foreign) sold qualifies as a tax regime to capital gains on certain assets. real estate company (“société à prépondérance immobilière”), the Capital gains on the sale of shares qualifying as a “participation withholding tax is levied at the rate of 33.33% on the difference exemption” may benefit from a partial exemption (see our answer between the sale price and the purchase price if the seller is a foreign to question 5.2). company. Capital gains on the sale of intellectual property, patents and Assuming the French company sold does not qualify as a real estate assimilated assets are, under certain conditions, subject to corporate company and that more than 25% of its share capital is held by a tax at a reduced rate of 15%. foreign company at the time of the sale or at any time during the five years preceding the sale, a 45% withholding tax applies. Capital gains realised on the sale of listed shares of real estate companies (“sociétés à prépondérance immobilière”) are subject to Assuming the seller is resident in a non-cooperative state or France a 19% reduced corporate tax. Shares of real estate companies which territory, the withholding tax is increased to 75% on the capital gain are not listed are still subject to corporate tax at the standard rate of amount. We are convinced that this rule restricts the free movement 33.33%. of capital. Finally, capital gains on certain qualifying venture capital, mutual funds and investment companies, may, under certain conditions 6 Local Branch or Subsidiary? (they should be owned for more than five years, among other conditions), benefit either from a reduced rate of taxation of 15% or from a full exemption. 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary?

5.2 Is there a participation exemption for capital gains? No tax would be imposed upon the formation of a French subsidiary by a foreign company. Sale of companies’ shares benefit from a partial exemption (amounting to 88%) if, among other conditions, the share has been held for more than two years. 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? 5.3 Is there any special relief for reinvestment? As a general rule, there are very few differences between the No special relief for reinvestment applies in France at the moment. taxation of a locally formed subsidiary and a local branch set up by a non-resident company. 5.4 Does your jurisdiction impose withholding tax on the Because a branch (as opposed to a subsidiary) does not benefit from proceeds of selling a direct or indirect interest in local a legal personality different to that of its head office, interest as well assets/shares? as royalties paid by a French branch to its foreign head office are not deductible for French tax purposes. Unless tax treaties provide otherwise, withholding taxes are levied Unless a treaty applies, corporate tax profits transferred by a French in France either in the case of the sale of a real estate property branch to its foreign head office are subject to a 30% withholding located in France by a foreign company, or in the case of the sale of tax. A 75% withholding tax applies when the non-resident company company shares (French or foreign), as described below. is resident in a non-cooperative state or territory. Once again, we The sale of a real estate property located in France by a foreign are convinced that this rule restricts the free movement of capital. company is subject to a withholding tax amounting to 33.33%. Depending on the seller’s country of residence, the taxable basis of 6.3 How would the taxable profits of a local branch be this withholding tax may vary. determined in its jurisdiction? Assuming the seller is a company resident in a Member State of the EEA, the 33.33% withholding tax is levied on the difference The French branch would only be subject to French corporate tax on between the sale price and net book value of the real estate property. profits realised in France, as a French subsidiary would have been Assuming the seller is a company resident in a state which is not a (see our answer to question 4.1). member of the EEA, the 33.33% withholding tax is levied on the difference between the sale price and the purchase price of the real 6.4 Would a branch benefit from double tax relief in its estate, less an amount corresponding to 2% of the purchase value of jurisdiction? the real estate per year of ownership of the sold real estate property. We are convinced that this rule restricts the free movement of Branches of foreign companies are not considered resident for the capital, as does the obligation to appoint a French tax representative. application of tax treaties, and therefore cannot benefit from their In both cases, the withholding tax levied at the time of the sale provisions. of the French real estate is a prepayment of corporate tax (at the standard rate of 33.33%), which is computed at the end of the fiscal 6.5 Would any withholding tax or other similar tax be year during which the real estate is sold. Assuming the 33.33% imposed as the result of a remittance of profits by the withholding tax exceeds the 33.33% corporate tax due, the excess branch? can be refunded by a claim filed to the French tax authorities. A withholding tax is also levied in case of sale of shares by a foreign See our answer to question 6.3. company, which varies depending on the quality of the company sold.

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to their shareholders, corresponding to 95% of their rental income, 7 Overseas Profits 60% of their capital gains and 100% of dividends received from their subsidiaries. 7.1 Does your jurisdiction tax profits earned in overseas branches? 9 Anti-avoidance and Compliance As explained above, according to the strict territorial regime of French corporate tax, profits realised by overseas branches ofa 9.1 Does your jurisdiction have a general anti-avoidance French company are not taxable in France. or anti-abuse rule? France

7.2 Is tax imposed on the receipt of dividends by a local The FTC provides numerous anti-avoidance or anti-abuse of law company from a non-resident company? rules. Some of them have a very wide scope and may function to prevent As a general rule, dividends from abroad received by a French internal and international tax avoidance (the theory of “abus de company are subject to French corporate tax. droit” or “acte anormal de gestion”). Others are specifically However, according to the French parent-subsidiary tax regime, dedicated to preventing international tax evasion. assuming the French company owns more than 5% of the shares of The French tax authorities may use the theory of abuse of law (“abus the distributing company for more than two years, dividends benefit de droit”) provided by article L64 of the Tax Procedure Handbook from a 95% exemption for corporate tax purposes. This favourable (“livre des procédures fiscales”) to challenge an operation (or a regime does not apply when the subsidiary is resident in a non- series of operations) which allow the taxpayer to avoid, reduce or cooperative state or territory. postpone a French tax. An abuse of law may be characterised when either the operation 7.3 Does your jurisdiction have “controlled foreign or the scheme used is fictitious or the taxpayer researched a literal company” rules and, if so, when do these apply? application of a provision or decision that is contrary to the intention of the lawmaker and was motivated only by the intention of avoiding Article 209 B of the FTC provides that when a French company, or reducing its tax burden. A penalty at the rate of either 40% or subject to corporate tax, either realises a business enterprise in a 80% applies when an abuse of law is deemed to have occurred. low-tax jurisdiction or controls directly or indirectly (for more than The theory of abnormal management act (“acte anormal de 5% if the company is listed; 50% in other cases) the capital of a gestion”) allows the French tax authorities to disregard an operation company located in a low-tax jurisdiction, profits realised by such a which has not been realised in the best interest of the company. company are subject to corporate tax in France even if they have not These general provisions may be difficult to apply because the been distributed to the French shareholder. French tax authorities may conclude that there exists “abus de droit” or an “acte anormal de gestion”. 8 Taxation of Commercial Real Estate This is the reason why specific anti-avoidance provisions have been introduced in the FTC which presume the existence of tax avoidance. Then the taxpayer should (sometimes) prove the absence 8.1 Are non-residents taxed on the disposal of of the intention of avoidance in order to escape the application of the commercial real estate in your jurisdiction? presumption imposed by the law. This is the case for: article 57 of the FTC (see our answer to question Foreign companies selling real estate located in France are subject 3.9); article 209 B of the FTC (see our answer to question 7.3); to a 33.33% withholding tax, as explained in question 5.4 above. article 238 A of the FTC; and article 155 A of the FTC. According to article 238 A of the FTC, any payments made by a 8.2 Does your jurisdiction impose tax on the transfer of French company benefiting a company located in a low-tax country an indirect interest in commercial real estate in your are not deductible for French tax purposes. jurisdiction? According to article 155 A of the FTC, payments received by a non- Unless tax treaties provide otherwise, foreign companies are resident (individual or company) corresponding to the remuneration subject to a 33.33% withholding tax on the sale of shares of of services rendered by a French taxpayer are, under certain companies (French or foreign) owning (directly or indirectly) conditions, taxable in France. real estate properties located in France and having a fair market Finally, as explained before, any dividends, royalties, capital gains value exceeding the fair market value of other assets they own, as or income from a French source are subject to a 75% withholding explained in question 5.4. tax when paid to a resident in a non-cooperative state or territory. As explained in question 3.4, as an EU Member State, France 8.3 Does your jurisdiction have a special tax regime will have to implement in its domestic legislation ATA Directive- for Real Estate Investment Trusts (REITs) or their compliant provisions by 31 December 2018 (with the provisions equivalent? applying from 1 January 2019).

France does not recognise the concept of REITs. However, 9.2 Is there a requirement to make special disclosure of French tax law provides for a specific optional regime applying, avoidance schemes? under certain conditions, to listed real estate companies (“sociétés d’investissements cotées”). A French corporate tax exemption is The requirement to make special disclosure of avoidance schemes granted provided that the major part of their results are distributed has not yet been introduced into French tax law.

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9.3 Does your jurisdiction have rules which target not 10.2 Does your jurisdiction intend to adopt any legislation only taxpayers engaging in tax avoidance but also to tackle BEPS which goes beyond what is anyone who promotes, enables or facilitates the tax recommended in the OECD’s BEPS reports? avoidance? France largely follows the recommendations of the OECD’s Article 1741 of the FTC provides that the voluntary fraudulent BEPS reports. Sometimes, it requires more transparency in regard avoidance of taxation can give rise to a penalty amounting to to transfer pricing. Companies, when they are controlled by tax €500,000 and an imprisonment sentence of five years. Under certain authorities, have to provide the French tax authorities with a copy of aggravating circumstances, the fine can be increased to €2,000,000 the rulings from which they benefit in other countries, in addition to and the imprisonment sentence to seven years. other reporting obligations provided by the OECD’s transfer pricing France Article 1742 of the FTC, in combination with articles 121-6 and recommendations. 121-7 of the French Criminal Code, provides that anyone facilitating the fraudulent avoidance of taxation by assisting or advising the 10.3 Does your jurisdiction support public Country-by- perpetrators of such offence can also be sentenced. Country Reporting (CBCR)?

9.4 Does your jurisdiction encourage “co-operative At the beginning of 2016, the European Commission published a compliance” and, if so, does this provide procedural draft directive to fight against fiscal fraud, including a country-by- benefits only or result in a reduction of tax? country reporting mechanism. This draft was adopted in 25 May 2016, amending Directive 2011/16/EU as regards the mandatory The sentences provided for by article 1741 of the FTC can be halved automatic exchange of information in the field of taxation. The if the perpetrator or an accomplice in the abovementioned offences Member States have to apply its rules no later than 5 June 2017. enables the French tax or judicial authorities to identify other However, the French Parliament took the lead and from 1 January participants in the same offences. 2016 imposed an obligation to report accounting and taxable results Article 109 of the Finance Bill for 2017 also introduced, temporarily, country-by-country. Companies which hold foreign subsidiaries the possibility for the FTA to compensate individuals providing or branches, establish consolidated accountings and realise a information on existing “infringements” of the provisions of the consolidated turnover of over €750 million, are subject to this FTC (i.e., absence of reporting, tax avoidance arrangements, etc.). specific reporting obligation. This provision entered into force on 1 January 2017, and the system is supposed to be tested for two years. 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box? 10 BEPS and Tax Competition French legislation provides for multiple grants and tax incentives to attract new investors. They take the form of tax credits and 10.1 Has your jurisdiction introduced any legislation exemptions at both a national and regional level. Investors must in response to the OECD’s project targeting Base meet strict criteria to apply for these. Erosion and Profit Shifting (BEPS)? The main incentive provided by French tax legislation is the “R&D tax credit” (“credit d’impôt recherche”), which is a corporate tax France has already introduced legislation in response to the OECD’s incentive based on the research and development expenditure project targeting Base Erosion and Profit Shifting (“BEPS”), as a incurred by any trading company located in France, regardless of specific mechanism which aims to strive against the effects of sector and size. This mechanism allows all companies to benefit hybrid mismatch arrangements. Within the scope of this legislation, from a 30% (under €100 million) or 5% (exceeding €100 million) when a company which is subject to corporate income tax is bonded partial refund (either by way of tax reduction or tax reimbursement). to another company, wherever it is located in France or in a foreign This mechanism was extended to innovation expenditures incurred country, the loan’s interests are deductible only if the borrowing by SMEs, offering a yearly tax credit of 20% for up to €400,000 of company shows that the lending company is subject to income tax expenses (that is, a yearly tax credit of €80,000). on the same interests.

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Maryse Naudin Jean-Marc Tirard Tirard, Naudin Tirard, Naudin 9 rue Boissy d’Anglas 9 rue Boissy d’Anglas 75008 Paris 75008 Paris France France

Tel: +33 1 53 57 36 00 Tel: +33 1 53 57 36 00 Email: [email protected] Email: [email protected] URL: www.tirard-naudin.com URL: www.tirard-naudin.com France Maryse Naudin began her career in the tax department of one of the Jean-Marc Tirard is recognised as an authority in French and major accounting firms, where she was in charge of the real estate international tax law and has considerable experience in tax and practice and the South East Asia region, prior to co-founding Tirard, estate planning for French and foreign high-net-worth individuals. Naudin. She now has more than 30 years’ experience in advising and He has published many articles and books on these subjects, in defending a varied clientele, from multinational corporations to high- both French and English. Mr. Tirard has advised French and foreign net-worth individuals, in relation to cross-border tax issues. She has companies and private clients on domestic and international corporate a particular expertise in advising foreign investors acquiring French tax issues, negotiated with tax authorities and handled tax litigations real estate property, as well as French clients with foreign interests. for more than 40 years. He is the co-founder of the French branch of Ms. Naudin also has a wealth of expertise in matters relating to trust STEP, a member of the International Academy of Estate and Trust Law aspects in a civil law environment, European taxation and, in particular, and a Fellow of the American College of Trust and Estate Counsel. He tax litigation with respect to community freedoms. She is the co- is rated as one of the leading French tax and private client lawyers in founder and former secretary of the French branch of STEP, and a various surveys, and named Outstanding European Individual of the former chairman of the International Estate Planning Commission of Year by the Citywealth Magic Circle Awards 2009. the Union Internationale des Avocats.

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

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Germany Michael Best

P+P Pöllath + Partners Nico Fischer

in many of the more recent treaties. Several treaties contain general 1 Tax Treaties and Residence anti-abuse clauses that may be interpreted in such a way as to permit the application of domestic anti-abuse rules within the scope of the 1.1 How many income tax treaties are currently in force in treaty provisions. If the application of such anti-abuse clauses leads your jurisdiction? to double taxation, some of the treaties oblige the countries to open the mutual agreement procedure. As of 1 January 2017, income tax treaties with 95 countries were in Upon consultation between the parties, several treaties allow the force. Moreover, negotiations on first-time treaties are taking place application of the tax credit method, instead of the exemption with a further 14 countries. 35 treaties are going to be amended in method, to avoid a double tax exemption of income or to counter the near future and further agreements exist in respect of cooperation arrangements that lead to an abuse of the treaty. Furthermore, some and information sharing. treaties exclude the application of reduced withholding tax rates for dividends, royalties or interest payments if such treaty benefits are 1.2 Do they generally follow the OECD Model Convention claimed without reasonable economic justification. or another model? A detailed and very complex limitation-on-benefits clause is part of the treaty between Germany and the United States. This clause Germany’s tax treaties are usually based on the OECD model. has become even more rigid as of 2008, when the new protocol Therefore, the official commentary to the OECD model may be used amending the U.S./Germany treaty became effective. for the interpretation of most provisions in German treaties; this includes the 2003 Real Estate clause of Art 13 (4), introduced recently 1.5 Are treaties overridden by any rules of domestic from the German side into treaties with Great Britain, Luxembourg, law (whether existing when the treaty takes effect or Spain and the Netherlands. However, some of the treaties, especially introduced subsequently)? those with developing countries, incorporate elements of the UN model treaty. The treaty between Germany and the United States In principle, tax treaties incorporated into German law prevail over reflects many peculiarities of United States treaty policy. statutory law, as provided for in the German General Tax Code. However, this conflict rule, like tax treaties after their implementation, 1.3 Do treaties have to be incorporated into domestic law has the status of ordinary statutory law and competes against the before they take effect? general lex specialis and lex posterior rules. Tax treaties are not superior to ordinary law and, therefore, domestic legislation may According to German constitutional law, treaties must be override a tax treaty that was concluded previously if it is expressly incorporated into national law by the federal legislator. This requires aimed at abrogating the treaty provision by establishing a deviating the consent of both chambers of the parliament in the form of a rule. Treaty overrides have been used by the German tax legislator federal law. Therefore, the federal law implementing tax treaties for about 20 years, mainly in order to combat tax structures and must be approved by the Bundestag and the Bundesrat and is finally schemes that it suspects of being abusive. Notwithstanding the signed by the Federal President (Bundespräsident) and promulgated effective priority, constitutional admissibility and legality of such a in the Federal Law Gazette (Bundesgesetzblatt). lex posterior under domestic German law, treaty-overriding by the This legislative procedure has to be distinguished from the process legislator constitutes an infringement of international law, which of ratification of the treaty by exchanging documents in which can only be invoked by the other treaty state. (in the case of Germany) the Federal President declares that the The legislator, for example, introduced in section 50d paragraph 3 of requirements for the internal applicability of the treaty have been the German Income Tax Act, a rule under which a foreign corporation met. Only upon such ratification does the treaty become binding may not claim exemption from, or a refund of, German withholding under international law. tax under a double tax treaty or the EU Parent-Subsidiary Directive as far as its shareholders would not be entitled to claim treaty benefits in case of a direct holding of the German entity and where certain 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? comprehensive substance requirements are not met. In its judgment of 15 December 2015, the Federal Constitutional In general, Germany’s tax treaties did not include anti-treaty Court (Bundesverfassungsgericht) ruled that a domestic law shopping rules. However, such rules have been adopted, in particular provision overriding a double tax treaty is permissible under the

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Constitution. Otherwise, a general treaty override ban would deduction of input VAT is allowed. If an “entrepreneur” renders contradict the basic constitutional principles, according to which the both taxable and tax-exempt services, input VAT on supplies for later legislator is entitled to amend the decisions of the previous both has to be split up according to the respective percentage of ones. taxable supplies to determine the deductible part of input VAT. The most notable restriction concerns the letting of real property; on 1.6 What is the test in domestic law for determining the such a supply, a waiver of the tax exemption is permitted only if the residence of a company? lessee uses (or intends to use) the property exclusively for supplies subject to tax on its part. This rule results in a loss of input VAT to For German tax purposes, the residence of a company is determined lessors letting real property, e.g. to banks, insurance companies or by the legal seat or the place of management of a corporation. If doctors, or for residential purposes. Germany either of those is located in Germany, the corporation is subject to German unlimited tax liability. The place of management is the 2.5 Does your jurisdiction permit “establishment only” centre of the top management of a corporation. It is located where VAT grouping, such as that applied by Sweden in the commercial matters of some importance for the corporation are Skandia case? effectively decided, usually at the directors’ office. The legal seat of a corporation, on the other hand, is determined by the by-laws of Germany does not permit “establishment only” VAT grouping. the corporation.

2.6 Are there any other transaction taxes payable by 2 Transaction Taxes companies?

The transfer of German real property is subject to German Real 2.1 Are there any documentary taxes in your jurisdiction? Estate Transfer Tax (RETT) at a rate of 3.5% up to 6.5% of the purchase price, or – in case there is no consideration – of the Germany does not levy any stamp duties on transactions and has property’s value. The basic tax rate is 3.5%, but has been increased abolished the capital transfer tax. by most German states in recent years. Real Estate Transfer Tax also becomes due if 95% or more of the interests in a partnership owning German real property are transferred within a period of 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? five years or if 95% or more of the shares in a corporation owning German real property are acquired, or united for the first time, by the same party (or affiliates of such party). The German Value Added Tax Act is based on EC Directive 2006/112/EC, i.e. on the common system of Value Added Tax (the An exemption from Real Estate Transfer Tax for intra-group former Sixth EC Directive). The standard rate of VAT is currently reorganisations with each five-year minimum 95% shareholding 19% (as of 2007); a reduced rate of 7% applies to a limited number pre- and post-reorganisation (introduced as of 2010) is rather of supplies of goods or services. restrictively applied by the tax administration. A rule has been introduced in 2013 under which the so-called RETT-Blocker structures will no longer be possible, by which an economic 2.3 Is VAT (or any similar tax) charged on all transactions participation of more than 95% in a German real property could be or are there any relevant exclusions? achieved without triggering Real Estate Transfer Tax.

There are several VAT exemptions for certain supplies of goods or services. The most relevant of these exemptions apply to: 2.7 Are there any other indirect taxes of which we should be aware? ■ financial services by banks or other financial institutions (waiver of tax exemption is possible); German Insurance Tax applies at a standard rate of 19% on the ■ the transfer of shares in a corporation or interest in a payment of insurance premiums for several types of insurance partnership (waiver possible); contract. Excise duties are levied on certain kinds of goods, e.g. ■ the transfer of real property (waiver possible); and on fuel. ■ the lease of real property (waiver possible under certain conditions). The waiver of a tax exemption is allowed only if the respective 3 Cross-border Payments services are rendered to a taxable party (“entrepreneur”) for its respective business. The transfer of a business as a going concern, 3.1 Is any withholding tax imposed on dividends paid by however, is not only tax-exempt – it is not a taxable event at all. a locally resident company to a non-resident? The sale of a real property that is leased out generally constitutes a transfer of a business as a going concern that is not taxable. The general withholding tax rate for dividends paid by a German corporation to non-resident shareholders is 26.375%. Non-resident 2.4 Is it always fully recoverable by all businesses? If not, corporations, however, may generally apply for a refund of 40% of what are the relevant restrictions? the tax withheld on the dividends received. Thus, their effective withholding tax rate will equal the general Corporate Income Tax Input VAT on supplies is fully recoverable by an “entrepreneur” if rate in Germany (15.825%). Moreover, a further refund or total the respective supplies are wholly used to render taxable supplies relief from the withholding tax on dividends may be available that are not tax-exempt. Input VAT on supplies that are used to according to a tax treaty or the EU Parent-Subsidiary Directive. render tax-exempt supplies is, in principle, not deductible. However, However, such refund or relief is subject to Germany’s anti-treaty especially for several cases of tax-exempt cross-border supplies, the shopping rules, which provide for certain substance requirements.

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€3m. To the extent that the net interest charge does not exceed 30% 3.2 Would there be any withholding tax on royalties paid of the corporation’s EBITDA, the interest limitation rule does not by a local company to a non-resident? apply and interest expenses are fully deductible.

Royalty payments by a local company to non-residents are, in principle, unilaterally subject to a 15% withholding tax on the gross 3.6 Would any such rules extend to debt advanced by a amount. Under most German tax treaties, the withholding tax on third party but guaranteed by a parent company? royalty payments is reduced to between 0% (in particular, in treaties with OECD countries) and 10%. Within the European Union, no The interest limitation rule extends to loans granted by third parties withholding tax is due on royalties paid by a German company (or anyway. A guarantee given by a parent company with respect to a a European company that has a German branch) to an associated third-party loan may have an additional negative effect insofar as it Germany company in another Member State of the EU, according to the EC may be considered as “harmful debt financing” and therefore prevent Interest and Royalties Directive 2003/49/EC, as incorporated into the application of an “escape clause” (see question 3.4 above). German law. A so-called licence barrier rule will come into force as of 1 January 2018 (see question 10.1). 3.7 Are there any other restrictions on tax relief for interest However, any reduction, exemption or refund (by treaty or EC payments by a local company to a non-resident? Directive) is granted only upon application. There are no such restrictions (except treatment as a constructive 3.3 Would there be any withholding tax on interest paid dividend or for certain instruments, as mentioned in question 3.3 by a local company to a non-resident? above).

Principally, no withholding tax on interest payments to non- 3.8 Is there any withholding tax on property rental residents is levied. However, withholding tax may be levied for payments made to non-residents? certain instruments, e.g. instruments where the amount of the interest depends on the profits of the borrower or instrument, which Germany does not levy withholding tax on property rental payments qualify as a jouissance right (Genussrecht), or where the terms and made to non-residents. However, non-residents are subject to conditions of the loan are not at arm’s length and, therefore, result in German limited tax liability regarding rental payments in the case treatment of the interest as constructive dividends. that the real estate is situated in Germany.

3.4 Would relief for interest so paid be restricted by 3.9 Does your jurisdiction have transfer pricing rules? reference to “thin capitalisation” rules?

Generally, transactions between related parties with German As of 2008, a general limitation on the deduction of interest corporations involved must comply with the dealing-at-arm’s- payments was introduced regarding both shareholder loans and all third-party loans. According to the so-called interest limitation rule length principle. Apart from tax treaties, this principle is also part (Zinsschranke), interest expenses exceeding interest earned (net of domestic German law, which provides much more detailed rules interest) will only be deductible up to an amount equal to 30% of according to which an “acceptable” market price has to be computed the corporation’s earnings before interest, taxes, depreciation and for tax purposes. Also, more detailed documentation requirements amortisation (EBITDA). The interest limitation rule will apply: have been and will be introduced over the years with regard to cross- border transactions. (a) if the overall net interest exceeds €3m; and (b) in case the corporation does not belong to a group of companies (Konzern): 4 Tax on Business Operations: General ■ if “harmful debt financing” occurs, i.e. debt financing by shareholders, related parties or third-party lenders with recourse to such shareholders, and interest paid/owed for 4.1 What is the headline rate of tax on corporate profits? such debt exceeds 10% of the overall net interest; or (c) in case the corporation belongs to a group of companies The aggregate tax burden of corporations was reduced from almost (Konzern): 40% to only around 30% by the Corporate Tax Reform 2008. ■ if “harmful debt financing” occurs in any group company The German Corporate Income Tax rate is 15%. In addition, the and the financing shareholder, related party and/or third Solidarity Surcharge of 5.5% is levied on the amount of Corporate party who has recourse to a shareholder or related party is Income Tax due, resulting in an aggregate tax rate of 15.825%. not part of the group; or German corporations are also subject to Trade Tax. The basic Trade ■ the equity ratio of the tax-paying company is lower than Tax rate is 3.5%; it is supplemented by the application of a multiplier that of the consolidated group. fixed by the respective municipality which varies from a minimum Net interest that is not deductible under these rules becomes rate of 200% (prescribed by federal law), up to around 490% in the deductible, however, up to the amount of EBITDA carried forward large cities. Therefore, the effective Trade Tax rate ranges from 7% from the preceding five years. The remainder of the non-deductible to around 17.15%. net interest is carried forward into the following years. Corporate Income and Trade Tax due are not treated as a business expense and, therefore, cannot be deducted from the Corporate 3.5 If so, is there a “safe harbour” by reference to which Income Tax base, as well as the Trade Tax base itself. As a result, tax relief is assured? corporations are subject to Corporate Income Tax (including Solidarity Surcharge) and Trade Tax at a combined rate of at least The interest limitation rule is only applied (and then to all interest) if 22.825% and up to 32.975%. the overall net interest charge of the borrowing corporation exceeds

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For transfers (or comparable measures) of more than 25% within 4.2 Is the tax base accounting profit subject to five years to one acquirer (or related persons), the tax losses carried adjustments, or something else? forward and the tax losses of the current year are forfeited pro rata. For transfers (or comparable measures) of more than 50% within In principle, the corporation’s net income determined according to five years, the tax losses carried forward and the tax losses of the German commercial accounting principles is also the Corporate current year are fully forfeited. Income Tax base. However, tax law provides for several adjustments A direct or indirect transfer of shares in a corporation does not for tax purposes, e.g. restrictions on the deduction of certain result in forfeiture of the losses carried forward and the tax losses business expenses or 95% exemptions for dividends (provided a of the current year if certain requirements are met which qualify minimum shareholding is met) or capital gains derived from the sale of shares in other corporations (for which the possible introduction the transfer as a privileged intra-group transfer. Initially, certain Germany of a minimum shareholding is under discussion). restructuring measures were privileged; however, the European Commission declared that this violated European law and therefore The corporation’s net income for Corporate Income Tax purposes must not be applied by the German tax authorities. Under a further also serves for the computation of the Trade Tax base, which is, rule, tax losses are not forfeited to the extent that hidden reserves however, subject to further specific adjustments. There are several exist which would be taxable in Germany. Hidden reserves in add-backs and also exclusions for Trade Tax purposes exclusively, shares in a corporation (where a disposal of such shares would be e.g. the add-back of 25% of interest payments on debt, the add-back non-taxable) are not taken into account for the determination of such of 12.5% of lease payments for immovable fixed assets, 5% for hidden reserves. movable fixed assets and 6.25% for royalties. However, the German Constitutional Court has ruled in its decision dated 29 March 2017 that the tax loss forfeiture rule for ownership 4.3 If the tax base is accounting profit subject to changes greater than 25% and up to 50% is unconstitutional adjustments, what are the main adjustments? irrespective of the aforementioned escape clauses for intra-group transfers or hidden reserves and therefore not applicable for the years For tax purposes, the commercial accounting principles are overruled 2008 through 2015. With regard to 2016 and subsequent years the by several tax accounting provisions, mainly to restrict accounting Constitutional Court did not deal with the question of constitutional options allowed by commercial law to prevent taxpayers from conformity due to the introduction of the new continuity of business influencing their tax base. For example, tax rules with regard to the rule which could also prevent tax loss forfeiture and thus may valuation and depreciation of assets or the accumulation of accruals mitigate the unconstitutionality of the tax loss forfeiture provisions. have been tightened and restricted repeatedly in recent years. The German Constitutional Court has not yet explicitly commented Tax accounting options may be exercised independently from the on whether ownership changes of more than 50% are constitutional commercial balance sheet. As a consequence, assessments in the or not. This legal question has recently been submitted to the tax balance sheet may deviate from those in the commercial balance German Constitutional Court by a German finance court, but there sheet. is not yet a ruling.

4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas 4.6 Is tax imposed at a different rate upon distributed, as subsidiaries? opposed to retained, profits?

German tax grouping rules for Corporate Income Tax and Trade Tax Under the rules of the shareholder relief system (in force since purposes (Organschaft) require a more than 50% shareholding in a 2002), the corporation’s Corporate Income Tax and Trade Tax rate subsidiary and a profit and loss absorption agreement, according to is not reduced in case of profit distributions. German commercial law, concluded by the group parent company and the subsidiary and executed for a period of at least five years. 4.7 Are companies subject to any significant taxes not As a result, the subsidiary’s net income is attributed to the group covered elsewhere in this chapter – e.g. tax on the parent company for Corporate Income Tax and Trade Tax purposes. occupation of property? Subsidiaries with their seat in Germany or in a Member State of the EU/EEA in the legal form of a German limited corporation (GmbH), The German Property Tax (Net Worth Tax) has not been levied a stock corporation (AG), a partnership limited by shares (KGaA), since 1997 for constitutional reasons. However, from time to time a European Stock Corporation (SE) or a foreign corporation can there are political discussions about reintroducing Property Tax in be members of a tax group, provided the subsidiary’s place of Germany. management is in Germany. The group parent company needs to have a permanent establishment in Germany, to which the Real Estate Tax is levied on German real estate; the respective tax shareholding in the subsidiary is allocated for the duration of the tax rate is fixed by the municipalities and is applied to the value of the group. Relief for losses incurred by foreign subsidiaries is usually real property. not available in Germany. The transfer of property, including business assets and participations in partnerships and corporations by way of succession or donation, is subject to German Inheritance and Gift Tax. Although the 4.5 Do tax losses survive a change of ownership? valuation rules have been completely revised by the recent reform of the Inheritance and Gift Tax Act, business assets are still subject Tax losses carried forward and tax losses of the current year may to favourable valuation rules if certain conditions are met. The be forfeited by direct share transfers as well as by indirect share German Federal Constitutional Court held certain provisions of the transfers one or several tiers above the corporation which has the tax German Inheritance and Gift Tax Law to be unconstitutional, which losses. This rule applies as well for measures comparable to transfers relate to favourable rules applying to the transfer of businesses. of shares, e.g. transfer of voting rights and various reorganisation These rules were replaced by new rules as of 1 July 2016. measures. The forfeiture applies in the following situation:

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5 Capital Gains 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local assets/shares? 5.1 Is there a special set of rules for taxing capital gains and losses? In principle, a withholding tax of 26.375% is imposed on capital gains from the disposition of (less than 1%) shares in any In principle, capital gains are included in the tax base of Corporate corporation, according to national law. However, most tax treaties Income Tax and Trade Tax. However, the German Corporate restrict the German taxation right (with the exception of special Income Tax Act provides for a 95% tax exemption for capital gains real estate companies) to zero; furthermore, the withholding tax received by corporations on the disposition of shares in German or applies only in cases where the shares are sold through a financial foreign corporations. The tax exemption applies irrespective of a Germany institution. No withholding tax is imposed on proceeds of selling an minimum shareholding or a minimum holding period. In return, interest in a partnership or in local assets. losses from the sale of such shares are disregarded for tax purposes and not deductible from the tax base. A legislative initiative to introduce a minimum shareholding of 10% (as for dividends) is 6 Local Branch or Subsidiary? currently not pursued further. Capital gains received by individuals on the sale of shares in 6.1 What taxes (e.g. capital duty) would be imposed upon corporations are taxable if the shares belonged to a business or if the formation of a subsidiary? the individual’s participation in the corporation was at least 1% of the capital at any time within the preceding five years. In these The formation of a subsidiary is not subject to any special taxes in situations, 40% of such capital gains are tax-exempt. Capital Germany. gains received by individuals from the sale of shares (<1%) which were held as private assets, are subject to a flat tax of 26.375%, irrespective of the holding period (unless the shares were acquired 6.2 Is there a difference between the taxation of a local before 2009, in which case capital gains are tax-free). subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? For certain shareholders, including financial enterprises (Finanz- unternehmen) within the meaning of the German Banking Act (Kreditwesengesetz) the exemption of 95% (or 40% as applicable) A locally formed corporate subsidiary, being legally a separate does not apply. Although the tax exemption may not apply under entity, is unlimitedly liable for German Corporate Income and German domestic tax law, foreign shareholders which are protected Trade taxation, therefore German tax is charged on the worldwide by a double tax treaty are, as a rule, not affected. income of the subsidiary (subject to applicable double tax treaties). In the case of a branch (being legally a dependent part of its parent company), the non-resident company running such German branch 5.2 Is there a participation exemption for capital gains? is liable to limited taxation in Germany, with the income allocated to and realised by the branch. The 95% tax exemption for capital gains (see also question 5.1) also Capital gains realised upon the disposal of a locally formed corporate applies to dividends received by a corporation. While a minimum subsidiary are generally tax-exempt under most of the double tax holding period is not normally required (see question 5.1), a treaties, while capital gains realised by the disposal of a branch are minimum direct shareholding of at least 10% as of the beginning generally taxable in Germany. of the calendar year is required for the 95% exemption relating to The taxable income of a branch is, in principle, computed and dividends for Corporate Income Tax purposes, whereas for Trade taxed according to the same rules, as they are applicable to any Tax purposes, the 95% tax exemption of dividends (not that of other German business taxpayer. There is no branch profits tax in capital gains) requires a minimum shareholding of 15% from the Germany; the remittance of profits by the branch to its head office is beginning of the respective calendar year (a 10% shareholding irrelevant for German tax purposes. may be sufficient in case the parent-subsidiary directive applies). In addition, the participation exemption requires that payments on dividends have not been tax-deductible at the level of the distributing 6.3 How would the taxable profits of a local branch be corporation. determined in its jurisdiction?

For tax purposes, a branch located in Germany is treated, 5.3 Is there any special relief for reinvestment? according to the so-called Authorized OECD Approach (AOA) as a functionally separate entity, although it is legally a part of the parent A rollover relief is available if capital gains from the disposition company. Thus, the taxable profits of the branch are determined by of certain assets (especially real property) are reinvested in the taking into account the functions performed, assets used and risks acquisition of similar assets within a period of four years (Germany assumed by the enterprise through the branch and through the other is being sued by the EU Commission, as the present restriction on parts of the enterprise. German assets is in violation of the EU freedom of capital). Due to the extensive capital gains exemption (see question 5.1), no rollover Section 1 paragraph 5 of the Foreign Tax Act, which constitutes the relief is available upon the disposition of shares by corporations. transformation of the AOA into German tax law, assumes a “two- Economically, a relief for reinvestment may be achieved under the step approach” in order to allocate the profits between headquarters German Reconstruction Tax Act (Umwandlungsteuergesetz). and branch. In the first step, a functional risk analysis needs to be undertaken which determines the allocation of significant personnel functions of the branch. Furthermore, it needs to be identified which assets and liabilities are required in order to perform these functions

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and which therefore need to be attributed either to the branch or Then, passive income earned by these foreign corporations is treated the headquarters. Based on this, the opportunities and risks can as taxable income of the German shareholders. Passive income be identified. Further, fictitious so-called third-party relationship is all income that is not active income, as defined by the German dealings are identified. Finally, the capital necessary to perform Foreign Tax Act. The German “controlled foreign company” rules these functions will be allocated to the branch. may apply in case of passive capital investment income even in case In the second step, profits are allocated between headquarters and of a holding of 1% or even below 1%. These rules do not apply to branch, in accordance with the functional separate entity approach. controlled foreign companies resident in EU/EEA Member States if the shareholders provide evidence for economic substance of the The German branch of a foreign head office in the legal form of a foreign corporation in the respective Member State. corporation is subject to German Corporate Income Tax and Trade Tax as if it were a German corporation. It is therefore, for example, Germany entitled to the 95% exemption of dividends received from other 8 Taxation of Commercial Real Estate corporations (provided the minimum shareholding requirement is met) and of capital gains derived from the sale of shares in other corporations, in the same way as a German corporation (see 8.1 Are non-residents taxed on the disposal of questions 5.1 and 5.3). commercial real estate in your jurisdiction?

A corporate entity is taxed on the disposal of real estate situated in 6.4 Would a branch benefit from double tax relief in its Germany at a corporate tax rate of 15.825%. An individual (unless jurisdiction? it is holding the real estate as a business asset), is only taxed on the disposal of real estate situated in Germany in cases where the The head office, but not the branch itself, is entitled to treaty benefits period between the date of acquisition and the date of disposal does because a branch is legally a part of its head office and not a resident not exceed 10 years. The individual will be taxed at the individual for tax treaty purposes. However, non-discrimination clauses in income tax rate up to approx. 48%. tax treaties usually oblige the contracting states to treat branches like corporations resident in their jurisdiction. For European In addition, German Real Estate Transfer Tax at a tax rate between Union Member States, a discrimination of branches would also be 3.5% and 6.5% of the sales price of the real estate is levied. The prohibited by the freedom of establishment. exact rate depends on the federal state where the real estate is located.

6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the 8.2 Does your jurisdiction impose tax on the transfer of branch? an indirect interest in commercial real estate in your jurisdiction? No withholding tax applies to the remittance of profits by a German branch to its head office. Germany does levy Real Estate Transfer Tax on the transfer of an indirect interest in real estate in several cases: ■ A (direct or indirect) transfer of 95% or more of the interest in 7 Overseas Profits a partnership, holding real estate situated in Germany within five years, to new partners. ■ A (direct or indirect) transfer of 95% or more of the shares/ 7.1 Does your jurisdiction tax profits earned in overseas interest in a corporation/partnership holding real estate branches? situated in Germany, to one shareholder/partner or a transfer of shares/interest in a corporation/partnership, by which Profits earned in foreign branches are not subject to German Trade 95% or more of the shares/interest will be held (directly or Tax (see question 4.1), but are included in the Corporate Income Tax indirectly) by one shareholder/partner (or affiliates of such base of German corporations. However, these profits are usually shareholder/partner). exempt from German income taxation under Germany’s tax treaties ■ Under a rule introduced in 2013, German RETT applies as or are subject to a credit system provided by a tax treaty or by well, in case of a legal transaction, by which economically at German national law. least 95% of the shares/interest in a corporation/partnership holding real estate situated in Germany are held (directly or indirectly) by one shareholder/partner. The indirect 7.2 Is tax imposed on the receipt of dividends by a local shareholding/interest is calculated by multiplying the company from a non-resident company? participations in the capital and/or in the assets of the entities involved. Foreign dividends received by German companies are subject to the general exemption system for dividends, providing principally 8.3 Does your jurisdiction have a special tax regime for a 95% exemption for dividends received by a corporation (see for Real Estate Investment Trusts (REITs) or their question 5.3). equivalent?

7.3 Does your jurisdiction have “controlled foreign In cases where a company has opted for the G-REIT status and company” rules and, if so, when do these apply? has been registered as such in the German commercial register, the G-REIT must be a stock corporation (Aktiengesellschaft), which is The German “controlled foreign company” rules apply to foreign listed on an organised stock market, be tax-resident in Germany, corporations that are subject to low taxation (an income tax rate below and meet further requirements. G-REITs are exempted from 25%) and controlled by shareholders resident in Germany holding Corporate Income Tax and Trade Tax for all income, irrespective more than 50% of the capital or the vote of the foreign corporation. of whether such income derives from real estate or not. This tax

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exemption is applicable (retrospectively) from the beginning of the financial year of such company in which it has been registered in the 10 BEPS and Tax Competition German commercial register. This tax exemption is not applicable to subsidiaries of the G-REIT, i.e. the subsidiaries are subject 10.1 Has your jurisdiction introduced any legislation to general taxation. Dividend distributions from the G-REIT are in response to the OECD’s project targeting Base subject to 26.375% withholding tax. For corporate shareholders Erosion and Profit Shifting (BEPS)? and individual shareholders holding at least 1% in the G-REIT, dividends and capital gains derived from the disposal of shares in At the end of 2016, the so-called “BEPS 1 – Implementation Act” the G-REIT are fully taxable. In order to avoid a double taxation, passed the German legislation process. This was the first step to the same (partial) tax exemptions apply to distributed dividends, implement the recommendation of the BEPS process into domestic which stem from income which has been pre-taxed with German law. The BEPS 1 – Implementation Act leads to an extension of Germany Corporate Income Tax or a comparable foreign tax, as to ordinary cooperation obligations in cross-border situations which is based dividends. For individuals with a shareholding of less than 1% in on BEPS action point 13 “Transfer Pricing Documentation and the G-REIT, dividends and capital gains are taxable at a 26.375% Country-by-Country-Reporting”. As a result the transfer pricing tax rate, irrespective of a pre-taxation of the income of the G-REIT. documentation will consist of a Master File, a country-specific and company-related Local File and a country-specific Country- by-Country-Report. Furthermore, the minimum standards and 9 Anti-avoidance and Compliance reporting obligations resulting from the changes to the EU Mutual Administrative Cooperation Directive were also implemented. All 9.1 Does your jurisdiction have a general anti-avoidance changes shall be applicable for the first time to fiscal years starting or anti-abuse rule? after 31 December 2016, except the Country-by-Country-Report which has to be prepared for fiscal years starting after 31 December The German General Tax Code provides for a general anti-avoidance 2015. rule with respect to all kinds of taxes. This rule allows the German In addition, tax rulings (i.e. advanced cross-border rulings and tax authorities to disregard the legal form of a transaction agreed advanced pricing arrangements) issued, reached, amended or renewed upon among the parties, if such transaction is regarded as an abuse after 31 December 2016 have to be automatically exchanged. of legal arrangements without valid reasons other than tax savings Further amendments were introduced for tax rulings issued, reached, not intended by the respective Tax Act. amended or renewed in the year 2012 and subsequent years. These amendments take into account BEPS action point 5 “Measures to counter harmful tax practices”. 9.2 Is there a requirement to make special disclosure of avoidance schemes? Furthermore, the BEPS 1 – Implementation Act introduced a new regulation into domestic law in order to prevent double taxation of There is no special disclosure rule for avoidance schemes. However, business expenses (i.e. double deduction) for partnerships effective the burden of proof to demonstrate the above-mentioned valid from 1 January 2017. reasons rests with the taxpayer. In 2007, a legislative initiative by Germany will also introduce a so-called licence barrier with legal the German government to introduce a disclosure rule that would effect as of 1 January 2018. This introduction shall limit the tax oblige taxpayers to disclose avoidance schemes in advance to the deductibility of licence fees or royalty payments to foreign-related federal tax authorities failed. parties that benefit from preferential tax regimes (such as IP, Licence or Patent boxes) which are incompatible with the OECD nexus approach of BEPS action point 5 “Measures to counter harmful tax 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also practices”. anyone who promotes, enables or facilitates the tax Germany also signed the OECD Multilateral Instrument in June avoidance? 2017. As a first step, Germany would like to amend 30 of its 100 double tax treaties, if the other countries agree. Ratification shall Germany does not have rules which target anyone other than the be made in the upcoming legislative period (elections will be taxpayer to enable or facilitate tax avoidance. With respect to in September 2017), first amendments of double tax treaties are the proposal of the amending Directive 2011/16/EU as regards expected for 2019. mandatory automatic exchange of information in the field of taxation Further required legislative procedure is foreseen in the second half in relation to reportable cross-border arrangements Germany will of 2017. eventually introduce such rules.

10.2 Does your jurisdiction intend to adopt any legislation 9.4 Does your jurisdiction encourage “co-operative to tackle BEPS which goes beyond what is compliance” and, if so, does this provide procedural recommended in the OECD’s BEPS reports? benefits only or result in a reduction of tax? Germany has published an Action Plan against Tax Fraud, Tax German jurisdiction does not encourage “co-operative compliance”. Avoidance Schemes and Money Laundering – 10 next steps for a fair However, in order to differentiate a voluntary self-disclosure from international tax system and a more effective fight against money a simple representation of amendments, the German tax authorities laundering. For instance, Germany introduced a transparency should indicatively exclude the initial suspicion of a criminal register, where any beneficial owner of a company is published offence, if the taxpayer has properly set-up an internal control in order to make the backers behind company structures more system which serves the fulfilment of tax obligations. However, no transparent. Further transparency rules are expected. procedural benefits or reductions of tax result from this.

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transparency and fairness of tax systems should also be improved 10.3 Does your jurisdiction support public Country-by- with a public CbCR. However, the protection of business secrets Country Reporting (CBCR)? must be ensured and the reporting obligations shall be reasonable and grantable. In General, German’s jurisdiction does support public CbCR. Thus, according to a recommendation of a committee of the Federal Council, public CbCR represents an effective measure to prevent 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box? base erosion and profit shifting. Furthermore, a public CbCR complements the non-public CbCR in a reasonable way regarding the reputation of a company. Thus, the public confidence in Germany does not maintain any preferential tax regimes. Germany

Michael Best Nico Fischer P+P Pöllath + Partners P+P Pöllath + Partners Hofstatt 1 Hofstatt 1 80331 Munich 80331 Munich Germany Germany

Tel: +49 89 2424 0470 Tel: +49 89 2424 0464 Email: [email protected] Email: [email protected] URL: www.pplaw.com URL: www.pplaw.com

Dr. Michael Best is a partner at P+P Pöllath + Partners. He specialises Dr. Nico Fischer is a partner at P+P Pöllath + Partners. He specialises in domestic and international tax law, in particular the structural in domestic and international tax law, tax structuring, cross-border and ongoing tax aspects of private equity funds, including the tax acquisitions and structural and ongoing tax aspects of private equity matters of investors and carried interest holders, as well as the tax funds, including the tax matters of investors and carried interest structures of (cross-border) acquisitions and real estate transactions. holders. He advises major private equity funds, corporate clients as He has published numerous articles in professional journals and is well as private clients. continuously ranked among the leading tax experts in Germany. Nico’s various publications include articles on the tax aspects of private equity investments and acquisition structures. He is the co- author of a manual on the legal and tax structuring of acquisitions, and gives tax-related lectures at the University of Münster, and leads M&A training courses.

P+P Pöllath + Partners is an internationally operating German law firm, whose more than 125 lawyers and tax advisors in Berlin, Frankfurt and Munich provide high-end legal and tax advice. The firm focuses on transactional advice and asset management. P+P partners regularly advise on corporate/M&A, private equity and real estate transactions of all sizes. P+P has achieved a leading market position in the structuring of private equity and real estate funds and tax advice, and enjoys an excellent reputation in corporate matters as well as in asset and succession planning for family businesses and high-net-worth individuals. More than half of P+P’s professionals specialise in the tax implications of the firm’s primary areas of expertise – transaction and asset management, and private equity – or are experts familiar with the tax aspects of their own specialities. P+P partners serve as members of supervisory and advisory boards of known companies. They are regularly listed in domestic and international rankings as the leading experts in their respective areas of expertise.

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Greece Ioannis Stavropoulos

Stavropoulos & Partners Law Office Vasiliki Koukoulioti

1 Tax Treaties and Residence 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced subsequently)? 1.1 How many income tax treaties are currently in force in your jurisdiction? According to article 28 (1) of the Greek Constitution, international treaties, once they are ratified by law and come into effect, constitute Greece has concluded income tax treaties with fifty-seven (57) states, an integral part of the internal legal order and supersede any contrary i.e. all the EU Member States and Albania; Armenia; Azerbaijan; domestic provision. This applies to both existing and subsequently- Bosnia-Herzegovina; Canada; China; Egypt; Georgia; Iceland; introduced domestic law provisions. India; Israel; the Republic of Korea; Kuwait; Mexico; Moldova; Morocco; Norway; Qatar; Russia; the Republic of San Marino; Saudi Arabia; Serbia; South Africa; Switzerland; Tunisia; Turkey; 1.6 What is the test in domestic law for determining the Ukraine; the United Arab Emirates; the USA; and Uzbekistan. residence of a company?

A legal entity or other entity is considered tax-resident in Greece if 1.2 Do they generally follow the OECD Model Convention one of the following conditions is met: it has been incorporated or or another model? established according to the Greek legislation; it has its registered seat in Greece; or the place of effective management is located in Greece’s tax treaties are generally based on the OECD Model Greece. The determination by the tax authorities that the effective Convention (with the exception of the treaties with the USA and the management of a legal entity is exercised in Greece is made on UK, which were both concluded in 1953, i.e. prior to 1963 when the the basis of the actual facts and circumstances of each case and by first draft of the model was published). taking into account mainly the place where day-to-day management is exercised, the place where strategic decisions are made, the 1.3 Do treaties have to be incorporated into domestic law place where the annual general meeting of shareholders or partners before they take effect? is held, the place where the books and records are kept, the place where the meeting of the members of the board of directors (BoD) Greece follows the dualistic principle. Thus, as prescribed by or other executive management board takes place, and the residence article 36(2) of the Greek Constitution, treaties (including income of the members of the BoD or other executive management board. tax treaties) need to be incorporated into domestic law, by virtue of The residence of the majority of the shareholders or partners may a statute voted by the Greek parliament and published in the Official also be taken into consideration. Companies that are established Government Gazette, before they take effect. and operate according to Law 27/1975 on the taxation of vessels and L.D. 2687/1954 on the investment and protection of foreign capital are explicitly excluded from the application of these provisions on 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? tax residence.

Tax treaties concluded by Greece do not generally incorporate anti- 2 Transaction Taxes treaty shopping rules, with the following exceptions: (i) the Greece-Luxembourg tax treaty precludes from its provisions Luxembourgian holding companies; 2.1 Are there any documentary taxes in your jurisdiction? (ii) the Greece-USA tax treaty provides for a limitation on benefits clause; and Stamp duty is levied on a limited number of transactions, documents (iii) recent tax treaties (e.g. Belgium, Ireland, etc.) contain anti- and contracts, in the form of a percentage on the value of the abuse provisions precluding the application of treaty benefits transaction, which is not subject to VAT. The most notable cases concerning interest and royalties. where stamp duty applies are commercial property leases (3.6%), On 7 June 2017, Greece signed the Multilateral Convention to private loan agreements (2.4–3.6%), commercial loan agreements Implement Tax Treaty Related Measures to Prevent BEPS, in which (2.4%) and cash withdrawal facilities granted to shareholders and a number of anti-treaty shopping rules are included. partners (1.2%).

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

The Greek Value Added Tax Code is based on EC Directive 1. Customs duties are imposed on imports from non-EU 2006/112/EC, i.e. on the common system of Value Added Tax (the Member States, as prescribed by the Community Customs former Sixth EC Directive). The standard VAT rate is 24%. Two Code and the Common Customs Tariff. other rates may apply depending on the nature of goods or services 2. Excise duties on coffee, tobacco products, alcohol and (13% and 6%). VAT rates reduced by 30%, namely to 17%, 9% and alcoholic drinks, and fuels (heating and transportation) are 4% apply in certain Greek islands (e.g. Lesvos, Chios, Samos etc.). imposed in line with EU law. Greece Such reduced-rate status shall remain until 12 December 2017. 3. A special luxury tax is levied on certain categories of goods considered “luxury goods”, such as leather goods, jewellery and precious stones, precious metals, aircraft, seaplanes and 2.3 Is VAT (or any similar tax) charged on all transactions helicopters of private use. or are there any relevant exclusions? 4. As of 1 June 2016, cars, motorcycles and trucks that enter Greek territory are subject to registration duty at new rates VAT applies to all stages of production and distribution of goods, varying from 4% to 32% on their retail sale price (before provision of services and intra-community acquisitions or imports taxes), regardless of their cylinder capacity. Ηybrid cars, of goods from abroad, against a consideration. previously exempted, are also burdened with 50% of the applicable registration duty. However, VAT exemptions are applicable which either: (i) preclude the recovery of input VAT (e.g. provision of services of a social 5. Insurance tax applies on the amount of premiums and related or cultural nature, such as medical services, educational services, costs charged by insurance companies, and is borne by the customer. The rates vary from 4% to 20% depending on insurance services and most banking services); or (ii) do not, in the type of insurance. Life insurance premiums paid in the which case the supplies are treated as zero-rated (e.g. exports, intra- context of contracts with a duration of at least 10 years are community supplies, international transit of goods and transactions exempted. related to shipping and the aircraft sector). 6. An annual contribution of 0.6% is imposed on the average outstanding monthly balance of each loan granted by a bank 2.4 Is it always fully recoverable by all businesses? If not, operating in Greece or abroad. Certain exceptions apply in what are the relevant restrictions? regard to loans between banks, loans to the Greek State, loans funded by the European Investment Bank, etc. Taxable persons are entitled to deduct input VAT from output VAT, as long as the goods and services are wholly used in taxable 3 Cross-border Payments transactions within the same tax period or in exempt transactions but with retention of the right to deduct VAT. However, input VAT on supplies that are used to render tax-exempt supplies without 3.1 Is any withholding tax imposed on dividends paid by retention of the right to deduct VAT is, in principle, not deductible. a locally resident company to a non-resident? If taxable persons render both taxable and tax-exempt services, input VAT on supplies for both has to be split up according to the Dividends or profits distributed by a locally resident company to a respective percentage of taxable supplies to determine the deductible non-resident are subject to (final) withholding tax at a rate of 15%. part of input VAT. Profits deriving from a branch of a foreign company are not subject to any withholding tax on distribution. If input tax is higher than output tax at the end of the tax year, such difference may be either carried forward or refunded, if certain Dividend income may be subject to a lower withholding tax rate, conditions are met. provided the recipient of the dividend income is resident in a state with which Greece has concluded a tax treaty which provides for a Lastly, there are a number of expenditures for which input VAT is more favourable tax treatment. No withholding tax applies if the not deductible, e.g. hotel accommodation, food, drink and tobacco. conditions of the EU Parent-Subsidiary Directive (2011/96/EU) are satisfied (i.e. a 10% minimum shareholding for an uninterrupted 2.5 Does your jurisdiction permit “establishment only” period of at least 24 months), subject to the provisions of the recently VAT grouping, such as that applied by Sweden in the enacted anti-abuse rules concerning hybrid mismatch arrangements Skandia case? and tax avoidance arrangements without economic and business substance that are solely aimed at obtaining a tax benefit. No, it does not.

3.2 Would there be any withholding tax on royalties paid 2.6 Are there any other transaction taxes payable by by a local company to a non-resident? companies? Royalties paid to a non-resident are subject to a 20% (final) 1. Real estate transfer tax is imposed on the higher of the withholding tax, subject to a reduced rate under an applicable tax objective value or the market value of the property sold and treaty or the application of the EU Interest and Royalties Directive is borne by the buyer at a percentage of 3% (except from the (i.e. a 25% minimum shareholding for an uninterrupted period of at first sale of new buildings, where VAT applies with respect to building licences issued after 1 January 2006). least 24 months). 2. Sales of shares listed on the Athens Stock Exchange or any other recognised stock exchange market are subject to 0.2% transaction tax.

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transfer of profits, income or capital for tax avoidance or evasion. 3.3 Would there be any withholding tax on interest paid Exceptionally, deduction of interest expenses paid to a tax resident by a local company to a non-resident? in an EU/EEA Member State is not precluded, if a legal basis for exchange of information between Greece and the Member State in Interest payments effected to a non-resident are subject to a 15% question exists. (final) withholding tax, subject to a reduced rate under an applicable tax treaty or the application of the EU Interest and Royalties Directive (i.e. a 25% minimum shareholding for an uninterrupted 3.8 Is there any withholding tax on property rental payments made to non-residents? period of at least 24 months). It is to be noted that interest received from Greek government bonds and treasury bills by legal entities that are not tax-resident in Greece and that do not maintain a permanent No, there is not. Greece establishment in Greece are not subject to withholding tax. 3.9 Does your jurisdiction have transfer pricing rules? 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? A general provision sets out the “arm’s length” principle by stating that any profit not realised by a domestic legal person or legal entity Pursuant to the Greek “thin capitalisation” rules, interest costs are due to economic or commercial terms in transactions with associated not recognised as deductible business expenses if: a) they exceed persons different from the terms that would apply between non- the amount of EUR 3,000,000 per year; and b) they exceed interest associated persons (independent businesses) or between associated income and that excess interest expenditure exceeds 30% of persons and third parties, increases the taxable base of the domestic taxable earnings before interest, tax, depreciation and amortisation legal person or legal entity by following the OECD’s general (EBITDA). Any interest cost that is thus not deductible may be principles and guidelines for intercompany transactions. carried forward indefinitely to future years and will be deductible “Associated person(s)” means: a) any person who directly or in future years to the extent that those future years indicate an indirectly owns shares, parts or participation equity in another uncovered EBITDA amount. person of at least 33% in value or number, or rights to profits, or voting rights; b) two or more persons, if a third person owns directly or indirectly shares, parts, voting rights or participation equity in 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? such persons of at least 33% in value or number, or rights to profits, or voting rights; or c) any person with whom there is a direct or indirect relationship of substantial management dependence or There is no safe harbour. However, it should be noted that the control, or who exercises decisive influence or has the ability to aforementioned “thin capitalisation” rules do not apply to credit exercise decisive influence over another person, or if both persons institutions, leasing companies, and factoring companies that are have a direct or indirect relationship of substantial management licensed by the Bank of Greece or respective regulatory authorities dependence or control or the ability to exercise decisive influence of other EU Member States. through a third party. Specific rules exist for the transfer pricing documentation file, as 3.6 Would any such rules extend to debt advanced by a well as the procedure for an Advance Pricing Arrangement (APA) third party but guaranteed by a parent company? related to transfer pricing methodology.

Yes, interest from loans guaranteed by a parent company is deductible, on the conditions prescribed under the aforementioned 4 Tax on Business Operations: General “thin capitalisation” rules.

4.1 What is the headline rate of tax on corporate profits? 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- resident? The headline rate of tax on corporate profits is 29%. By virtue of Law 4472/2017, published on 19 May 2017, any Interest expenses on loans received from third parties, to the extent business income realised by legal persons/legal entities as of 1 that they exceed the interest that would arise if the interest rate January 2019 shall be taxed at a rate of 26%, with the exemption was equal to the interest rate of loans on open deposit/withdrawal of credit institutions, for which the currently applicable rate accounts provided to non-financial corporations, as indicated in the of 29% shall continue to be applicable. The reduction of the Statistical Bulletin of the Central Bank of Greece for the nearest corporate income tax rate from 29% to 26% shall be applicable, period preceding the date of borrowing, are not tax-deductible. The on the condition that there is no divergence from the medium-term above interest deductibility restrictions do not apply to inter-bank budgetary objectives set in the Economic Adjustment Program loans, bonds, and inter-company loans issued by sociétés anonymes. following an assessment of the International Monetary Fund and the European Commission in collaboration with the European In addition, interest payments to tax residents in non-cooperative Central Bank, the European Stability Mechanism, and the Greek states (i.e. non-EU Member States which have not concluded and do authorities. not apply a convention on administrative assistance in tax matters with respect to Greece and at least 12 other countries) or states with a preferential tax regime (i.e. states where there is no taxation or 4.2 Is the tax base accounting profit subject to de facto taxation, or where profits, income or capital are taxed at adjustments, or something else? a rate equal to or lower than 50% of the corresponding Greek tax rate) are not tax-deductible, unless the taxpayer proves that these Taxable business profit occurs after deduction, from the entire expenses relate to real and ordinary transactions and do not result in business income, of the business expenses, the depreciation and the

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provisions for bad debts. Business income includes the revenues Said tax is not imposed on the objective value of real estate property, from sale of assets as well as the liquidation proceeds. Taxable but is determined on the basis of various factors, according to the profit is determined each tax year, as set out in the entity’s P&L final registration of the property at the land registry or the ownership account, according to the Greek Accounting Standards or the title. International Accounting Standards (IAS), after adjustment for In addition, a special real estate tax is imposed on companies which income tax purposes. have ownership or usufruct on real estate located in Greece at the rate of 15%. However, exemptions are provided by law, e.g. listed 4.3 If the tax base is accounting profit subject to companies, companies with gross revenues from other activities adjustments, what are the main adjustments? higher than those revenues derived from the exploitation of real

Greece estate in Greece, sociétés anonymes with registered shares up to the Deduction of expenses is subject to the following conditions: they level of individual shareholder(s) or which declare their ultimate (i) are incurred in the interest of the business or in the ordinary individual shareholders with a Greek tax registration number, etc. course of the business; (ii) correspond to an actual transaction and the value of the transaction is not deemed lower or higher than the 5 Capital Gains market value, based on elements available to the tax administration; and (iii) are entered in books where transactions are recorded for the period in which they are incurred and are supported by appropriate 5.1 Is there a special set of rules for taxing capital gains documentation. In addition, specifically prescribed expenses are and losses? not deductible, e.g. interest on loans received from third parties, except for bank loans, interbank loans and bond loans issued by In general, capital gains derived by a Greek company are taxed as corporations, to the extent that they exceed the interest that would business profits and are, thus, included in the taxable profits of the arise if the interest rate was equal to the rate of overdraft account company and taxed at the standard corporate income tax rate of loans to non-financial corporations, as indicated in the Statistical 29%. Bulletin of the Bank of Greece for the nearest period preceding the The income derived from the goodwill arising upon the transfer of date of borrowing; any expense related to a purchase of goods or Greek government bonds or Greek treasury bills that are acquired services, of more than EUR 500, where partial or total payment was by legal entities that do not qualify as Greek tax residents and do not not made via a bank payment instrument; fines and penalties, etc. maintain a permanent establishment in Greece is tax-exempt.

4.4 Are there any tax grouping rules? Do these allow 5.2 Is there a participation exemption for capital gains? for relief in your jurisdiction for losses of overseas subsidiaries? No, there is not. Νο, there are not. 5.3 Is there any special relief for reinvestment? 4.5 Do tax losses survive a change of ownership? No, there is not. If, during a tax year, direct or indirect ownership of the share capital or the voting rights of a company has changed by more than 33% 5.4 Does your jurisdiction impose withholding tax on the in value or in number, the right to carry forward tax losses ceases to proceeds of selling a direct or indirect interest in local apply unless the taxpayer proves that the change of ownership has assets/shares? been made exclusively for commercial or business purposes and not for tax avoidance or tax evasion. No, it does not.

4.6 Is tax imposed at a different rate upon distributed, as 6 Local Branch or Subsidiary? opposed to retained, profits?

Tax is not imposed at a different rate to distributed and retained 6.1 What taxes (e.g. capital duty) would be imposed upon profits. the formation of a subsidiary? However, in the case of capitalisation or distribution of profits which have not been subjected to any corporate income tax (e.g. The issuance of share capital upon formation of a company is untaxed reserves), the capitalised or distributed amount is, in any exempt from capital duty. A 0.1% surcharge for the benefit of the case, subject to corporate income tax. competition committee applies on the contribution of capital to a société anonyme upon its formation or any increase.

4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the 6.2 Is there a difference between the taxation of a local occupation of property? subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? The ownership of real estate property/property rights in Greece is subject to the Uniform Tax on the Ownership of Real Estate Property No, there is not. (ENFIA), which consists of a principal tax imposed on each real estate property and a supplementary tax imposed on the total value of the property rights on real estate property of the taxpayer subject to tax.

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■ the above legal person or legal entity is subject to taxation 6.3 How would the taxable profits of a local branch be in a non-cooperative state or in a state with a preferential tax determined in its jurisdiction? regime; ■ more than 30% of the net income before taxes earned by A branch located in Greece is treated, according to the so-called a legal person or legal entity derives from interest or other Authorised OECD Approach (AOA), as a functionally separate income generated from financial assets, dividends, royalties or entity, although it is legally a part of the parent company. Its profits capital gains, income from movable or immovable property, or are determined by taking into account the functions performed, income from insurance, banking, or other financial activities; assets used and risks assumed by the enterprise through the branch. ■ more than 50% of the corresponding source of income, as The Greek branch of a foreign head office is subject to Greek illustrated above, of the legal person or entity arises from corporate income tax as if it were a Greek corporation. transactions with the taxpayer or with its affiliates; and Greece ■ the legal person or entity is not a company whose principal class of shares is subject to trading on a regulated market. 6.4 Would a branch benefit from double tax relief in its jurisdiction? The above do not apply to legal persons or legal entities with tax residence in an EU or EEA Member State, unless the establishment or the financial activity of such legal entity constitutes a fictitious The head office, but not the branch itself, is entitled to treaty benefits situation with a view to avoiding taxation. because a branch is legally a part of its head office and not a resident for tax treaty purposes. However, the non-discrimination clauses in the tax treaties that Greece has signed are applicable. For EU 8 Taxation of Commercial Real Estate Member States, discrimination of branches would also be prohibited by freedom of establishment. 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the branch? Legal entities which are non-resident or do not maintain a permanent establishment in Greece are not subject to Greek corporate income No, it would not. tax. Therefore, capital gains from the disposal of commercial real estate located in Greece by a non-resident legal entity are not subject to tax in Greece. 7 Overseas Profits 8.2 Does your jurisdiction impose tax on the transfer of 7.1 Does your jurisdiction tax profits earned in overseas an indirect interest in commercial real estate in your branches? jurisdiction?

Resident companies are taxed on their worldwide income. Capital gains earned by individuals that arise from the transfer Therefore, profits earned in foreign branches are included inthe of participations which attract more than 50% of their value Greek corporate income tax base of the Greek corporations. directly or indirectly from real estate and do not constitute income from business operations, are taxed at a rate of 15%. If the aforementioned income constitutes business income, it is taxed at 7.2 Is tax imposed on the receipt of dividends by a local the ordinary corporate income tax rate of 29%. company from a non-resident company?

A participation exemption regime applies to intra-group dividends 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their received by a local company from a non-resident company which equivalent? has its legal seat in another EU Member State, subject to the provisions of the EU Parent-Subsidiary Directive (2011/96/EU). Dividends received by other non-resident companies are subject to No. However, a special regime exists with respect to corporations the normal tax rate, subject to any foreign tax credit or exemption, that invest in real estate. if provided by any applicable tax treaty or the domestic legislation. 9 Anti-avoidance and Compliance 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? “Controlled foreign company” rules were introduced into the Greek tax legislation for the first time pursuant to Law 4172/2013 (effective as of 1 January 2014). A general anti-avoidance rule was first introduced with the Greek Code of Tax Procedures (Law 4174/2013). Under this rule, the According to these rules, the taxable income of a taxpayer with tax tax administration may disregard any artificial arrangement or residence in Greece includes undistributed income of a legal person series of arrangements that aim at the evasion of taxation and or legal entity with tax residence in another country, under the lead to a tax advantage. An arrangement is considered artificial following conditions: if it lacks commercial substance and is aimed at the evasion of ■ the taxpayer, alone or together with affiliated persons, directly taxation or towards a tax benefit. To determine if an arrangement or indirectly owns shares, parts, voting rights, or participation is artificial, various characteristics are examined. For the purposes in equity in excess of 50% or is entitled to receive more than of this measure, the goal of an arrangement is to avoid taxation if, 50% of the profits of that legal person or legal entity;

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regardless of the subjective intention of the taxpayer, it is contrary to The existing transfer pricing rules refer to the OECD guidelines, the object, spirit and purpose of the tax provisions that would apply which are, thus, immediately effective. in other cases. To determine the tax advantage, the amount of tax Greece has signed a multilateral competent authority agreement due after taking into consideration such arrangements is compared for the automatic exchange of CBC reports and the Multilateral to the tax that would be payable by the taxpayer under the same Convention to Implement Tax Treaty Related Measures to Prevent conditions in the absence of such an arrangement. BEPS. A mutual administrative procedure provision has been included in 9.2 Is there a requirement to make special disclosure of the Greek Code of Tax Procedures. avoidance schemes? Greece is required to implement into domestic law the two EU

Greece Anti-Tax Avoidance Directives (ATAD and ATAD 2) which provide No, there is not. for controlled foreign company, anti-hybrid and interest limitation rules. 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also 10.2 Does your jurisdiction intend to adopt any legislation anyone who promotes, enables or facilitates the tax to tackle BEPS which goes beyond what is avoidance? recommended in the OECD’s BEPS reports?

A person who assists or instigates another person or collaborates Greece is expected to follow the OECD recommendations for with another person in the commitment of tax avoidance is liable to tackling BEPS. the same penalties as the taxpayer. In addition, a person who by any means knowingly collaborates or 10.3 Does your jurisdiction support public Country-by- offers immediate assistance in committing tax evasion is punishable Country Reporting (CBCR)? as a primary accessory in the crime. Please refer to our answer to question 10.1. 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box?

No. However, tax amnesty schemes and voluntary disclosure There is a preferential tax regime for shipping companies. programmes are occasionally introduced, providing for tax/penalty reductions or other procedural benefits.

10 BEPS and Tax Competition

10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)?

Greece has already implemented into domestic law the EU VAT Directive regarding the VAT on B2C digital services and the anti- avoidance measures included in the EU Parent-Subsidiary Directive.

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Ioannis Stavropoulos Vasiliki Koukoulioti Stavropoulos & Partners Law Office Stavropoulos & Partners Law Office 58 Kifissias Avenue 58 Kifissias Avenue 151 25 Maroussi 151 25 Maroussi Athens Athens Greece Greece

Tel: +30 210 363 4262 Tel: +30 210 363 4262 Email: [email protected] Email: [email protected] URL: www.stplaw.com URL: www.stplaw.com Greece Ioannis Stavropoulos has been a Managing Partner at Stavropoulos & Vasiliki Koukoulioti joined Stavropoulos & Partners Law Office in 2017. Partners Law Office since 1991. As a tax consultant and tax attorney, She has experience in the provision of tax consultancy services and he has dealt with numerous cases concerning the application of double the representation of domestic and international clients before the tax taxation treaties, transfer pricing and EU direct taxation and VAT authorities and the administrative courts in complex tax controversies. legislation. A number of his cases constitute leading jurisprudence She also provides support to companies and individuals in the course published in Greek and international legal and tax journals. He of tax audits. She obtained her law diploma from the National and has participated in legislative and scientific committees, both as Kapodistrian University of Athens (2010) and an LL.M. in Tax Law an independent expert and representing various organisations. In from Queen Mary University of London (2012). She is admitted to the 2012–2013 he actively participated, as an expert, in the tax reform Athens Bar Association (2013). committee which produced the new tax codes. As a business lawyer, Ioannis has taken part in major merger & acquisition projects, domestic and international share and asset transactions, as well as anti-trust cases. He has published articles on various tax issues and has participated as a speaker in numerous seminars. He participates in the Taxation Committee of the American- Hellenic Chamber of Commerce, as well as in tax and legal committees of various Federations and Chambers.

Stavropoulos & Partners Law Office is a partnership of lawyers established in Athens which offers a wide range of legal services, with a particular emphasis on taxation, commercial/corporate law, European Union law, mergers & acquisitions, corporate restructuring, antitrust and dispute resolution. The firm collaborates with law firms in Europe and worldwide, as well as with other professionals such as auditors, accountants, stock brokers, real estate agents, public notaries and judicial bailiffs. The client base consists mainly of multinational companies deriving from Europe and North America and having activities in Greece and the wider Balkan region. The firm consists of ten (10) lawyers, all of whom have national and international academic credentials and are members of the Athens Bar Association.

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Iceland Garðar Víðir Gunnarsson

LEX Law Offices Guðrún Lilja Sigurðardóttir

1 Tax Treaties and Residence 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced subsequently)? 1.1 How many income tax treaties are currently in force in your jurisdiction? No, generally they are not overridden by rules of domestic law. However, there exists a general principle that international In Iceland there are currently 45 tax treaties in force, one of which is obligations entered into by the Icelandic government should, to the a multilateral treaty between the Nordic countries (Iceland, Sweden, extent possible, be construed in accordance with domestic law. Norway, Finland, Denmark and the Faroe Islands). A further treaty has been signed but has not yet entered into force, and two more treaties have been negotiated. Moreover, Iceland has entered into 1.6 What is the test in domestic law for determining the 36 treaties concerning the exchange of information relating to tax residence of a company? matters. A further seven information exchange treaties have been signed but have not yet entered into force. Iceland has signed the The test applied when determining corporate residence is comprised Multilateral Convention to Implement Tax Treaty Related Measures of three different factors. Accordingly, a company is considered a to Prevent Base Erosion and Profit Shifting (“MLI”), although it has tax resident in Iceland if (i) it is registered in Iceland, (ii) its effective not yet entered into force. management is in Iceland, or (iii) Iceland is considered the domicile of the company according to its articles of association.

1.2 Do they generally follow the OECD Model Convention or another model? 2 Transaction Taxes

The tax treaties that Iceland has entered into generally follow the OECD model. 2.1 Are there any documentary taxes in your jurisdiction?

In Iceland, stamp duty is imposed on deeds on immovable property 1.3 Do treaties have to be incorporated into domestic law before they take effect? and vessels over five gross tonnes (0.8% for individuals, 1.6% for legal entities). In the case of deeds regarding real estate, the percentage is calculated from the rateable value of the property. Tax treaties are not incorporated into Icelandic law. Pursuant to In the case of vessels over five gross tonnes, the percentage is Icelandic tax law, the government of Iceland has the authority to calculated from the purchase price but the basis for the calculation negotiate and enter into tax treaties with governments of other shall never be lower than the amount of any encumbrances. countries. The prevailing practice in Iceland is that after being published in the Official Gazette (Icelandic: Stjórnartíðindi), a tax treaty enters into force and has effect in Iceland. 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates?

1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? Iceland has a VAT system, regulated by the Value Added Tax Act, No 50/1988, pursuant to which VAT is imposed on all stages of supply of goods and services. Currently, there are two VAT rates Tax treaties that Iceland has entered into do not generally incorporate applicable: limitation of benefits articles. However, such a provision canbe found in the Iceland-US treaty, the Iceland-Barbados treaty and the ■ The standard rate of VAT is 24%. The standard rate applies to any supply of goods and services that is not exempt from VAT Iceland-India treaty. Furthermore, the Iceland-Luxembourg treaty or subject to the reduced rate. includes a provision similar to a limitation of benefits provision, as it excludes certain types of companies from the benefits of the treaty. ■ A reduced rate of 11%. This applies, inter alia, to food, utilities such as electricity and water for heating, passenger Finally, Icelandic domestic tax legislation includes a general anti- transportation, accommodation services, travel agency services, avoidance rule, applicable in cases of treaty shopping (see section 9). books, newspapers/magazines and music records.

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2.3 Is VAT (or any similar tax) charged on all transactions 3.2 Would there be any withholding tax on royalties paid or are there any relevant exclusions? by a local company to a non-resident?

As a general rule, VAT shall be levied on all transactions that are not In Iceland, a 20% withholding tax is imposed on royalties paid expressly excluded by law. Sectors and services excluded from VAT to foreign companies and individuals. The rate can be reduced are, inter alia: financial and banking services; insurance services; pursuant to provisions in an applicable tax treaty. health services; social services; education; libraries; museums; sports activities; public transportation; transportation of school 3.3 Would there be any withholding tax on interest paid children, people with disabilities and elderly people; postal services; by a local company to a non-resident? renting of real estate; lotteries; and charities. All exceptions are Iceland construed restrictively. Moreover, certain types of transactions are Withholding tax is levied on interests paid to non-residents by an considered as exempt turnover, in which case the VAT is 0% but the Icelandic company. The applicable rate is 10% for both individuals taxable person is allowed to recover the input tax. and companies. However, in the case of individuals, income from interest up to ISK 125,000 is exempt from taxation. Furthermore, 2.4 Is it always fully recoverable by all businesses? If not, rates can be reduced pursuant to provisions in an applicable tax what are the relevant restrictions? treaty. Also, it should be noted that interests on bonds issued by the Central Only taxable persons registered for VAT purposes are entitled Bank of Iceland, financial undertakings in their own name or energy to recovery of input tax for transactions relating to their taxable companies are exempt from withholding tax, given that the bonds operations. Should a taxable person’s input tax exceed its output tax are listed and that the transaction in question is not subject to during a settlement period, that person is entitled to reimbursement. currency restrictions.

2.5 Does your jurisdiction permit “establishment only” 3.4 Would relief for interest so paid be restricted by VAT grouping, such as that applied by Sweden in the reference to “thin capitalisation” rules? Skandia case?

Yes. According to Icelandic thin capitalisation rules, the deduction This is not applicable as Iceland is not a part of the EU VAT regime. of interest paid to related parties is limited to 30% of the taxpayer’s earnings before interest, taxes, depreciation and amortisation 2.6 Are there any other transaction taxes payable by (“EBITDA”). However, this limitation does not apply if: (i) the total companies? interest paid to related parties does not exceed ISK 100 million; (ii) the receiver of the interest bears unlimited tax liability in Iceland; No, there are not. (iii) the Icelandic taxpayer proves that their debt-equity ratio is not more than 2% below the debt-equity ratio of the group to which it belongs (some restrictions apply); or (iv) the Icelandic taxpayer is a 2.7 Are there any other indirect taxes of which we should be aware? financial undertaking, an insurance company, or a company owned by such companies which undertakes similar operations. Excise tax is charged on automobiles, fuel, alcohol and tobacco. In cases of import, customs and, if applicable, excise tax may be levied 3.5 If so, is there a “safe harbour” by reference to which parallel to the goods being imported into the country. tax relief is assured?

Yes. Please see the answer to question 3.4. 3 Cross-border Payments

3.6 Would any such rules extend to debt advanced by a 3.1 Is any withholding tax imposed on dividends paid by third party but guaranteed by a parent company? a locally resident company to a non-resident? No, they would not. Non-resident individuals and companies are subject to a withholding tax on dividends gained and/or received by a resident company in Iceland. The rate for the withholding tax is 20% for individuals and 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- 18% for companies. resident? If a receiving company is a limited liability company registered in an EU/EEA country, the withholding tax can be reimbursed There are no further restrictions that target interest payments, but following a tax assessment, if the company submits a tax return and general anti-avoidance rules may apply (see section 9). files for a refund. Withholding tax rates can be reduced pursuant to provisions in an applicable tax treaty following an application to the Directorate of 3.8 Is there any withholding tax on property rental payments made to non-residents? Internal Revenue (“DIR”). Such application can be made before the dividend is paid and then the distributing entity shall only withhold tax at the reduced treaty rate. If, however, the application has not Rental payments on property made to non-residents are not subject been made prior to payment of the dividends, the receiving entity to withholding tax. can nevertheless file for a refund and request that the treaty rates be applied retroactively.

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3.9 Does your jurisdiction have transfer pricing rules? 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the Yes. Iceland has adopted transfer pricing rules, which are based occupation of property? on the OECD transfer pricing guidelines. Pursuant to the transfer pricing provision, the conditions for the implementation of the A social security tax is levied on all wages and is paid by companies provision, including documentation, are laid down in a regulation. employing staff/workers. The rate for the social security tax is now 6.85%. Real estate taxes are imposed by municipalities on all commercial 4 Tax on Business Operations: General real estate. The rates vary between different municipalities, but Iceland average at 1.65%. 4.1 What is the headline rate of tax on corporate profits? Financial institutions are subject to a special tax at the rate of 5.5%; the tax base is total salaries paid. Financial institutions are also In Iceland, the general corporate income tax rate for limited liability subject to a special income tax at the rate of 6%, with a total income companies is 20% and for other company forms it is 36%. tax base (income less deductible expenses) exceeding ISK 1,000 million. A further tax is imposed on banks and lending institutions, including ones that are undergoing winding-up proceedings, at the 4.2 Is the tax base accounting profit subject to rate of 0.376%. The tax base is total debts, according to the tax adjustments, or something else? return of the relevant company, exceeding ISK 50 billion. Other taxes include, for example: the farmers’ charge (1.2%); lodging The tax base is determined by the total worldwide income of resident tax – imposed on all entities providing lodging and accommodation companies, less any deductible expenses. services (at a flat rate of ISK 100 per night); and the supply of hot water is subject to 2% tax of the retail price. 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? 5 Capital Gains The main adjustments include, inter alia: deductible expenses, which generally consist of costs incurred in acquiring, securing and 5.1 Is there a special set of rules for taxing capital gains maintaining the taxable income; and depreciation of assets. and losses?

4.4 Are there any tax grouping rules? Do these allow The applicable tax rate on capital gains for non-resident companies for relief in your jurisdiction for losses of overseas is 18%. For companies registered in Iceland, general corporate subsidiaries? income tax (see question 4.1) is levied on all profits, including capital gains. However, in the case of a disposal of shares by a Icelandic tax law permits group tax consolidation for resident corporate shareholder, a full deduction against such capital gains is companies, which provides for relief for losses against other group permitted, which results in 0% taxation. This may also apply to the companies’ profits. However, such relief is not available and may sale of shares in companies registered in Iceland sold by companies not be extended to overseas subsidiaries. registered in Iceland, EEA or EFTA countries or the Faroe Islands. Finally, this can apply to capital gains from the sale of shares in non- 4.5 Do tax losses survive a change of ownership? resident companies, provided that the seller can demonstrate that the foreign company’s profit has been taxed abroad under provisions that do not substantially deviate from those prevailing in Iceland and In the event of a change of ownership, tax losses can survive if that the profits of the foreign company have been subject to taxation certain conditions are met. Provided that the operations of the at a rate that is not lower than the general tax rate in any OECD, company remain the same as before, the tax losses will survive for EEA or EFTA country or the Faroe Islands. Capital gains on shares the benefit of the new owner(s). held by an individual are subject to 20% tax upon their disposal. In the event of a merger or division of a company, tax losses will survive if all of the following conditions are met: (i) The company/companies taking over engage in similar 5.2 Is there a participation exemption for capital gains? operations to those of the company being dissolved. Losses are not transferred if the company being dissolved had No. There is no participation exemption in Iceland. However, the insubstantial properties or did not engage in any operations. possibility of full deduction for a corporate shareholder against (ii) The merger or division of the existing company is made for capital gains may apply (see question 5.1). ordinary and normal operational purposes. (iii) The losses in question occurred in operations similar to the 5.3 Is there any special relief for reinvestment? operations of the recipient company. Note that tax losses may only be carried forward and offset against taxable income in the following 10 years. In the matter of share investments, no special relief for reinvestment is awarded following the adoption of full deduction against capital gains, leading to 0% taxation on capital gains for corporate 4.6 Is tax imposed at a different rate upon distributed, as shareholders (see question 5.1). However, regarding the sale of real opposed to retained, profits? estate and permanent operational assets, taxation on capital gains realised from the sale of such assets can be deferred by reinvestment No, the tax rate is the same for distributed and retained profits. within a certain time limit.

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5.4 Does your jurisdiction impose withholding tax on the 7.2 Is tax imposed on the receipt of dividends by a local proceeds of selling a direct or indirect interest in local company from a non-resident company? assets/shares? The general principle is that tax is imposed in such circumstances. Upon the sale of shares in an Icelandic company, foreign individuals However, a deduction in the amount of the dividends received is and legal entities will be subject to withholding tax under Icelandic permitted, provided that the distributing company’s profit has been law (individuals at 20% and legal entities at 18%). However, the taxed abroad under provisions that do not substantially deviate from possibility of full deduction for a corporate shareholder against those prevailing in Iceland and that the profits of the distributing capital gains may apply (see question 5.1). Hence, if the seller is a company have been subject to taxation at a rate that is not lower limited company in an EU/EEA country, full reimbursement can be than the general tax rate in any OECD, EEA or EFTA country or the Iceland applied for, following a tax assessment, if the company submits a Faroe Islands. tax return and files for a refund.

Furthermore, it is possible to apply for a reduced withholding tax 7.3 Does your jurisdiction have “controlled foreign rate pursuant to provisions in an applicable tax treaty. company” rules and, if so, when do these apply?

6 Local Branch or Subsidiary? Yes, Iceland has enacted CFC rules. When a company or an individual owns shares in a company (directly or indirectly) in a low-tax jurisdiction, the company’s profits are subject to taxation in 6.1 What taxes (e.g. capital duty) would be imposed upon Iceland as personal profits to the owner. A jurisdiction is considered the formation of a subsidiary? to be low-tax if the taxes imposed there are lower than ⅔ of the tax that would be imposed in Iceland on the same income. No taxes are imposed upon the formation of subsidiaries. 8 Taxation of Commercial Real Estate 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? There is no difference. Gains from the disposal of commercial real estate are subject to tax for non-residents at a 20% rate. 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? 8.2 Does your jurisdiction impose tax on the transfer of There are no special rules enacted in Iceland on how to allocate an indirect interest in commercial real estate in your income to branches. Rules on transfer pricing (see question 3.9) jurisdiction? may, however, effect abnormal allocation. Determination of the tax base for a local branch would generally be the income allocated to If indirect interest in real estate stems from ownership through a the branch, less the deductible costs allocated to the branch. company and shares in said company are sold with profits, this would not be considered as the sale of real estate in regard to taxation and tax would not be levied on the transfer of such indirect ownership. 6.4 Would a branch benefit from double tax relief in its jurisdiction? The transfer of other kinds of indirect interest, e.g. rental rights or other indirect property rights, may be subject to taxation. In general, foreign branches are taxed in the same manner as resident companies. 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent? 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the branch? No, Iceland does not have such a tax regime.

No, such withholding tax would not be imposed. Remittance of 9 Anti-avoidance and Compliance profits by a branch forms part of the taxable base and is subject to corporate income tax. 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? 7 Overseas Profits Yes, the Icelandic tax legislation has a provision under which it 7.1 Does your jurisdiction tax profits earned in overseas may be possible to disregard a transaction if its purpose is only to branches? circumvent tax. The wording of the relevant provision does not, however, provide for clear conditions under which it is applicable. Yes, unless overseas branch profits are exempt by a tax treaty. This provision has been construed as constituting a general anti- avoidance rule.

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and came into force on 1 January 2017. It should also be noted that 9.2 Is there a requirement to make special disclosure of Iceland signed the Multilateral Competent Authority Agreement avoidance schemes? (“MCAA”) on the Exchange of CBC Reports in May 2016. According to the Icelandic CBCR rules, an ultimate parent company No, there is not. (“UPC”) in a group of multinational enterprises that has unlimited tax liability in Iceland shall hand in a CBC report to the DIR, unless 9.3 Does your jurisdiction have rules which target not the total income of the group was less than 100 billion ISK or more only taxpayers engaging in tax avoidance but also in the fiscal year. Furthermore, other companies in Iceland that are anyone who promotes, enables or facilitates the tax part of a group of multinational enterprises but are not UPCs must avoidance? hand in a CBC report if the UPC is foreign and: Iceland (i) the foreign UPC is not obliged to hand in a CBC report in its According to Icelandic law, the involvement in punishable tax country of residence; offences can lead to punishment for the person involved. Apart (ii) the UPC’s country of residence has not entered into an from that, there are no such rules. information exchange agreement with Iceland that includes provisions on automatic exchange of CBC reports; or 9.4 Does your jurisdiction encourage “co-operative (iii) the DIR has notified the Icelandic company that the UPC’s compliance” and, if so, does this provide procedural country of residence has not entered into an information benefits only or result in a reduction of tax? exchange agreement with Iceland or the UPC’s country of residence does not provide the Icelandic tax authorities with No. Iceland does not encourage “co-operative compliance”. CBC reports for other reasons.

10.4 Does your jurisdiction maintain any preferential tax 10 BEPS and Tax Competition regimes such as a patent box?

10.1 Has your jurisdiction introduced any legislation There is a special Act on incentives for initial investment in in response to the OECD’s project targeting Base Iceland to promote initial investment in commercial operations, the Erosion and Profit Shifting (BEPS)? competitiveness of Iceland and regional development. If a company qualifies for this scheme the incentives may, inter alia, include: (i) Yes. In October 2016, three amendments that implement certain derogations from certain taxes and charges; (ii) a reduced rate of factors of BEPS were introduced into Icelandic law. These rules income tax fixed for up to 10 years; (iii) a stability clause in terms of included Country-by-Country reporting, a provision on interest new taxation; and (iv) favourable depreciation rules. deduction (BEPS Action 4) and permanent establishment status Special incentives are granted for film and TV production in Iceland. (BEPS Action 7). Furthermore, Icelandic legislation previously The film and TV production cost rebate rate is currently 25%. included CFC rules, transfer pricing rules and transfer pricing There is an incentives scheme for innovation companies. Under the documentation. scheme, companies that carry out research and development projects can apply to the Icelandic Centre for Research for a tax credit, which 10.2 Does your jurisdiction intend to adopt any legislation is 20% of ISK 300 or 450 million of the project cost, irrespective of to tackle BEPS which goes beyond what is whether the total project cost is higher. This support is granted as a recommended in the OECD’s BEPS reports? reimbursement of the respective company’s paid income tax.

No such legislation has been introduced.

10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)?

Yes. The Icelandic CBCR rule is placed in Article 91 a. of the Income Tax Act No 90/2003. Furthermore, regulation No 1166/2016, on Country-by-Country Reporting was introduced in December 2016

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Garðar Víðir Gunnarsson Guðrún Lilja Sigurðardóttir LEX Law Offices LEX Law Offices Borgartúni 26 Borgartúni 26 105 Reykjavík 105 Reykjavík Iceland Iceland

Tel: +354 590 2600 Tel: +354 590 2600 Email: [email protected] Email: [email protected] URL: www.lex.is URL: www.lex.is Iceland Garðar Víðir Gunnarsson joined LEX in 2009 and has been a partner Guðrún Lilja Sigurðardóttir joined LEX in 2012. Her main field of since 2013. He is the firm’s leading specialist in tax law and has advised activity is tax law; in particular, VAT and corporate taxation. Additionally, numerous companies, both domestic and international, on tax-related her practice focuses on corporate advice in the fields of competition matters. Garðar’s tax practice is particularly focused on corporate law, administration law and maritime law. She is a qualified District taxation, mergers & acquisitions and cross-border investments. In Court Attorney and a member of the Icelandic Bar Association. She addition, Garðar specialises in corporate law and is one of the country’s holds a Master’s degree in law from Reykjavík University. chief specialists in the field of arbitration law. He is a member of, inter alia, the Icelandic Bar Association and the International Council for Commercial Arbitration. He has been a lecturer at Reykjavík University since 2008. He holds an LL.M. degree in International Commercial Arbitration Law from Stockholm University.

LEX Law Offices is one of Iceland’s leading law firms, providing clients with comprehensive services over a wide range of financial, corporate and commercial issues, as well as most other aspects of Icelandic law. LEX aims to be the Icelandic legal firm of choice for our clients and to address their needs in the ever-changing local and international markets. LEX is one of Iceland’s largest law firms. Over the course of several decades, LEX has successfully acted on behalf of a large number of internationally respected corporations, organisations and private individuals both in Iceland and abroad. LEX has provided legal services to clients that include major local and international banks, financial institutions, merchants and ship owners, in addition to a large number of municipalities, government institutions, insurance companies, manufacturers, businesses, media outlets, utility companies and private individuals.

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India T. P. Ostwal

T. P. Ostwal & Associates LLP, Chartered Accountants Siddharth Banwat

such as the United Kingdom, Poland, Ethiopia and Nepal, to insert 1 Tax Treaties and Residence such a clause. Most recently, an LOB clause was added to the controversial India-Mauritius treaty. The LOB clause was already 1.1 How many income tax treaties are currently in force in included in new treaties, such as those with Malta and Bhutan that your jurisdiction? came into force in 2015. Indian tax treaties do not follow a consistent approach in adopting There are currently 96 Comprehensive Agreements, eight Limited the LOB clause. Some of the treaties have exhaustive LOB clauses Agreements and six Limited Multilateral Agreements in force in (such as with the US); in some it is very narrowly worded (such as India. Further, India has entered into 19 Tax Information Exchange with the UAE), while in others it is based on the payment of sums to Agreements. India has also signed a Multilateral Instrument the other contracting country (such as with Singapore). In some of (“MLI”) under the BEPS initiative and has submitted a list of 93 the treaties, the LOB clause is based on an expenditure test (such as tax treaties which it has entered into and would like to designate as with Mauritius and Singapore). Covered Tax Agreements (“CTAs”), i.e. tax treaties to be amended Indian tax treaties also contain a “principal purpose test” to deny through the MLI. treaty benefits to enterprises that engage in treaty shopping; however, the test does not contain specific conditions that would attract the 1.2 Do they generally follow the OECD Model Convention limiting of benefits; rather, it leaves the same to the discretion of the or another model? tax administration. Further, domestic tax law mandates non-resident persons in India to India, being a developing economy, generally follows the United provide a Tax Residency Certificate and other information relating Nations Model Double Taxation Convention. However, some of the to their residence and tax identification, in the prescribed format, in treaties India has entered into with some developing economies are order that they may avail themselves of the treaty benefit in India. based on the OECD Model, while some other treaties are based on The provisions of the General Anti Avoidance Rules (“GAAR”), other models or a combination of these models. which have been made effective from 1 April 2017, provide for anti- treaty shopping rules in cases where the arrangement is entered into 1.3 Do treaties have to be incorporated into domestic law with the main purpose of obtaining a tax benefit involving treaty before they take effect? shopping.

There is no requirement under the domestic law to incorporate a 1.5 Are treaties overridden by any rules of domestic treaty into domestic law in order to make it effective. Domestic tax law (whether existing when the treaty takes effect or law (Section 90 of the Income Tax Act, 1961 (“ITA”)) recognises introduced subsequently)? any treaty entered into by the Indian government with another country for avoidance of double taxation, exchange of information Generally, where an assessee chooses to be governed by the and recovery of taxes, and allows any assessee to have recourse provisions of a tax treaty, the same would prevail over the ITA. to such treaty where the same is beneficial as compared to the However, the GAAR, overrides the provisions of any tax treaty, and provision of the ITA. even other provisions of the ITA, in order to determine the taxability of any transaction whose main purpose is the avoidance of tax and which is declared to be an “impermissible avoidance arrangement”. 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? GAAR would only be applicable on those arrangements where the aggregate tax benefit to all parties to the arrangement exceeds INR 30 million. Of the 96 Comprehensive Agreements that India has entered into, 41 of its treaties have a limitation of benefits (“LOB”) clause. The India-USA tax treaty has an extensive LOB article. Further, an 1.6 What is the test in domestic law for determining the LOB clause was also inserted in the India-Singapore Tax Treaty residence of a company? after renegotiation in 2005 and with the UAE in 2008. In recent years, especially after the OECD’s Report on Base Erosion and A domestic company, i.e. one which is incorporated in India or any Profit Shifting, India has renegotiated several treaties with countries other company which, in respect of its income liable to tax in India,

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has made the prescribed arrangements for declaration and payment fruits & vegetables, jaggery, food grains, rice & wheat, spices, tea, of dividends within India, is a resident of India. For a foreign coffee, sugar, vegetable/mustard oil, newsprint, coal, Indian sweets, company, with effect from 1 April 2016, corporate residence would silk and jute fibre in the case of goods. Hotels and lodges with be determined on the basis of the Place of Effective Management tariffs below Rs. 1,000, and services provided to the United Nations “PoEM” of a company. Therefore, any company whose PoEM is or specified international organisations, are exempt by way ofa in India would be a regarded as resident in India. For this purpose, refund in the case of services. PoEM would mean the place where the key management and commercial decisions that are necessary for the conduct of the 2.4 Is it always fully recoverable by all businesses? If not, business of an entity as a whole, are in substance made. Detailed what are the relevant restrictions? guidelines describing parameters to determine the PoEM of a India foreign company in India have been prescribed. Hitherto, a foreign Being an indirect levy, GST is recoverable by all businesses from company wholly controlled and managed from India was considered the customers. In other words, the burden of tax is shifted onto to be resident in India. the end-consumer. Further, every business is allowed to take a credit of tax or duty paid on inputs, be it goods or services. In cases 2 Transaction Taxes where businesses have an excess amount of input tax against which no output tax is available for set-off, a refund of such input tax is available. Therefore, effectively, a business only has to pay the 2.1 Are there any documentary taxes in your jurisdiction? differential amount of taxes paid on inputs or purchases and taxes collected on output or sale. The final consumer of the goods or In India, documentary taxes called Stamp Duty are levied on service bears the entire amount of tax or duty. certain types of documents or agreements. The levy of Stamp Duty is governed by Central legislation – namely, the Indian Stamp 2.5 Does your jurisdiction permit “establishment only” Act, 1899 – and the respective State legislation. The rate of duty, VAT grouping, such as that applied by Sweden in the the value on which the duty is levied, and the type of document Skandia case? on which it is levied, depend on the prevailing law of the state, wherever specifically provided, or otherwise the Indian Stamp Act. The concept of “group taxation” does not exist in India in either Certain documents have a per-unit duty, while others have an ad direct or indirect tax laws. Further, an Indian branch of a foreign valorem rate. company and a foreign branch of an Indian company are treated as separate legal entities for taxation purposes. 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? 2.6 Are there any other transaction taxes payable by companies? From 1 July 2017, India adopted a dual Goods and Service Tax (“GST”), which is a destination-based tax applicable on all India has introduced a tax called the Equalization Levy (“EL”), transactions involving the supply of goods and services for a with effect from 1 June 2016, which is charged on payments made consideration, subject to exceptions thereto. GST is imposed to a non-resident as consideration for online advertisement or concurrently by the Centre and States, i.e.: the Central Goods and provision of digital advertising space. An amount of 6% must be Service Tax (“CGST”), levied and collected by Central Government; deducted by any Indian resident or a non-resident with a permanent the State Goods and Service Tax (“SGST”), levied and collected establishment (“PE”) in India making such payment for business or by State Government/Union Territories with State Legislature; and professional purposes to a non-resident. Further, the consideration the Union Territory Goods and Service Tax (“UTGST”), levied and on which EL is applicable is exempted from Income Tax in the collected by Union Territories without State Legislatures, on intra- hands of such non-resident recipient. The EL is a special levy and State supplies of taxable goods and/or services. Inter-State supplies is not part of the Indirect Tax or Income Tax laws. of taxable goods and/or services will be subject to the Integrated Further, a Securities Transaction Tax is levied on the transfer of any Goods and Service Tax (“IGST”). security listed on any recognised stock exchange in India. Rates for CGST, IGST, SGST and UTGST as notified by the Government are 5%, 12%, 18% and 28% respectively. IGST is approximately a sum total of CGST and SGST/UTGST and will be 2.7 Are there any other indirect taxes of which we should levied by the Centre on all inter-State supplies. The maximum rate be aware? of CGST is 20%, while for IGST it is 40%. Certain taxes which will continue in the GST era are Basic Customs The following taxes are subsumed into GST: Central Excise Duty; Duty, Stamp Duty, Property Tax levied by Local Bodies, Profession Service Tax; Countervailing Duty (“CVD”) and Special CVD; Tax, Central Excise in respect of alcohol for human consumption, Central Sales Tax; surcharges and cesses in relation to the supply Central Excise/VAT on petroleum products, etc. of goods and services; Entertainment Tax (except those levied by local bodies); Tax on Lottery, Betting and Gambling; Entry Tax and Purchase Tax; VAT/Sales tax; Luxury Tax; and taxes on 3 Cross-border Payments advertisements.

3.1 Is any withholding tax imposed on dividends paid by 2.3 Is VAT (or any similar tax) charged on all transactions a locally resident company to a non-resident? or are there any relevant exclusions? Dividends paid by a domestic company to any person who is a In the case of GST, there are certain goods as well as services on shareholder (whether resident or non-resident) are exempted in which GST is imposed at a Nil rate. For example, milk, cereal,

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the hands of the shareholder. However, individuals, firms and deducted and paid to the credit of the government. In such cases, Hindu Undivided Families (“HUFs”) which are resident in India interest expenditure is disallowed for the purpose of computation of and receiving dividends in excess of INR 1 million will be taxed income tax of the payer. at the rate of 10% on the excess amount of dividends. Further, the domestic tax laws also say that a domestic company distributing 3.8 Is there any withholding tax on property rental dividends to its shareholders has to pay a Dividend Distribution Tax payments made to non-residents? (“DDT”) on such dividends at the rate of 15%. Property rental payments made to a non-resident would also be subject 3.2 Would there be any withholding tax on royalties paid to a withholding tax based on a maximum marginal rate of tax as India by a local company to a non-resident? applicable to such non-resident. In other words, individuals are subject to a withholding tax at the rate of 30% unless the individual obtains Royalties are subject to a withholding tax at the rate of 10%, added a certificate from the prescribed authority allowing withholding at a by applicable surcharge and cess as per the domestic tax law. lower rate. Persons other than individuals are subject to withholding at a rate of 40% on the gross amount. However, even non-individuals can obtain a certificate that would allow withholding at a lower rate. 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? 3.9 Does your jurisdiction have transfer pricing rules? Interest paid to a non-resident is generally subject to a 40% withholding tax, added by applicable surcharge and cess. However, when interest India has transfer pricing rules with respect to both domestic is paid for foreign currency borrowings, the withholding rate is 20% transactions and international transactions. However, with a view to plus surcharge and cess. In certain cases, where interest is payable in reducing the domestic transfer pricing burden, a recent amendment respect of long-term bonds and infrastructure debt funds, the lower has restricted the domestic transfer pricing applicability only to rate of 5% is applicable. This rate is also applicable in cases where domestic Indian entities enjoying benefits of any tax holiday/profit- a business trust (such as a REIT) distributes interest income received linked deduction where the aggregate of such a transaction exceeds from a special-purpose vehicle to its non-resident unitholders. INR 200 million.

3.4 Would relief for interest so paid be restricted by 4 Tax on Business Operations: General reference to “thin capitalisation” rules?

A section has recently been introduced into the ITA which provides 4.1 What is the headline rate of tax on corporate profits? for restrictions on interest deductibility in line with the OECD BEPS project, with effect from 1 April 2018. Profits of an Indian or domestic company are taxed at 30%, and those of a foreign company at 40%. However, a recent amendment As per this amendment, any debt issued by a non-resident associated has reduced the rate of tax to 25% on companies which have an enterprise, the interest expense of which exceeds INR 10 million, annual turnover of INR 500 million or less. Further, an additional shall not be allowed as a deduction in computation of its income. surcharge of 7% (2% for foreign companies) is levied on income Further, excess interest has been defined as total interest paid or exceeding INR 10 million up to INR 100 million, and 12% (5% payable in excess of 30% of EBITDA or the interest actually paid or for foreign companies) on income exceeding INR 100 million. payable, whichever is less. Additionally, an Education Cess of 2% of the tax (and surcharge, if any) and a Secondary & Higher Secondary Education Cess of 1% of 3.5 If so, is there a “safe harbour” by reference to which the tax (and surcharge, if any) are also levied. tax relief is assured?

4.2 Is the tax base accounting profit subject to The safe harbour rules in India recently underwent an amendment to adjustments, or something else? include intra-group loans to a non-resident wholly owned subsidiary, either in foreign currency or Indian currency. Indian tax law contains specific provisions for accounting treatment of certain income and certain expenditure that differs from the 3.6 Would any such rules extend to debt advanced by a treatment or requirements for the purpose of ordinary or non-tax third party but guaranteed by a parent company? accounting and reporting. As a result, the accounting profit is subject to certain adjustments for the purpose of calculating the Yes, as per the recent amendment to the ITA, the proviso to the taxable income and tax due thereon. interest deductibility section clarifies that when a debt is issued by Further, companies are also subject to the Minimum Alternate Tax a lender which is not an associated enterprise, but an associated (“MAT”) whereby, if the tax payable as normally calculated is lower enterprise provides either implicit or explicit guarantee to the lender than 18.5% on the book profits of the company, the company would or deposits a matching amount of funds, such debt would also be have to pay an MAT equal to 18.5% of the book profits, and the deemed to have been issued by an associated enterprise. differential amount (i.e. the difference between the tax liability as normally calculated and the MAT liability) is available as MAT credit which can be carried forward for 15 assessment years. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- resident? 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? There is no restriction on payment of interest by a local company to a non-resident under the ITA unless the withholding tax is not duly In 2015, the Indian government announced certain Income

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Computation and Disclosure Standards (“ICDS”), which become Property Tax, payable by the owner of real estate, is payable to the effective from April 2015 onwards. ICDSs apply to all taxpayers local municipal body; Profession Tax is levied in most States on following an accrual system of accounting for the purpose of salaried individuals and professionals, and the same is withheld and computation of income under the “heads” of “Profits and gains of paid by the employer. Further, Profession Tax is also applicable to business and profession” and “Income from other sources”. Further, each legal entity engaged in an active business or profession. the method of accounting prescribed in ICDS is mandatory but it is meant only for income computation and not maintenance of books of accounts. Most Indian companies follow the Indian Accounting 5 Capital Gains Standards (“IndAS”) that are based on the International Financial

Reporting Standards (“IFRS”) for the purpose of financial reporting, India 5.1 Is there a special set of rules for taxing capital gains and there are differences in several areas between the IndAS and and losses? the ICDS. Further, for the purpose of income tax, computation of depreciation Taxability of capital gains is governed by the provisions of the ITA. and treatment of income from sale or disposal of assets is based However, a computation mechanism is specifically provided, which on the “block of assets” concept; while for accounting purposes lays down the rules for the determination and taxation (or treatment) the same is calculated for individual assets. Further, for income of capital gains and losses. The rate of tax on capital gains is lower tax purposes, the income earned is segregated into five “heads” of as compared to other sources of income in most cases. Further, income, and there are specific computation rules for each head, and capital gains that arise from assets considered long-term enjoy a also for adjustment of losses within the head and between different lower rate of tax, whereas short-term capital gains are charged tax at heads, and for the manner of carrying forward such losses, while the the regular rate of income tax. treatment as per IndAS is different. While computing long-term capital gains, the benefit of indexation Further, adjustments also have to be made for certain deductions or is available based on the cost inflation index, thereby resulting in accounting provisions that are disallowed (or limited) for income a higher deduction of cost base as compared to the original cost of tax purposes, as well as for certain provisions or deductions that acquisition. are allowed to be taken over-and-above the expenses accounted Further, in cases of non-residents acquiring assets in foreign for; certain income may be exempt from taxation; and the quantum currency, gains are computed in foreign currency and thereafter of income that is taxable may differ from accounting revenue arrive at the resultant gain by applying the prescribed conversion recognised. exchange rate. The concept of deferred tax liabilities and assets exists in the Indian Set-off and carry-forward of losses is permissible intra-group and accounting space, but not for tax purposes. inter-group, subject to certain terms and conditions.

4.4 Are there any tax grouping rules? Do these allow 5.2 Is there a participation exemption for capital gains? for relief in your jurisdiction for losses of overseas subsidiaries? India does not have the concept of a participation exemption for capital gains. Irrespective of the participation of a shareholding, There is no concept of tax grouping rules in Indian tax law and, capital gains on the transfer of shares or any other security are therefore, there is no relief for losses of overseas subsidiaries. chargeable to tax on a uniform basis.

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

The tax losses of a private limited company survive a change in There are certain roll-over or capital gains tax deferment options ownership if such change does not result in a change in voting available to taxpayers that earn capital gains with specific conditions power up to 49% of the voting power in the company. In other and assets in which the gains must be reinvested with a prescribed words, not less than 51% of the voting power should remain the lock-in period. same to continue the carry-forward of tax losses in a company.

5.4 Does your jurisdiction impose withholding tax on the 4.6 Is tax imposed at a different rate upon distributed, as proceeds of selling a direct or indirect interest in local opposed to retained, profits? assets/shares?

There is no additional tax on “retained profits”. Once corporate tax In India, there are no withholding taxes on proceeds of transfer is paid on the profits and the same are reinvested in the business, or – direct or indirect – of local assets/shares, except in two cases. simply retained and not distributed, there is no additional tax levied. Indirect holding of local assets through foreign entities, whose value is substantially derived (i.e. more than 50%) from such local asset, is taxable in India and therefore is subject to withholding tax. 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the Firstly, if the local asset being transferred is immovable property occupation of property? other than agricultural land, a 1% withholding tax is levied if the sale value exceeds INR 5 million. Secondly, if the seller of the local There are many minor taxes that businesses may have to pay in the asset/share is a non-resident, then the buyer, be it a non-resident or form of annual or periodic fees to various government or municipal a resident, has to withhold taxes at the rate of tax prescribed for the bodies, depending on the State where the business is located. specific nature of capital gains on the asset being transferred.

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6 Local Branch or Subsidiary? 7 Overseas Profits

6.1 What taxes (e.g. capital duty) would be imposed upon 7.1 Does your jurisdiction tax profits earned in overseas the formation of a subsidiary? branches?

At the time of formation of a subsidiary, registration fees are levied Yes, overseas branches of an Indian company would be taxed in on the amount of authorised capital of the company, subject to a India, since taxes are levied on the global income of a resident maximum ceiling. Also, Stamp Duty is levied by different States entity. However, credit for the taxes paid on such income would

India on the Memorandum of Association and Articles of Association of be available. the company (documents required to be filed while incorporating a company), the basis of which differs from one State to another. 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident Dividends received from a non-resident company, in which the company (for example, a branch profits tax)? recipient local company holds 26% or more of the nominal share capital, are taxable at 15% (plus applicable surcharge and cess) A locally formed subsidiary is considered an Indian or domestic while, if the shareholding is less than 26%, the dividends would be company and is therefore subject to tax in the same manner as any taxed at the normal headline rate of tax. other Indian company, and is taxed at 30% on its taxable income. A branch of a non-resident company is, however, taxed at 40% on its 7.3 Does your jurisdiction have “controlled foreign taxable income, since it is considered a foreign company. A branch company” rules and, if so, when do these apply? of a foreign company is taxed only on income accruing or arising in India or received in India, whereas a domestic company is taxed on There are no specific rules regarding “controlled foreign companies” its global income whether or not it is accrued or received in India. in Indian tax law at present. Presently, there is no branch profit tax payable specifically by local branches of non-resident companies; only income tax is payable on taxable income. 8 Taxation of Commercial Real Estate

6.3 How would the taxable profits of a local branch be 8.1 Are non-residents taxed on the disposal of determined in its jurisdiction? commercial real estate in your jurisdiction?

India follows the same rules for the determination of profits of If a non-resident disposes of real estate (commercial or residential) branches and PEs, such as a company having a physical presence. located in India, the capital gains arising from such disposal would However, head offices and general administrative overheads are not be subject to tax in India in the same manner as they are taxed in fully deductible, but are allowed only up to 5% of the taxable profit. the hands of a resident. The tax would differ based on the period of When it is not possible to determine the income of the branch due holding – if the asset is a long-term asset, the cost would be indexed to non-maintenance of records, a formulatory approach has been and the rate of tax is lower, while if the asset is a short-term asset, prescribed for the apportionment of income based on local and the cost cannot be indexed and the rate of tax is higher than for global turnover. long-term assets.

6.4 Would a branch benefit from double tax relief in its 8.2 Does your jurisdiction impose tax on the transfer of jurisdiction? an indirect interest in commercial real estate in your jurisdiction? A local branch of a foreign entity cannot obtain relief from double taxation in India. However, in a triangular case, they can apply the If any share or interest in a foreign company or entity derives its treaty of the source country and the residence country of the head value substantially from the assets, whether real estate or other, office for the purpose of withholding. located in India, then such share or interest is deemed to be situated in India. Thus, any income arising from the transfer of such 6.5 Would any withholding tax or other similar tax be share or interest is deemed to accrue or arise in India and is taxed imposed as the result of a remittance of profits by the accordingly. The share or interest would be deemed to derive value branch? substantially from Indian assets if they constitute 50% or more of the total value of such share or interest. Further, in the case of Repatriation of profits to the head office would not be subject to domestic companies holding immovable property as the only asset, withholding taxes, but the same would require Indian taxes to be there is no specific provision targeting the transfer of such company paid on such profit and documentary evidence to support the same. as an indirect transfer of immovable property.

8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent?

In the past few years, the government has come out with new provisions and amendments to existing provisions to rationalise

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the REIT tax regime in India. Subject to certain conditions and which are self-contained tax offices under the Department of requirements, REITs have been granted pass-through status and Revenue which act as a single-window clearance point for all exemption from paying Dividend Distribution Taxes and the income matters relating to Income Tax, Corporate Tax and Goods & would be taxed in the hands of the unitholders instead. Further, Service Tax. the provisions regarding a “business connection” (which is pertinent Eligible taxpayers opting for assessment by an LTU can file their in determining taxability of income in the hands of non-residents) excise return, direct tax return and service tax return at such LTUs for REITs sponsored by foreign funds have been relaxed to exclude and, for all practical purposes, will be assessed to these taxes Indian fund managers of such foreign REITs from being considered thereunder. as “business connections” in India. However, this does not result in a reduction of tax. India

9 Anti-avoidance and Compliance 10 BEPS and Tax Competition

9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? India first introduced the General Anti-Avoidance Rules (“GAAR”) in the domestic tax law in 2012, but the same had been made India has introduced several provisions in the ITA in response to effective from 1 April 2017. These rules are also, in effect, anti- the BEPS Action Plans such as Country-by-Country Reporting, abuse rules, since they give the power to the tax administration to transfer pricing documentation requirements, anti-avoidance rules override the provisions of tax treaties. to minimise treaty abuse, a tax on digital businesses, a limit on interest deduction, secondary adjustment, etc. 9.2 Is there a requirement to make special disclosure of avoidance schemes? 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is There is no special or additional disclosure requirement in respect of recommended in the OECD’s BEPS reports? aggressive tax planning schemes, but true and complete disclosure of all information regarding transactions is required to be made to India has already introduced an Equalization Levy at the rate the tax authorities and specific information can be called for in order of 6% on specified payments made by residents or permanent to determine whether the taxpayer has resorted to an avoidance establishments of non-residents to other non-residents. scheme.

10.3 Does your jurisdiction support public Country-by- 9.3 Does your jurisdiction have rules which target not Country Reporting (CBCR)? only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax avoidance? India has incorporated provisions in the ITA for Country-by-Country Reporting which came into effect on 1 April 2017. The provisions are in line with the guidelines of BEPS Action Plan 13. The GAAR also covers connected persons and accommodating parties under its purview and, consequently, they may also face implications if they are found to be part of an impermissible 10.4 Does your jurisdiction maintain any preferential tax avoidance arrangement entered into in order to obtain tax benefits. regimes such as a patent box?

India has introduced the patent box regime in India with effect from 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural April 2017, which provides for a reduced 10% tax on the gross benefits only or result in a reduction of tax? royalty received by a resident for a patent developed and registered in India. For a patent to be considered “developed in India”, at Although India does not have “co-operative compliance”, the least 75% of the expenditure for such development must have been Ministry of Finance has set up Large Taxpayer Units (“LTU”), incurred in India.

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T. P. Ostwal Siddharth Banwat T. P. Ostwal & Associates LLP, T. P. Ostwal & Associates LLP, Chartered Accountants Chartered Accountants Suite #1306/07, Lodha Supremus Suite #1306/07, Lodha Supremus Senapati Bapat Marg, Lower Parel Senapati Bapat Marg, Lower Parel Mumbai – 400 013, Maharashtra Mumbai – 400 013, Maharashtra India India

Tel: +91 22 4945 4000 Tel: +91 22 4945 4006 Email: [email protected] / [email protected] Email: [email protected]

India URL: www.tpostwal.in URL: www.tpostwal.in

T. P. Ostwal is the Managing Partner of T. P. Ostwal & Associates LLP, Siddharth Banwat is a Partner with T. P. Ostwal & Associates LLP and Mumbai – a firm of Chartered Accountants with almost four decades handles the practice areas of international taxation, transfer pricing and of experience in providing a variety of high-quality advisory and valuations. He is a Bachelor of Commerce & Computer Applications assurance services. He is also founding partner of the firm DTS & (BCA) from the University of Nagpur; a Chartered Accountant; a Associates – primarily an audit firm headquartered in Mumbai. Company Secretary; and holds an Advanced Diploma in International Taxation from the Chartered Institute of Taxation, UK (specialising in He was the first Vice President of the executive committee of the transfer pricing and Singapore taxation). International Fiscal Association’s (IFA) for the Netherlands, Chairman of IFA-India and a member of the UN Sub-Committee on Transfer He has advised various Indian and multinational clients on cross- Pricing for Developing Countries since 2012, which developed the first border transaction tax and transfer pricing issues, regulatory aspects UN Transfer Pricing Guidelines and those of several committees of related to inbound and outbound investments; and has represented the Indian government, Indian Central Board of Direct Taxes and the various clients before the tax and regulatory authorities and other OECD. appellate bodies for matters relating to income tax, including transfer pricing, international taxation and foreign exchange regulations. He is a member of the visiting faculty of International Tax on the LL.M. course at Vienna University, Austria. Mr. Banwat is a member of the International Tax Committee of the Bombay Chartered Accountants’ Society and is on the Managing Mr. Ostwal was ranked 11th in the top 50 Tax Professionals in the Committee of the Western Region Chapter of the International Fiscal world for the year 2006–2007 by Tax-Business magazine, UK, in Association (IFA). He has contributed articles on several topics relating November 2006. to international taxation, transfer pricing, GAAR, etc. He has been nominated as country reporter on the subject ‘General Anti Avoidance Rules’, to be published in IFA Cahier for the IFA 2018 Congress to be held in Seoul.

T. P. Ostwal & Associates LLP, Chartered Accountants is a professional services firm focused on providing high-quality services to its clients in the tax, consulting and regulatory spheres and bringing technical and practical business advice, with consulting, tax and regulatory inputs providing added value for the client. The firm is engaged in providing a wide spectrum of services, providing consultancy on: inbound and outbound investment; corporatetax; management; and exchange control regulations. Furthermore, the firm offers advice on audits and investigations, and consultancy and compliance services on mergers & acquisitions, foreign collaborations, domestic taxation and international taxation, alongside strategic planning & compliance and service tax matters. The firm was rated as the best Tier-3 firm for ‘World Tax’ from 2009 to 2016 successively in The Comprehensive Guide to the World’s Leading Tax Firms, and has been consistently rated as one of the top 10 firms in India in the field of transfer pricing advisory services.

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Ireland Andrew Quinn

Maples and Calder David Burke

1 Tax Treaties and Residence 1.6 What is the test in domestic law for determining the residence of a company?

1.1 How many income tax treaties are currently in force in your jurisdiction? A company is resident in Ireland if it is incorporated in Ireland or, if not Irish-incorporated, is centrally managed and controlled in Ireland. This test is based on case law and focuses on board control, As of August 2017, 73 treaties have been signed, of which 72 are but is a question of fact based on how decisions of the company are in force. made in practice. If a company incorporated in Ireland is managed and controlled in a 1.2 Do they generally follow the OECD Model Convention treaty state, it may be regarded as resident in that other state under or another model? the “tie-breaker” clause of Ireland’s double taxation treaty (“DTT”) with that state. Generally speaking, they follow the OECD Model.

1.3 Do treaties have to be incorporated into domestic law 2 Transaction Taxes before they take effect? 2.1 Are there any documentary taxes in your jurisdiction? Yes, but a number of Irish domestic provisions, including certain exemptions from withholding tax, take effect immediately a treaty Generally a document is chargeable to stamp duty, unless exempt, is signed. where the document is both: ■ listed in Schedule 1 to the Irish Stamp Duties Consolidation 1.4 Do they generally incorporate anti-treaty shopping Act 1999 (the principal head of charge is a transfer of any rules (or “limitation on benefits” articles)? Irish property); and ■ executed in Ireland or, if executed outside Ireland, relates to No, other than in respect of certain treaties such as the treaty with property situated in Ireland or to any matter or thing done or the US. to be done in Ireland. Additionally, the OECD’s Base Erosion and Project Shifting project The transferee is liable to pay stamp duty and a return must be recommended that members include in their double tax treaties a filed and stamp duty paid within 45 days of the execution of the limitation-on-benefits test and/or a principal purpose test (“PPT”) as instrument. a condition for granting treaty relief. This recommendation will be Stamp duty is charged on the higher of the consideration paid for, or implemented by means of a multilateral instrument (“MLI”). The the market value of, the relevant asset at the following rates: MLI was signed by Ireland on 7 June 2017 and Ireland has indicated ■ Shares or marketable securities: 1%. that it will include the PPT in its treaties. Ireland’s double tax treaty ■ Non-residential property: 2%. with another country will be modified by the MLI where both treaty partners have ratified the MLI. ■ Residential property: 1% on consideration up to EUR 1 million and 2% on the excess. There are numerous reliefs and exemptions including: 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or ■ Group relief on transfers between companies where transferor introduced subsequently)? and transferee are 90% associates at the time of execution and for two years afterwards. No, Irish double tax treaties prevail over domestic law. As noted ■ Reconstruction relief on a share-for-share exchange or under question 1.3, certain domestic exemptions mirror the treaty share-for-undertaking transaction, subject to meeting certain conditions. relief and indeed may be more favourable and apply before a treaty comes into force. ■ Exemptions for transfers of intellectual property, of non-Irish shares and land, loan capital, aircraft and ships.

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Excise duty applies at varying rates to mineral oils, alcohol and 2.2 Do you have Value Added Tax (or a similar tax)? If so, alcoholic beverages, tobacco products and electricity, and will also at what rate or rates? apply to certain premises and activities (e.g. betting and licences for retailing of liquor). VAT is a transaction tax based on EU directives as implemented There is an insurance levy on the gross amount received by an into Irish law. It is chargeable on the supply of goods and services insurer in respect of certain insurance premiums. The rate is 3% for in Ireland and on goods imported into Ireland from outside the EU. non-life insurance and 1% for life insurance. There are exceptions Persons in business in Ireland generally charge VAT on their for re-insurance, voluntary health insurance, marine, aviation supplies, depending on the nature of the supply. and transit insurance, export credit insurance and certain dental

Ireland The standard VAT rate is 23% but lower rates apply to certain insurance contracts. supplies of goods and services, such as 13.5%, e.g. on supplies of land and property, and 0%, e.g. on certain food and drink, books, and children’s clothing. 3 Cross-border Payments

2.3 Is VAT (or any similar tax) charged on all transactions 3.1 Is any withholding tax imposed on dividends paid by or are there any relevant exclusions? a locally resident company to a non-resident?

The application of VAT to a supply of goods or services depends Dividend withholding tax at 20% applies to dividends paid to non- on the place of supply of those goods or services. For example, resident persons. However, a number of exemptions apply in that business-to-business supplies of services take place where the case, including where payments are made to: recipient is established. ■ persons resident in an EU Member State (other than Ireland) The supply of the following goods and services is exempt from VAT: or a country with which Ireland has concluded a DTT (“EU/ treaty state”); most banking, insurance and financial services; medical services; education and training services; and passenger transport. ■ companies ultimately controlled by persons who are resident in an EU/treaty state; and The transfer of certain assets of a business between accountable ■ companies whose shares are substantially and regularly persons is not subject to VAT where the assets constitute an traded on a recognised stock exchange in an EU/treaty state undertaking capable of being carried on independently. or where the recipient company is a 75% subsidiary of such a company or is wholly owned by two or more such companies. 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? VAT incurred will generally be recoverable as long as it is incurred by a taxable person (a person who is, or is required to be, VAT- Royalties are not generally subject to withholding tax unless paid in registered) for the purpose of making taxable supplies of goods and respect of an Irish patent. services. VAT incurred by a person who makes exempt supplies is No withholding tax will apply to royalties paid to a resident of an not recoverable. Where a taxable person makes exempt and non- EU/treaty state or paid between “associated companies” in the EU. exempt or non-business supplies, VAT recovery will be allowed in respect of the non-exempt supplies only. However, if the It is Irish Revenue’s administrative practice since 2010 not to charge VAT incurred cannot be attributed to either (for example, general withholding tax on royalties payable under a licence agreement overheads), the VAT must be apportioned between the taxable and executed in a foreign territory which is subject to the law and exempt supplies. jurisdiction of a foreign territory (subject to the Irish company’s obtaining advance approval from Revenue).

2.5 Does your jurisdiction permit “establishment only” VAT grouping, such as that applied by Sweden in the 3.3 Would there be any withholding tax on interest paid Skandia case? by a local company to a non-resident?

No. Irish Revenue is still considering the implications of the Payments of “yearly” interest by an Irish corporation to a non- decision. resident are normally subject to withholding tax at 20%. There are wide exemptions from this requirement, the most notable of which include payments: 2.6 Are there any other transaction taxes payable by companies? ■ between “associated companies” under the EU Interest and Royalties Directive; Certain taxes, including interest withholding tax, dividend ■ by a company in the ordinary course of its trade or business withholding tax, professional services withholding tax and relevant to a company resident in an EU/treaty state (provided the payments do not relate to an Irish branch or agency of the contract tax, may be payable depending on the nature of the lender), where that state imposes a tax that generally applies transaction and the type of business carried on by the parties to the to interest receivable in that state by companies from sources transaction. outside that state; ■ on quoted Eurobonds; or 2.7 Are there any other indirect taxes of which we should ■ by an Irish “section 110 company” to a person resident in an be aware? EU/treaty state, other than where it relates to an Irish branch or agency. Customs duties are payable on goods imported from outside the EU.

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3.4 Would relief for interest so paid be restricted by 4 Tax on Business Operations: General reference to “thin capitalisation” rules?

4.1 What is the headline rate of tax on corporate profits? There are no “thin capitalisation” rules applicable in Ireland. It is nonetheless possible in certain limited cases that the interest Ireland has two rates of corporation tax, a 12.5% rate and a 25% may be reclassified as a distribution preventing such interest from rate. being tax-deductible. The 12.5% rate applies to the trading profits of a company which carries on a trade in Ireland. There is no precise definition of what

3.5 If so, is there a “safe harbour” by reference to which constitutes a trade for this purpose. As a general rule, it would Ireland tax relief is assured? require people on the ground in Ireland carrying out real economic activity on a regular or habitual basis, and normally with a view to This is not applicable in Ireland. realising a profit. The corporation tax rate of 25% applies in respect of passive income, 3.6 Would any such rules extend to debt advanced by a profits arising from a possession outside of Ireland (i.e. foreign third party but guaranteed by a parent company? trade) and profits of certain trades such as dealing in or developing land and mineral exploration activities. This is not applicable in Ireland. 4.2 Is the tax base accounting profit subject to 3.7 Are there any other restrictions on tax relief for adjustments, or something else? interest payments by a local company to a non- resident? A company’s profits for tax purposes will follow its accounts, provided that they are prepared in accordance with generally Interest is generally deductible if provided for as an expense in the accepted accounting principles, subject to specific adjustments accounts of the company, and is incurred wholly and exclusively for required by Irish tax legislation. the purposes of its trade.

Subject to meeting certain conditions, interest incurred in lending 4.3 If the tax base is accounting profit subject to money to a trading or rental company or in acquiring shares in a adjustments, what are the main adjustments? trading or rental company or a holding company of such a company, should also be deductible. Revenue expenses which are not incurred wholly and exclusively Tax relief for interest might not be available where it is paid for for the purposes of the trade are not deductible from the company’s acquiring shares in or lending to a connected company or for the taxable profits. purposes of acquiring a trade or business of that or another connected While depreciation of assets is not generally deductible, tax company (irrespective of the payee’s country of residence). depreciation can be taken into account for “plant and machinery” While the new EU anti-tax avoidance directive contains certain and “industrial buildings” subject to meeting certain conditions. restrictions on borrowing costs, it is not expected to be implemented It is possible to carry forward trading profits arising from the same in Ireland until 2024. trade and surrender losses from group companies to reduce taxable profits. 3.8 Is there any withholding tax on property rental payments made to non-residents? 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas Withholding tax applies at a rate of 20% on rent paid directly to a subsidiaries? non-resident landlord in respect of Irish situate property (payable to Irish Revenue by the tenant). Yes. Companies can be grouped for different tax purposes (but are The appointment of an Irish tax-resident agent by the non-resident not taxed on the basis of consolidated accounts). landlord to collect rental payments on his behalf excludes the For loss relief and capital gains tax (“CGT”) purposes, a group application of withholding tax on the rent altogether. consists of a principal company and all its effective 75% subsidiaries, provided that both the principal and subsidiary company are EU or EEA resident. 3.9 Does your jurisdiction have transfer pricing rules? An Irish company will be allowed relief for losses in an Irish Yes, Ireland has had transfer pricing rules since 2011 and these subsidiary and for losses in an overseas subsidiary provided the loss apply to arrangements entered into between associated companies is not available for use by the overseas subsidiary. Capital losses where one of them carries on a trade. If an arrangement is not made cannot be surrendered between members of a CGT group. at arm’s length, an adjustment will be made to the trading profits Capital assets may be transferred between group members on a to reflect an arm’s length amount. The Irish tax legislation refers no gain / no loss basis. This has the effect of postponing liability to the OECD Transfer Pricing Guidelines for the interpretation of until the asset is transferred outside the group or until the company the arm’s length principle. There is an exemption for small and holding the asset is transferred outside the group. medium-sized enterprises. Payments between members of a 51% group can be made without withholding.

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Transfers between associated companies are exempt from stamp duty where certain conditions are met. 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local It is possible to apply for a VAT grouping of companies established assets/shares? in Ireland that are under common control. Transactions between these companies are disregarded for VAT purposes. Where a company disposes of Irish real estate, or shares deriving more than 50% of their value from Irish real estate, for 4.5 Do tax losses survive a change of ownership? a consideration exceeding €500,000, or in the case of residential property exceeding €1,000,000, the purchaser is obliged to withhold Tax losses may survive a change in ownership but there are rules 15% of the sales proceeds unless the purchaser obtains a CG50 Ireland denying the use of carry-forward losses in certain circumstances clearance certificate from Irish Revenue. Such certificate will be following such a change. issued where the vendor is resident in Ireland, the CGT has been paid or no CGT arises.

4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits? 6 Local Branch or Subsidiary?

A surcharge of 20% applies in respect of “estate and investment” income retained by “close” companies. In general terms, close 6.1 What taxes (e.g. capital duty) would be imposed upon companies are ones which are controlled by five or fewer people. the formation of a subsidiary? A surcharge of 15% will also be applicable in respect of retained professional income in cases of close “professional” service No taxes would be imposed. companies. 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident 4.7 Are companies subject to any significant taxes not company (for example, a branch profits tax)? covered elsewhere in this chapter – e.g. tax on the occupation of property? Yes. An Irish-resident subsidiary would pay corporation tax on its Other than “local” rates which may apply to the occupation of worldwide income and gains, whereas a branch would be liable commercial property, no they are not. to corporation tax only on the items listed in question 6.3. The charge to Irish corporation tax only applies where the non-resident company is carrying on a trade in Ireland through the branch. A 5 Capital Gains branch set up for investment purposes only, and not carrying on a trade, is not subject to Irish corporation tax, though certain Irish source income (mainly rent and interest) may be subject to income 5.1 Is there a special set of rules for taxing capital gains tax either through withholding or by way of income tax charge, and losses? subject to any available exemptions. A branch would not be subject to a branch profits tax. Yes, there is a separate set of rules for computing capital gains. Those rules are broadly as follows: ■ costs of acquisition and disposal are deducted from disposal 6.3 How would the taxable profits of a local branch be proceeds; determined in its jurisdiction? ■ enhancement expenditure is generally deductible where such expenditure is reflected in the value of the asset; and A non-resident company carrying on a trade though an Irish branch is subject to Irish tax on the following items: ■ the application of capital losses carried forward may reduce the amount of gain. ■ the trading income arising directly or indirectly through or from the branch; The rate of tax imposed upon capital gains is currently 33% and ■ income from property or rights used by or held by or for the therefore differs from the rate imposed on business profits (12.5% branch; and for trading income, 25% for investment income). ■ such gains as, but for the Corporation Tax Acts, would be chargeable to capital gains tax in the case of a company not 5.2 Is there a participation exemption for capital gains? resident in Ireland. The profits subject to tax may arise from within Ireland and from Where an Irish company disposes of shares in a company resident abroad. in Ireland or an EU/treaty state in which it has held at least 5% of the ordinary shares for more than 12 months, any gain should be exempt from CGT. The subsidiary must carry on a trade, or else the 6.4 Would a branch benefit from double tax relief in its jurisdiction? activities of the disposing company and all of its 5% subsidiaries taken together must amount to trading activities. Irish domestic legislation does not give treaty relief against Irish tax unless the person claiming credit is resident in Ireland for the 5.3 Is there any special relief for reinvestment? accounting period in question. This means that the Irish branch of a non-resident company cannot claim treaty relief. No, there is no such relief.

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tax on income and chargeable gains of its property rental business, 6.5 Would any withholding tax or other similar tax be provided it meets certain conditions as to Irish residence, listing of imposed as the result of a remittance of profits by the shares (on an EU stock exchange), derives 75% of its assets and profits branch? from its property rental business, and distributes 85% of its property income by dividend to shareholders in each accounting period. No such tax would be imposed. Income tax can apply where a dividend is paid to a shareholder who holds at least 10% of the share capital or voting rights in the REIT. 7 Overseas Profits 9 Anti-avoidance and Compliance Ireland 7.1 Does your jurisdiction tax profits earned in overseas branches? 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? Profits in overseas branches are, as a general rule, taxed in Ireland because an Irish-resident company is subject to corporation tax on Ireland has a general anti-avoidance provision, section 811 of the its worldwide profits. It is nonetheless generally possible to claim a Irish Taxes Consolidation Act 1997, the applicability of which was tax credit for the foreign tax paid. considered by the Irish Supreme Court in O’Flynn Construction Limited & Others v The Revenue Commissioners. 7.2 Is tax imposed on the receipt of dividends by a local Section 811 applies where Irish Revenue forms an opinion that a company from a non-resident company? transaction gives rise to a tax advantage for the taxpayer, was not undertaken for any other purpose but obtaining that advantage, and Dividends received from a non-resident company are generally would be a misuse or abuse of any relief sought by the taxpayer. taxed at 25% but the lower rate of 12.5% applies in many cases including where dividends are paid out of the “trading profits” of 9.2 Is there a requirement to make special disclosure of a company resident in an EU/treaty state or in a country which is a avoidance schemes? signatory to the Convention on Mutual Administrative Assistance in Tax Matters. In any event, tax credits can be claimed, up to the Irish Yes, Ireland has a mandatory disclosure regime for tax avoidance corporation tax due, for: transactions similar to the regime in the UK. Section 817D – ■ withholding tax suffered on the dividend; and Section 817T of the Taxes Consolidation Act (“TCA”) deal with the ■ underlying tax suffered on the trading profits out of which the mandatory reporting of certain defined transactions. dividend was paid. The regime aims to enforce promoters, advisors, and on occasion the It is possible to pool and carry forward excess foreign tax credits and clients who implement tax avoidance schemes, to inform Revenue offset these against Irish corporation tax on other foreign dividends. of the details of such schemes. The promoter includes persons involved in designing, managing 7.3 Does your jurisdiction have “controlled foreign or marketing the transaction. The promoter is entitled to assert company” rules and, if so, when do these apply? legal professional privilege when making the disclosure, subject to informing the taxpayer of its obligation to disclose the transaction There are no controlled foreign company (“CFC”) rules in Ireland directly to Revenue. except, in certain limited cases, for close companies. Failure to comply can result in penalties determined by the court in amounts ranging up to a maximum of €4,000 plus €500 per day for each day the scheme remains unnotified after the due date for 8 Taxation of Commercial Real Estate notification.

8.1 Are non-residents taxed on the disposal of 9.3 Does your jurisdiction have rules which target not only commercial real estate in your jurisdiction? taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax avoidance? CGT arises on the disposal of commercial Irish real estate by non- residents. In addition to the mandatory disclosure regime, in June 2017 the European Commission proposed new tax transparency rules for intermediaries to help tackle tax abuse and ensure fairer taxation in 8.2 Does your jurisdiction impose tax on the transfer of the EU. The aim of the proposal is to tackle the central role played an indirect interest in commercial real estate in your by intermediaries in international tax avoidance and evasion. The jurisdiction? proposal focuses on intermediaries who actively design, promote and sell schemes with the specific aim of helping their clients to CGT arises on the disposal of shares (other than shares quoted on avoid taxation. a stock exchange) deriving their value, or the greater part of their value, directly or indirectly from Irish commercial real estate. 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural 8.3 Does your jurisdiction have a special tax regime benefits only or result in a reduction of tax? for Real Estate Investment Trusts (REITs) or their equivalent? Yes, in January 2017 the Irish Revenue Commissioners (“Irish Revenue”) relaunched its cooperative compliance framework Ireland introduced a REIT regime in 2013. A REIT is exempt from (“CCF”) for large cases division (“LCD”) taxpayers.

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The CCF is designed to promote open communication between measures not existing in other OECD countries, such as a legislative Irish Revenue and larger taxpayers, reflecting the mutual interest in GAAR (general anti-avoidance rule). being certain about tax liabilities and ensuring there are no surprises in later reviews. It is entirely voluntary and does not result in a 10.3 Does your jurisdiction support public Country-by- reduction of tax. Country Reporting (CBCR)?

10 BEPS and Tax Competition Yes. Regulations implementing CBCR apply from 1 January 2016. Groups with an Irish presence and turnover exceeding €750,000,000 will need to prepare to implement the rules in 2016, and generate

Ireland 10.1 Has your jurisdiction introduced any legislation reports in 2017. in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box? In response to certain themes emerging from the BEPS consultation, Ireland amended its corporate tax residence rules in order to phase out the so-called “double Irish” structure used by certain multinational Ireland has recently introduced a “knowledge development box” groups. (“KDB”) which provides for an effective 6.25% tax rate on income from IP and software that was improved, created or developed in It has also introduced country-by-country reporting and updated its Ireland. transfer pricing legislation as recommended in the BEPS reports. Additionally, Ireland amended its legislation in relation to securitisation companies (section 110 TCA) in 2011 in advance of 10.2 Does your jurisdiction intend to adopt any legislation BEPS, to prevent certain possible cross-border “double non-taxation” to tackle BEPS which goes beyond what is results arising. recommended in the OECD’s BEPS reports?

No. Ireland’s objective is to adopt best international practice. Preceding BEPS, Ireland already operated certain anti-avoidance

Andrew Quinn David Burke Maples and Calder Maples and Calder 75 St. Stephen’s Green 75 St. Stephen’s Green Dublin 2 Dublin 2 Ireland Ireland

Tel: +353 1 619 2038 Tel: +353 1 619 2779 Email: [email protected] Email: [email protected] URL: www.maplesandcalder.com URL: www.maplesandcalder.com

Andrew is Head of Tax at Maples and Calder. He is an acknowledged David is a highly experienced tax specialist and advises on international leader in Irish and international tax and advises companies, investment transactions structured in and through Ireland. He works with funds, banks and family offices on Ireland’s international tax offerings. companies, banks and investment funds and their advisors to structure Andrew is Chairman of the Irish Debt Securities Association and and implement capital markets, structured finance, asset finance and also the International Fiscal Association. He is a member of the Tax funds transactions. Committee of the Law Society of Ireland and the Irish Funds Industry David joined Maples and Calder in 2013 from an Irish corporate law Association. firm. He trained in London and was Special Counsel in the London Prior to joining Maples and Calder, Andrew was a senior partner with a office of a New York law firm. large Irish law firm and, before that, a tax consultant with Ernst & Young. David holds the Chartered Tax Advisor qualification in both the UK He is recommended by a number of directories including Chambers, and Ireland. The Legal 500, PLC Which Lawyer?, Who’s Who Legal, World Tax, Best Lawyers, International Tax Review’s World Tax Guide and the Tax Directors Handbook. Andrew has also been endorsed in Practical Law Company’s Tax on Transactions multi-jurisdictional guide.

Maples and Calder is a leading international corporate and finance law firm advising on the laws of the Cayman Islands, Ireland and the British Virgin Islands. The firm’s affiliated organisation, MaplesFS, provides specialised fiduciary, corporate and administration services to finance vehicles and funds. With over 1,500 staff worldwide, the Maples group has offices in Bermuda, Boston, the British Virgin Islands, the Cayman Islands, Delaware, Dubai, Dublin, Hong Kong, London, Luxembourg, Montreal, the Netherlands, New York, San Francisco and Singapore. Established in 1967, Maples and Calder celebrates 50 years of award-winning excellence in 2017.

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Italy Paolo Ludovici

Ludovici Piccone & Partners Stefano Tellarini

of the tax year (i.e. more than 183 days in a year), it has, in the 1 Tax Treaties and Residence Italian territory, either: (i) its legal seat; 1.1 How many income tax treaties are currently in force in (ii) its place of effective management; or your jurisdiction? (iii) its main business purpose (defined as the activity which is essential to reach the primary goals of the company according Italy has concluded 94 tax treaties (currently in force) for the with the law, the deed of incorporation or the articles of avoidance of double taxation and the prevention of fiscal evasion association). with respect to taxes on income and capital. Other treaties have In addition, Italian tax law contains some anti-abuse provisions. recently been signed but the related process of ratification still needs For example, unless proof to the contrary is provided, a foreign to be concluded. company is deemed to be resident in Italy if it controls an Italian company and either: (i) is directly or indirectly controlled by Italian 1.2 Do they generally follow the OECD Model Convention resident persons; or (ii) its board of directors or other governing or another model? body is composed, in the majority, of Italian-resident persons.

Most income and capital tax treaties concluded by Italy follow, in 2 Transaction Taxes general terms, the OECD Model Convention.

1.3 Do treaties have to be incorporated into domestic law 2.1 Are there any documentary taxes in your jurisdiction? before they take effect? Italy has both a registration tax and a financial transaction tax In order for tax treaties to take effect, they have to be incorporated (“FTT”). into Italian domestic law through a ratification process. Registration tax is levied on certain transfers of assets and rights which are realised through written acts filed for registration in Italy at rates ranging from 0.5% to 3% (higher rates may apply to transfers 1.4 Do they generally incorporate anti-treaty shopping of immovable properties). In general, registration tax applies at a rules (or “limitation on benefits” articles)? fixed amount (€200) on transfers which are subject to other indirect taxes (e.g. VAT, inheritance and gift taxes). Italian tax treaties do not generally incorporate specific anti-treaty shopping clauses, save for a few exceptions. For instance, such FTT is levied on transfers of ownership of shares and participating clauses are provided in the income and capital tax treaties in force financial instruments issued by companies that have their legal with the United States of America and Switzerland. seat in Italy, regardless of the parties involved and the place where the contract is executed. The FTT is due from the person who acquires the shares at a rate of 0.2% (0.1% if the transferred 1.5 Are treaties overridden by any rules of domestic shares are negotiated in certain types of regulated markets). Several law (whether existing when the treaty takes effect or exemptions and exclusions apply, as is the case for some types of introduced subsequently)? intra-group transaction.

Italian tax law provides that a domestic tax law conflicting with a treaty provision may override such a treaty provision only if it is 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? more favourable for the taxpayer (this principle applies regardless of whether the domestic law is introduced before or after the treaty becomes enforceable). Italian VAT rates are as follows: ■ a 22% standard rate on supplies of goods (including imported but excluding exported goods) and services (the rate might be 1.6 What is the test in domestic law for determining the increased up to 25% in the next years, depending on the state residence of a company? of Italian public finances); ■ a 10% reduced rate that applies, for instance, to: some food A company is considered Italian tax-resident if, for the greater part products; water supplies; some pharmaceutical products;

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domestic passenger transport; admission to cultural events; residential non-luxury real estate properties; renovation 2.7 Are there any other indirect taxes of which we should and repair of private dwellings; and some supplies and be aware? construction work for new buildings (the rate might be increased to 13% in the next years, depending on the state of Customs duties and excise duties apply on several products in Italian public finances); accordance with the European common law. ■ a 5% reduced rate that applies, for instance, to social and health services provided by social cooperatives and their consortia; and 3 Cross-border Payments

Italy ■ a 4% ultra-reduced rate that applies, for instance, to some food products; certain medical equipment for disabled persons; certain books; newspapers and some periodicals; 3.1 Is any withholding tax imposed on dividends paid by some e-books; online journals newspapers; the TV licence; a locally resident company to a non-resident? and residential real estate properties benefitting from the so- called prima casa (first abode) benefit. In principle, dividends distributed to non-resident persons are subject to a final withholding tax at the rate of 26% (or at the lower rate provided by the applicable Double Tax Treaty). A partial refund 2.3 Is VAT (or any similar tax) charged on all transactions may be claimed by non resident recipients who prove (by means of or are there any relevant exclusions? proper documentation issued by the tax authorities in their country of residence) that a final tax on the same dividends has been paid in A number of transactions are excluded or exempt from VAT in the foreign State, up to 11/26 of the Italian withholding tax. accordance with the Directive on the Common System of VAT (2006/112/EC). For instance, education, healthcare and financial A reduced rate of 1.2% may apply if the following three conditions services may be exempt from VAT. Among the most relevant are met: excluded transactions, it is worth mentioning the transfer of going (i) the recipient of the dividends is a company or an entity; concerns, the sale of agricultural lands, and the transfer of goods as (ii) such company or entity is resident in an EU/EEA State that a consequence of mergers and demergers. allows an adequate exchange of information with the Italian tax authorities; and (iii) such company or entity is liable to corporate income tax in its 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? State of residence. In addition, under the domestic law implementing the EU Parent- Input VAT is, in principle, recoverable by a taxable person insofar Subsidiary Directive (2011/96), no withholding tax is levied on as the latter uses the purchased goods and services for the purpose dividends if all the following conditions are met: of carrying out taxable supplies. Taxable persons cannot therefore (i) the parent company receiving the dividends is tax-resident in deduct input VAT to the extent they make VAT-exempt supplies. an EU Member State; Taxable persons systematically carrying out both taxable and VAT- (ii) the parent company is a “qualifying company” under the exempt supplies shall deduct input VAT incurred on all the goods Directive; and services which they have acquired on the basis of a general pro (iii) the parent company is ordinarily subject to corporate income rata deduction (a deductible proportion based on turnover). tax in its State of residence; and Specific restrictions to the right of VAT deduction are also provided (iv) the parent company has held at least 10% of the capital of the Italian subsidiary distributing the dividends for an for the purchase of certain goods and services. uninterrupted period of at least one year.

2.5 Does your jurisdiction permit “establishment only” 3.2 Would there be any withholding tax on royalties paid VAT grouping, such as that applied by Sweden in the by a local company to a non-resident? Skandia case?

Italy has only recently introduced a VAT grouping, implementing In principle, royalties paid by an Italian-resident company to a non- Article 11 of the VAT Directive. According to the recently enacted resident person are subject to withholding tax at the rate of 30% or at provisions, taxpayers established in Italy – also including Italian the lower rate provided by the applicable Double Tax Treaty. fixed establishments of taxable persons having their head office Under the domestic law implementing the provisions of the EU abroad – which meet certain financial, economic and organisational Interest and Royalties Directive (2003/49), outbound royalties are requirements, may opt for the new VAT grouping scheme from exempt from the Italian withholding tax, provided that the following January 2018, and the scheme will become effective not earlier requirements are met: than 1 January 2019. Specific implementing regulations aimed at (i) the recipient company is tax-resident in another EU Member better clarifying the scope and procedure are expected from both the State; Italian government and the tax authorities. (ii) the recipient company is a “qualifying company” under the Directive; 2.6 Are there any other transaction taxes payable by (iii) the recipient company is ordinarily liable to corporate income companies? tax in its State of residence; (iv) the royalties are subject to the tax referred to in point (iii) Cadastral taxes are generally levied on the transfer of real estate above; and properties at the rate of 1% and mortgage taxes at the rate of 2% (3% (v) the recipient company is an “associated company” with the on the transfer of commercial real properties). company paying the royalties. Two companies are considered “associated companies” if: (a) one of them has uninterruptedly held directly at least 25% of the voting rights of the other

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company for a period of at least one year; or (b) a third EU company has uninterruptedly held directly at least 25% of the 3.8 Is there any withholding tax on property rental voting rights of the two companies for a period of at least one payments made to non-residents? year. A 30% withholding tax applies on payments made to non-residents on the rental of industrial, commercial or scientific equipment. 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? In addition, a withholding tax has been recently introduced with reference to certain short-term leases among individuals (the so- In principle, interest paid by an Italian-resident company to a non- called “Airbnb tax”). The withholding tax is paid by intermediaries resident person is subject to withholding tax at the rate of 26% or at involved in the payment of the lease at a rate of 21% and is applied Italy the lower rate provided by the applicable Double Tax Treaty. also if the recipient is a non-resident individual. An exemption is provided for interest paid to a non-resident on bonds issued by Italian banks or by Italian listed companies, or on 3.9 Does your jurisdiction have transfer pricing rules? bonds that are listed on a regulated market if the beneficial owner is resident in “white-listed” States (i.e. foreign States allowing Italian tax law has transfer pricing legislation that applies to an adequate exchange of information with Italy and listed in a transactions between Italian companies and their foreign associated Ministerial Decree) or is an institutional investor established therein. companies. In addition, under the domestic law implementing the provisions of Such legislation follows the principles laid down in Article 9 of the EU Interest and Royalties Directive (2003/49), outbound interest the OECD Model Tax Convention and the OECD Transfer Pricing is exempt from Italian withholding tax, provided that the following Guidelines for Multinational Enterprises and Tax Administrations. requirements are met: (i) the recipient company is tax-resident in another EU Member State; 4 Tax on Business Operations: General (ii) the recipient company is a “qualifying company” under the Directive; 4.1 What is the headline rate of tax on corporate profits? (iii) the recipient company is ordinarily subject to corporate income tax in its State of residence; The corporate income tax (“Imposta sul reddito delle società” or (iv) the interest is subject to the tax referred to in point (iii) above; “IRES”) applies at a rate of 24%. For certain qualifying banks and and financial institutions, a 3.5% surtax also applies. (v) the recipient company is an “associated company” with Companies that are considered “dummy entities” (“società di the company paying the interest. Two companies are considered “associated companies” if: (a) one of them has comodo”) are subject to IRES at a 34.5% rate. uninterruptedly held directly at least 25% of the voting rights of the other company for a period of at least one year; or (b) 4.2 Is the tax base accounting profit subject to a third EU company has uninterruptedly held directly at least adjustments, or something else? 25% of the voting rights of the two companies for a period of at least one year. Resident companies are subject to IRES on their worldwide An exemption also applies on interest on medium-term loans income. The taxable base is determined on the basis of the profit/ advanced to Italian enterprises by EU banks and insurance loss resulting in the statutory profit and loss account – prepared for companies, as well as by institutional investors established in the relevant financial year according to company law rules – and “white-listed” States and subject to supervision therein. adjusted according to tax law provisions.

3.4 Would relief for interest so paid be restricted by 4.3 If the tax base is accounting profit subject to reference to “thin capitalisation” rules? adjustments, what are the main adjustments?

Thin capitalisation rules do not apply in Italy for this purpose. The main adjustments include: (i) partial exclusion from taxation of certain types of income. 3.5 If so, is there a “safe harbour” by reference to which This is the case, for instance, with capital gains and dividends tax relief is assured? that may benefit from the participation exemption regime (a 95% exemption applies) and income from patents and other This is not applicable in Italy. intellectual property rights that, subject to certain conditions, may benefit from the patent box regime (a 50% exemption applies); 3.6 Would any such rules extend to debt advanced by a (ii) timing adjustments, such as: third party but guaranteed by a parent company? ■ depreciation and amortisation instalments of tangible and intangible assets that are deductible within specific yearly This is not applicable in Italy. coefficients; ■ losses on receivables that are deductible only if evidenced 3.7 Are there any other restrictions on tax relief for by accurate proof or if resulting from bankruptcy or interest payments by a local company to a non- other insolvency procedures. Write-off receivables are resident? deductible only within strict amounts; ■ expenses deductible only on a cash basis (such as This is not applicable in Italy. directors’ fees and certain deductible taxes); and

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■ provisions that are generally non-deductible save for a income is determined on the basis of the statutory profit and loss few exceptions; account. (iii) non-deduction/partial deduction of certain types of expenses, IRAP applies at the ordinary rate of 3.9% subject to variations on a such as the cost of vehicles, entertainment expenses and regional basis and depending on the type of activity carried out by telephone costs; the taxable company (for example, qualifying banks and financial (iv) a limited deduction of interest expenses, other than capitalised institutions are generally subject to IRAP at a rate of 5.9%). interest expenses, that are deductible (save for few exceptions) on a yearly basis up to an amount equal to interest income accrued and, for the excess, up to 30% of EBITDA. The 5 Capital Gains

Italy excess may be carried forward for deduction in subsequent tax periods; and (v) finally, a notional deduction is provided for certain qualifying 5.1 Is there a special set of rules for taxing capital gains equity increases (i.e. “ACE”). and losses?

Capital gains and losses are ordinarily included in the taxable base 4.4 Are there any tax grouping rules? Do these allow subject to IRES in the year when the disposal of the asset generating for relief in your jurisdiction for losses of overseas subsidiaries? the gain/loss takes place. However, capital gains realised through the disposal of certain fixed assets may be included in the taxable income in up to five equal yearly instalments. Italian tax law provides for: Finally, special rules for capital gains and losses realised through the ■ an elective domestic tax group regime; and disposal of shareholdings apply (see question 5.2 below). ■ an elective worldwide tax group regime. The domestic tax group regime is allowed only between tax-resident companies and it is characterised by a cherry-picking mechanism 5.2 Is there a participation exemption for capital gains? so that not all the Italian-resident companies of a group need to be included in the group taxation. Conversely, the worldwide tax group Italian tax law provides for a participation exemption regime, regime applies on an all-in basis according to which, if the option according to which gains on the disposal of shares, participating for the worldwide tax group regime is exercised, all the foreign- financial instruments assimilated into shares and shareholdings are controlled companies shall be included. tax-exempt for 95% of their amount provided that: (i) the shareholding has been held for at least 12 months (the last Both the domestic tax group regime and the worldwide group in, first out (“LIFO”) method applies); taxation allow the determination of a single IRES taxable base, equal to the algebraic sum of the positive or negative taxable income (ii) the shareholding is classified as a fixed asset in the first balance sheet published after the acquisition; of each of the participating entities. Losses arising in fiscal years preceding the election for domestic tax consolidation can be carried (iii) the participated company is engaged in a commercial business activity (companies whose assets are mainly represented by forward and used only by the company originating such losses. real estate properties not used in the business activity are deemed not to be engaged in a real business activity); and 4.5 Do tax losses survive a change of ownership? (iv) the participated company is not resident in a State which has a privileged tax regime (for the definition of such States, see As a general rule, tax losses from previous years can be carried question 7.2 below). forward for an unlimited period of time and may be used to offset Capital losses realised through the disposal of shareholdings meeting up to 80% of the taxable income in each subsequent tax year. Such the requirements for the participation exemption are not deductible. a limitation does not apply to losses realised in the first two tax periods and referable to a new business activity. 5.3 Is there any special relief for reinvestment? The carrying forward of losses is also allowed in the case of change of control, or of mergers and demergers. However, in these cases In principle, Italian tax law does not ordinarily provide for special specific anti-abuse provisions apply with the aim of avoiding relief for reinvestment. situations where such transactions may entail the offsetting of the income deriving from profitable businesses with losses generated by no-longer-vital businesses. 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local assets/shares? 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits? Italian tax law does not provide for any withholding tax on the proceeds realised by a company through the disposal of interests Corporate tax applies at the same rates both on distributed and in local assets/shares. By contrast, taxation at source may, in some retained profits. cases, apply on capital gains realised by private individuals.

4.7 Are companies subject to any significant taxes not 6 Local Branch or Subsidiary? covered elsewhere in this chapter – e.g. tax on the occupation of property? 6.1 What taxes (e.g. capital duty) would be imposed upon Italian companies are also subject to a regional tax on productive the formation of a subsidiary? activities (“Imposta regionale sulle attività produttive” or “IRAP”). IRAP is levied on the added value produced in Italy and the taxable No taxation is imposed upon the formation of a subsidiary in Italy.

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resident in a State having a privileged tax regime, dividends are 6.2 Is there a difference between the taxation of a local subject to tax for their entire amount. For this purpose, jurisdictions subsidiary and a local branch of a non-resident other than States of the EU and EEA are deemed to have a privileged company (for example, a branch profits tax)? tax regime if they provide for a nominal tax rate lower than 50% of the Italian nominal tax rate (to be determined considering both the In principle, no relevant difference exists between the taxation of 24% corporate income tax and the 3.9% regional tax on productive an Italian subsidiary and the taxation of an Italian branch of a non- activities). resident company, given that the branch is also ordinarily subject to IRES and IRAP in the same way as an Italian-resident company 7.3 Does your jurisdiction have “controlled foreign

(while no branch profits tax is provided). Italy company” rules and, if so, when do these apply? There is a difference between the subsidiary and the branch as regards the repatriation of profits. Indeed, the repatriation from the Italian tax law provides for a controlled foreign company rule which branch is not subject to any withholding tax, while the repatriation applies to Italian-resident persons that control: from the subsidiary in the form of dividends may be subject to the application of a withholding tax (see question 3.1 above). ■ companies established in jurisdictions having a privileged tax regime; and ■ companies established in other jurisdictions, including EU 6.3 How would the taxable profits of a local branch be States, if both the following conditions are met: determined in its jurisdiction? (i) “passive income” and fees from intra-group services (including financial services) represent more than 50% The branch is required to prepare a specific statutory account according of the proceeds of the foreign companies; and to the accounting principles applying to resident enterprises. The (ii) the effective tax rate is lower than 50% of the tax rate taxable income is equal to the profit/loss resulting from such statutory that would have been applied if the same companies account, adjusted on the basis of the same tax rules provided for were Italian-resident. Reference must be made, for this Italian-resident companies (see par. 4.3 above). purpose, to the effective level of taxation. The profits to be attributed to the local branch are determined in Under the CFC regime, the controlling shareholder is required to tax accordance with the Authorised OECD Approach, so that the branch the CFC’s income regardless of distribution. is considered a functionally separate entity and the transactions with the head office are determined on the basis of the transfer pricing legislation. 8 Taxation of Commercial Real Estate

6.4 Would a branch benefit from double tax relief in its 8.1 Are non-residents taxed on the disposal of jurisdiction? commercial real estate in your jurisdiction?

In principle, a local branch benefits from a tax credit relief for taxes Under Italian tax law, the capital gain derived from the disposal paid outside Italy with respect to income that is included in the of commercial real estate situated in the Italian territory by a non- Italian taxable base of the branch. resident is, in principle, subject to tax in Italy. However, capital gains realised through the disposal of real estate properties, other than building plots, may be tax-exempt provided that the property 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the sold has been held for more than five years. branch? 8.2 Does your jurisdiction impose tax on the transfer of No tax applies on the remittance of the profits by an Italian branch. an indirect interest in commercial real estate in your jurisdiction?

7 Overseas Profits In general terms, the sale of a participation in an Italian real estate company is subject to taxation according to ordinary rules applicable 7.1 Does your jurisdiction tax profits earned in overseas to the sale of participations. However, limitations may apply on the branches? application of the participation exemption regime (see question 5.2 above). An Italian tax-resident company is subject to IRES on its worldwide income, and thus also on profits earned in overseas branches. 8.3 Does your jurisdiction have a special tax regime A branch exemption regime has recently been adopted in Italian tax for Real Estate Investment Trusts (REITs) or their law, according to which Italian tax-resident companies are allowed equivalent? to opt for the exemption of the profits and losses pertaining to all their foreign branches. Italian tax law provides for a special tax regime that applies to listed real estate investment companies (“SIIQS”) and real estate investment funds (“REIFs”). 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? According to such regime, entities qualifying as “SIIQs” are exempt from both the Italian corporate income tax and the regional tax on productive activities on income deriving from real estate properties In principle, dividends received by a local company from a non- leased to third parties. Italian REIFs are exempt from Italian income resident company are subject to tax in Italy to the extent of 5% taxes. of their amount. If the dividends derive from a foreign company

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■ tax penalties are reduced by 50% and, in any case, applied to 9 Anti-avoidance and Compliance an amount not exceeding the minimum provided by the law; and 9.1 Does your jurisdiction have a general anti-avoidance ■ no guarantees are required to obtain refunds of direct and or anti-abuse rule? indirect taxes.

Italian tax law sets forth a general anti-abuse legislation according to 10 BEPS and Tax Competition which Italian tax authorities are allowed to disregard tax advantages achieved through one or more transactions lacking economic Italy substance and, despite being formally in compliance with tax law, 10.1 Has your jurisdiction introduced any legislation aimed at obtaining undue tax advantages. In this regard: in response to the OECD’s project targeting Base ■ transactions are deemed to lack economic substance when Erosion and Profit Shifting (BEPS)? they imply facts, actions and agreements that are unable to generate significant economic consequences other than tax Provisions implementing the BEPS project have recently been advantages; and introduced, such as the introduction of a CbC Reporting regime in ■ tax advantages are deemed to be undue where they consist of line with Action 13, and some amendments to the transfer pricing benefits that are achieved in conflict with the purpose of the legislation in order to make it compliant with the latest version of relevant tax provisions and the principles of the tax system. the OECD Guidelines. In any event, based on the anti-abuse legislation, a transaction that is justified by non-marginal business purposes, including those aimed 10.2 Does your jurisdiction intend to adopt any legislation at improving the organisational and managerial structure of the to tackle BEPS which goes beyond what is business, cannot be considered an abusive scheme. recommended in the OECD’s BEPS reports?

9.2 Is there a requirement to make special disclosure of There is no evidence so far of an intention to adopt such legislation. avoidance schemes? 10.3 Does your jurisdiction support public Country-by- Under the Italian general anti-abuse rule, special disclosure of Country Reporting (CBCR)? avoidance schemes is not required. At the same time, taxpayers are allowed to file a special advanced ruling to the Italian tax authorities The CbC Reporting regime has recently been introduced in Italy and in connection with specific transactions in order to obtain a binding is substantially compliant with the indication contained in Action 13 confirmation that the envisaged/realised transaction does not of the BEPS project. The obligation to file CbC Reporting applies represent an abusive scheme. to: (i) Italian parent companies of international groups which: 9.3 Does your jurisdiction have rules which target not ■ are subject to the obligation to prepare consolidated only taxpayers engaging in tax avoidance but also financial statements; anyone who promotes, enables or facilitates the tax ■ have a consolidated turnover of at least €750 million, avoidance? generated by the international group of companies in the tax year preceding the year of reporting; and In principle, persons who promote, enable or facilitate tax avoidance ■ in turn, are not controlled by other companies or entities. may be subject to penalties in addition to those applicable to the (ii) Italian subsidiary companies of international groups, if one of taxpayer engaged in tax avoidance. the following conditions occurs: ■ the holding company of the international group is not 9.4 Does your jurisdiction encourage “co-operative obliged to file CbC Reporting in its jurisdiction, as it is compliance” and, if so, does this provide procedural resident in a State that has not introduced this obligation; benefits only or result in a reduction of tax? or ■ the parent holding company is resident in a State that Italian tax law provides for a cooperative compliance programme that has not entered into an agreement with Italy providing is aimed at promoting enhanced cooperation between the Italian tax for an automatic exchange of information relative to the administration and taxpayers in order to increase the level of certainty reporting. on relevant tax issues and, consequently, to prevent tax litigation. Currently, the following taxpayers can access the programme: 10.4 Does your jurisdiction maintain any preferential tax (i) resident and non-resident entities having a permanent regimes such as a patent box? establishment in Italy with a total turnover or operating revenues exceeding €10 billion; and Italy has introduced a patent box regime under which taxpayers can (ii) entities acting in compliance with an opinion issued by the exclude from their income tax, for the purposes of both corporate Italian Revenue Agency in response to the advance ruling tax and regional tax on productive activities, 50% of qualified on new investments, regardless of their total turnover or income deriving from the direct exploitation of intangibles or from operating revenues. the licensing of intellectual property (“IP”), such as royalties earned The main benefits deriving from the cooperative compliance by the taxpayer, net of all IP-related costs. programme may be summarised as follows: ■ a fast-track ruling (no more than 45 days from the receipt of request or the integration of documents) where requested regarding the application of tax provisions;

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Paolo Ludovici Stefano Tellarini Ludovici Piccone & Partners Ludovici Piccone & Partners Via Sant’Andrea 19 Via Sant’Andrea 19 Milan Milan Italy Italy

Tel: +39 02 303 2311 Tel: +39 02 303 2311 Email: [email protected] Email: [email protected] URL: www.ludoviciandpartners.com URL: www.ludoviciandpartners.com Italy

Paolo Ludovici advises on all areas of tax law. His expertise includes Stefano Tellarini has been a partner at the firm since its foundation. domestic and international corporate reorganisations, M&A and He works mainly on taxation of financial instruments and financial structured finance transactions. Paolo is renowned for his expertise transactions, as well as on taxation of real estate. In particular, in advising high-net-worth individuals with particular reference to he advises private and institutional clients, in Italy and abroad, estate and succession planning, transfer of businesses, lifetime on tax issues regarding different types of real estate and financial asset transfers and corporate governance, and all matters relating to investments, as well as the tax treatment of collective investment developing a long-term strategy that suits clients’ needs. He has also schemes, financing and capital market transactions, M&A and developed outstanding skills in giving assistance in relation to trusts structured finance. He also assists clients (domestic and international) and foundations, as well as charities and other non-profit entities. in potential tax controversies and tax dispute resolutions through settlements. He often speaks at tax conferences and lectures on post- Paolo is consistently ranked by the most reputed independent graduate specialisation courses. researchers as a leading Italian tax professional. He has published a large number of papers on tax matters and regularly participates as a speaker at conferences and lectures in the field of taxation.

Ludovici Piccone & Partners is an independent tax law firm based in Italy, providing integrated tax advice both in domestic and international transactions. Founded by Paolo Ludovici in November 2014, the firm currently includes 30 professionals, and has offices in Milan, London and Rome. Ludovici Piccone & Partners has a comprehensive tax practice, encompassing all domestic and cross-border transactional tax work. The firm supports companies and corporate groups with regular and ongoing tax advisory services regarding direct and indirect taxation. Professionals of the firm structure complex M&A transactions, as well as covering all other significant areas such as transfer pricing, tax litigation and VAT. The firm is renowned for its expertise in finance and real estate transactions, as well as wealth advisory services for high-net-worth individuals.

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Japan

Nagashima Ohno & Tsunematsu Shigeki Minami

clauses include the treaties with Australia, France, New Zealand, 1 Tax Treaties and Residence Sweden, Switzerland and the United Kingdom. The amended Japan/Germany Treaty, signed on December 17, 2015, introduced 1.1 How many income tax treaties are currently in force in a principal purpose test in its Article 21, Paragraph 8, for anti- your jurisdiction? avoidance in line with BEPS Action 6, “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances”, which entered into There are 70 income tax treaties applicable to 123 jurisdictions force on October 28, 2016. currently in force in Japan as of October 1, 2017, including 11 tax Some treaties or agreements (other than the above-mentioned information exchange agreements and the Convention on Mutual modernised tax treaties) also include a simple anti-treaty shopping Administrative Assistance in Tax Matters. clause (examples of which are Article 22, Paragraph 2 of the tax agreement between Japan and Singapore and Article 26 of the tax agreement between Japan and Hong Kong). 1.2 Do they generally follow the OECD Model Convention or another model? 1.5 Are treaties overridden by any rules of domestic Yes. Most of the income tax treaties currently in force in Japan law (whether existing when the treaty takes effect or generally follow the OECD Model Convention with certain introduced subsequently)? deviations. Japan signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit No. It is a well-established constitutional principle in Japan that no Shifting (“MLI”) on June 7, 2017, together with over 70 jurisdictions, treaty is overridden by any rule of domestic law (whether existing at subject to ratifications by at least five jurisdictions. Japan has yet the time the treaty takes effect or enacted subsequently). to ratify the MLI. The MLI covers the 35 existing tax treaties that Japan has entered into. 1.6 What is the test in domestic law for determining the residence of a company? 1.3 Do treaties have to be incorporated into domestic law before they take effect? The applicable test is the “location of head or principal office” test. Under Japanese domestic tax law, a corporation is treated as a No. Once treaties are ratified by the Diet (the Japanese Parliament) Japanese corporation (having a corporate residence in Japan) if such and are promulgated in Japan, such treaties take effect domestically corporation has its head office or principal office in Japan. in Japan in accordance with those treaties, without being incorporated into domestic law. However, the “Act on Special Provisions of the Income Tax Act, the Corporation Tax Act and the 2 Transaction Taxes Local Tax Act Incidental to Enforcement of Tax Treaties” provides certain procedures for obtaining treaty benefits, including filing of 2.1 Are there any documentary taxes in your jurisdiction? various application forms with the competent tax offices. Yes. Japan has Stamp Tax, which is imposed on certain categories 1.4 Do they generally incorporate anti-treaty shopping of documents that are exhaustively listed in the Stamp Tax Act, rules (or “limitation on benefits” articles)? including, for example, real estate sales agreements, land leasehold agreements, loan agreements, transportation agreements, merger No, although the new modernised tax treaty with the United States agreements, promissory notes, articles of incorporation and bills of entered into force on March 30, 2004 (the “Japan/US Treaty”) lading. and some other recent treaties do incorporate certain limitation on benefits clauses. The Japan/US Treaty is the first income tax treaty 2.2 Do you have Value Added Tax (or a similar tax)? If so, executed by Japan in which fairly comprehensive limitation on at what rate or rates? benefits clauses of general application are included, and have been followed, with certain variations, in the most recent modernised Yes. Japan has Consumption Tax which is a Japanese version of tax treaties. Those treaties that have similar limitation on benefits Value Added Tax, consisting of a national consumption tax and

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a local consumption tax. The current aggregate tax rate is 8% (national 6.3% and local 1.7%), effective on or after April 1, 2014. 3 Cross-border Payments Although an additional increase to 10% (national 7.8% and local 2.2%) was planned to be effective originally on October 1, 2015, the 3.1 Is any withholding tax imposed on dividends paid by government decided to defer the increase until October 1, 2019 for a locally resident company to a non-resident? fear of negative impacts on the economy. Generally, yes. Under Japanese domestic tax law, generally, a 2.3 Is VAT (or any similar tax) charged on all transactions non-resident shareholder (either a non-resident company or a non- or are there any relevant exclusions? resident individual) of a Japanese company is subject to Japanese

withholding tax with respect to dividends it receives from such Japan Consumption Tax is generally charged on all transactions, while Japanese company at the rate of 20.42%; however, if the Japanese there are certain exclusions. Specifically, taxable transactions, for company paying the dividends to a non-resident shareholder is a the purposes of Consumption Tax, are broadly defined to mean listed company, this withholding tax rate is reduced to 15.315%, those transactions conducted by a business enterprise (including except for the dividends received by a non-resident individual any resident and non-resident companies and individuals, regardless shareholder holding 3% or more of the total issued shares of such of whether they have any permanent establishment in Japan) to listed Japanese company, to whom the rate of 20.42% is applicable. transfer or lease goods or other assets or to provide services, for However, most of the income tax treaties currently in force in consideration, within Japan. However, certain specified categories Japan generally provide that the reduced treaty rate at the source of transactions, such as, for example, transfers and leases (other than country shall be 15% or 10% for portfolio investors and 10% or for certain temporary purposes) of land, housing leases (other than 5% for parent and other certain major shareholders. Furthermore, for certain temporary purposes), transfers of securities, extension under the Japan/US Treaty and a certain limited number of other of interest-bearing loans, provision of insurance, deposit-taking modernised tax treaties recently executed by Japan (including those and certain other specified categories of financial services, and with Australia, France, the Netherlands, Sweden, Switzerland and provision of certain specified medical, social welfare or educational the United Kingdom), the withholding tax rate is reduced to 10% services, are excluded from taxable transactions for the purposes of for portfolio investors and 5% or 0% for parent and certain other Consumption Tax. With respect to imported goods, they are, when major shareholders. they are released from a bonded area, subject to Consumption Tax, except for certain specified categories of imported goods. When the 3.2 Would there be any withholding tax on royalties paid tax rate is increased to 10% on October 1, 2019, as currently planned, by a local company to a non-resident? the 8% preferential rate will apply to foods and newspapers. Generally, yes. Under Japanese domestic tax law, royalties 2.4 Is it always fully recoverable by all businesses? If not, relating to patents, trademarks, design, know-how with respect what are the relevant restrictions? to technology, and copyrights used for any Japanese company’s business carried on in Japan and paid by the Japanese company to Generally, yes. At present, Consumption Tax that is charged a non-resident licensor (either a non-resident company or a non- on taxable transactions and incurred by a business enterprise is resident individual) are subject to Japanese withholding tax at the generally recoverable in full, by way of a tax credit or refund. By rate of 20.42%, with certain exemptions. way of exception: (i) if the ratio of a taxpayer’s revenue from taxable Most of the income tax treaties currently in force in Japan provide transactions over the taxpayer’s total revenue from transactions that the withholding tax rate for royalties generally be reduced to within Japan is less than 95%; or (ii) if a taxpayer’s revenue from 10%. Furthermore, under the Japan/US Treaty and a certain limited taxable transactions in the relevant fiscal year exceeds 500 million number of other modernised tax treaties recently executed by Japan yen, such taxpayer would recover only the Consumption Tax incurred (including those with France, the Netherlands, Sweden, Switzerland from the taxable purchases that correspond to its taxable sales. and the United Kingdom), an exemption from source country taxation with respect to royalties may be available. 2.5 Does your jurisdiction permit “establishment only” VAT grouping, such as that applied by Sweden in the 3.3 Would there be any withholding tax on interest paid Skandia case? by a local company to a non-resident?

No, this is not permitted. Generally, yes. (1) (a) Interest on corporate bonds issued by a Japanese company 2.6 Are there any other transaction taxes payable by that is paid to a non-resident bondholder (either a non- companies? resident company or a non-resident individual) was generally subject to Japanese withholding tax at the rate of 15.315%. Yes. There are some transaction taxes in Japan, including, but not (b) Also, under Japanese domestic tax law, with respect to a limited to, Registration and Licence Tax, Real Property Acquisition certain specified scope of discount corporate bonds issued by a Japanese company (except for certain qualified short-term Tax and Automobile Acquisition Tax. discount bonds), such Japanese company was required to withhold, at the time of the issuance of the discount corporate 2.7 Are there any other indirect taxes of which we should bonds, 18.378% (or 16.336% for certain bonds), as the case be aware? may be, of the amount equivalent to the difference between the face value and the issue price thereof (original issue discount). There were important exceptions to the foregoing Yes. There are various indirect taxes in Japan such as Tonnage Tax, (a) and (b): (i) corporate bonds issued outside Japan by Special Tonnage Tax, Liquor Tax, Tobacco Tax and Gasoline Tax. Japanese corporations; and (ii) book-entry corporate bonds.

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The 2013 Tax Reform, which came into force on January 1, third party and guaranteed by a parent company would generally be 2016, introduced, among others, a new rule for withholding treated as related party debt, subject to the thin capitalisation rules. tax to be applied to discount corporate bonds. Under such new rule, a withholding tax at the time of the issuance of discount corporate bonds was lifted, and a withholding tax at the time of 3.7 Are there any other restrictions on tax relief for the redemption was introduced. An issuer company of discount interest payments by a local company to a non- corporate bonds is generally required to withhold, at the time resident? of the redemption of such discount corporate bonds, 15.315%, as the case may be, of the amount equivalent to (i) 0.2% of the Yes. Japan has earnings stripping rules, under which deduction for amount of the redemption (if the term of the bond in question is net interest payments (as defined in these rules) to certain related Japan one year or less), and (ii) 25% of the amount of the redemption persons (as defined in these rules) in excess of 50% of an adjusted (if the term of the bond in question is more than one year). taxable income (as defined in these rules) will be disallowed, and (2) Interest on bank deposits and other similar deposits made the disallowed amounts may be carried forward for seven ensuing by a non-resident depositor (either a non-resident company business years. If the disallowed interest amount under these rules or a non-resident individual) with any office of a bank or is smaller than the amount disallowed for deduction under the thin other institution in Japan is generally subject to Japanese capitalisation rules, then only the thin capitalisation rules will be withholding tax, under Japanese domestic tax law, at the rate of 15.315%. applied, and vice versa. (3) Interest on loans extended by a non-resident lender (either Even if deductibility is denied under the earnings stripping rules, a non-resident company or a non-resident individual) to a the relief under a treaty (i.e., the reduced treaty rate) available to Japanese company in relation to such company’s business the non-resident recipient of such interest, would nevertheless not carried on in Japan is generally subject to Japanese withholding be restricted. tax, under the Japanese domestic tax law, at the rate of 20.42%, with certain exemptions. 3.8 Is there any withholding tax on property rental (4) As an exception to the foregoing, if a certified non-resident payments made to non-residents? company makes a deposit or extends a loan to certain qualified financial institutions through a special Japan Offshore Market account, such non-resident company would be exempt from Generally, yes. Rental fees for leasing real property or rights to Japanese withholding tax with respect to interest to be paid real property located within Japan and paid by a Japanese company on such deposit or loan. to a non-resident (either a non-resident company or a non-resident (5) Most of the income tax treaties currently in force in Japan individual) are subject to Japanese withholding tax at the rate of provide that the withholding tax rate for interest (regardless 20.42%, subject to certain exemptions. of whether it is interest on bonds, deposits or loans) is reduced generally to 10%. It is worth noting that under the 3.9 Does your jurisdiction have transfer pricing rules? modernised tax treaties, beginning with the Japan/US Treaty, certain specified categories of financial or other qualified institutions (the scope of which may slightly vary from treaty Yes. Japanese transfer pricing rules are applicable to both a Japanese to treaty) which are residents of the contracting states, may be company and a Japanese branch of a non-resident company if either exempt from source country taxation with respect to interest, of them engage in transactions with any of their “foreign-related subject to certain requirements. persons” (measured by, in principle, a direct or indirect 50%-or- more share ownership). 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? 4 Tax on Business Operations: General No. The payor company of interest may be denied a deduction of the interest which it paid to a non-resident recipient for its 4.1 What is the headline rate of tax on corporate profits? own corporation tax purposes, due to the application of the “thin capitalisation” rules under Japanese domestic tax law. The Japanese The nominal rate of Corporation Tax (national tax) is 23.4%, and thin capitalisation rules deny deductibility of interest expenses paid the effective corporation tax rate – national and local combined – is: to the payor company’s foreign affiliates when such company’s (a) approximately 31% for large companies (i.e., companies with a annual average ratio of debt to equity exceeds 3:1, subject to an stated capital of more than 100 million yen); and (b) approximately exemption available based on a certain alternative parameter. 35% with a 22–24% favourable rate for up to the first 8 million However, even when the deductibility is denied under the thin yen for small and medium-sized companies (i.e., companies with a capitalisation rules, the relief under a treaty (i.e., the reduced treaty stated capital of 100 million yen or less), operating in Tokyo for the rate) available to the non-resident recipient of such interest, would fiscal year beginning on or after April 1, 2017. nevertheless not be restricted.

4.2 Is the tax base accounting profit subject to 3.5 If so, is there a “safe harbour” by reference to which adjustments, or something else? tax relief is assured? Yes. The tax base for corporation tax is the net taxable income; No. This is not applicable. Please see question 3.4. such net taxable income is calculated based on the results reflected in the taxpayer company’s profit and loss statements, prepared in 3.6 Would any such rules extend to debt advanced by a accordance with Japanese generally accepted accounting principles. third party but guaranteed by a parent company? If a taxpayer company’s stated capital is more than 100 million yen, the tax base for the local Enterprise Tax is determined by certain Yes. Under the thin capitalisation rules in Japan, debt advanced by a factors; specifically, by a combination of the net taxable income,

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the amount of value added as determined by the compensation paid under a “qualified merger”; and (ii) if (a) the merger takes place to employees, the net interest paid, the net rental fees paid and the five years after there is a relevant more-than-50% change in issued net profit or loss in each fiscal year, and the stated capital of such and outstanding shares, or (b) the merger satisfies “joint-business” taxpayer company, with certain exceptions for electricity, gas and requirements. insurance businesses. In general, the tax losses in the past fiscal years can be carried forward to offset the taxable income of the current fiscal year, while 4.3 If the tax base is accounting profit subject to such deduction is limited to a maximum of 80% (to be amended adjustments, what are the main adjustments? to 65% from April 1, 2015, and to 50% from April 1, 2017) of the taxable income before the deduction for nine years (or 10 years from The main differences include, but are not limited to, the treatment April 1, 2017). Please note that these limitations are not applicable Japan of donations and entertainment expenses. Donations, including to a small and medium-sized company as defined in the law, which any kind of economic benefit granted for no or unreasonably low is a company with stated capital of 100 million yen or less that is consideration, are generally deductible only up to a certain limited not a wholly-owned subsidiary of a company (Japanese or non- amount. The deductibility of entertainment expenses is subject to Japanese) with stated capital of 500 million yen or more. certain qualifications and a certain ceiling. Also, see questions 5.2 and 5.3. 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits? 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas Tax is generally imposed at the same rate upon all corporate taxable subsidiaries? profits regardless of whether such profits are distributed or retained, with the exception that a certain additional surtax may be imposed Yes. There are two categories of tax grouping rules under Japanese on certain types of so-called family companies’ retained profits. tax law: (a) the consolidated tax return rules; and (b) the group However, there are certain special qualified corporate entities used taxation rules. for investment purposes that can deduct as expenses dividends (a) A group of Japanese companies, where a Japanese parent paid to their shareholders if they distribute more than 90% of their company directly, or indirectly through other Japanese distributable profits. companies, owns 100% of other Japanese subsidiaries, can elect to file, subject to the approval of the Commissioner 4.7 Are companies subject to any significant taxes not of the National Tax Agency, a consolidated tax return. The covered elsewhere in this chapter – e.g. tax on the consolidated tax is calculated on the basis of the aggregate net occupation of property? taxable income of the parent company and all consolidated subsidiaries. Yes. Among local taxes, other than those already mentioned above, (b) Separate from the above-mentioned consolidated tax return system, there are special rules for intra-group transactions Prefectural Inhabitant Tax per capita levy, Municipal Inhabitant (the “Group Taxation Rules”), which apply to group Tax per capita levy, Fixed Assets Tax and Automobile Tax may companies in a 100% group (companies that have a direct be of general application to the business operations in general of a or indirect 100% shareholding relationship), even if they company in Japan. do not elect to file a consolidated tax return. The Group Taxation Rules apply to Japanese companies wholly owned by a foreign or Japanese company or an individual (to which 5 Capital Gains certain family members’ ownership is attributed). The Group Taxation Rules include the following rules, among others: (i) deferral of capital gains/losses from transfer of certain assets 5.1 Is there a special set of rules for taxing capital gains between Japanese companies in a 100% group; and (ii) denial and losses? of deduction and exclusion of income on donations between Japanese companies in a 100% group. Generally, no. For purposes of income taxes imposed on a company In Japan, neither the consolidation rules nor Group Taxation Rules (not an individual) in Japan, generally all of the taxable income allow for relief for losses of overseas subsidiaries. of a company is aggregated, regardless of whether such income is classified as capital gains or ordinary/business profits.

4.5 Do tax losses survive a change of ownership? 5.2 Is there a participation exemption for capital gains? Generally, yes. A change of ownership does not restrict a corporation from utilising its accumulated tax losses that the corporation There is no participation exemption for taxation on capital gains. incurred in prior years, in general. However, for a company under However, with respect to dividends paid to a Japanese company certain specified events which shall take place within five years by its foreign subsidiary, a participation exemption from Japanese from the date of the ownership change (measured, in principle, by income taxation is granted for a 95% portion of such dividends if the more-than-50% of the issued and outstanding shares), utilisation of Japanese company owns at least 25% of such foreign subsidiary’s the tax losses of the company may be restricted. The restriction issued and outstanding shares or voting shares for at least six applies, for example: (i) when a company was dormant before months. The 25% threshold requirement may be altered if a tax the ownership change and begins its business after the ownership treaty explicitly so provides or if a particular taxpayer is eligible change; or (ii) when a company ceases its original business after for treaty benefits under an applicable tax treaty in which a lower the ownership change and receives loans or capital contributions, threshold is required for a treaty-based indirect foreign tax credit the amount of which exceeds five times the previous business scale. eligibility (for example, a 10% shareholding threshold is provided In respect of a merger, a surviving company is able to utilise the under the Japan/US Treaty). carried-forward losses of a merging company: (i) if the merger falls

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its branch in Japan earns “profits derived from business carried on 5.3 Is there any special relief for reinvestment? within Japan”, or “profits attributable to its permanent establishment in Japan” (from a fiscal year beginning on or after April 1, 2016), Generally, yes. Dividends received by a Japanese company such business profits constitute Japanese source income taxable from another Japanese company may be either 100%, 50% or in Japan in line with the Authorised OECD Approach. The rules 20% (subject to certain adjustments) excluded from the recipient similar to the transfer pricing regulations for foreign-related company’s taxable income, depending on whether or not the persons are applicable to the branch. With respect to the question recipient Japanese company owns more than a third, more than of how the amount of such business profits should be determined, 5%, or 5% or less of the total issued and outstanding shares of certain specific rules are provided in the relevant regulations. With

Japan the dividend-paying Japanese company. These qualifications and respect to the detailed method of calculating taxable income, the exclusions are applicable to dividends received on or after April rules applicable to a Japanese company are, in principle, also made 1, 2015. Such dividend-received exclusion is also available to a applicable to a branch of a non-resident company, mutatis mutandis. Japanese branch of a foreign corporation with respect to dividends In calculating the taxable income of a branch, only such expenses received by such branch from any Japanese company. as are necessary for earning Japanese source income, are treated as deductible expenses. 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local 6.4 Would a branch benefit from double tax relief in its assets/shares? jurisdiction?

Generally, no. However, Japan imposes withholding tax on the A branch of a company which is a resident in such treaty country proceeds of selling a direct interest in real property located within can benefit from the treaty provisions to some extent. However, Japan. See questions 8.1 and 8.2 below. with respect to the treaty relief given to passive income such as dividends, interest and royalties, because most of the income tax treaties currently in force in Japan include provisions similar to 6 Local Branch or Subsidiary? Articles 10(4), 11(4) and 12(3) of the OECD Model Convention, a branch of an non-resident company would not be allowed to enjoy 6.1 What taxes (e.g. capital duty) would be imposed upon such treaty relief. the formation of a subsidiary? 6.5 Would any withholding tax or other similar tax be In order to form a Japanese subsidiary, the articles of incorporation imposed as the result of a remittance of profits by the of such subsidiary must be prepared, which is subject to Stamp branch? Tax in the amount of 40,000 yen. Further, such subsidiary must be registered in the commercial register kept at the competent Generally, no. office of the legal affairs bureau of the Ministry of Justice, subject to Registration and Licence Tax at the rate of seven-thousandths (7/1,000) of its stated capital amount, but no less than 150,000 yen 7 Overseas Profits in the case of a joint-stock company (Kabushiki Kaisha). If a non-resident company forms a subsidiary in Japan (i.e., 7.1 Does your jurisdiction tax profits earned in overseas establishing a company incorporated under the laws of Japan) by branches? making a capital contribution in cash, the formation of the subsidiary is not a taxable event for corporation tax purposes. Yes. A Japanese company is generally subject to Japanese corporation taxes with respect to its worldwide income, with exclusion of a 95% portion of dividends from certain overseas 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident subsidiaries. See question 7.2 below. company (for example, a branch profits tax)? 7.2 Is tax imposed on the receipt of dividends by a local If a foreign parent forms a Japanese subsidiary which is a corporation, company from a non-resident company? such Japanese subsidiary will be treated as a Japanese taxpayer and will be subject to Japanese corporation tax on its worldwide income in The 95% portion of the dividends paid to a Japanese company by the same manner as any other domestic Japanese corporation, subject its overseas subsidiaries is excluded from Japanese corporation to 95% exclusion of dividends from certain foreign subsidiaries tax, subject to certain shareholding threshold and holding period (see question 5.2 above). A branch of a non-resident corporation, requirements. See question 5.2 above. by contrast, is generally only subject to Japanese corporation tax on the profits attributable to its permanent establishment in Japan 7.3 Does your jurisdiction have “controlled foreign under an applicable tax treaty (or under the Japanese domestic tax company” rules and, if so, when do these apply? law applicable from fiscal years beginning on or after April 1, 2016). There is no branch profits tax or other similar tax to which a branch Yes. Japan has its own CFC rules and if such CFC rules are applied to of a non-resident company, but not a subsidiary, is subject. any particular overseas subsidiary, such CFC subsidiary’s net profits (but not its net losses) shall be deemed to constitute the Japanese 6.3 How would the taxable profits of a local branch be parent company’s taxable income in proportion to their shareholding determined in its jurisdiction? percentages, regardless of whether or not such profits are distributed to the parent. These apply to Japanese companies which own 10% or Under the Corporation Tax Act, if a non-resident company which has more of shares in a certain overseas subsidiary more-than-50% owned

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by Japanese resident individuals or companies directly or indirectly, Real Property Related Company shares, such non-resident company and located in a jurisdiction where its effective tax rate is less than or the non-resident individual is required to file a tax return in Japan 20% (applicable for relevant subsidiaries’ fiscal year beginning on and is subject to Japanese income tax or corporation tax, as the case or after April 1, 2015, amended from “20% or less”). The Japanese may be, with respect to any capital gains derived from such transfer. CFC rules were overhauled in 2017 in line with BEPS Action 3, “Designing Effective Controlled Foreign Company Rules”, and the 8.3 Does your jurisdiction have a special tax regime new rules will be applicable for relevant subsidiaries’ fiscal years for Real Estate Investment Trusts (REITs) or their beginning on or after April 1, 2018. Under the new rules: (1) profits equivalent? of the foreign subsidiaries which are either a (a) “paper company”,

(b) “cash box company”, or (c) “company located in the black-list REITs structured in Japan (“J-REITs”) are generally structured in Japan jurisdictions” will be included in the taxable income of the Japanese the form of a company, although it is legally possible to structure parent unless the effective tax rate for the relevant subsidiaries is J-REITs in the form of a trust under Japanese law. Thus, dividends “30%” or higher; (2) profits of the foreign subsidiaries falling out of from J-REITs are, practically, subject to the same taxation as the foregoing categories (1)(a)–(c), but not satisfying the “Economic dividends paid by a local resident company to a non-resident Activity Test”, will be included in the taxable income of the Japanese (please see question 3.1 above), and transfers of investment equity parent unless the effective tax rate for the relevant subsidiaries is to J-REITs are subject to the same taxation as transfers of Real “20%” or higher; and (3) even if the foreign subsidiaries satisfy the Property Related Company shares (please see question 8.2), in “Economic Activity Test”, its “passive income” will be included in general. J-REITs are often structured in the form of certain special the taxable income of the Japanese parent unless the effective tax rate qualified corporate entities established under Japanese law, which for the relevant subsidiaries is “20%” or higher. can deduct as expenses dividends paid to their shareholders if they distribute more than 90% of their distributable profits. 8 Taxation of Commercial Real Estate 9 Anti-avoidance and Compliance 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? Generally, yes. If real property (land or any right on land or any building or auxiliary facility or structure), commercial or otherwise, No. Japanese tax law does not have a general anti-avoidance rule. which is located within Japan is alienated by a non-resident (either However, Japanese tax law includes a so-called “specific” anti- a non-resident individual or a non-resident company), the gross avoidance rule for a family company (i.e., a company where more amount of the consideration received by such non-resident from than 50% of its shares are held by three or fewer shareholders and such alienation is subject to Japanese withholding tax at the rate certain related persons). Japanese tax law also has specific anti- of 10.21% if it is paid, or deemed paid, within Japan, with certain avoidance rules that involve corporate reorganisation transactions exceptions (including no withholding tax for the sale to an individual and consolidated tax return filing. In addition, an anti-avoidance for use as a personal or family residence in consideration for 100 rule was introduced for transactions regarding income attributable million yen or less) and exemptions. to a permanent establishment of overseas corporations, which Regardless of the imposition of the aforementioned withholding is applicable to, among others, internal dealings between a non- tax, if a non-resident (either a non-resident individual or a non- Japanese company and its Japanese branch (from fiscal years resident company) alienates real property located within Japan, beginning on or after April 1, 2016). such non-resident alienator is required to file a tax return in Japan and is subject to Japanese personal income tax or corporation tax, 9.2 Is there a requirement to make special disclosure of as the case may be, with respect to any capital gains derived from avoidance schemes? such alienation. In the case where such non-resident alienator is subject to the aforementioned withholding tax, the amount of No. Japanese tax law does not have a disclosure rule that imposes such withholding tax may be credited against such income tax or a requirement to disclose avoidance schemes. The Japanese tax corporation tax, subject to certain procedural requirements. authorities are studying a potential adoption of mandatory disclosure rules in line with BEPS Action 12. However, given the ambiguity 8.2 Does your jurisdiction impose tax on the transfer of of the scope of the “avoidance schemes”, the tax authorities are an indirect interest in commercial real estate in your apparently being cautious in introducing new rules and a specific jurisdiction? proposal has yet to be seen.

Yes. When a non-resident individual or a non-resident company and his/her/its special related parties, in aggregate, hold: (i) more than 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also 5% of the shares issued by a company with 50% or more of its assets anyone who promotes, enables or facilitates the tax value attributable directly or indirectly to real property (land or avoidance? any right on land or any building or auxiliary facility or structure), commercial or otherwise, which is located within Japan (“Real No. The Japanese tax authorities are studying a potential adoption Property Related Company”) where such shares are either listed on of mandatory disclosure rules applicable to promoters, enablers or a stock exchange or traded over-the-counter; or (ii) more than 2% of facilitators of tax avoidance in line with BEPS Action 12. However, the shares issued by a Real Property Related Company not so listed, the tax authorities are being cautious in introducing new rules, and a the special rules apply. When the special rules are applicable, if the specific proposal has yet to be seen. non-resident individual or the non-resident company transfers the

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documentation approach, under which a separate “master file” 9.4 Does your jurisdiction encourage “co-operative and a “local file” as well as a “country-by-country report” are compliance” and, if so, does this provide procedural required. Any Japanese corporations and foreign corporations with benefits only or result in a reduction of tax? permanent establishments in Japan that are a constituent entity of a multinational enterprise (“MNE”) group with total consolidated Yes. The Japanese tax authorities encourage corporations to revenues of 100 billion yen or more in the previous fiscal year cooperate with the tax authorities and to voluntarily disclose (“Specified MNE Group”) are subject to the new documentation certain information for compliance purposes. As an incentive, rules. Such corporations must file (i) notification as to the ultimate if the authorities acknowledge that a certain taxpayer is well in parent entity, (ii) a country-by-country report, and (iii) a master file compliance with tax laws, the authorities may refrain from auditing Japan with the tax authority online (“e-Tax”). that taxpayer for one year in addition to the period that the authorities The local file (referring specifically to material transactions of the customarily took to audit that taxpayer in the past. However, it is local taxpayer) is mandated to be prepared simultaneously with the up to the discretion of the authorities and a voluntary disclosure will filing of the relevant corporation tax return for transactions with a not necessarily entail exemption or relaxation of any tax audit or certain foreign-affiliated person, with whom (1) the sum of payments other procedural requirements. It will not reduce any tax either. and receipts is 5 billion yen or more, or (2) the sum of payments and receipts for intangible transactions is 0.3 billion yen or more, in the 10 BEPS and Tax Competition previous fiscal year. In addition, presentation of the local file for any transaction the value of which is below the foregoing threshold amounts is to be made with the local tax authority, upon instruction 10.1 Has your jurisdiction introduced any legislation by the auditor, within a certain period designated by the auditor, in response to the OECD’s project targeting Base which is no more than 60 days. Erosion and Profit Shifting (BEPS)? In the master file, a taxpayer is required to report the items as described in Annex I to Chapter 5 of the revised OECD Guidelines, Yes. Japan has introduced legislation in response to Action 2 of which includes a description of the businesses of the MNE, the the BEPS project, which denies exclusion for dividends received MNE’s intangibles, the MNE’s intercompany financial activities, from 25%-owned non-Japanese companies (see question 5.2) as and the MNE’s financial and tax positions. In the country-by- long as they are deductible in the payer country, including dividends country report, a taxpayer is required to report the items as described on Mandatory Redeemable Preference Shares (“MRPS”) issued in in Annex III to Chapter 5 of the revised OECD Guidelines, which Australia and dividends from a Brazilian company. The new rules includes an overview of allocation of income, taxes and business are effective for any dividends received by a Japanese corporate activities by tax jurisdiction, and a list of all the constituent entities taxpayer whose fiscal year begins on or after April 1, 2016, subject of the MNE group included in each aggregation per tax jurisdiction. to a certain grandfathering rule. In the local file, a taxpayer is required to report the items as described In addition, in response to Action 13, “Guidance on Transfer Pricing in Annex II to Chapter 5 of the revised OECD Guidelines, which Documentation and Country-by-Country Reporting”, the Japanese includes a description of the local entity, a description of controlled government introduced new legislation to adopt the three-tiered transactions, and financial information. documentation approach consisting of a country-by-country report, Notification as to the ultimate parent entity (to be filed by the last a master file and a local file, which is applicable to any fiscal year fiscal day of the ultimate parent), a master file and a country-by- beginning on or after April 1, 2016. See question 10.3. country report (to be filed within one year of the last fiscal day of the ultimate parent) are applicable for fiscal years of the ultimate parent 10.2 Does your jurisdiction intend to adopt any legislation beginning on or after April 1, 2016. The new rules for a local file to tackle BEPS which goes beyond what is (to be prepared by the time of the filing of a relevant corporation tax recommended in the OECD’s BEPS reports? return) will be effective for corporation tax in fiscal years beginning on or after April 1, 2017. No. The Japanese tax authorities appear to intend to adopt legislation to tackle BEPS in line with the OECD’s BEPS reports. In addition to the new rules in line with Actions 2 and 13 set forth 10.4 Does your jurisdiction maintain any preferential tax in question 10.1 above, the Japanese government introduced the regimes such as a patent box? new CFC rules in line with BEPS Action 3, “Designing Effective Controlled Foreign Company Rules” and is expected to revise the No. Japan does not maintain any preferential tax regimes such as current transfer pricing regulations in line with the revised OECD a patent box. Transfer Pricing Guidelines under BEPS Actions 8–10, “Aligning Japanese tax law does, however, provide for special tax credits and Transfer Pricing Outcomes with Value Creation”, although the new deductions on certain research and development costs. transfer pricing rules have yet to be seen as of October 1, 2017.

10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)?

In line with BEPS Action 13, in 2016, the Japanese government introduced new legislation in which it adopted the three-tiered

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Shigeki Minami Nagashima Ohno & Tsunematsu JP Tower 2-7-2 Marunouchi, Chiyoda-ku Tokyo 100-7036 Japan

Tel: +81 3 6889 7177 Email: [email protected] URL: www.noandt.com/en Japan

Shigeki Minami is a partner at Nagashima Ohno & Tsunematsu in Tokyo, Japan. Mr. Minami is an expert in general tax law matters, including transfer pricing, international reorganisations, anti-tax- haven rules, withholding tax issues and other international and domestic tax issues. He regularly represents major Japanese and foreign companies in tax audits, tax disputes and competent authority procedures (including advance pricing agreements and mutual agreement procedures) with Japanese and foreign tax authorities and he has litigated tax cases in the National Tax Tribunal of Japan and in Japanese courts. His recent achievements include cancellation of transfer pricing and international reorganisation assessments in the amount of more than USD 100 million, representing major Japanese and international companies. Mr. Minami serves as the Chair of the Asia-Pacific Region Committee of the International Fiscal Association (“IFA”) and as a member of the Practice Council of the International Tax Program at New York University School of Law.

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

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Kazakhstan Safkhan Shahmammadli

SSH Advisors Jahangir Juraev

1 Tax Treaties and Residence 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced subsequently)? 1.1 How many income tax treaties are currently in force in your jurisdiction? According to Kazakhstan’s Constitution, duly ratified international treaties prevail over domestic laws. As of October 2017, Kazakhstan has 52 income tax treaties in force.

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

According to Kazakh tax law, any entity incorporated in Kazakhstan, Generally, Kazakhstan’s tax treaties are mostly based on the OECD as well as any entity whose effective place of management (location model with some provisions being drafted based on (or including of actual managerial authority) is situated in the Republic of elements of) the UN model treaty (e.g. Article 5 Permanent Kazakhstan, shall be recognised as a resident of the Republic of establishment, Article 13 Capital gains). Kazakhstan for tax purposes. Under Kazakh law, the place of effective management is deemed 1.3 Do treaties have to be incorporated into domestic law to be located where the meetings of the actual management body before they take effect? (board of directors or a similar body) take place, in which the ultimate management and/or supervision over the entity’s activities Prior to entry into force, an income tax treaty must be ratified by the is carried out and strategic commercial decisions necessary for the Kazakhstan Parliament, and the law on ratification shall be signed commercial activity of the legal entity are made. by the President, following which the ratification instruments must be exchanged between the signatory countries. Ratified tax treaties have a direct effect in Kazakhstan both under the Constitution and 2 Transaction Taxes by virtue of a general reference in the Kazakhstan Tax Code.

2.1 Are there any documentary taxes in your jurisdiction? 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? Kazakhstan does not have a stamp duty for transactions. The following documentary taxes are envisaged by the local tax Generally, Kazakh treaties do not incorporate specific anti-treaty legislation: state duties; registration fees; licence fees, etc. In most shopping rules or limitation of benefit articles (with rare exceptions). cases, the amount of the state duty or the fee is set out in the Tax The abusive treaty shopping structures are most often challenged Code in the Monthly Calculation Index (“MCI”) established by through application of the “beneficial ownership” concept, which is Kazakhstan’s legislation on the state budget, which in 2017 equals included both in the treaties and the statutory law. 2,269 Kazakh tenge or approximately USD 6. Under the majority of Kazakhstan’s treaties, only the “beneficial Notarisation is required for certain types of agreements, certain owner” is eligible for various treaty benefits, such as, for example, powers of attorney, and wills. Documents are also commonly the reduced withholding tax (“WHT”) rates on interest, dividends notarised to verify signatures and certify transactions. Applicable and royalties. state duties range between approximately US¢ 20 per document (for The Kazakhstan Tax Code includes a definition of a “beneficial the notarisation of signatures or translations) and approximately owner”, which is drafted broadly based on the OECD Commentary USD 30 for the notarisation of lease agreements, loan agreements, and excludes any recipients who are mere intermediaries, agents or financial leases, contractor arrangements, or foundation agreements nominees. of legal entities. The notarisation of agreements for the sale of land plots or buildings in an urban area is approximately USD 60. State duties for the issuance of patents or commonly known trademark certificates, and the registration of assignment agreements, pledge

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agreements, or licensing and sublicensing agreements for industrial banking, insurance, reinsurance and other financial services, the property objects, generally range between USD 6 and USD 10. interest element of finance lease payments, and sales of enterprises. A potentially significant source of exposure to state duties involves various court fees. The state duty for a petition challenging the results 2.4 Is it always fully recoverable by all businesses? If not, of a tax audit is 1% of the amount of the disputed tax and related what are the relevant restrictions? penalties, but it is limited to approximately USD 133,000. The state duty for the filing of a civil law suit is 3% of the value of the claim. A VAT payer can generally recover input VAT paid on goods and Certain types of activities specified in the Law on Licences and services (including import VAT paid at customs and reverse-charge Notifications require a mandatory state licence. Applicable VAT) against its output VAT, with the excess being carried forward licence fees range between approximately USD 20 for the licence against future VAT liabilities. However, no recovery is available for input VAT incurred before the registration of the VAT payer, or on to transport passengers by bus across state borders to about USD Kazakhstan 25,500 for the operation of a casino. For most licences, applicable VAT-exempt purchases. fees range between approximately USD 60 and USD 650. Generally, VAT refunds are available for sales subject to zero- rated VAT. While tax legislation permits tax refunds in other 2.2 Do you have Value Added Tax (or a similar tax)? If so, circumstances, as a matter of practice, cash refunds may be difficult at what rate or rates? to obtain.

VAT at a rate of 12% is charged on taxable domestic transactions and 2.5 Does your jurisdiction permit “establishment only” imports. VAT on export sales of goods, international transportation VAT grouping, such as that applied by Sweden in the services, and certain sales of goods in the territory of special Skandia case? economic zones, is charged at a zero rate. For domestic taxable transactions, VAT is charged on the value Tax legislation in Kazakhstan does not permit VAT grouping. of goods and services being sold based on the transaction price. The amount of VAT payable on taxable turnover is the difference 2.6 Are there any other transaction taxes payable by between the output VAT accrued on the taxable turnover and the companies? input VAT paid to suppliers. VAT on imported goods is payable by importers at the time when the goods clear customs. The value of There are no other transaction taxes. imported goods is calculated at their customs value, plus applicable taxes (except VAT) and customs duties. 2.7 Are there any other indirect taxes of which we should Kazakhstan’s “place of supply” rules determine whether services be aware? provided by non-residents to resident companies are deemed to be provided in Kazakhstan and therefore subject to Kazakh VAT. Kazakhstan imposes excise duties on the import and domestic sale The place of supply for activities connected with real estate is the of automobiles (with engine volume exceeding 3,000 cm3), alcohol, location of the real estate, while the place of supply for services tobacco, crude oil, natural gas, and certain other goods. The duty related to movable property is the place where such services are rate varies depending on the goods involved. actually performed. The place of supply for the provision of consulting, audit, legal and advocacy, accounting, engineering, The following customs payments and taxes are effective in advertising and information processing, and certain other services, Kazakhstan: is considered to be the purchaser’s place of activity. In most other ■ customs duties, ranging between 0% to 80% of the customs cases not enumerated in the Tax Code, the place of supply is the value of the imported goods, which includes transportation seller’s place of activity. If the services provided by a non-resident costs, insurance, royalties (licensing fees), etc.; service provider are deemed to be performed in Kazakhstan under ■ excise duties (where applicable); and the “place of supply” rules, VAT is charged using the reverse ■ VAT on import at the rate of 12% of the customs value of the charge mechanism, which requires the purchaser to self-charge any goods. applicable VAT on the amount paid to the service provider. In most Other customs fees: fees for the customs declaration of goods; cases, this would not represent an additional cost to the Kazakhstan customs escort fees; and fees for the issuance of a preliminary purchaser of the services, as it would presumably be able to offset decision. such input VAT against its own output VAT. Kazakh legal entities, branches and representative offices of foreign legal entities, and individual entrepreneurs, must register for VAT 3 Cross-border Payments with their local tax authority within 10 working days from the end of the month in which their cumulative turnover reaches 30,000 3.1 Is any withholding tax imposed on dividends paid by MCI or approximately USD 190,500 for the calendar year. Other a locally resident company to a non-resident? entities may register for VAT on a voluntary basis. Only taxpayers registered for VAT have to charge VAT on taxable transactions and The applicable WHT rate on dividends paid to a non-resident is have the right to offset input VAT. However, import VAT is paid by 15% (20% if the recipient is located in a “tax haven” jurisdiction). all taxpayers importing goods into Kazakhstan. This rate may be reduced (to 5% or 10%) under the majority of Kazakhstan’s tax treaties (provided, in most cases, that the recipient 2.3 Is VAT (or any similar tax) charged on all transactions of the dividends meets the minimum ownership requirements, or are there any relevant exclusions? ranging between 10% and 30%, depending on the treaty). The domestic tax law generally exempts dividends paid to a non- VAT-exempt activities include, inter alia, the activities of attorneys resident from the WHT in Kazakhstan if the non-resident is not and notaries, land- and residential housing-related turnover, certain registered in a tax haven and all of the following conditions are met:

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■ on the date on which the dividends accrue, the taxpayer has owned shares or participation interests for which dividends 3.8 Is there any withholding tax on property rental are paid for more than three years; payments made to non-residents? ■ the legal entity paying dividends was not a Kazakh subsoil user (e.g. during the period for which the dividends are paid); Generally, income received by non-residents from the rental of and property on the territory of Kazakhstan is subject to withholding tax ■ more than 50% of the assets of the entity paying the dividends at the rate of 20%. as of the day of the payment comprises the property of entities which are not Kazakh subsoil users. 3.9 Does your jurisdiction have transfer pricing rules?

3.2 Would there be any withholding tax on royalties paid Kazakhstan The Transfer Pricing Law applies to international business by a local company to a non-resident? transactions and to certain types of domestic transactions, including transactions involving a loss-making entity, an entity having tax The applicable WHT rate on royalties paid to a non-resident is 15% exemptions, or the sale of mineral resources by a subsoil user. (20% if the recipient is located in a “tax haven” jurisdiction). This Importantly, transfer pricing control applies in Kazakhstan regardless rate can be reduced to 10% under most of Kazakhstan’s tax treaties. of whether the parties to a particular transaction are related. No “safe harbour” is available for any deviation from a market price. 3.3 Would there be any withholding tax on interest paid If the tax or customs authorities determine that there is a deviation by a local company to a non-resident? between the transaction price and the prevailing market price, they may adjust the transaction price accordingly, assess unpaid/ The applicable WHT rate on interest paid to a non-resident is 15% underpaid taxes or customs duties, and impose fines and penalties. (20% if the recipient is located in a “tax haven” jurisdiction). This Taxpayers are required to keep documentation justifying the rate can be reduced to 10% under most of Kazakhstan’s tax treaties. prices used in transactions subject to transfer pricing legislation. Transactions relating to certain goods, such as crude oil, are monitored 3.4 Would relief for interest so paid be restricted by on an ongoing basis by the state authorities, for compliance with the reference to “thin capitalisation” rules? transfer pricing rules. Entities which are subject to monitoring must submit certain documents to the tax authorities on a regular basis, Deductibility of interest income for corporate tax purposes is including a justification of the prices charged, a functional analysis, restricted by thin capitalisation rules. Generally, the rules contain financial reports, the transfer pricing methodology used, and other certain restrictions on the deductibility of certain related party documents. interest and interest payable to lenders which are incorporated in “tax havens”. 4 Tax on Business Operations: General

3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? 4.1 What is the headline rate of tax on corporate profits?

Generally, any interest paid to an unrelated party transaction which The Corporate Income Tax (“CIT”) rate in Kazakhstan is generally is not incorporated in a “tax haven” jurisdiction should be fully 20% of the net profits. Special simplified tax regimes with deductible (please see additional exceptions under question 3.6 substantially reduced tax rates are available for certain individual below). entrepreneurs, small companies, farmers and agricultural producers. All other interest payments would only be deducted in full if the Investors implementing a so-called “priority investment project” are borrower has a debt-to-equity ratio of at least 4:1 (7:1 for financial exempt from the CIT on project-related activities for a maximum institutions). term of 10 years from the date of the execution of the investment contract with the state; they are also exempt from land tax and property tax. Priority investment projects include investment 3.6 Would any such rules extend to debt advanced by a projects performed by newly created legal entities in certain priority third party but guaranteed by a parent company? areas established by the Government of Kazakhstan, where the amount of investments is not less than 2 million MCI (approximately Yes, thin capitalisation restrictions may also apply to interest under USD 13.3 million). The designated priority areas include the loans made available by unrelated lenders, but guaranteed by a production of agricultural machinery and equipment, oil and gas, related party (e.g. parent company). However, the thin capitalisation mining, the chemical and petrochemical industry, pharmaceuticals, restriction would only apply to such interest if the related party transportation and logistics, IT and other industries. guarantee is actually triggered and performed. Furthermore, entities operating in a “special economic zone” created for the development of priority areas in Kazakhstan (currently there 3.7 Are there any other restrictions on tax relief for are 10 special economic zones) are also exempt from CIT. interest payments by a local company to a non- resident? 4.2 Is the tax base accounting profit subject to Any interest paid to a related party at a rate exceeding an “arm’s adjustments, or something else? length” interest rate, may be re-qualified as a disguised dividend and, accordingly, denied a deduction. Generally, the Tax Code contains specific rules for determining taxable base (including rules for determination of both taxable income and deductible expenses). In very broad terms, the

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calculation of income tax base follows International Financial equipment which has not been installed, securities, participation Reporting Standards (“IFRS”) accounting, with a number of shares, etc.) are equal to the difference between the selling price and important deviations (such as limits for deductions of depreciation, the initial cost value of assets (including all costs associated with interest and some other types of expenses). the purchase or production of the assets). Losses on the sale of non- depreciable assets are generally deductible only against gains on the sale of such assets. If those losses cannot be offset during the tax 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? year in which they occurred, they may be carried over for a period of 10 consecutive years to be applied against future gains from the sale of such assets. The statutory tax rate for capital gains is 20%. Clearly supported business-related expenses are generally deductible for CIT purposes, subject to limits on the deductibility Losses from the disposal of fixed assets that include buildings and structures may be carried over to reduce taxable income over a of interest expenses under the thin capitalisation rules, limits on Kazakhstan depreciation of fixed assets, and established limits onper diems paid subsequent 10-year period. By contrast, the residual balance sheet to employees on business trips. Charitable contributions and some value upon the disposal of other fixed assets is deductible for CIT other expenses may be deducted as well (subject to restrictions). purposes, when all of the assets in a particular fixed asset group have However, expenses incurred other than in connection with income- been disposed of. earning activities, fines and penalties paid to the state, and certain Capital losses from the sale of securities may be offset against taxable other expenses, are not deductible. capital gains on other securities of the same type. Excess losses may be carried forward and offset against taxable gains on securities for 10 years following the year in which the loss was incurred, except 4.4 Are there any tax grouping rules? Do these allow for losses arising from the public trading of securities officially for relief in your jurisdiction for losses of overseas listed on the Kazakhstan Stock Exchange (“KASE”). subsidiaries? Capital gains received by a non-resident are subject to taxation in Kazakhstan does not allow tax consolidation, and no relief is Kazakhstan if they arise from the sale of: available for losses incurred by overseas subsidiaries. ■ property located in the territory of Kazakhstan, the rights to which or transactions with which are subject to state registration in accordance with Kazakh legislation (this 4.5 Do tax losses survive a change of ownership? would include real estate); ■ property located on the territory of Kazakhstan, which is Yes, tax losses survive a change of ownership. subject to state registration in accordance with the legislative acts of Kazakhstan (for instance, vehicles);

4.6 Is tax imposed at a different rate upon distributed, as ■ securities issued by a resident legal entity and participation opposed to retained, profits? interests in the charter capital of a resident legal entity or a consortium located in Kazakhstan; or Corporate income tax applies at the same rate to both the retained ■ shares issued by a non-resident and participation interests in the charter capital of a non-resident legal entity or a profit and distributed profit. Distributed dividends may be subject consortium, if 50% or more of the value of such shares, to a further withholding tax, unless the dividends are specifically participation interests, or assets of a non-resident legal entity exempt (e.g. the exemption described under question 3.1 above). is derived from property located in Kazakhstan.

4.7 Are companies subject to any significant taxes not 5.2 Is there a participation exemption for capital gains? covered elsewhere in this chapter – e.g. tax on the occupation of property? While the term “participation exemption” is not used in Kazakhstan’s tax law, certain gains received by a non-resident from sale of shares Buildings and structures which are either treated as fixed assets or participation interest in a Kazakh (or a foreign) entity are exempt or real estate investment in accordance with IFRS are subject to from withholding tax, provided that the recipient of those gains is property tax. Most companies pay property tax on the average not registered in a tax haven and all of the following requirements book value of immovable property at the rate of 1.5% (0.5% for are met: companies operating under the simplified tax return regime). ■ on the date of the sale of shares or participation interests, the Companies and individuals owning land or having the right to use taxpayer has owned such shares or participation interests for land are subject to land tax, which depends on the land plot area, the more than three years; location of the land parcel and the soil quality. ■ the legal entity whose shares or participation interests are Vehicle owners are subject to vehicle tax. being sold, or the consortium participant selling its interest, Entities engaged in the production and export of natural resources is not a subsoil user; and are subject to subsoil taxes. ■ the value of the property belonging to subsoil user(s) in the total value of the assets of the legal entity being sold is not more than 50%. 5 Capital Gains Also, capital gains are exempt in relation to shares which are included in the official list of a stock exchange (Kazakh or foreign), if they are sold through an “open auction”. 5.1 Is there a special set of rules for taxing capital gains and losses? 5.3 Is there any special relief for reinvestment? Capital gains arising from the sale of assets which are not subject to amortisation (land parcels, unfinished construction objects and There is no special relief for reinvestments.

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In cases where a deduction for the head office’s overhead costs is 5.4 Does your jurisdiction impose withholding tax on the claimed under a tax treaty, the branch is required to maintain copies proceeds of selling a direct or indirect interest in local of the relevant financial statements for the head office, so asto assets/shares? be able to provide the tax authorities with them at their expense. Moreover, the branch’s tax accounting policy should stipulate Unless a specific exemption applies (see, for example, question 5.2 the allocation method used for the allocation of the head office’s above), withholding tax applies to any gains derived from the sale overhead expenses. by non-residents of: 1) any property located in Kazakhstan, if such property itself, the rights to it or the transactions with such property, are 6.4 Would a branch benefit from double tax relief in its subject to state registration in Kazakhstan (e.g. real estate, jurisdiction?

Kazakhstan certain transport vehicles, etc.); 2) shares or other equity interest in a Kazakhstan-resident legal The BPT rate under most treaties is reduced to the same maximum entity; or rate, which is applicable to dividend taxation (i.e., in most cases, 3) shares or other equity interest in a non-resident, if at least 10% or 5%). 50% of the value of such shares or interest is derived (directly or indirectly) from assets located in Kazakhstan. 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the branch? 6 Local Branch or Subsidiary? No additional withholding or any other taxes are imposed on the 6.1 What taxes (e.g. capital duty) would be imposed upon remittance of profits by the branch, and the branch may repatriate the formation of a subsidiary? profits at any time that it has a surplus of funds.

Generally, the incorporation of a Kazakh legal entity is subject to 7 Overseas Profits state duty in the range of approx. USD 15–USD 40, depending on the type of entity. 7.1 Does your jurisdiction tax profits earned in overseas branches? 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? Because Kazakh residents are taxed on a worldwide basis, profits earned by a Kazakhstan-resident entity from its overseas branches Generally, local subsidiaries and branches of a non-resident are subject to tax in Kazakhstan. company are subject to similar tax regimes, i.e. their tax bases and tax rates are similar. However, branches are also allowed to claim 7.2 Is tax imposed on the receipt of dividends by a local for deduction of a certain portion of general and administrative company from a non-resident company? expenses incurred by the non-resident company. Also, while local subsidiaries are taxed on their worldwide income, branches of a Dividends received by Kazakh legal entities are not subject to CIT non-resident company generally pay taxes in Kazakhstan only with in Kazakhstan, regardless of whether they are received from resident respect to their locally sourced income. or non-resident companies. There is also a difference in timing for paying the tax on net income after CIT. While for local subsidiaries, the dividend withholding tax 7.3 Does your jurisdiction have “controlled foreign becomes payable only when dividends are actually paid, the branch company” rules and, if so, when do these apply? profits tax is paid annually after filing the CIT declaration regardless of whether the net income has been distributed to the non-resident Any Kazakhstan-resident entity or individual owning, directly or company. indirectly, 10% or more of voting shares (or 10% or more of the Branches of non-resident legal entities are subject to a branch profits charter capital) of a foreign entity which is located in a tax haven tax (the “BPT”) on the net after-tax profit for the relevant year. jurisdiction, shall be subject to tax in relation to the corresponding Under domestic tax law, the BPT rate is 15%. part of any profit recognised in stand-alone financial statements of such foreign entity (less any income tax paid on such profits). 6.3 How would the taxable profits of a local branch be For the above purposes, tax haven jurisdictions include countries determined in its jurisdiction? where the corporate income tax rate is 10% or less, or which have laws on secrecy of financial information or secrecy of the Generally, the taxable profits of a local branch of a non-resident identity of the owners or beneficial ownership (except for those company would be determined similarly to those of a local subsidiary jurisdictions which have concluded international agreements with (see section 4 above). However, as mentioned above, under most Kazakhstan, contemplating mutual exchange of information). The treaties a branch may also be able to claim a tax deduction for a comprehensive list of tax haven jurisdictions is approved by the portion of the overhead expenses incurred by its head office in Government of Kazakhstan and amended from time to time. connection with the branch’s operations. Branches are not allowed to deduct the following charges from the head office: royalties for the use of property or IP; service fees; interest on loans provided, etc. All expenses must be substantiated by supporting documents such as contracts, invoices, receipts and acts of completion of services.

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8 Taxation of Commercial Real Estate 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? From 2019 the Kazakh tax authorities plan to introduce “co- operative compliance” for certain categories of taxpayers. It is Gains of non-residents from the disposal of real estate in Kazakhstan called “horizontal monitoring” and will involve such benefits as the are subject to WHT. provision of an explanation to taxpayers on the tax implications of transactions completed or planned, an absence of tax inspections, 8.2 Does your jurisdiction impose tax on the transfer of a simplification of customs clearance and an exemption from

an indirect interest in commercial real estate in your penalties in certain cases. In return, the taxpayer gives access to his Kazakhstan jurisdiction? accounting and tax information systems.

There is no specific rule for taxation of indirect ownership of Kazakh real estate. However, a similar result is achieved under Kazakh tax 10 BEPS and Tax Competition law by way of taxation of capital gains earned by non-residents from: (i) the sale of shares or other equity interest in a Kazakhstan- 10.1 Has your jurisdiction introduced any legislation resident entity; and (ii) the sale of shares in a non-resident entity, if in response to the OECD’s project targeting Base 50% or more of the value of such shares is derived from any assets Erosion and Profit Shifting (BEPS)? (including real estate or movable property) located in Kazakhstan. As of October 2017, Kazakhstan has not implemented any BEPS- 8.3 Does your jurisdiction have a special tax regime related legislation; however, it is actively working on joining the for Real Estate Investment Trusts (REITs) or their OECD initiatives targeting BEPS. equivalent?

10.2 Does your jurisdiction intend to adopt any legislation Yes, Kazakhstan has a special tax regime for Real Estate Investment to tackle BEPS which goes beyond what is Funds. recommended in the OECD’s BEPS reports?

9 Anti-avoidance and Compliance There is no information on the intention of the local tax bodies to adopt such legislation.

9.1 Does your jurisdiction have a general anti-avoidance 10.3 Does your jurisdiction support public Country-by- or anti-abuse rule? Country Reporting (CBCR)?

Kazakh tax law does not have a general anti-avoidance or anti-abuse Currently, Kazakhstan is working on the implementation of CBCR. rule.

10.4 Does your jurisdiction maintain any preferential tax 9.2 Is there a requirement to make special disclosure of regimes such as a patent box? avoidance schemes?

Kazakhstan does not maintain any tax regime similar to a patent No special disclosure of tax avoidance schemes is required. box.

9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax avoidance?

Currently, the Kazak legislation does not have any rules targeting those intermediaries who promote, enable or facilitate tax avoidance.

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Safkhan Shahmammadli Jahangir Juraev SSH Advisors SSH Advisors 188 Dostyk Avenue 188 Dostyk Avenue Kulan Business Center, Office 804 Kulan Business Center, Office 804 050051 Almaty 050051 Almaty Kazakhstan Kazakhstan

Tel: +7 727 259 6262 Tel: +7 727 259 6262 Email: [email protected] Email: [email protected] URL: www.sshtax.com URL: www.sshtax.com

Mr. Safkhan Shahmammadli is the founder and Managing Partner Mr. Jahangir Juraev is a Co-Managing Partner who joined SSH Kazakhstan of SSH Advisors, with more than 18 years of experience in providing Advisors in 2013. Prior to this, Jahangir was a tax partner with EY consulting services in tax and law. Prior to establishing SSH Advisors, Kazakhstan where he led the International Tax Services and Financial Safkhan worked as the Tax & Legal Director for a large private equity Services groups. Jahangir has over 18 years of experience in fund in Kazakhstan, whose partners included Goldman Sachs, Mittal providing consulting services in tax (Arthur Andersen, EY). Prior to Investments and several high-net-worth individuals. joining a consulting business in 1998, Jahangir worked in the Treasury department of ABN AMRO Bank, Uzbekistan. For more than 10 years of his career, Safkhan has worked for international accounting and law firms in Kazakhstan, Azerbaijan and In addition to tax law, Jahangir has a broad understanding of various the UK (such as PWC, KPMG, EY and Baker Botts). business and investment-related issues which domestic and foreign investors encounter in their operations. He has proven experience In addition to tax law, Safkhan has broad experience in other areas of of tailoring solutions to specific requirements of a business within the law, such as contracts, property law, corporate law, and employment framework of Kazakhstan and international tax law. law. Jahangir holds a Master’s degree in Banking and Finance from Mr. Shahmammadli holds a Master’s degree in Law from the LSE Tashkent State University of Economics. He has completed one year (1999) and an LL.M. in Taxation from New York University School of in the Business Administration Program at Emory University, USA. Law (2004). He obtained his Bachelor’s degree in International Law Jahangir is an author of several publications and has participated as a from Baku State University (1997). speaker in various international conferences on taxation issues.

SSH Advisors is a niche advisory practice with specialist expertise in the full scope of tax, legal and finance issues, and has been operating in Kazakhstan since 2009. SSH Advisors specialises in helping businesses enter, operate, expand and transact in Kazakhstan. SSH Advisors has a solid reputation and a proven track record on complex, high-profile, cross-border transactions. Core services include: ■■ Legal Services. ■■ Tax Consulting. ■■ Accounting & Financial Services. With a strong background and an established presence in Almaty and Astana, SSH Advisors assists a wide range of clients, from large multinationals to fast-growing entrepreneurial clients. SSH Advisors is widely recognised in Central Asia and the Commonwealth of Independent States as a leading specialist for tax, legal and financial advice. Its tax and legal services include: tax-efficient structuring of foreign investments into Kazakhstan and vice versa; tax litigation; legal support in the M&A process; provision of legal and tax due diligence; assistance and legal support to companies undergoing reorganisation or liquidation; and advice on various regulatory, labour and intellectual property issues, etc.

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Kosovo Andi Pacani

Boga & Associates Fitore Mekaj

1 Tax Treaties and Residence 1.6 What is the test in domestic law for determining the residence of a company?

1.1 How many income tax treaties are currently in force in your jurisdiction? The test of residence of a company is whether a company: (i) is established in Kosovo; or (ii) has its place of effective management in Kosovo. Kosovo, as an independent country, has concluded several new tax treaties, such as those with (i) the Republic of Albania (2016), (ii) the Republic of Macedonia (2014), (iii) the Republic 2 Transaction Taxes of Turkey (2016), (iv) Slovenia (2015), (v) the Czech Republic (published in the Official Gazette on 27 March 2015), (vi) the United Kingdom (2016), (vii) Hungary (2015), (viii) the Republic 2.1 Are there any documentary taxes in your jurisdiction? of Croatia (published in the Official Gazette on 8 June 2017), and (ix) Switzerland (signed on 26 May 2017, not yet published in the No, there are no documentary taxes in Kosovo. Official Gazette). Kosovo has also acceded to other tax treaties on the avoidance of double taxation with respect to taxes on income 2.2 Do you have Value Added Tax (or a similar tax)? If so, and capital from the former Yugoslavia (with Germany, Belgium, at what rate or rates? the Netherlands and Finland, as well as with the Czech Republic for the avoidance of double taxation on inheritance tax). Kosovo introduced VAT in 2001. A new Law “On VAT” entered into force on 1 September 2015. The standard rate of VAT is 18%; 1.2 Do they generally follow the OECD Model Convention the reduced rate of VAT is 8%; and exports are zero-rated. The or another model? turnover threshold for registration purposes is set to EUR 30,000.

Kosovo tax treaties generally follow the OECD model. 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? 1.3 Do treaties have to be incorporated into domestic law before they take effect? The following activities are VAT-exempt: ■ insurance and reinsurance transactions; The new tax treaties must be ratified by Parliament. A treaty ratified ■ financial services; by Parliament becomes part of the Kosovo legal system after ■ the supply of postage stamps; publication in the Official Gazette, and prevails over any law which differs from the treaty’s provisions. ■ the supply at face value of fiscal stamps and other similar stamps; ■ betting, lotteries and other forms of gambling; 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? ■ the supply of land; ■ the supply of houses, apartments or other accommodation The treaties do not incorporate anti-treaty shopping rules. used for residential purposes; and ■ the leasing or letting of immovable property.

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

A treaty prevails over domestic law regardless of whether the Generally, taxpayers registered for VAT are entitled to recover the domestic legislation existed previously or is introduced subsequently input VAT, provided that the VAT is charged in relation to their to it. taxable activity. When taxpayers perform both taxable and exempt

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supplies, VAT may be partially reclaimed. VAT cannot be reclaimed on certain recreation expenses and representation costs, and it is 3.7 Are there any other restrictions on tax relief for limited on expenses for passenger vehicles which are not used solely interest payments by a local company to a non- resident? for business purposes.

No, there are no other restrictions on tax relief for interest payments 2.5 Does your jurisdiction permit “establishment only” by a local company to a non-resident. VAT grouping, such as that applied by Sweden in the Skandia case? 3.8 Is there any withholding tax on property rental payments made to non-residents?

Kosovo No, Kosovo does not permit “establishment only” VAT grouping.

Yes. There is a 9% withholding tax on property rental payments 2.6 Are there any other transaction taxes payable by made to non-residents. companies?

There is an excise tax which applies to a limited number of goods 3.9 Does your jurisdiction have transfer pricing rules? such as coffee, tobacco, alcoholic drinks, soft drinks, derivatives of petroleum, and motor vehicles used mainly for the transport of The Corporate Income Tax Law provides that the prices between passengers. related parties should be set at open market value. Such value should be determined under the uncontrolled price method, and when this is not possible, under the resale price method or the cost-plus method. 2.7 Are there any other indirect taxes of which we should Additional rules are provided in an administrative instruction. be aware?

Except for VAT and excise, there are no other indirect taxes. 4 Tax on Business Operations: General

3 Cross-border Payments 4.1 What is the headline rate of tax on corporate profits?

The Kosovo Corporate Income Tax Law provides for a rate of 10%. 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 4.2 Is the tax base accounting profit subject to No, there is no withholding tax on dividends distributed from a adjustments, or something else? Kosovo-resident company. The taxable base is calculated starting from the profit shown in the financial statements, and is adjusted in accordance with the 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? limitations provided in the Corporate Income Tax Law.

Yes. There is withholding tax at a rate of 10% on royalties paid by 4.3 If the tax base is accounting profit subject to a Kosovo company to a non-resident. adjustments, what are the main adjustments?

The Corporate Income Tax Law provides a list of expenses that are 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? non-deductible for tax purposes, consisting of: ■ fines, penalties and interest imposed by any public authority Yes, there is withholding tax at a rate of 10% on interest paid by a and expenses related to them; Kosovo company to a non-resident. ■ income tax paid or accrued for the current or previous tax period and any interest or late penalty incurred for its late payment; 3.4 Would relief for interest so paid be restricted by ■ any loss from the sale or exchange of property between reference to “thin capitalisation” rules? related persons; ■ pension contributions above the maximum amount allowed No, there are no “thin capitalisation” rules or any similar rules. by the Kosovo Pension Law; ■ bad debts that do not meet the specified conditions; 3.5 If so, is there a “safe harbour” by reference to which ■ contributions made for humanitarian, health, education, tax relief is assured? religious, scientific, cultural, environmental protection and sports purposes, which exceed 5% of taxable income (before No, there is no such provision. the deduction of such expenses); ■ representation costs (these include publicity, advertising, entertainment and representation) which exceed 2% of the 3.6 Would any such rules extend to debt advanced by a total gross income; and third party but guaranteed by a parent company? ■ accrued expense for which the withholding tax should be paid, unless such expense is paid on or before 31 March of There are no such rules in place. the subsequent tax period.

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4.4 Are there any tax grouping rules? Do these allow 6.2 Is there a difference between the taxation of a local for relief in your jurisdiction for losses of overseas subsidiary and a local branch of a non-resident subsidiaries? company (for example, a branch profits tax)?

No, there are no tax grouping rules. There is no difference between the taxation of a locally formed subsidiary and the branch of a non-resident company.

4.5 Do tax losses survive a change of ownership? 6.3 How would the taxable profits of a local branch be As a general rule, the losses may be carried forward for 6 (six) years, determined in its jurisdiction? Kosovo but they do not survive a change of more than 50% in ownership or a change in the legal form of the entity. Branches are taxed only on the taxable income from a Kosovo source of income. The taxable income is determined in the same manner as for resident companies. Taxable income of branches is 4.6 Is tax imposed at a different rate upon distributed, as subject to Corporate Income Tax at the same rate of 10%. opposed to retained, profits?

No, there is no difference in this regard. 6.4 Would a branch benefit from double tax relief in its jurisdiction?

4.7 Are companies subject to any significant taxes not Branches have the same treatment under the local legislation. covered elsewhere in this chapter – e.g. tax on the occupation of property? 6.5 Would any withholding tax or other similar tax be Yes, there is a property tax in Kosovo. All persons who own, use or imposed as the result of a remittance of profits by the occupy immovable property are subject to tax on real estate. The branch? Municipal Assembly of each municipality sets the property tax rates on an annual basis at the rate of 0.15% to 1% of the market property No, there is no withholding tax or other tax with regard to the value. remittance of profits by the branch.

5 Capital Gains 7 Overseas Profits

5.1 Is there a special set of rules for taxing capital gains 7.1 Does your jurisdiction tax profits earned in overseas and losses? branches?

The Corporate Income Tax Law indicates the rules applicable to Foreign-sourced income is taxable in Kosovo. However, tax credit capital gains. As a general rule, capital gains and losses are treated is allowable for the amount of income tax paid overseas for the as ordinary income/losses from economic activity. Capital gains are income derived abroad. not recognised for fixed assets which are depreciated in a pool and purchased prior to 1 January 2010. 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? 5.2 Is there a participation exemption for capital gains? No, dividends distributed by a non-resident to a local company are No, there is no participation exemption for capital gains. considered as exempt income.

5.3 Is there any special relief for reinvestment? 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? No, there is no relief for reinvestment. No, there are no “controlled foreign company” rules.

5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local 8 Taxation of Commercial Real Estate assets/shares?

There is no withholding tax on the proceeds of selling a direct or 8.1 Are non-residents taxed on the disposal of indirect interest in local assets/shares. commercial real estate in your jurisdiction?

Non-residents are taxed on the disposal of commercial real estate in 6 Local Branch or Subsidiary? Kosovo, at a rate of 10% of the realised profit.

6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary?

There are no taxes payable upon the formation of a subsidiary.

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8.2 Does your jurisdiction impose tax on the transfer of 9.4 Does your jurisdiction encourage “co-operative an indirect interest in commercial real estate in your compliance” and, if so, does this provide procedural jurisdiction? benefits only or result in a reduction of tax?

No, there is no tax on the transfer of an indirect interest in commercial There are no provisions encouraging “co-operative compliance”. real estate located in Kosovo. 10 BEPS and Tax Competition 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their Kosovo equivalent? 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base No, Kosovo does not have any special regime for REITs or their Erosion and Profit Shifting (BEPS)? equivalent. Kosovo has not introduced any legislation in response to the OECD’s project targeting BEPS. 9 Anti-avoidance and Compliance

10.2 Does your jurisdiction intend to adopt any legislation 9.1 Does your jurisdiction have a general anti-avoidance to tackle BEPS which goes beyond what is or anti-abuse rule? recommended in the OECD’s BEPS reports?

The Tax Procedure Law provides for the right of tax authorities No, Kosovo does not intend to adopt any legislation to tackle BEPS. to disregard and re-characterise a transaction or element of the transaction that does not have a substantial economic effect, where 10.3 Does your jurisdiction support public Country-by- the form of the transaction does not reflect its economic substance Country Reporting (CBCR)? and where it was entered into as part of a scheme to avoid a tax liability. No, Kosovo does not support public CBCR.

9.2 Is there a requirement to make special disclosure of 10.4 Does your jurisdiction maintain any preferential tax avoidance schemes? regimes such as a patent box?

No, there are no requirements to disclose avoidance schemes. No, Kosovo does not maintain any preferential tax regimes.

9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax avoidance?

No, there are no such rules.

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Andi Pacani Fitore Mekaj Boga & Associates Boga & Associates Ibrahim Rugova Str. Nena Tereza Street P.O. Box 8264 Entry 30, No.5 Tirana Pristina Albania Kosovo

Tel: +355 4 225 1050 Tel: +381 38 223 152 Email: [email protected] Email: [email protected] URL: www.bogalaw.com URL: www.bogalaw.com Kosovo Andi is a Senior Associate at Boga & Associates, which he joined in Fitore is a Senior Associate at Boga & Associates, which she joined 2006. in 2010. His practice is focused on accounting, tax and regulatory matters. Her practice covers accounting and tax services. Over several years, Andi has gained ample experience in the application Fitore has developed a particular expertise in accounting services as of accounting regulations (national and international standards), part of the accounting and tax team in Kosovo. corporate tax law and other fiscal laws. These assignments involve She graduated in Finance from the South-East European University of regular assistance to local and international clients in both the Albania Tetovo, Macedonia in 2008. and Kosovo jurisdictions. Fitore is a Certified Accountant in Kosovo. Andi graduated in Business Administration from the University of Tirana, Albania in 1999. He has been a member of the Approved Accountants Association since 2005. Andi is fluent in English and Italian.

Boga & Associates, established in 1994, has emerged as one of the premier law firms in Albania, earning a reputation for providing the highest quality of legal, tax and accounting services to its clients. The firm also operates in Kosovo (Pristina), offering a full range of services. Until May 2007, the firm was a member firm of KPMG International and the Senior Partner/Managing Partner, Mr. Genc Boga was also a Senior Partner/Managing Partner of KPMG Albania. The firm’s particularity is linked to the multidisciplinary services it provides to its clients, through an uncompromising commitment to excellence. Apart from the widely consolidated legal practice, the firm also offers the highest standards of expertise in tax and accounting services, with keen sensitivity to the rapid changes in the Albanian and Kosovo business environment. The firm delivers services to leading clients in major industries, banks and financial institutions, as well as to companies engaged in insurance, construction, energy and utilities, entertainment and media, mining, oil and gas, professional services, real estate, technology, telecommunications, tourism, transport, infrastructure and consumer goods. The firm is continuously ranked as a “top tier firm” by The Legal 500, by Chambers and Partners for Corporate/Commercial, Dispute Resolution, Projects, Intellectual Property and Real Estate, as well as by IFLR in Financial and Corporate Law. The firm is praised by clients and peers as a “law firm with high-calibre expertise”, “the market-leading practice” with “a unique legal know-how”, distinguished “among the elite in Albania” and described as “accessible, responsive and wise”.

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Liechtenstein

Sele Frommelt & Partners Attorneys at Law Ltd. Heinz Frommelt

nevertheless apply in respect of privileged taxed entities (i.e. subject 1 Tax Treaties and Residence to merely the minimum income tax; see question 4.1 below).

1.1 How many income tax treaties are currently in force in 1.5 Are treaties overridden by any rules of domestic your jurisdiction? law (whether existing when the treaty takes effect or introduced subsequently)? To date, Liechtenstein has concluded 19 Double Taxation Agreements (DTAs), of which three are not yet in force. Liechtenstein has signed International treaties ratified by Liechtenstein rank higher than DTAs with the following countries (in alphabetical order): Andorra domestic law. Consequently, a treaty override is not conceivable. (2015); Austria (1955, amended in 1969 and 2013); Bahrain (2012, not yet in force); the Czech Republic (2014); Georgia (2015); 1.6 What is the test in domestic law for determining the Germany (2011); Guernsey (2014); Hong Kong SAR PRC (2010); residence of a company? Hungary (2015); Iceland (2016); Luxembourg (2009); Malta (2013); Monaco (2017, in force as of 1 January 2018); San Marino (2009); Corporate income tax is applicable to legal entities, including Singapore (2013); Switzerland (1995, amended 2015); the United foundations, which are thus considered separate taxpayers. Arab Emirates (2015, in force as of 1 January 2018); the United Conversely, partnerships and/or trusts are deemed transparent for Kingdom (2012); and Uruguay (2010). tax purposes. Any legal entity having its registered seat (place Liechtenstein is keen on expanding its DTA network. As a result, defined as such in the statutes) or place of effective management negotiations are ongoing with several jurisdictions, in particular in Liechtenstein is subject to unlimited corporate tax liability in with major European countries, for entering into further DTAs. Liechtenstein (Art. 44 para. 1 Tax Act). The place of effective management is deemed as the place where the central entrepreneurial 1.2 Do they generally follow the OECD Model Convention activity for the entity is undertaken (Art. 2 para. 1 lit. d) Tax Act), or another model? i.e. the place where the strategic management decisions are made. Such is not the place where the day-to-day administration of the All DTAs concluded by Liechtenstein follow the OECD Model entity is carried out. The corporate income tax rate is 12.5% on the Convention. The only exception to this would be the amended DTA entity’s worldwide taxable income, with a minimum payable annual with Switzerland, which entered into force on 1 January 2017, and tax of CHF 1,800 as of 1 January 2017. likewise follows the OECD Model Convention. 2 Transaction Taxes 1.3 Do treaties have to be incorporated into domestic law before they take effect? 2.1 Are there any documentary taxes in your jurisdiction? DTAs are signed by the Government and must be approved by the Liechtenstein Parliament and published in the Official Gazette in Liechtenstein is part of the Swiss customs area, for which reason order to come into effect and become directly binding. the Swiss federal legislation on stamp duties (including formation duty, duty on insurance premiums and securities transfer stamp tax) is directly applicable in Liechtenstein. 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? Swiss formation (or issuance) duty is levied at a rate of 1% with an allowance of CHF 1 million upon formation of a company Yes. In general, the DTAs concluded so far contain anti-treaty limited by shares, a limited liability company or a cooperative, the shopping rules, and all future DTAs shall contain such rules in increase of its statutory capital or, in the case of a non-repayable light of Liechtenstein’s commitment to implement BEPS Action equity contribution, by the shareholder. Certain transactions (e.g. Point 6 (see question 10.1 below). Currently, the DTAs with Hong restructuring within a corporate group) are tax-exempt. Kong SAR PRC, Luxembourg, Malta and Singapore do not contain The Swiss duty on insurance premiums applies upon insurance limitation-on-benefits (LOB) clauses. However, with respect to contracts concluded by a Liechtenstein-based insurance company Luxembourg, the two Governments have agreed that LOB shall or between a Liechtenstein-resident policyholder and a non-

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Liechtenstein-based insurance company. The standard rate amounts rendered within Switzerland or Liechtenstein by an entrepreneur to 5% of the premium; the rate for life insurance is 2.5%. Several resident in Liechtenstein, are subject to VAT. In addition, VAT is types of insurance are exempt. levied by a reverse charge procedure upon services imported from Swiss securities transfer stamp tax applies upon the sale of an entrepreneur based outside the VAT area (i.e. Switzerland and certain securities, viz. mainly bonds, shares (in companies or Liechtenstein), provided the annual aggregate amount exceeds CHF funds) or other participating rights, provided one of the directly 10,000. Import of goods from outside Switzerland is also subject or (as an intermediary) indirectly involved parties is a Swiss- or to import duty. The VAT Act lists several transactions which are Liechtenstein-resident stockbroker, are deemed as stockbrokers in not taxable. The most important are services by medical doctors, particular Swiss or Liechtenstein banks, or securities dealers, but dentists and other medical practitioners, children and youth care, also any corporate entity with more than CHF 10 million worth of services in the area of education and training, artistic performances, taxable securities in its books. The applicable rates vary between insurance and reinsurance transactions, dealing with securities and

0.15% and 0.30%, depending on the residency of the entity having fund shares, transfer of real estate, letting of real estate and sale of Liechtenstein issued the taxable security. agricultural products. In all those cases where the Swiss federal legislation on stamp duties An entrepreneur with an annual turnover below CHF 100,000 is is not applicable, a special Liechtenstein formation duty and/or a exempted from VAT duties. duty on insurance premiums are levied (Art. 66 and 67 Tax Act). The Liechtenstein formation duty is levied upon the formation of 2.4 Is it always fully recoverable by all businesses? If not, a legal entity, transfer of its registered seat into Liechtenstein or what are the relevant restrictions? increase of the statutory capital, unless the Swiss legislation on stamp duties is already applicable. Thus, such duty applies, e.g., VAT is, in principle, recoverable for all entrepreneurs in relation in the case of the setting up of a Liechtenstein foundation or a to the VAT paid on all goods and services (including the import Liechtenstein establishment (Anstalt). The standard rate is 1% with service VAT). In case the taxpayer uses the goods or services both an allowance of CHF 1 million, which decreases to 0.5% for capital for entrepreneurial and non-entrepreneurial purposes, the VAT is above CHF 5 million and to 0.3% for capital above CHF 10 million. recoverable only to a certain extent. Analogous provisions apply in Foundations are subject to a formation duty at a rate of 0.2% on their the case of privately used goods or services. statutory capital; at least 200 CHF. The same rate applies upon the setting up of a trust. 2.5 Does your jurisdiction permit “establishment only” The Liechtenstein duty on insurance premiums is charged on VAT grouping, such as that applied by Sweden in the insurance contracts, provided the insured risk is located in Skandia case? Liechtenstein and unless the Swiss legislation on stamp duties is already applicable. The provision is very much coined after the Entities having their registered seat or permanent establishment in Swiss equivalent, thus the same rates apply (standard rate 5%, life Liechtenstein, which are connected under a uniform direction of a insurance 2.5%). Several types of insurance are exempt. single entity, may file a motion to be treated as a single VAT-taxable Moreover, Liechtenstein has a capital gains tax which is levied upon entity (VAT group). The group can also comprise entities which the transfer of real estate (see question 8.1 below). do not pursue a commercial activity, as well as individuals. The pooling to a VAT group can be activated as of the beginning of each taxable year and be terminated as of the end of the respective taxable 2.2 Do you have Value Added Tax (or a similar tax)? If so, year (Art. 13 VAT Act). at what rate or rates? A VAT group can be formed by any legal entity, partnerships or individuals as long as they have their registered seat or a permanent Because of the customs area with Switzerland, Liechtenstein is establishment in Liechtenstein. Entities having their registered seat part of the Swiss VAT area and applies the substantive Swiss VAT abroad can be part of a VAT group provided they have a permanent regime. Liechtenstein has thus enacted its own VAT Act (2009) and establishment in Liechtenstein. Permanent establishments of Swiss- a VAT Ordinance (2009), which are modelled upon the Swiss legal incorporated companies are attributed to the Swiss headquarters and basis. can therefore form part of a Swiss VAT group. Conversely, Swiss The standard rate is 8%. A reduced rate of 2.5% applies for certain permanent establishments of Liechtenstein-incorporated companies goods like food, medicaments, books and newspapers, inter alia. A are attributed to the Liechtenstein headquarters and can thus not be special rate of 3.8% applies for bed and breakfast facilities (see Art. part of a Swiss VAT group, but only of a Liechtenstein VAT group. 25 VAT Act). From 1 January 2018, a partial revision of the Swiss VAT Act 2.6 Are there any other transaction taxes payable by will be introduced. This revision will see a reduction in the companies? VAT related competitive disadvantage of domestic enterprises, a reduced tax rate for electronic newspapers and magazines, tax No, there are no other transaction taxes apart from the stamp duties relief for the cooperation of the communities, and margin taxation (see question 2.1 above) and real estate capital gains tax (see for collectibles. Further details are yet to be published by the question 8.1 below). Liechtenstein Government.

2.7 Are there any other indirect taxes of which we should 2.3 Is VAT (or any similar tax) charged on all transactions be aware? or are there any relevant exclusions?

No, there are not. The general principle is that all services within the meaning of the VAT Act (i.e. supply of goods and provision of services), which are

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3 Cross-border Payments 3.9 Does your jurisdiction have transfer pricing rules?

3.1 Is any withholding tax imposed on dividends paid by The Liechtenstein Tax Act contains a general “arm’s length” a locally resident company to a non-resident? principle in Art. 49, but not an explicit transfer pricing rule. Art. 49 Tax Act states that commercial transactions between related persons Liechtenstein does not levy any withholding tax on dividends. must correspond to the terms generally applied between unrelated parties. The term “related person” has been defined as relatively far-reaching, including not only participating entities, entities of 3.2 Would there be any withholding tax on royalties paid which the taxpayer is a beneficiary, and members of the board of by a local company to a non-resident? the taxpayer, but even persons to whom the taxpayer is connected

Liechtenstein by personal bonds of family relationship or friendship (Art. 31a Liechtenstein does not levy any withholding tax on royalties. Tax Ordinance). With regard to transfer pricing, the administrative practice of the Tax Authority broadly follows the OECD Transfer 3.3 Would there be any withholding tax on interest paid Pricing Guidelines. by a local company to a non-resident? At the time of writing, the Liechtenstein Government is proposing to amend Art. 49 Tax Act to introduce a general duty for taxpayers to Liechtenstein does not levy any withholding tax on interest. keep transfer pricing documentation on significant transactions with However, under the terms of a Tax Cooperation Agreement with related persons (see question 10.1 below). Further, the provision is Austria, Liechtenstein paying agents, e.g. banks, are obliged to scheduled to be amended to also affect permanent establishments. withhold a tax in the amount of 25% on interest paid to an individual It is possible, and also general practice, to obtain an Advance Pricing resident in Austria or to an investment vehicle deemed transparent Agreement from the Tax Authority in relation to the applicable for tax purposes with a beneficial owner resident in Austria, unless transfer price. the bank’s client and beneficial owner has waived his banking secrecy right and instructed the bank to notify the interest payment directly to the Austrian Tax Authority. 4 Tax on Business Operations: General

3.4 Would relief for interest so paid be restricted by 4.1 What is the headline rate of tax on corporate profits? reference to “thin capitalisation” rules?

Corporate profits are taxed at a flat rate of 12.5% p.a., whereby a Liechtenstein does not have thin capitalisation rules. However, with minimum annual tax of currently CHF 1,800 is payable irrespective respect to interest-bearing liabilities between related parties booked in Swiss francs, the Liechtenstein Tax Authority currently recognises of gains made by the legal entity. Such minimum tax has increased a maximum tax rate allowance of 1.5%. For liabilities in other from CHF 1,200 to CHF 1,800 as of 1 January 2017. currencies, other rates apply (e.g. 2% for EUR, 2.75% for GBP). A special tax regime applies for legal entities qualifying as so-called Private Asset Structures (basically a vehicle – very often a private foundation – used for the management of an individual’s private 3.5 If so, is there a “safe harbour” by reference to which wealth without pursuing an economic activity). Those entities tax relief is assured? pay merely the minimum annual tax irrespective of their effective income and are not required to file a tax return. See question 3.4 above.

4.2 Is the tax base accounting profit subject to 3.6 Would any such rules extend to debt advanced by a adjustments, or something else? third party but guaranteed by a parent company?

Yes, that may be the case. The relevant tax base is the annual profit Generally no, as the administrative practice illustrated in question pursuant to the financial statements drawn up under the applicable 3.4 above applies only between related entities. However, each commercial and accounting rules. case must be looked at individually as further utilisation of the loaned amount may have an influence on the assessment by the Tax Authority. 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments?

3.7 Are there any other restrictions on tax relief for The main adjustments leading to an increase in the net profit interest payments by a local company to a non- resident? are: depreciations, value adjustments and reserves which are not commercially justified; profit distributions and hidden profit distributions to shareholders or related persons; and tax expenses; as No, there are not. well as income generated from capital made available to shareholders or related persons which does not correspond to the “arm’s length” 3.8 Is there any withholding tax on property rental principle. payments made to non-residents? Conversely, several income items are tax-exempt, including dividends from subsidiaries, capital gains from the sale of subsidiaries, There is no withholding tax on property rental payments made to rental income from foreign real estate, income from agricultural non-residents. However, real estate located in Liechtenstein which and silvicultural land abroad, the net result of foreign permanent is owned by a non-resident is subject to limited wealth taxation, and establishments, inter alia. the owner is under a duty to file a tax return in relation thereto.

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4.4 Are there any tax grouping rules? Do these allow 5.3 Is there any special relief for reinvestment? for relief in your jurisdiction for losses of overseas subsidiaries? No, there are not.

The Tax Act provides for group taxation upon request. A tax group is possible with a parent subject to unlimited tax liability in Liechtenstein, 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local and affiliated group members subject to tax in Liechtenstein or abroad. assets/shares? Group taxation allows the proportionate offset of losses from the subsidiaries to the group parent, or from the group parent to any group The sale of real estate located in Liechtenstein is subject to real member subject to unlimited tax liability in Liechtenstein. estate capital gains tax, payable by both resident and non-resident

Indeed, the provisions allow for relief for losses of foreign owners. The applicable rate is equal to the tax bracket applicable for Liechtenstein subsidiaries. unmarried individuals plus a municipality surcharge of 200%. The Tax grouping for VAT purposes is also feasible. sale of shares of a real estate holding company owning real estate in Liechtenstein is treated for tax purposes as if the real estate was sold directly. The tax is owed by the seller. 4.5 Do tax losses survive a change of ownership? The sale of shares of local companies is not subject to withholding Yes. Losses may be carried forward for an indefinite period of time. taxes. Special rules apply in relation to losses from a foreign permanent establishment. 6 Local Branch or Subsidiary?

4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits? 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? No. Liechtenstein taxes profits on an annual basis as they arise. The subsequent utilisation of the profits does not trigger tax consequences. Any Liechtenstein company formed as a subsidiary of a resident or In the case of a partnership, profits are taxed immediately at the non-resident parent company will be subject to the same formation progressive income tax rate of each partner, irrespective of a duties applied for all legal entities, i.e. depending on the legal form, distribution. either the Swiss formation (issuance) duty or the Liechtenstein formation duty (see question 2.1 above).

4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the 6.2 Is there a difference between the taxation of a local occupation of property? subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? No; there is no such tax on the occupation of property. Foundations and trusts with settlors and/or beneficiaries resident in Liechtenstein A subsidiary locally formed or having its seat transferred into may be subject to endowment tax if assets are transferred to a Liechtenstein is subject to taxation on its worldwide income. foundation or trust which is deemed opaque for wealth tax purposes. The branch of a non-resident company is taxed as a permanent Endowment tax is not applied to companies limited by shares and establishment only on its Liechtenstein-sourced income, which is other types of corporate entities. deemed as the income from agricultural and silvicultural land in Liechtenstein, rental income from real estate located in Liechtenstein and the taxable net income from a permanent establishment located 5 Capital Gains in Liechtenstein. The definition of “permanent establishment” contained in the Tax Act is akin to the definition used in the OECD Model Tax Convention. 5.1 Is there a special set of rules for taxing capital gains and losses? 6.3 How would the taxable profits of a local branch be Capital gains on the sale of participations in Liechtenstein or foreign determined in its jurisdiction? legal entities, as well as the sale of real estate located outside of Liechtenstein, are tax-exempt. Gains realised upon the sale of other A local branch is subject to limited tax liability in relation to its assets are subject to ordinary corporate income tax. Gains from the Liechtenstein-sourced income. The branch is obliged to follow the sale of real estate located in Liechtenstein are subject to special rules same accounting rules which exist for other entities, and its taxable (see question 5.4 below). Capital losses are tax-deductible. profits are thus determined in accordance with the applicable accounting provisions.

5.2 Is there a participation exemption for capital gains? 6.4 Would a branch benefit from double tax relief in its jurisdiction? Capital gains on the sale of shares in participations are tax-exempt, irrespective of the quota held and the duration of time for which the shares are held. A branch is not deemed as a separate legal entity under domestic law. The branch can therefore not benefit directly from double tax relief, but only its head office or entrepreneur, depending on the terms of the applicable DTA.

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

Liechtenstein does not impose any withholding tax or similar tax No, it does not. with respect to the remittance of profits by the branch. 9 Anti-avoidance and Compliance 7 Overseas Profits

9.1 Does your jurisdiction have a general anti-avoidance

Liechtenstein 7.1 Does your jurisdiction tax profits earned in overseas or anti-abuse rule? branches? Liechtenstein introduced an anti-avoidance provision in its Tax The earnings of the foreign branch of a Liechtenstein company are Act in 2011. Art. 3 Tax Act stipulates when a tax arrangement exempt from tax in Liechtenstein. can be deemed abusive. A legal or factual arrangement, which can be deemed inadequate in relation to its economic reality and whose only aim is to obtain a tax advantage, is deemed abusive if 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? the granting of tax advantages could collide with the rationale of the Tax Act and if the taxpayer cannot indicate any economic or otherwise significant arguments for such arrangement and the same No. Dividend income is exempt from income tax. However, to does not show any own economic consequences. All mentioned comply with BEPS, dividend income shall remain tax-exempt, but requirements must be met in order to affirm the application of the only if and insofar as the dividend payment has not been granted a anti-avoidance provision. If the anti-avoidance rule is applied, tax expenditure at the level of the dividend-paying company. the Tax Authority is empowered to disregard the tax planning and to assess the taxes as they would be applicable in the case of an 7.3 Does your jurisdiction have “controlled foreign appropriate legal arrangement in compliance with the respective company” rules and, if so, when do these apply? business transactions, facts and circumstances. In practice, this rule has so far been used in a limited number of cases. No. Liechtenstein does not have “controlled foreign company” legislation. However, for individuals resident in Liechtenstein, a 9.2 Is there a requirement to make special disclosure of comparable provision is applied in respect of foundations or trusts avoidance schemes? used to hold family wealth. These are generally deemed as fiscally transparent by the Tax Authority and their assets are consequently No, there is not. subject to wealth tax upon the settlors or the beneficiaries resident in Liechtenstein. This provision does not apply to foundations or trusts with settlors and/or beneficiaries resident outside of Liechtenstein. 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax avoidance? 8 Taxation of Commercial Real Estate Yes. In Art. 139 para. 1 of the Tax Act, anyone who promotes, enables or facilitates tax avoidance will be punished regardless of 8.1 Are non-residents taxed on the disposal of the criminal liability of the taxpayer. The punishment may be a fine commercial real estate in your jurisdiction? of up to CHF 50,000 (Art. 139 para. 2 Tax Act). Yes. Capital gains realised by a resident or non-resident on the disposal of real estate located in Liechtenstein are subject to capital 9.4 Does your jurisdiction encourage “co-operative gains tax. The applicable rate is equal to the tax bracket applicable compliance” and, if so, does this provide procedural for unmarried individuals plus a municipality surcharge of 200%. benefits only or result in a reduction of tax? The tax is owed by the seller. No, there is not.

8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your 10 BEPS and Tax Competition jurisdiction?

The Tax Act lists certain transactions concerning real estate, which 10.1 Has your jurisdiction introduced any legislation are deemed as transfer of real estate for capital gains tax purposes. in response to the OECD’s project targeting Base These are: the transfer of real estate by way of forced sale or Erosion and Profit Shifting (BEPS)? expropriation; change of ownership through transactions having the same effect as a disposal; the encumbrance of real estate if this The Liechtenstein Government has proposed to apply all the Minimum influences matters considerably, and for an unlimited period of time, Standards of the BEPS proposal and to therefore implement – at this the unlimited cultivation or the transfer value of the real estate and stage – four of the 15 BEPS Action Points. The following amendments consideration charged for it; or the transfer of shares in a real estate came into force on 1 January 2017: holding company (Art. 35 para. 3 Tax Act). ■ Hybrid arrangements: The so-called “correspondence principle” was introduced with regard to the taxation of dividends. Under

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the new regime, dividend income from participations above 25% are no longer tax-free, if the dividend paid has been treated 10.2 Does your jurisdiction intend to adopt any legislation as a tax allowance at the level of the dividend-paying company. to tackle BEPS which goes beyond what is The idea is to combat hybrid arrangements which can lead to a recommended in the OECD’s BEPS reports? double non-taxation. ■ Exchange on Tax Rulings: Liechtenstein introduced a duty to No. Liechtenstein’s plan is to implement the Minimum Standards exchange tax rulings with foreign jurisdictions in accordance requested by the BEPS Action Points. with BEPS Action Point 5. For the first step, information with help of a standardised form is exchanged to the foreign jurisdiction (e.g. the name and the Liechtenstein address of the 10.3 Does your jurisdiction support public Country-by- company, the name of the multinational company, the date of Country Reporting (CBCR)? the granting and the category of the tax ruling, a summary of

the subject, as well as the name and address of the company Yes. The Government introduced CBCR on 1 January 2017 (see Liechtenstein in the foreign jurisdiction). For the next step, the tax ruling question 10.1 above). will be exchanged if, and only if, a concrete query is raised by the foreign jurisdiction. A difference is made between existing tax rulings and new tax rulings. Tax rulings which 10.4 Does your jurisdiction maintain any preferential tax are new and therefore, by chance, exchangeable all remain regimes such as a patent box? in force as at 1 January 2017. Tax rulings made before 31 December 2016 and which were still in force as at 1 January Liechtenstein has had a preferential tax regime for income from IP 2017 are considered as existing tax rulings. In this respect, rights since 2011. Income from the exploitation or sale of patents, tax rulings made before 1 January 2012 are, according to the trademarks and designs, as well as software and scientific databases, BEPS Minimum Standards, excluded from the exchange. is taxed at a preferred rate of 2.5%. The Liechtenstein IP-box ■ Intellectual Property box (IP-box) regime: Liechtenstein regime is deemed not to be in compliance with the OECD’s nexus has had an IP-box regime since 2011. The current regime approach. As a result, the Government had proposed to abolish this is deemed not to be in compliance with BEPS Action Point regime completely with effect from 1 January 2017. Companies 5 insofar as the list of IP rights eligible for preferred taxation which made use of this tax regime in the financial year 2016 were is rather wide (including, e.g., trademarks) and the current provision does not reflect the “nexus approach” required by grandfathered for their IP-income until the calendar year 2020. the OECD. The Government has therefore abolished the IP-box regime completely with effect from 1 January 2017. Companies which made use of this tax regime in the financial year 2016 will be grandfathered for their IP income until the calendar year 2020. Heinz Frommelt ■ Transfer pricing documentation: Following BEPS Action Sele Frommelt & Partners Attorneys at Law Point 13, a duty to establish transfer pricing documentation Ltd. P.O. Box 1617, Meierhofstrasse 5 on significant transactions with related persons shall be FL-9490 Vaduz introduced. The assessment of the transfer prices shall be made Liechtenstein in accordance with the internationally recognised Transfer Pricing Rule, e.g. the OECD Transfer Price Guidelines for Tel: +423 237 11 55 Multinational Enterprises and Tax Administrations. Email: [email protected] URL: www.sfpartner.li ■ Country-by-Country Reporting (CBCR): Liechtenstein has committed to implement this BEPS recommendation as per Action Point 13. The duty to file the relevant report shall apply Heinz Frommelt is a partner with Sele Frommelt & Partners Attorneys at Law Ltd. and of NSF Services Trust reg. He studied law at the to a parent company of a multinational group of companies University of Zurich, graduating in 1988 (Dr. iur.), and was admitted to with an annual turnover exceeding CHF 900 million. The the Bar in 1992. Heinz acted as Minister of Justice in the Government report will be exchanged with those countries that have of the Principality of Liechtenstein from 1997 to 2001. His practice ratified the Multilateral Competent Authority Agreement on focuses on tax planning and asset structuring, but also on banking, the Exchange of CBC Reports, in which any of the members investment fund and insurance law. Heinz publishes on a range of of the multinational group is subject to tax either by virtue of tax issues and is active in various think tanks. He is Secretary of residency or on the grounds of a permanent establishment. the International Fiscal Association (IFA), Liechtenstein branch, and a member of the Liechtenstein Chamber of Lawyers, the International ■ Anti-treaty abuse: In accordance with BEPS Action Point Association of Young Lawyers (AIJA) and the DACH Europäische 6, Liechtenstein has committed to include LOB clauses and Anwaltsvereinigung (European Lawyers’ Association). anti-abuse clauses in all of its DTAs.

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

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Malta Walter Cutajar

Avanzia Taxand Limited Mary Anne Inguanez

1 Tax Treaties and Residence 1.3 Do treaties have to be incorporated into domestic law before they take effect?

1.1 How many income tax treaties are currently in force in your jurisdiction? A treaty needs to be incorporated into domestic law. Treaties are given force of law by means of publication in the Government Gazette as a legal notice under the Income Tax Act. A treaty will Malta has an extensive treaty network with well over 60 income enter into force and have effect from the date determined by the tax treaties in force and a few other treaties that are in the pipeline treaty. awaiting signature, ratification or both. Malta’s tax treaties are not only with European countries but also with countries in North America, Latin America, Africa, the Middle East and Asia. 1.4 Do they generally incorporate anti-treaty shopping Moreover, as a Member of the European Union, dividends, interest rules (or “limitation on benefits” articles)? and royalties may also benefit from the EU Parent Subsidiary Directive or the Interest and Royalties Directive. Very few treaties have an article on Limitation of Benefits (LOB), Apart from treaty relief, Malta also gives double taxation relief although protocols often exclude persons who are entitled to a through legislative provisions in the form of unilateral relief or a special tax regime, such as offshore companies, Freeport companies Flat Rate Foreign Tax Credit (FRFTC) on foreign source income and shipping companies registered under the Merchant Shipping and capital gains. Act. Most of these companies are now defunct. There is relief from double taxation on a unilateral basis where tax The tax treaty with the United States of America contains a detailed is charged in a country with which Malta does not have a double LOB clause. tax treaty. Unilateral relief may also be claimed in respect of any underlying tax. The overseas tax is allowed as a credit against the 1.5 Are treaties overridden by any rules of domestic Malta tax up to a level which does not exceed the total tax charge law (whether existing when the treaty takes effect or in Malta. introduced subsequently)? The FRFTC is available to entities in receipt of income or capital gains from overseas and is therefore allocated, for income tax The Income Tax Act provides that once a tax treaty enters into force, purposes, to the Foreign Income Account (FIA). A certificate from this shall have effect in relation to income tax notwithstanding an auditor, stating that the income stands to be allocated to the FIA, anything in the Act or any other enactment. Therefore, should there is sufficient to claim FRFTC and no proof is necessary as to any be a conflict between a treaty provision and domestic legislation, it foreign taxes paid or suffered. is the treaty which prevails. The FRFTC is calculated at 25% of the amount of the net overseas Needless to say, if the treaty provision is less attractive than the income or gain received by the Maltese company before any normal provisions contained in the Income Tax Act then the latter allowable expenses. The income plus the credit, less allowable prevails. A classic example is withholding taxes, since Malta does expenses, is subject to income tax at the standard rate of 35%, with not impose any withholding tax on dividends, interest and royalties. relief for the deemed credit up to a maximum of 85% of the Malta The only limitation is that treaties made after 1 October 1968 do not tax payable. Upon a distribution of profits, the shareholders are apply with respect to income tax upon the chargeable income of any entitled to tax credits and tax refunds, and this system results in an person engaged in the production of petroleum produced in Malta. effective tax rate of 6.25% or less.

1.6 What is the test in domestic law for determining the 1.2 Do they generally follow the OECD Model Convention residence of a company? or another model? Companies incorporated under the laws of Malta are deemed Malta’s double tax treaties are mainly based on the OECD Model to be resident and domiciled in Malta, irrespective of the place Convention. Some of the treaties contain a tax-sparing provision of management and control. On the other hand, companies not which makes the treaty even more attractive. In all tax treaties, the incorporated in Malta are deemed to be tax-resident in Malta if the dividends article caters for Malta’s full imputation system of taxation. company is effectively managed and controlled from Malta. The

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Maltese tax legislation does not contain any specific provisions to for. A derogation obtained during accession negotiations (and determine the place of effective management and control. However, subsequently confirmed by the EU) enables Malta to have the Inland Revenue Department usually looks where the board exemption with credit status on food, pharmaceutical products, meetings are held, its composition and the decisions taken, and at inland passenger transport, international passenger transport and the level of substance in Malta. domestic inter-island sea passenger transport. The supply of water by public authorities and the supply of buildings and building land are also exempt without credit. 2 Transaction Taxes

2.4 Is it always fully recoverable by all businesses? If not, 2.1 Are there any documentary taxes in your jurisdiction? what are the relevant restrictions? Malta

Malta levies a stamp duty which is known as a ‘duty on documents Input tax is only recoverable by a taxable person (a person who is, and transfers’. This is payable on transfers of immovable property or is required to be, registered for VAT). Input tax is attributed in situated in Malta, certain marketable securities, insurance contracts accordance with the nature and the tax status of the supply intended and certain other transactions. to be made by the business. Input tax on supplies wholly used to Duty on the acquisition of immovable property is levied at 5% (with make taxable supplies is deductible in full. Input tax wholly used to some exemptions in instances where the property is being bought make exempt or non-business supplies is not deductible. Where a as the individual’s sole ordinary residence). Stamp duty on share person makes both taxable and ‘exempt without credit’ supplies, and transfers (which do not hold any property) is 2%, but transfers of incurs expenditure that is not directly attributable to either, the VAT shares in Collective Investment Schemes (funds) and companies on the expenditure must be apportioned between the supplies (under which have more than 50% of shares owned or controlled by non- the partial attribution provisions). resident persons are exempt from duty. Small undertakings with a turnover below the established threshold No duty is chargeable on the transfer of securities which are affected may opt for ‘exempt without credit’ status. Such entities or through a local bank or through a person holding a licence under the individuals will not recover input VAT. Investment Services Act. Hence transfers of listed securities, which Input tax on tobacco and tobacco products, alcoholic beverages, have to be transferred through a licensed person, are consequently works of art, motor vehicles, entertainment and some other items exempt from duty. Certain exemptions from stamp duty are also is not recoverable. provided on certain share transfers made upon the restructuring of a shareholding that occurs through mergers, demergers, amalgamation and reorganisation within a group of companies. 2.5 Does your jurisdiction permit “establishment only” VAT grouping, such as that applied by Sweden in the There is no succession duty or inheritance tax in Malta, except that Skandia case? duty is levied on causa mortis transfers of immovable property or securities in Maltese companies (provided they do not fall within the During the last budget, the Ministry of Finance announced the exemptions referred to above). introduction of VAT grouping; however, no legislation has yet been introduced in this respect. Thus, the Maltese VAT legislation does 2.2 Do you have Value Added Tax (or a similar tax)? If so, not provide for VAT grouping and therefore the Skandia case has at what rate or rates? limited impact, if any, on Malta.

Malta’s VAT legislation is based on the EU Directives and therefore similar to the VAT system in other EU Member States. However, 2.6 Are there any other transaction taxes payable by companies? Malta has negotiated some special arrangements. The standard rate of VAT is 18% and applies to any supply of goods and services which is not exempt or subject to the reduced rate of either 5% or 7%. Customs duties are levied on certain imports from non-EU countries. Excise duties are levied on particular classes of goods The reduced rate of 5% applies to the supply of electricity, such as alcohol and tobacco. confectionery, medical accessories, printed matter, items for use by disabled persons, and works of art; whereas the reduced rate of 7% applies to accommodation which is licensed under the Malta Travel 2.7 Are there any other indirect taxes of which we should and Tourism Services Act. be aware? Goods and services may also be ‘exempt with credit’ or ‘exempt without credit’. ‘Exempt with credit’ is similar to having a zero There are no further taxes applicable to businesses and corporate VAT rate and applies on exports, pharmaceutical goods and food. entities. ‘Exempt without credit’ applies to immovable property, insurance, Malta has not adopted the Financial Transaction Tax (FTT). banking, broadcasting and education. Where supplies are either taxable or ‘exempt with credit’, input VAT is fully recoverable (unless specifically blocked), but where supplies 3 Cross-border Payments are ‘exempt without credit’, VAT is neither charged nor recoverable by the supplier. 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? There is no withholding tax on dividends, irrespective of the shareholder’s country of residence and/or tax status. Malta has a Malta applied the EU Sixth Directive but also negotiated certain full imputation system of taxation on dividend distributions out of special arrangements. Exclusions from VAT are also provided profits allocated to the Foreign Income Account, the Maltese Taxed

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Account and the Immovable Property Account. Any tax paid by the a taxpayer may apply for an Advance Revenue Ruling (ARR) and company is credited in full to the shareholder upon a distribution of thus have certainty on the tax treatment of a transaction. ARRs are such profits. valid for five years and renewable for a further five-year period, The income tax rate applicable to companies is 35% and the highest and are still valid for a two-year period if there is a change in the personal tax rate is also 35%. If a shareholder is not subject to tax legislation which affects the ruling. or qualifies for a lower rate of tax than the 35% already paid by the company, then he is entitled to a tax refund equivalent to the excess 3.6 Would any such rules extend to debt advanced by a tax paid by the company. This system avoids any double taxation of third party but guaranteed by a parent company? distributed corporate profits.

Malta Moreover, the income tax system utilises five different tax accounts, As already mentioned in question 3.4 above, Malta does not have namely the Maltese Taxed Account (MTA), the Foreign Income any thin capitalisation rules, debt-to-equity ratios or other rules Account (FIA), the Final Tax Account (FTA), the Immovable with respect to financing arrangements; however, a scheme which Property Account (IPA) and the Untaxed Account (UA). A reduces the tax payable may fall foul of the general anti-avoidance distribution from the MTA or the FIA entitles shareholders to claim provision and thus be ignored for income tax purposes. Normally, ths ths a tax refund equivalent to 6/7 , 5/7 or even 100% of the tax paid the Maltese tax authorities accept guarantees by a parent company by the distributing company (depending on the type of income). and acknowledge that this will also have a bearing on the interest A distribution from the FIA entitles the shareholder to claim a tax rate charged. It is fairly common, when such arrangements exist, to refund, equivalent to 100% of the tax paid by the company, or else obtain an Advance Revenue Ruling. to 2/3rds of the tax paid. As a result of these tax refunds, the overall effective tax rate may be reduced to 5% or lower, and in some cases any tax leakage may also be eliminated completely. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- Distributions to a non-resident person from the FTA, IPA and UA resident? are not subject to any withholding tax, and no tax refunds may be claimed in respect of such dividend distributions. Malta does not impose any restrictions or limitations on the interest payments made by a local company to a non-resident person. 3.2 Would there be any withholding tax on royalties paid The Income Tax Act exempts from tax, interest received by non- by a local company to a non-resident? residents, provided there is no permanent establishment in Malta.

Royalties arising in Malta and accruing to a non-resident person 3.8 Is there any withholding tax on property rental are exempt from any tax in Malta, provided such royalties are not payments made to non-residents? related to a permanent establishment which the said person may have in Malta. Rental payments with respect to immovable property situated Malta does not impose any withholding tax, irrespective of the outside Malta are not subject to any tax or withholding tax. If the recipient’s tax status and the country of residence. immovable property is situated in Malta, the income is considered to be income arising in Malta and subject to income tax. Malta 3.3 Would there be any withholding tax on interest paid does not impose a withholding tax as such, but tax must be deducted by a local company to a non-resident? at the rate of 25% or 35% depending on whether the payment is made to an individual or a company. The tax deducted by the person Interest arising in Malta and accruing to a non-resident person is making the payment must be remitted to the tax authorities as an exempt from any tax in Malta, provided such interest is not related advance payment of the income tax on such rental income. to a permanent establishment which the said person may have in The landlord or owner of the property, irrespective of whether it is Malta. a company or individual, has the option to have the rental income Malta does not impose any withholding tax, irrespective of the subject to a final withholding tax of 15% as long as the rental recipient’s tax status and the country of residence. property is used for residential purposes. No further tax will be due on the rental income which has been subject to the final withholding tax of 15%. 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? 3.9 Does your jurisdiction have transfer pricing rules? Malta does not have any thin capitalisation rules or debt-to-equity ratios, but the Income Tax Act contains a general anti-avoidance Malta does not have any specific transfer pricing rules but adopts the provision. By virtue of this anti-avoidance provision, the tax general arm’s length principle. authorities may disregard any scheme which reduces the tax payable. However, a taxpayer may apply for an Advance Revenue Ruling on 4 Tax on Business Operations: General the tax treatment of any transaction which concerns any financial instrument or other security, and on any transaction which involves international business (see also question 3.5 below). 4.1 What is the headline rate of tax on corporate profits?

3.5 If so, is there a “safe harbour” by reference to which Companies are subject to income tax at a standard rate of 35%. A tax relief is assured? company in receipt of foreign source income may claim the FRFTC (see question 1.1) so that the tax payable on such foreign source There are no statutory safe harbour rules. The principle for related income or gain is reduced to 18.75%. party transactions should be the arm’s length principle. However,

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Companies engaged in petroleum produced in Malta are subject to a tax rate of 50%. 4.5 Do tax losses survive a change of ownership?

Tax losses may be carried forward indefinitely and may also be 4.2 Is the tax base accounting profit subject to utilised if there is a change in the company shareholding, provided adjustments, or something else? that the company’s trading activities do not change and the change in the company shareholding (e.g. by share transfer, merger, etc.) The tax base follows the commercial or statutory accounts, which is not deemed by the Maltese tax authorities to be a tax avoidance are based on International Financial Reporting Standards (IFRS) scheme. as adopted by the EU or General Accounting Principles for Small Entities (GAPSE), subject to certain adjustments. Certain items Malta of expenditure which reduce the accounting profits may not be 4.6 Is tax imposed at a different rate upon distributed, as allowable or deductible for tax purposes, and are therefore added opposed to retained, profits? back in order to calculate the chargeable income. This applies to provisions, unrealised expenses and foreign exchange differences No. Subject to double taxation relief which reduces the Malta tax and payments of a voluntary nature (such as donations). payable, chargeable income is subject to income tax at the standard On the other hand, tax legislation may provide for certain deductions rate of 35%, irrespective of whether it is distributed or not. which are not claimed as expenses in the commercial accounts. This Profits which are distributed are brought to charge inthe may apply in cases of inflated allowances in excess of the actual shareholder’s hands at the grossed-up amount and full credit is given expenditure incurred (for example, R&D allowances). for the tax already paid/suffered by the company on the dividend so distributed. Under Malta’s full imputation system of taxation (which ensures a full credit of the income tax paid by the company), 4.3 If the tax base is accounting profit subject to it may be said that profits which are distributed by a company are adjustments, what are the main adjustments? not subject to any income tax at all at the level of the distributing company (except for the distribution of untaxed profits to a Maltese The general rule is that expenses which are incurred in the tax-resident individual). Distributions of untaxed profits to a production of the income are allowable for income tax purposes, Maltese tax-resident individual are subject to a final withholding whilst expenses which are of a private nature, of a capital nature, tax of 15%. recoverable from any insurance or of a voluntary nature, are not allowed for income tax purposes. Expenses or amounts which have not been incurred, such as 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the unrealised exchange difference or provisions, are not allowable/ occupation of property? deductible for income tax purposes. There are no other national taxes payable by companies. 4.4 Are there any tax grouping rules? Do these allow Certain capital gains are brought to charge together with trading for relief in your jurisdiction for losses of overseas income. Capital gains arising on transfers of immovable property subsidiaries? or other specific assets such as securities, patents, trademarks, trade- names and business goodwill are brought to charge as part of the Malta’s income tax laws do not require consolidated accounts for taxpayer’s chargeable income. tax purposes. However, groups of companies may still benefit from ‘group relief’ which enables a member company to surrender tax Transfers of certain immovable property may be subject to a losses to another group member. The losses surrendered by a group property transfer tax, which varies between 2% and 12% of the company may be set off against the tax profits or chargeable income transfer value, instead of taxing the actual capital gain (see question of the claimant company. The surrendered losses may be carried 5.1 below). forward by the claimant company and these are available for set-off against future profits. The surrendering and claimant company must 5 Capital Gains have identical accounting periods, have satisfied the definition of a group during the last financial year, and be tax-resident in Malta. Hence, relief for losses incurred by overseas subsidiaries is not 5.1 Is there a special set of rules for taxing capital gains possible under Maltese law. and losses? The ‘group relief’ provisions contain specific anti-abuse provisions to restrict the surrendering of losses made by companies whose Capital gains which are chargeable to tax in Malta are those gains activities are related to immovable property. or profits realised from immovable property, securities (excluding preference shares having a fixed rate of return), business goodwill, Companies are considered to be members of the same group if copyright, patents, trademarks, trade-names and the transfer of the more than 50% of the capital is owned directly or indirectly by the beneficial interest in a trust. same company. The 50% test applies to share capital, voting rights, profits available for distribution and distribution on a winding up. There are specific rules on how to calculate or determine the capital gain on immovable property and securities, including securities in A much wider definition of a group of companies applies for capital companies which own immovable property. The rules also contain gains tax purposes. In this case, companies of which more than formulae and inflation-linked adjustments, which mean that the 50% are owned and controlled by the same shareholders qualify as effective tax rate can be less than the standard rate of 35%. a group for capital gains tax purposes. Assets may be transferred within a group without any capital gains tax. A capital gain is brought to charge as part of the chargeable income, but a capital loss cannot be set off against other income for the year

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of assessment but shall be carried forward and set off against capital The Income Tax Act contains anti-abuse measures in relation to gains in respect of subsequent years of assessment until the full loss the above two tax deferral provisions, to ensure that companies is absorbed. benefiting from the above do not transfer the asset to third parties.

5.2 Is there a participation exemption for capital gains? 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local Yes, companies that derive dividend income and/or capital gains from assets/shares? a ‘participating holding’ may opt for the ‘participation exemption’. Alternatively, the Maltese company may elect to be subject to tax No, Malta does not impose any withholding taxes on the transfer of Malta and pay income tax on dividend received and capital gains arising assets or shares in a Maltese company. A share transfer is subject to from a participation holding and then upon a distribution of profits; duty on documents; however, exemptions are available for transfers the shareholder is entitled to claim a full refund of the company made in a company which has obtained an exemption from such income tax. duty. Such exemption is granted to companies whose business interests are outside Malta and the shareholders of the company are, A shareholding in a company qualifies as a ‘participating holding’ directly or indirectly, non-resident persons. (and therefore for the participation exemption) if the Maltese company holds equity shares in a company or a qualifying body of persons and it: 6 Local Branch or Subsidiary? ■ has at least 10% of the equity shares in another company; ■ is an equity shareholder in a company and is entitled to purchase the balance of the equity shares of the other 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? company, or it has the right of first refusal to purchase such shares; ■ is an equity shareholder in a company and is entitled to either There are no taxes imposed on the formation of a subsidiary. sit on the Board or appoint a person on the Board of that However, a registration fee (ranging from a minimum of €245 up subsidiary as a director; to a maximum of €2,250) is payable to the Registry of Companies. ■ is an equity shareholder which invests in a company a The registration fee is calculated on the company’s authorised share minimum of €1,164,000 (or the equivalent in a foreign capital. currency) and such investment is held for a minimum uninterrupted period of not less than 183 days; or 6.2 Is there a difference between the taxation of a local ■ holds the shares in a company for the furtherance of its own subsidiary and a local branch of a non-resident business and the holding is not held as trading stock for the company (for example, a branch profits tax)? purpose of a trade. Furthermore, the ‘target company’ must either satisfy any one of the A Maltese subsidiary/company is subject to tax on a worldwide following three conditions in order to claim participation exemption basis, subject to the tax credits and refunds which may apply upon on the dividend income: a distribution of profits. However, a branch of a foreign company, ■ it is resident or incorporated in the EU; known as an ‘oversea company’, is only subject to tax on income ■ it is subject to foreign tax of a minimum of 15%; or attributable to the branch. The income computation follows that adopted for domestic companies, and the same principles apply. The ■ it does not derive more than 50% of its income from passive branch is allowed to deduct a proportion of the expenses associated interest and royalties, with the head office management if these are related to the Malta or else it must satisfy both of the following conditions: branch. In practice, there are minor differences between having a ■ the shares in a body of persons not resident in Malta must not branch and a locally registered subsidiary. be held as a portfolio investment; and ■ the body of persons not resident in Malta or its passive interest or royalties have been subject to tax at a rate which is 6.3 How would the taxable profits of a local branch be not less than 5%. determined in its jurisdiction?

A branch is subject to income tax in Malta as if it were a wholly 5.3 Is there any special relief for reinvestment? independent entity. Taxable profits are based on accounting profits (see questions 4.2 and 4.3 above) and the tax authorities follow the Where an asset (which is subject to capital gains and is used in OECD principles in determining the profits attributable to a branch. a business for a period of at least three years) is transferred and replaced within one year by an asset used solely for a similar purpose in the business, any capital gain realised on the transfer 6.4 Would a branch benefit from double tax relief in its jurisdiction? is not subject to tax but the cost of acquisition of the new asset is reduced by the said gain. When eventually the asset is disposed A branch of a foreign company or an overseas company may benefit of without replacement, the overall gain shall take into account the from Malta’s network of tax treaties, provided it is a tax resident in transfer price and the cost of acquisition, reduced as aforesaid. terms of the treaty provisions. The tax legislation does not contain Furthermore, where an asset is transferred from one company to specific provisions applicable to branches, and these are treated another and such companies are deemed to be a group of companies, as a permanent establishment subject to income tax on income it shall be deemed that no loss or gain has arisen from the transfer. attributable to the branch. This is also applicable where the two companies are controlled and Apart from tax treaty provisions, an overseas company may also beneficially owned, directly or indirectly, to the extent of more than benefit from unilateral relief. 50%, by the same shareholders.

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There are no major differences between the tax treatment of Malta. Rules apply in determining the market value of a company branches and subsidiary companies, except that the determination which holds immovable property situated in Malta, to take into of chargeable income of a Malta branch may be more subjective account the value of the property being indirectly disposed of, and (for example, with respect to the allocation of expenses or if a cost- various anti-abuse provisions and clawback provisions apply when plus arrangement is applicable) and therefore it may be advisable such shares are disposed. to seek an Advance Revenue Ruling or a tax confirmation from the tax authorities. 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their 6.5 Would any withholding tax or other similar tax be equivalent? imposed as the result of a remittance of profits by the Malta branch? Malta does not have any special regime similar to REITs. A trust which holds immovable property situated in Malta is ‘seen through’ No, Malta does not impose any withholding taxes. Profits may be for income tax purposes, and is thus subject to the same provisions remitted without any tax implications whatsoever. as if the immovable property were held directly by the beneficiaries.

7 Overseas Profits 9 Anti-avoidance and Compliance

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

Yes, profits earned in an overseas branch (of a Maltese company) The income tax legislation contains a few general anti-avoidance are subject to income tax at the standard rate of 35% subject to any provisions. double taxation relief. Such profits are allocated to the FIA. (See One provision provides that where any scheme which reduces the further details on the implications arising from distributions from amount of tax payable by any person is artificial or fictitious, or the FIA in question 3.1 above.) is in fact not given effect to, this shall be disregarded by the tax However, branch profits may also benefit from the participation authorities and the person concerned is assessable accordingly. exemption regime which is normally applicable to dividend income Another provision provides that where ‘a series of transactions’ is and capital gains from participating holdings / equity investments. effected with the sole or main purpose of reducing the amount of tax payable by a person under the ‘investment income provisions’, then 7.2 Is tax imposed on the receipt of dividends by a local such person would be assessable as if the said ‘investment income company from a non-resident company? provisions’ did not apply. (The investment income provisions provide for a final tax of 15% on certain investment income.) The likelihood is that such dividend income will qualify for the full A similar anti-avoidance provision (applicable to the investment exemption from tax under Malta’s generous participation exemption income provisions) applies to the Flat Rate Foreign Tax Credit. regime. If not, dividends are subject to tax in Malta but credit is Another anti-avoidance provision relates to group relief. If a given for any foreign taxes against the Malta tax. company is a member of a group of companies and arrangements are in existence, the sole or main purpose of which is to reduce any 7.3 Does your jurisdiction have “controlled foreign company’s tax liability, then that company shall be treated as not company” rules and, if so, when do these apply? being a member of that group of companies for any year preceding a year of assessment in which the said arrangements are in existence. No, Malta does not have any CFC rules. There are also other specific anti-abuse provisions related to group relief. Another provision provides that when an asset is transferred from 8 Taxation of Commercial Real Estate one company to another company within a group, and the transfer is exempted from tax as the two companies form part of a group, 8.1 Are non-residents taxed on the disposal of the transfer will be subject to property tax at the rate of 8% if the commercial real estate in your jurisdiction? companies cease to be a group before the lapse of six years.

Non-resident persons are subject to income tax in Malta on the 9.2 Is there a requirement to make special disclosure of disposal or transfer of any immovable property in Malta. Subject avoidance schemes? to various conditions, the sale of such immovable property is either subject to tax at the rate of 8% on the transfer value, or the gain/ No, there is no legal requirement to make special disclosure of profit is subject to tax using non-resident tax rates with the highest avoidance schemes. tax rate being 35%.

9.3 Does your jurisdiction have rules which target not 8.2 Does your jurisdiction impose tax on the transfer of only taxpayers engaging in tax avoidance but also an indirect interest in commercial real estate in your anyone who promotes, enables or facilitates the tax jurisdiction? avoidance?

Various provisions in the Income Tax Act bring to charge the sale No specific legislation or rules have been drawn up to target of shares in companies which hold immovable property situated in persons promoting, enabling or facilitating tax avoidance; however,

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such persons may still be subject to investigations and charged as Directives, some of which may have been triggered by the BEPS accomplices to a crime. recommendations. These include: changes in the EU Administrative Cooperation Directive, which also includes Country-by-Country Reporting; the proposed EU Anti-Tax Avoidance Directive, 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural which includes various recommendations derived from the BEPS benefits only or result in a reduction of tax? recommendations; and the anti-abuse rules in the Parent-Subsidiary Directive. No. Malta does not grant any reduction in tax if paid in time or in advance; however, penalties and interest are imposed if deadlines 10.3 Does your jurisdiction support public Country-by- Malta are not adhered to. Country Reporting (CBCR)? The Inland Revenue Department also encourages the online submission of returns, and provides for a longer submission period Malta has implemented CBCR as a result of the relevant EU if online access and submission are used. Directive (see question 10.2 above). The Income Tax Act also provides for reduced penalties and interest rates if any errors or omissions are declared by the taxpayer. 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box?

10 BEPS and Tax Competition No preferential tax regimes exist targeting any specific areas or industries. However, the legislation contains various provisions 10.1 Has your jurisdiction introduced any legislation providing exemptions, deductions and tax credits in connection in response to the OECD’s project targeting Base with specific sources of income. These include exemptions Erosion and Profit Shifting (BEPS)? from tax on: dividend income and capital gains originating from participating holdings (see question 5.2 above); income derived No legislation has been introduced as yet in connection with BEPS. from certain patents, copyrights and trademarks; the value of certain assets revalued upon redomiciliation to Malta; and the income of a collective investment scheme. 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports?

Malta has not formally adopted any of the BEPS recommendations, but as an EU Member State, Malta has to adopt and transpose EU

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Walter Cutajar Mary Anne Inguanez Avanzia Taxand Limited Avanzia Taxand Limited Blue Harbour Business Centre Level 1 Blue Harbour Business Centre Level 1 Ta’ Xbiex Yacht Marina Ta’ Xbiex Yacht Marina Ta’ Xbiex XBX 1027 Ta’ Xbiex XBX 1027 Malta Malta

Tel: +356 2730 0045 Tel: +356 2730 0045 Fax: +356 2730 0049 Fax: +356 2730 0049 Email: [email protected] Email: [email protected] URL: www.avanzia.com.mt URL: www.avanzia.com.mt Malta

Walter Cutajar is Managing Director of Avanzia Taxand. Mary Anne Inguanez is a Director of Avanzia Taxand. With over 25 years’ experience in local and international tax, Walter She holds a first degree in Accounting from the University of Malta maintains a reputation of adopting a commercial approach to his and a Diploma in Taxation awarded by the Malta Institute of Taxation. advice. Working with predominantly multinational companies, he has She is also a member of the Malta Institute of Accountants, a member provided structuring and transactional consultation on the complete of the Malta Institute of Taxation and a member of the Institute of range of corporate tax activities, including mergers and acquisitions, Financial Services Practitioners. company reorganisations and cross-border restructurings. Mary Anne worked for some time in the tax department of one of the Walter currently advises a number of multinational companies and sits Big 4 audit firms before moving to Avanzia Taxand in 2005. She has on the board of directors of a number of companies, including finance considerable experience in a number of areas, including corporate tax, companies, ‘captives’ and investment vehicles. Aside from his wealth personal tax, employment issues, capital gains tax, indirect taxation of experience in international tax matters, including tax planning, treaty and liquidations. interpretation and advice, he also has a great deal of knowledge on She is a tax consultant, advising a number of multinational companies, corporate matters, company law, management, and administration. financial institutions, funds and high-net-worth individuals in her He specialises in treaty planning, holding companies, intellectual areas of expertise, and is often involved in cross-border financing property, and treasury and finance operations. transactions and reorganisations, as well as VAT issues. During his time as a Big 4 partner, he was responsible for the firm’s Aside from her experience in local and international tax matters, she tax department and was a regular participant in international tax assists clients in tax negotiations and in obtaining advance revenue conferences and events. He continues to give various lectures and rulings and tax confirmations from the tax authorities. presentations, and is the author of various taxation articles. For a number of years, he was an examiner in taxation with the UK’s Association of Chartered Certified Accountants. Walter holds a first degree in Accounting and a post-graduate qualification in International Tax Law. He is a fellow of theMalta Institute of Accountants, and a member of the Institute of Financial Accountants in the UK, the Malta Institute of Taxation, the Institute of Financial Services Practitioners and the International Fiscal Association. He has been involved in various councils and committees in the fields of taxation and financial services.

In 2009, 2013 and 2016 Avanzia Taxand was named ‘Malta Tax Firm of the Year’ by the International Tax Review, whilst in 2011, 2014 and 2015 Avanzia Taxand was chosen as the winner of the Corporate INTL Magazine Global Award for ‘Tax Law Firm of the Year in Malta’. Avanzia Taxand was also ranked as a Tier 1 Firm in International Tax Review’s Transactional Tax Survey. Avanzia Taxand is, exclusively, Taxand Malta. With more than 400 tax partners and over 2,000 advisors in nearly 50 countries, Taxand is the world’s largest organisation of tax advisors to multinational businesses. Taxand provides high-quality, integrated tax advice worldwide. Our tax professionals grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business. We’re passionate about tax. We collaborate and share knowledge, capitalising on our expertise to provide you with high-quality, tailored advice that helps relieve the pressures associated with making complex tax decisions. We’re also independent – ensuring that you adhere both to best practice and to tax law, and that we remain free from time-consuming audit-based conflict checks. This enables us to deliver practical advice responsively. Avanzia Taxand provides a comprehensive range of tax advisory and tax compliance services, as well as a variety of specialist corporate services, to its extensive array of international clients. Avanzia Taxand employs tax professionals, accountants and lawyers who, together as a team, offer a comprehensive and integrated range of tax, legal and corporate services. The areas of expertise include corporate tax and international tax, restructuring, mergers and acquisitions, and corporate law.

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Mexico Ana Paula Pardo Lelo de Larrea

SMPS Legal Alexis Michel

below the Constitution. Nonetheless, regarding aspects related to 1 Tax Treaties and Residence human rights, the hierarchy is at the same constitutional level.

1.1 How many income tax treaties are currently in force in 1.6 What is the test in domestic law for determining the your jurisdiction? residence of a company?

Mexico currently has over 57 income tax treaties in force. Legal entities could be deemed as Mexican tax residents whenever Furthermore, Mexico has also concluded tax information exchange they establish the main administration of their business or agreements with certain countries or jurisdictions with which headquarters within national territory or their effective management income tax treaties are not in force (e.g., the Cayman Islands). is deemed to be located therein. In this regard, a legal entity could be considered as a Mexican tax resident when the parties (i.e., shareholders) entitled to decide its business strategies, policies, 1.2 Do they generally follow the OECD Model Convention or another model? distribution of profits or dividends or other core subjects are located within national territory. Yes, the double taxation agreements concluded by Mexico adhere to the OECD Model. 2 Transaction Taxes

1.3 Do treaties have to be incorporated into domestic law 2.1 Are there any documentary taxes in your jurisdiction? before they take effect?

Certain internal procedures ought to be complied with for tax There are no documentary or stamp taxes imposed in Mexico. treaties to take effect. Pursuant to the Mexican Constitution, once the relevant treaty has been adopted, it must be executed by the 2.2 Do you have Value Added Tax (or a similar tax)? If so, President and ratified by the Senate. Lastly, the ratified and final at what rate or rates? instrument must be published in the Mexican Official Gazette. Mexico has a value added tax (“VAT”), which could be triggered by the performance of any of the following activities within national 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? territory: 1. alienation of goods; Most double tax treaties incorporate anti-treaty shopping rules and 2. rendering of independent services; limitation on benefits provisions in line with the OECD Model 3. granting of temporary use or enjoyment of goods; and Convention. 4. importation of goods and/or services. Additionally, since Mexico, as a G20 Member State, has been The general VAT rate is 16%. In some cases, the tax rate could be actively participating in the development and implementation of the 0% (for instance, the exportation of goods or services) and other BEPS Action Plan, it should be noted that its tax system has been activities could be considered as tax-exempt. gradually incorporating general anti-avoidance rules referred to in said document. 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or In accordance with the Mexican VAT Law, some activities are introduced subsequently)? exempted from such tax; inter alia, the following: a) Exempt sales Pursuant to Mexican law, a treaty may only be overridden if it contradicts a provision found in the Federal Constitution. In terms of 1. Land. hierarchy, the Supreme Court of Justice has stated that international 2. Constructions for residential purposes (dwellings). treaties are positioned above federal and local laws, but immediately 3. Books, newspapers, magazines and copyrights.

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4. Used personal property (except for those sold by business event a taxpayer is exempt for part of the transactions carried out, corporations). the VAT Law establishes an apportionment method to consider only 5. Lotteries, raffles, draws, etc. the taxable portion of such transactions. 6. Currency and troy ounces. 0% VAT rate transactions are considered taxable transactions, to 7. Partnership interest, and certain negotiable instruments. determine the portion of the recoverable VAT. 8. Non-participating real estate trust certificates. 9. Gold ingots. 2.5 Does your jurisdiction permit “establishment only” 10. Goods exchanged between foreign residents, insofar as VAT grouping, such as that applied by Sweden in the the relevant goods were introduced to the country under Skandia case? specific import programmes (e.g.,maquila ). Mexico b) Exempt services No, this is not applicable in Mexico. 1. Considerations for mortgage loans. 2. Commissions charged for the management of retirement 2.6 Are there any other transaction taxes payable by or pension funds. companies? 3. Free services (excepting those in which the beneficiaries are the members, partners or shareholders of the legal Besides the abovementioned federal tax, States are entitled to collect entity rendering the relevant services). tax on the acquisition of real estate. The applicable tax rates range 4. Educational services rendered by the State or authorised from 3% to 5% of the value of the real estate. third parties. Likewise, in certain States, payroll taxes are imposed and paid by 5. Land passenger transportation services rendered within employers, and the corresponding tax rates range from 1% to 3% on urban or metropolitan areas. the payroll value. 6. International maritime transportation of goods. 7. Agribusiness insurances, housing loans, certain financial 2.7 Are there any other indirect taxes of which we should guarantees and life insurances. be aware? 8. Interests accrued on the provision of specific services. 9. Financial derivative transactions. Mexican authorities also collect a special federal tax on products and 10. Certain services rendered by associations, civil services (excise tax) applicable to certain alienations and/or the import partnerships or unions to their members. of goods such as alcoholic and some non-alcoholic beverages, tobacco, 11. Certain public shows or events. gasoline and diesel. Moreover, this tax also applies to certain services. 12. Professional medical services (for which official In addition, there are customs fees, taxes and duties on the import certification or licence is required) rendered by individuals. of goods. However, any free trade agreements and foreign trade 13. Medical and hospital services provided by government programmes in force could reduce said burdens or even grant certain agencies. exemptions. 14. Certain services conducted by authors pertaining to the publication of their works by third parties. 3 Cross-border Payments c) Exempt use or enjoyment of goods 1. Real property intended or used for residential purposes (unfurnished dwelling). 3.1 Is any withholding tax imposed on dividends paid by 2. Farms or estates for agricultural or livestock purposes. a locally resident company to a non-resident? 3. Books, newspapers and magazines. Yes. There is a 10% withholding tax on dividends paid by a Mexican d) Exempt imports entity out of the after-tax earnings and profits account to a non- 1. Non-finalised, temporary or in-transit goods. resident shareholder/partner. However, this tax could be reduced, and 2. Baggage and household chattels. in some cases eliminated by means of a double taxation agreement. 3. Goods donated to the Federal Government, States, municipal authorities or authorised third parties by foreign tax residents. 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? 4. Works of art intended for permanent public exhibition. 5. Works of art created by Mexicans abroad whose cultural Yes. In general terms, royalties paid by a Mexican entity to a non- value has been recognised by the competent authorities. resident recipient are subject to withholding; however, different 6. Gold (at least 80% of gold). withholding tax rates apply depending on the concept for which they 7. Vehicles, in some specific cases. are being paid: Finally, a 0% rate applies to certain acts or activities (including a) a 5% rate concerning royalties paid for the temporary use or sale of goods, services and use or enjoyment), such as the sale of enjoyment of railway carriages; patented medicine and products destined as food. b) a 35% rate on royalties paid for the use of patents, inventions, trademarks, trade names and commercial names;

2.4 Is it always fully recoverable by all businesses? If not, c) a 25% rate for technical assistance and other royalty what are the relevant restrictions? payments; and d) a 40% rate on income derived from a preferential tax regime. To recover the VAT, individuals or corporations must be registered Under most double tax treaties executed by Mexico, the withholding as taxpayers for income tax and value added tax purposes. In the tax rate is reduced to 10% or 15%.

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3.3 Would there be any withholding tax on interest paid 3.7 Are there any other restrictions on tax relief for by a local company to a non-resident? interest payments by a local company to a non- resident? Yes. There is a withholding tax on interest paid by Mexican entities to non-resident lenders. Nonetheless, the applicable withholding Interest income subject to a preferential tax regime could be subject tax rate varies depending on several factors such as the type of to a 40% withholding rate, if certain requirements are not met. credit or the nature of the parties involved. Generally speaking, the This does not apply to interest paid to foreign banks or to foreign withholding tax rate could range from 4.9% to 35%. residents derived from financial instruments. Finally, under some double tax treaties, different (normally reduced) Also, for the benefits of a double tax treaty to apply (reduced Mexico withholding tax rates could apply. withholding tax), some formal requirements must be met, especially on interest paid to a foreign related party.

3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? 3.8 Is there any withholding tax on property rental payments made to non-residents? The law provides that interest on a taxpayer’s debts that exceeds the equivalent of three times its shareholder’s equity, and that comes In accordance with the Mexican Income Tax Law, there is a from debts entered into with foreign-resident related parties, is not withholding tax on property rental payments made to non-residents deductible. at a 25% rate of the income obtained (gross income), without the Nonetheless, debts bearing the interest responsibility of the possibility of claiming any deductions. It should be noted that the taxpayers shall not be included for computing their excess amount double taxation agreement concluded with the USA provides a at triple their stockholders’ equity; neither shall those assumed by reduced rate if certain requirements are met. the members of the financial system when performing transactions related to their purpose, or those assumed for the construction, 3.9 Does your jurisdiction have transfer pricing rules? operation or maintenance of productive infrastructure related to strategic areas for the country or the generation of electric power. The Mexican transfer pricing rules have been adapted to the OECD guidelines on the subject. Accordingly, transactions between related 3.5 If so, is there a “safe harbour” by reference to which parties must be at fair market values and are required to comply with tax relief is assured? the “arm’s length” principle. The extent of the relationship between parties required to apply the Safe harbour only applies to the maquila tax regime (under an transfer pricing rules to transactions is direct or indirect participation authorised IMMEX programme). In general terms, this programme in management, supervision, control, or capital/ownership. The allows holders to perform temporary imports and, thus, to have parent entity of a permanent establishment and all other permanent preferential treatment regarding customs processing fees, general establishments of that entity are also considered related parties. import duties and value added tax (with an additional certification). The interpretation of the transfer pricing rules is based on the Regarding income tax, the main benefit would be that the foreign Transfer Pricing Guidelines for Multinational Enterprises and Tax resident performing maquila operations in Mexico would not be Administrations which were approved by the OECD. It should be deemed to have a permanent establishment. For such purpose, one mentioned that the “Best Method Rule” applies with respect to the of the following three options must be exercised: Income Tax Law. a) determining income by applying 6.9% of the total value of assets used in the maquila operations in each fiscal year; b) determining income by applying 6.5% of the aggregate value 4 Tax on Business Operations: General of the costs and expenses of the maquila operation in each fiscal year; or 4.1 What is the headline rate of tax on corporate profits? c) requesting an advance price agreement to the competent authority. The Income Tax Law provides a flat rate of 30% over all taxable income received by Mexican corporate entities (worldwide income). 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company? 4.2 Is the tax base accounting profit subject to adjustments, or something else? Interest income derived from back-to-back loans would (for tax purposes) be treated as dividend income, and as such, deemed as a non-deductible expense. Corporate Mexican entities ought to accrue all income earned whether in cash, in kind, in services, in credit or in another form Back-to-back loans are transactions where one person provides during the fiscal year. cash, goods or services to another person who, in turn, provides directly or indirectly, cash, goods or services to the former person or The taxable profit would then be determined by subtracting the to a related party thereof. authorised deductions and the employee’s profit-sharing paid in the fiscal year from the accruable (gross) income obtained by the Back-to-back loans are also transactions in which one person extends relevant legal entity. financing and the credit is guaranteed by cash, cash deposits, shares or debt instruments of any kind from a related party or from the Furthermore, the taxable profit for the fiscal year could be reduced, same borrower, to the extent that the credit is guaranteed in this as applicable, by the loss carry-forward from previous years. same manner.

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4.3 If the tax base is accounting profit subject to 5 Capital Gains adjustments, what are the main adjustments?

5.1 Is there a special set of rules for taxing capital gains In addition to question 4.2 above, Mexican entities could offset and losses? income tax payable in Mexico with income tax effectively paid abroad, provided that the applicable requirements set forth in the In Mexico, entities may deduct capital losses but only to the extent Income Tax Law are met. of capital gains, whenever the amount of deductions is higher than gross income. Excess capital losses may be carried forward 10 4.4 Are there any tax grouping rules? Do these allow years to offset capital gains from such years. Mexico for relief in your jurisdiction for losses of overseas Double tax treaties reduce or except withholding tax on capital gains subsidiaries? upon compliance with the requirements of the relevant treaty.

Under the Income Tax Law, corporate members of an affiliated group may elect the tax grouping rules (an optional tax regime), 5.2 Is there a participation exemption for capital gains? which allows the tax results obtained by the relevant entities to be combined and subject to a tax deferral (a portion of taxes due) of There is no participation exemption in Mexico for capital gains of up to three years, taking into account only the profits and losses Mexican entities. generated by the entities that comprise the group. For an entity to obtain the authorisation to operate under the optional 5.3 Is there any special relief for reinvestment? regime, certain requirements must be met; for example, it must: i) be a Mexican-resident company; Currently there is no special relief for profit reinvestment in Mexico. ii) directly or indirectly hold more than 80% of the shares with voting rights of the companies that will be integrated; 5.4 Does your jurisdiction impose withholding tax on the iii) obtain the written consent of the legal representative of each proceeds of selling a direct or indirect interest in local of the companies that will be integrated; and assets/shares? iv) file a request with the tax authorities to operate under the optional regime for groups of companies (accompanying In general, such proceeds could be subject to taxation insofar as thereto, supporting information and documentation such as they are deemed as Mexican-sourced. In this regard, the Income the companies’ shareholders and their participation therein). Tax Law provides that gains arising from the disposition of capital It should be noted that several restrictions apply, both to the assets could be considered as Mexican-sourced when the issuer is a integrating company and to the integrated companies. For instance, Mexican tax resident, or in cases where more than 50% of the book entities that form part of the financial system, foreign residents, or value of the relevant shares is directly or indirectly attributed to real legal entities with non-profit purposes may not opt to apply this tax property located in the country. regime. In principle, a foreign resident engaging in such a transaction would be subject to a 25% withholding tax on the gross amount thereof 4.5 Do tax losses survive a change of ownership? without the possibility of claiming any deductions. However, the transferor could opt to apply a 35% tax rate on the net As a general rule, the right to amortise losses corresponds exclusively gains, assuming certain requirements are met. to the taxpayer that incurred such losses and may not be transferred even as a consequence of a merger. 6 Local Branch or Subsidiary?

4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits? 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? There is no additional corporate tax on a distribution event insofar as the amount being distributed comes from the after-tax earnings and In Mexico, there are no taxes levied on the incorporation of any profits account (CUFIN); that is, the account composed of profits kind of entity. that have already been subject to corporate taxation. However, an additional withholding tax could be applicable at the level of the 6.2 Is there a difference between the taxation of a local shareholder/partner when profits are distributed. Indeed, profits subsidiary and a local branch of a non-resident obtained by non-residents or Mexican-resident individuals could company (for example, a branch profits tax)? be taxed with an additional 10% withholding rate when distributed. In accordance with the Mexican Income Tax Law, a Mexican tax- 4.7 Are companies subject to any significant taxes not resident subsidiary would be subject to income tax on its worldwide covered elsewhere in this chapter – e.g. tax on the income as any other Mexican corporation. On the other hand, occupation of property? branch offices of a non-resident are generally subject to taxation on any and all income attributable thereto (if they constitute a In Mexico, the main federal taxes levied on legal entities are income permanent establishment), in which case special rules concerning tax, value added tax and special tax on products and services (the deductions apply. excise tax). However, certain State taxes mainly regarding real In addition, foreign tax residents could also be subject to income estate, including ownership or acquisition, and payroll taxes, among taxation in Mexico regarding Mexican-sourced income that cannot others, could apply. be attributed to a permanent establishment.

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could be deemed to receive income from jurisdictions considered as 6.3 How would the taxable profits of a local branch be preferential tax regimes whenever: (i) income deriving therefrom is determined in its jurisdiction? not subject to taxation; or (ii) the income tax to which said income is subject to in the relevant jurisdiction is less than 75% of the income Permanent establishments in Mexico are taxed on all income tax that would have been levied in Mexico for an equivalent operation. attributable thereto. For such purposes, income obtained as a consequence of a business activity, the rendering of a service and/ or the sale of goods within national territory could be deemed as 8 Taxation of Commercial Real Estate attributable income. Additionally, income obtained by the central office or by another permanent establishment set up abroad, for the

Mexico realisation of which the Mexican permanent establishment incurred 8.1 Are non-residents taxed on the disposal of expenses or shared costs, could also be deemed as attributable income. commercial real estate in your jurisdiction? Permanent establishments in Mexico could be allowed to deduct Yes. The sale of real estate located in Mexico by non-residents the expenses incurred by them for the performance of their taxable could be subject to income taxation at a tax rate of 25% on the activity insofar as the applicable conditions are met. total revenue obtained, without the possibility of claiming any deductions. The foreign taxpayer may elect to apply the 35% on the 6.4 Would a branch benefit from double tax relief in its gain obtained if some requirements are met. jurisdiction?

8.2 Does your jurisdiction impose tax on the transfer of All payments received by a permanent establishment are considered as an indirect interest in commercial real estate in your being done to a Mexican entity, and payments made by the permanent jurisdiction? establishment are considered as a payment of the main office. Permanent establishments do not have tax residency in Mexico, thus Yes. In Mexico, the transfer of an indirect interest in real estate double tax treaties do not apply. located in Mexico could be subject to taxation. For such purposes, such a transaction could trigger income tax in the case that more 6.5 Would any withholding tax or other similar tax be than 50% of the book value of the interest being sold (alienation of imposed as the result of a remittance of profits by the property through the disposition of shares or interests in any entity) branch? can be attributed to real estate located within Mexican territory.

In the case that remittances are paid out of the permanent 8.3 Does your jurisdiction have a special tax regime establishment’s net tax profit account or from the capital remittances for Real Estate Investment Trusts (REITs) or their account, then such profits could be tax-free at the corporate level. equivalent? Notwithstanding the foregoing, and regardless of the obligation to accrue taxable income and to pay the income tax due (amount Yes. Mexican laws set forth a special tax regime for real estate registered on the net tax profit account), profits distributed or investment trusts (FIBRA) dedicated to the acquisition and reimbursed (in cash or in kind) by the permanent establishment development of real estate for leasing purposes or to the acquisition to its parent company or main office would receive a similar tax of the right to receive income from the lease of such properties or to treatment to that applicable to dividend payments in favour of grant financing for such purposes. Under this tax regime, taxpayers foreign residents. Accordingly, a 10% withholding tax would apply. that contribute the property to the trust can benefit from tax deferrals. Furthermore, FIBRAs are exempted from the obligation to file monthly provisional income tax payments, provided that 7 Overseas Profits certain requirements are met.

7.1 Does your jurisdiction tax profits earned in overseas 9 Anti-avoidance and Compliance branches?

In accordance with the Mexican Income Tax Law, Mexican tax 9.1 Does your jurisdiction have a general anti-avoidance residents are taxed on their worldwide income, including income or anti-abuse rule? derived from their establishments abroad. The Mexican tax system contemplates transfer-pricing, thin capitalisation, CFC, back-to-back and tax re-characterisations as 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? general anti-avoidance rules. Also, for taxpayers to be able to claim treaty benefits, tax authorities Yes, dividends received by a local company from a non-resident could request a sworn affidavit from the foreign party stating the company would be subject to taxation. However, foreign tax credits existence of a double taxation and identifying the statutes or provisions could be claimed in relation to taxes paid abroad on such dividends, under foreign law in terms of which said double taxation exists. assuming the applicable requirements are met. 9.2 Is there a requirement to make special disclosure of 7.3 Does your jurisdiction have “controlled foreign avoidance schemes? company” rules and, if so, when do these apply? Yes, under Mexican tax law, taxpayers are required to file several Concerning CFC rules, the Income Tax Law establishes that Mexican notices, such as offshore investments, transactions with related tax residents and residents with a permanent establishment in Mexico parties, Country-by-Country Reports, etc.

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Likewise, whenever the tax audit report is prepared by an independent certified public accountant, they are required to disclose 10.2 Does your jurisdiction intend to adopt any legislation any transaction that might be in violation of Mexican tax law. to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports?

9.3 Does your jurisdiction have rules which target not Since the tax reform of 2014, the local set of laws has been amended only taxpayers engaging in tax avoidance but also to abide by the standards set forth in the BEPS Action Plan, in anyone who promotes, enables or facilitates the tax accordance with the OECD’s recommendations. avoidance? In this regard, more stringent conditions and requirements have been Under the Mexican Fiscal Code, parties that advise or provide established relating to hybrid mismatches (Action 2), CFC rules Mexico consultancy services to a taxpayer in order that he may totally or (Action 3), treaty abuse (Action 8), transfer pricing rules (Actions 8, partially omit the payment of any contribution in violation of the 9 and 10), and reporting obligations (Action 13). applicable tax provisions, could be sanctioned. 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? The CBCR filing obligations regarding transactions with related parties abroad have been included in the Income Tax Law. In Mexico, there is no co-operative compliance programme as such. Taxpayers could now be required to file (no later than on December Regardless of the foregoing, it is worth nothing that taxpayers that 31 of the following tax year to which the filing obligation are being audited are entitled to seek remedy before the Mexican tax corresponds) the following informative returns: (a) a master file, ombudsman (PRODECON). consisting of information concerning the structure and activities This alternative allows taxpayers to negotiate amicable solutions of multinational corporate groups; (b) a local file, describing the with the tax authorities to avoid litigation. Furthermore, under these structure and activities conducted with related parties at a local procedures, fines could be reduced or even condoned. level; and (c) CBCR, with respect to the activities, distribution of income and taxes paid in each jurisdiction.

10 BEPS and Tax Competition 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box? 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base No. In Mexico, there is no special tax regime concerning intellectual Erosion and Profit Shifting (BEPS)? property. However, some tax incentives are granted for national The BEPS Action Plan has had a major impact on Mexico, and some cinematographic and theatrical productions, as well as for of the new provisions and amendments of the law and regulations innovation (CONACYT). Likewise, certain incentives in the form have been influenced by BEPS. The Mexican tax authorities are of beneficial tax treatments have been designed for real investment challenging and reviewing in more detail cross-border structures trusts (FIBRA) or trusts for investment in risk capital (FICAP), as and transactions conducted by taxpayers with related parties. well as for the maquila industry. In addition, more stringent requirements concerning the deductibility of certain income/expense items have been incorporated into Mexican law since BEPS.

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Ana Paula Pardo Lelo de Larrea Alexis Michel SMPS Legal SMPS Legal Andrés Bello N. 10, office 402 Andrés Bello N. 10, office 402 Polanco, 11560 Polanco, 11560 Mexico City Mexico City Mexico Mexico

Tel: +52 55 5282 9063 Tel: +52 55 5282 9063 Email: [email protected] Email: [email protected] URL: www.smpslegal.com URL: www.smpslegal.com Mexico Ana Paula joined SMPS Legal in 2015 as tax partner. Her main area Alexis Michel focuses his practice not only on compliance with of practice is taxation, both from a domestic and an international obligations in matters of customs and foreign trade, but also on perspective, and involves representing corporations and individuals. helping his clients navigate the enforcement of administrative She regularly advises clients on matters relating to commercial instruments that the Mexican authorities have implemented, and transactions, tax planning, start-up businesses, joint ventures, identifying and developing areas with opportunities for the expansion investments, acquisitions, mergers, spin-offs, dispositions, tax-free of his clients’ businesses. Alexis is specialised in tariff classification, reorganisations and transfer pricing consulting. customs valuation, implementation of free trade agreements, origin verifications, criteria confirmation and certifications before various Ana Paula has extensive experience in: international transactions; authorities, as well as the development of foreign trade development corporate law, including representation of both multinational and programmes such as Maquila, Sector Promotion and Drawback. domestic groups; specific controversy and litigation; representing domestic and international clients in tax audits; and negotiations. Likewise, he has extensive experience in the performance of internal audits to verify compliance with the obligations arising from foreign Before joining SMPS Legal, Ana Paula was an associate at Hogan trade transactions. He has represented clients before the different Lovells BSTL from 2010, and before that she was an associate at tax and customs authorities in audits, administrative proceedings and Basham Ringe y Correa. She also clerked at the tax boutique Ortiz, the contesting of resolutions derived therefrom. Furthermore, he has Sainz y Erreguerena for two-and-a-half years. developed a successful practice in matters of international commercial Ana Paula gained her Law Degree from Universidad Panamericana unfair trade practices such as antidumping and subventions. in 2002, and her Postgraduate Degree from the Universidad de Before joining SMPS, Alexis worked at: Jauregui, Navarrete, Nader Salamanca. She holds an LL.M. from the University of Florida – Fredric y Rojas, S.C.; White & Case LLP; Trón y Natera, S.C.; and Natera y G. Levin College of Law, 2007, obtaining the Certificate of Academic Espinoza, S.C., accruing more than 19 years of experience. Excellence. Alexis obtained his J.D. from the División de Estudios Superiores of Ana Paula is fluent in Spanish and English and she is a member of the Centro Universitario México, with honours, in 1998 and his degree International Bar Association (IBA), the International Fiscal Association in the Specialty of Tax Law from Universidad Panamericana, with (IFA) and the Young IFA Network (YIN) Committee. honours, in 2006. Alexis is the former Head of the Foreign Trade Commission of the Mexican Bar Association (Barra Mexicana Colegio de Abogados, A.C.), and is an active member of the American Chamber of Commerce, the Canadian Chamber of Commerce and the International Chamber of Commerce. Alexis is fluent in both English and Spanish.

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

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Mozambique Samuel Almeida

VdA Vieira de Almeida Ana Raquel Costa

tax purposes in Mozambique if it has its head office or effective 1 Tax Treaties and Residence place of management in Mozambique.

1.1 How many income tax treaties are currently in force in your jurisdiction? 2 Transaction Taxes

Mozambique has entered into nine double tax treaties (“DTTs”) 2.1 Are there any documentary taxes in your jurisdiction? with Portugal, the United Arab Emirates, Italy, Mauritius, Macao, Botswana, Vietnam, India and South Africa. Yes. Stamp Duty (“SD”) is a tax levied on acts, contracts, agreements and financing operations entered into in Mozambican territory. For 1.2 Do they generally follow the OECD Model Convention contracts entered into outside Mozambique, SD will still be due, or another model? provided that the contract/agreement is submitted therein for any legal purpose. Loans and guarantees are always subject to SD in Mozambican DTTs follow the OECD Model and the United Nations Mozambique, provided that the beneficiary (i.e. the borrower and/ Model Double Taxation Convention. or the entity which requested the guarantee) is a resident entity in Mozambique or with a permanent establishment therein.

1.3 Do treaties have to be incorporated into domestic law before they take effect? 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? Mozambican DTTs do not have to be incorporated into domestic law but they must be approved, ratified and published in Mozambique. Yes. The standard VAT rate is 17%.

1.4 Do they generally incorporate anti-treaty shopping 2.3 Is VAT (or any similar tax) charged on all transactions rules (or “limitation on benefits” articles)? or are there any relevant exclusions?

Apart from the DTT with India, treaties signed by Mozambique do VAT is levied on the supply of goods and services that are deemed not include a limitation on benefits clause. This notwithstanding, located in Mozambican territory. VAT is also due on the import Mozambican domestic law has a treaty shopping provision according of goods. Certain exemptions are available, such as the supply of to which the benefits arising from tax treaties shall not be applicable goods and services deemed essential (e.g. essential food, medical in the event of a third party, not resident in the relevant Contracting services, educational services and agricultural exploration), banking States, using the DTT for the sole purpose of taking advantage of its and financial activity, etc. provisions.

2.4 Is it always fully recoverable by all businesses? If not, 1.5 Are treaties overridden by any rules of domestic what are the relevant restrictions? law (whether existing when the treaty takes effect or introduced subsequently)? As a general rule, VAT-taxable persons are entitled to deduct input VAT (i.e. VAT incurred in the acquisition of goods and services) Pursuant to the Mozambican Constitution, international tax from VAT payable on their taxable transactions. Entities that carry treaties have the same value as infra-constitutional domestic law. out taxable and non-taxable/exempt activities may partially deduct Additionally, the general tax code sets the prevalence of international VAT borne in their inputs, either using a direct allocation method or treaties over domestic law. by reference to a deductible proportion, or pro rata. There are also some restrictions to VAT deduction related, inter alia, 1.6 What is the test in domestic law for determining the to VAT on vehicles, fuel, and travel and accommodation expenses. residence of a company?

According to domestic law, a company is deemed to be resident for

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Entities are deemed to be related, provided that one of the following 2.5 Does your jurisdiction permit “establishment only” requirements is met: VAT grouping, such as that applied by Sweden in the a) The non-resident entity directly or indirectly holds at least Skandia case? 25% of the share capital of the debtor. b) Both parties are (directly or indirectly) controlled by the No. To date, Mozambique does not allow for VAT grouping. same entity. c) The non-resident entity, although not holding a 25% stake, 2.6 Are there any other transaction taxes payable by exercises a significant influence in the management of the companies? Mozambican subsidiary. In the situations above, the rule is that interest on financing in excess A 2% Property Transfer Tax (locally known as “SISA”), along with of a 2:1 debt-to-equity ratio is not deductible by the Mozambican Mozambique a 0.2% Stamp Duty, are levied on the transfer of real estate located company for Corporate Income Tax (“CIT”) purposes. in Mozambique.

3.5 If so, is there a “safe harbour” by reference to which 2.7 Are there any other indirect taxes of which we should tax relief is assured? be aware? Yes. Interest on financing below the 2:1 debt-to-equity ratio can still Excise Tax applies on the consumption of certain non-essential be deducted by the Mozambican company. goods (tobaccos, spirits, wine, diamonds and other luxury goods). The rates vary according to the nature of the goods – from 15% up to 75%. 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company?

3 Cross-border Payments Yes. The aforementioned rule would apply to a third-party financing secured by a related entity.

3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- resident? Dividends paid by a Mozambican company to its foreign shareholder without a permanent establishment in Mozambique are subject to a 20% withholding tax, which is the final tax liability of the Interest charged in connection with shareholder loans (i.e. the excess) beneficiary in Mozambique. The withholding tax may be avoided is not eligible as a deductible cost for CIT purposes whenever the or reduced under an applicable DTT. interest rate exceeds the MAIBOR 12-month reference rate, accrued by 2%. In addition, the Corporate Income Tax Code foresees a specific 3.2 Would there be any withholding tax on royalties paid anti-avoidance rule applicable to payments – which should include by a local company to a non-resident? interest payments – made to entities resident in tax havens, whereby such amounts cannot be deemed as a tax cost (unless the taxpayer Royalties – which, under Mozambican internal law, also can prove that the payments correspond to operations effectively encompasses payments in connection with the right to use industrial carried out, which are not abnormal or of an exaggerated amount). or commercial equipment – paid by a local company to a non- resident entity without a permanent establishment in Mozambique are subject to a 20% withholding tax, which is the final tax liability 3.8 Is there any withholding tax on property rental of the beneficiary in Mozambique. The withholding tax may be payments made to non-residents? reduced under an applicable DTT. Rents paid by a local company to a non-resident entity without a permanent establishment in Mozambique are subject to a 20% 3.3 Would there be any withholding tax on interest paid withholding tax whenever the debtor is a CIT taxpayer or the by a local company to a non-resident? payments are related to the business activity of a Personal Income Tax taxpayer with an organised accounting system. Interest paid by a local company to a non-resident entity without a permanent establishment in Mozambique is subject to a 20% withholding tax, which is the final tax liability of the beneficiary 3.9 Does your jurisdiction have transfer pricing rules? in Mozambique. The withholding tax may be avoided or reduced under an applicable DTT. Under the DTT entered into with Portugal, Yes. Transactions between related parties must comply with the interest and royalties charged in excess, i.e. not complying with the “arm’s length” principle. Entities are deemed to be related when “arm’s length” principle, cannot benefit from (the excess of) the one of such entities has the power to, directly or indirectly, exercise reduced withholding tax rate foreseen in the Treaty Convention. a significant influence in the management of the other. Mozambican transfer pricing provisions are modelled on the OECD 3.4 Would relief for interest so paid be restricted by principles but, up to now, have still been quite incipient. Reportedly, reference to “thin capitalisation” rules? Mozambique’s Council of Ministers has recently approved regulations aimed at introducing new rules and procedures regarding Thin capitalisation rules are generally applicable to credits and loans transfer pricing. These regulations are still to be published. granted by a related non-resident entity to a Mozambican taxpayer.

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Dividends distributed by a resident entity to a resident corporate 4 Tax on Business Operations: General shareholder may be exempt from CIT provided that the parent company holds a 20% share for a minimum holding period of two 4.1 What is the headline rate of tax on corporate profits? years.

The CIT rate is 32%. 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the occupation of property? 4.2 Is the tax base accounting profit subject to adjustments, or something else? Urban Property Tax applies on real estate owned: 0.4% for residential buildings; and 0.7% for real estate used for commercial purposes.

Yes. Mozambican CIT is based on the taxpayer’s annual profits Mozambique as computed for accounting purposes with specific tax adjustments. A 20% withholding tax (a 10% rate applies in certain situations) is also applicable to amounts paid in consideration of services rendered by non-resident entities whenever such services are carried out or 4.3 If the tax base is accounting profit subject to used in Mozambique. The tax may be avoided under an applicable adjustments, what are the main adjustments? DTT.

When computing the taxable profits for CIT purposes, taxpayers should bear in mind some specific tax adjustments; notably, among 5 Capital Gains others: i) Loss computation. 5.1 Is there a special set of rules for taxing capital gains ii) Provisions. and losses? iii) Depreciation and amortisation of fixed assets. iv) Transfer pricing. No. Capital gains are included in the company’s annual taxable v) Thin capitalisation rules. income and subject to 32% CIT. vi) Limitation on deduction of payment made to low-tax jurisdictions. 5.2 Is there a participation exemption for capital gains? vii) CFC provisions. Additionally, some costs are not deductible for CIT purposes, such No, there is no such exemption. as: i) Undocumented costs. 5.3 Is there any special relief for reinvestment? ii) Taxes that shall be borne by third parties. iii) Taxes on mining and petroleum activities. Yes. Capital gains resulting from the sale of tangible fixed assets iv) Penalties and expenses regarding infringement procedures. shall not be computed as taxable profits provided that the proceeds of v) Indemnities paid for events whose risk is insurable. the sale are reinvested in the acquisition, production or construction of tangible fixed assets within the following three years after the vi) Interest from related parties’ loans deemed as excessive (see question 3.4 above). disposal. vii) Interest from shareholder loans above the fixed limit (see question 3.7 above). 5.4 Does your jurisdiction impose withholding tax on the viii) Part of the travel (per diems) and representation expenses and proceeds of selling a direct or indirect interest in local certain expenses related to vehicles and fuel. assets/shares?

There is no withholding tax on the proceeds of selling a direct 4.4 Are there any tax grouping rules? Do these allow or indirect interest in Mozambican assets/shares. Nevertheless, for relief in your jurisdiction for losses of overseas capital gains obtained from the disposal of quotas/shares held subsidiaries? in a Mozambican company – including the direct and indirect transfer of rights and participating rights involving assets located Mozambican law has no tax grouping rules or relief for losses of in Mozambique – by a non-resident entity are subject to 32% CIT, overseas subsidiaries. to be reported in Mozambique through the submission of an annual tax return. 4.5 Do tax losses survive a change of ownership?

Yes. Tax losses of merged or demerged companies can be deducted 6 Local Branch or Subsidiary? and carried forward by the new or acquiring company for five years, subject to prior authorisation from the Minister of Finance. 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits? The incorporation of a local company in Mozambique could be subject to 2% SISA in cases where the shareholders contribute with There is no tax regime for retained profits in Mozambique. Dividends real estate to the share capital. paid to a Mozambican entity are subject to 20% withholding tax.

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6.2 Is there a difference between the taxation of a local 8.2 Does your jurisdiction impose tax on the transfer of subsidiary and a local branch of a non-resident an indirect interest in commercial real estate in your company (for example, a branch profits tax)? jurisdiction?

Local companies are subject to 32% CIT on profits obtained on a Please see question 5.4 above. Capital gains obtained from the worldwide basis. Local branches are subject to 32% CIT on profits disposal of quotas/shares held in a Mozambican company (including attributable to the PE located in the country. the direct and indirect transfer of rights and participating rights involving assets located in Mozambique) by a non-resident entity are subject to 32% CIT. 6.3 How would the taxable profits of a local branch be determined in its jurisdiction?

Mozambique 8.3 Does your jurisdiction have a special tax regime Foreign companies operating in Mozambique through a PE (such as for Real Estate Investment Trusts (REITs) or their a local branch) are subject to 32% CIT on profits attributable to their equivalent? activity in the country. No, there is no such regime in Mozambique.

6.4 Would a branch benefit from double tax relief in its jurisdiction? 9 Anti-avoidance and Compliance

No, it would not. 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the There is no general anti-abuse rule in Mozambique, although there branch? is a treaty shopping provision. There is no branch remittance tax in Mozambique. 9.2 Is there a requirement to make special disclosure of avoidance schemes? 7 Overseas Profits No, there is no such requirement.

7.1 Does your jurisdiction tax profits earned in overseas branches? 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also Yes, resident corporations are subject to 32% CIT on their worldwide anyone who promotes, enables or facilitates the tax annual profits. avoidance?

No, it does not. 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? 9.4 Does your jurisdiction encourage “co-operative Yes. Dividends paid by a non-resident entity to a Mozambican compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? company are included in the company’s annual taxable income and subject to 32% CIT on profits. No, this is not encouraged.

7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? 10 BEPS and Tax Competition

Yes. Profits obtained by a foreign company resident in a tax haven 10.1 Has your jurisdiction introduced any legislation shall be allocated to its Mozambican shareholders whenever these in response to the OECD’s project targeting Base hold, directly or indirectly: (i) at least 25% of the share capital; or Erosion and Profit Shifting (BEPS)? (ii) 10% of the share capital when more than 50% of the company is owned by Mozambican residents. Although not directly related to BEPS, new regulations on transfer pricing will reportedly be enacted in 2018 and new rules regarding 8 Taxation of Commercial Real Estate VAT on electronic services were also recently introduced into the VAT Code, which could have been encouraged by OECD BEPS Action 1 (“Challenges of the Digital Economy”). 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is Yes. Capital gains obtained from the disposal of real estate in recommended in the OECD’s BEPS reports? Mozambique by a non-resident entity are subject to 32% CIT. No, such legislation is not foreseen in Mozambique.

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10.3 Does your jurisdiction support public Country-by- 10.4 Does your jurisdiction maintain any preferential tax Country Reporting (CBCR)? regimes such as a patent box?

No, CBCR is not supported in Mozambique. No such regimes are maintained in Mozambique. Mozambique

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Samuel Almeida Ana Raquel Costa VdA Vieira de Almeida VdA Vieira de Almeida Rua Dom Luis I, 28 Rua Dom Luis I, 28 1200-151 Lisbon 1200-151 Lisbon Portugal Portugal

Tel: +351 21 311 3485 Tel: +351 21 311 3400 Email: [email protected] Email: [email protected] URL: www.vda.pt URL: www.vda.pt

Samuel Almeida joined VdA in 2015, and is a partner in the Tax Ana Raquel Costa joined VdA in 2016. She is a senior associate in

Mozambique practice. He has extensive experience in tax litigation, representing a the Tax practice where she has been involved in several transactions, significant number of domestic and foreign companies before judicial mainly focused on tax consultancy, international tax planning and tax and arbitral tribunals, the Court of Justice of the European Union and litigation. even the Tax Authority, in both the non-contentious and contentious Raquel has 10 years of professional experience dealing with indirect stages (tax inspections, legal assistance) as well as the judicial stage. taxes, focusing on the areas of VAT, customs and excise duties. She Samuel is a tax arbitrator at the Administrative Arbitration Centre. has a broad practice in tax consulting, international tax planning, and tax optimisation in Portugal, Angola, Mozambique, Cape Verde, Samuel has also advised relevant Portuguese and international business groups in terms of restructuring, mergers and acquisitions, Guinea-Bissau and other African countries, having actively advised tax audits, transfer pricing, securities and real estate funds, and tax clients from several sectors of activity, including in the oil & gas issues related to regulated industries, such as telecommunications industry. and insurance. Alongside this, Samuel has broad experience in Raquel contributes to several publications related to indirect tax tax consulting and international tax planning, particularly in Angola, matters and is co-author of articles published in the most prestigious Mozambique and Cape Verde, having actively advised oil & gas domestic and international tax publications, such as: “O Pecado sector companies, particularly on LNG projects, submission of foreign Original do IVA: As Prestacões de Servicos Conexas Realizadas por investment projects, multijurisdictional tax structuring investments, Corretores ou Intermediários de Seguros ” (VAT’s Original Sin: the elimination of double taxation and structuring remuneration packages Supply of Insurance-Related Services by Insurance Intermediaries), for expatriates. Cadernos IVA 2015; “UK: VAT promotional schemes & the influence Samuel is recommended as a Tax Controversy Leader by the of the ECJ on national law”, BNA International, volume 12, no. 5, May International Tax Review and is also ranked in Chambers Europe, Best 2010; and “O IVA na Economia Digital” (VAT and the Digital Economy), Lawyers and Who’s Who Legal as a Tax Expert. Cadernos IVA 2017 (published in May 2017). He is the author of various books on tax and articles in specialised Raquel has an LL.M. in International Business Law (Catholic journals, namely: University), a Master’s Degree in Accountancy, with a dissertation on “As Prestações de Serviços Conexas Realizadas por Corretores ou ■■ ‘Portugal – Law & Practice’, in Chambers and Partners, 2016; Intermediários de Seguros” (Insurance-Related Activities Carried Out ■■ ‘Breves notas introdutórias sobre a reforma do IRC’, in A Reforma by Insurance Intermediaries) (ISCTE-IUL) and an Executive Master’s do IRC, Vida Económica, October 2014; in Tax Management (INDEG-ISCTE). She is a member of GLCA, the Customs Lawyers’ Network. ■■ ‘Breve Enquadramento do Regime de Preços de Transferência nos Países de Língua Oficial Portuguesa’, in Cadernos Preços de Transferência 2013, Almedina, 2013; ■■ ‘Primeiras Reflexões sobre a Lei de Arbitragem em Matéria Tributária’, in Estudos em Memória do Prof. Doutor J. L. Saldanha Sanches, Vol. V, Coimbra Editora, 2011; ■■ ‘A eliminação da dupla tributação económica dos dividendos e o Imposto Sucessório por avença no Orçamento do Estado para 2002’, in Fiscalidade n. 11, July 2002; and ■■ ‘Portugal: New Transfer Pricing Regime’, co-authored by Paulino Brilhante Santos, in Tax Planning International Transfer Pricing, Volume 3, Number 2, BNA International, February 2002.

Vieira de Almeida (VdA) is a leading independent law firm with more than 40 years of experience in international legal practice and with a strong presence in various sectors. The recognition of VdA’s work is shared with our team and clients, and is reflected in the awards achieved, such as: the “Financial Times 2015 Game Changing Law Firm in Continental Europe”; the “Financial Times Innovative Lawyers in Continental Europe 2013, 2016 and 2017”; the “Most Active Law Firm” awarded to VdA by Euronext for six consecutive years, including 2017; the “Portuguese Law Firm of the Year 2015 and 2016” awarded by the IFLR; the “Portuguese Law Firm of the Year 2016” and “Client Service Law Firm of the Year 2017” awarded by Chambers & Partners; the “Iberian Firm of the Year 2017” awarded by The Lawyer; the “International Firm of the Year 2017” awarded by Legal Business and the “Portuguese Law Firm of the Year in 2017” awarded by Who’s Who Legal. VdA, through its VdA Legal Partners (which designates the network of lawyers and independent law firms associated with Vieira de Almeida for the provision of integrated legal services), is actively present in 11 jurisdictions, including all African members of the Community of Portuguese-Speaking Countries (“CPLP”), as well as Timor-Leste and several francophone African countries. Angola – Cape Verde – Congo – Democratic Republic of the Congo – Equatorial Guinea – Gabon – Guinea-Bissau – Mozambique – Portugal São Tomé and Príncipe – Timor-Leste

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Nigeria

Blackwood & Stone LP Kelechi Ugbeva

company is the place of incorporation. A company is resident in 1 Tax Treaties and Residence Nigeria if it is incorporated under the relevant Nigerian law.

1.1 How many income tax treaties are currently in force in your jurisdiction? 2 Transaction Taxes

There are currently 13 tax treaties in force in Nigeria. These treaties 2.1 Are there any documentary taxes in your jurisdiction? are between Nigeria and the following countries: Belgium; Canada; China; the Czech Republic; France; Italy; the Netherlands; Pakistan; Yes, stamp duty is payable on instruments listed in the Stamp Duties the Philippines; Romania; Slovakia; South Africa; and the United Act. Kingdom.

2.2 Do you have Value Added Tax (or a similar tax)? If so, 1.2 Do they generally follow the OECD Model Convention at what rate or rates? or another model? Yes, VAT is charged at a flat rate of 5%. Yes they generally follow the OECD Model Convention and the UN Model Convention. 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? 1.3 Do treaties have to be incorporated into domestic law before they take effect? According to the VAT Act, VAT is charged on the supply of taxable goods and services. There are certain exemptions which include: all Yes, treaties must be incorporated into Nigerian domestic law before medical and pharmaceutical products; basic food items; books and they take effect. educational materials; baby products; fertilizer, locally produced agricultural and veterinary medicine, farming machinery and 1.4 Do they generally incorporate anti-treaty shopping farming transportation equipment; all exports; plant and machinery rules (or “limitation on benefits” articles)? imported for use in the Export Processing Zone; plant, machinery and equipment purchased for utilisation of gas in downstream No, Nigeria does not have provisions for anti-treaty shopping rules petroleum operations; troughs, ploughs and agricultural equipment (or “limitation on benefits” articles). and implements purchased for agricultural purposes; proceeds from the disposal of short-term Federal Government of Nigeria securities and bonds; proceeds from the disposal of short-term state, local 1.5 Are treaties overridden by any rules of domestic government and corporate bonds (including supra-national bonds); law (whether existing when the treaty takes effect or introduced subsequently)? medical services; services rendered by Community Banks, the People’s Bank and mortgage institutions; plays and performances conducted by educational institutions as part of learning; and all The Nigerian Constitution is the supreme law of the land and it overrides every other law, regulation or treaty. No other rules of export services. domestic law can override a treaty that has been ratified by the National Assembly, and this position is supported by judicial 2.4 Is it always fully recoverable by all businesses? If not, authority in a number of cases. Furthermore, section 45(1) of the what are the relevant restrictions? Companies Income Tax Act stipulates that where there is a conflict, double taxation treaties shall override the provisions of the Act itself. VAT is recoverable; however, it is restricted to goods purchased or imported directly for resale and goods which form the stock-in- 1.6 What is the test in domestic law for determining the trade used for the direct production of any new product on which the residence of a company? output VAT is charged. VAT on fixed assets/capital items, overheads, service and general Under Nigerian law, the test for determining the residence of a administration are not recoverable.

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Furthermore, excess input VAT may be carried forward as credit against future VAT payable. In addition, the Federal Inland Revenue 3.6 Would any such rules extend to debt advanced by a Service (FIRS) Establishment Act provides for a cash refund on third party but guaranteed by a parent company? application within 90 days of the FIRS’ decision, subject to an appropriate tax audit. This is not applicable in Nigeria.

2.5 Does your jurisdiction permit “establishment only” 3.7 Are there any other restrictions on tax relief for VAT grouping, such as that applied by Sweden in the interest payments by a local company to a non- Skandia case? resident? Nigeria No, Nigeria does not permit “establishment only” VAT grouping. No, there are no other restrictions.

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

Yes. Capital gains tax is applicable on qualifying transactions at a Yes. WHT is applicable on rental payments where the property is rate of 10%. situated in Nigeria and is charged at a rate of 10%.

2.7 Are there any other indirect taxes of which we should 3.9 Does your jurisdiction have transfer pricing rules? be aware? Yes. The Income Tax (Transfer Pricing) Regulations, No. 1, 2012 Yes. Customs and excise duties are imposed by the Customs and (TP Regulations) are applicable in Nigeria. Excise Act. 4 Tax on Business Operations: General 3 Cross-border Payments

4.1 What is the headline rate of tax on corporate profits? 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? The headline rate of tax on corporate profits is 30% of total profits made. Yes, withholding tax (WHT) at the rate of 10% is imposed on dividends paid to non-resident companies. The WHT rate for 4.2 Is the tax base accounting profit subject to recipients of dividends from double taxation treaties countries is adjustments, or something else? 7.5%. Yes, tax is assessed on profits, which are subject to adjustments. 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? Yes. See question 3.1 above for the tax rates. The Companies Income Tax Act (CITA) allows the deduction 3.3 Would there be any withholding tax on interest paid of expenses incurred wholly, exclusively and necessarily in the by a local company to a non-resident? promotion of a business venture, and provides for capital allowances for qualifying capital expenditure incurred in the course of doing WHT is generally applicable on interest paid by a local company to business (as provided for under the Second Schedule to the CITA). a non-resident; however, the law grants tax exemptions for interest payable in relation to foreign and agricultural loans invested in 4.4 Are there any tax grouping rules? Do these allow Nigeria under certain circumstances, as provided for under the Third for relief in your jurisdiction for losses of overseas Schedule (pursuant to section 11) of the Companies Income Tax Act. subsidiaries?

3.4 Would relief for interest so paid be restricted by There are no tax grouping rules in Nigeria. reference to “thin capitalisation” rules?

4.5 Do tax losses survive a change of ownership? There are currently no “thin capitalisation” rules in Nigeria. Yes, tax losses survive a change of ownership. 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits? The specific “interest-related” tax reliefs are discussed in question 3.3 above. No, tax is levied on the entire profits of a company for that year of assessment.

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4.7 Are companies subject to any significant taxes not 6 Local Branch or Subsidiary? covered elsewhere in this chapter – e.g. tax on the occupation of property? 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? Other taxes include: ■ Education Tax: this is payable by all Nigerian companies and Stamp duties will be imposed and are payable on the share capital of levied on assessable profits at a rate of 2%. the subsidiary upon incorporation. ■ Petroleum Profits Tax (PPT): this is levied on the income of companies engaged in upstream petroleum operations. It is chargeable at a rate of: 65.75% for non-Production 6.2 Is there a difference between the taxation of a local Nigeria Sharing Contract (PSC) operations in their first five years, subsidiary and a local branch of a non-resident during which the company has not fully amortised all pre- company (for example, a branch profits tax)? production capitalised expenditure; 50% for PSCs with the Nigerian National Petroleum Corporation (NNPC); and 85% No, there is none. For tax purposes, a local branch is deemed to for petroleum operations carried out under joint-venture be independent of its parent company. A non-resident company arrangements with the NNPC or any non-PSC over five intending to do business in Nigeria must incorporate a Nigerian years. entity. Invariably, a company cannot carry out business in Nigeria through an unincorporated branch. Companies incorporated in 5 Capital Gains Nigeria (subsidiaries) are taxable under the same regime.

6.3 How would the taxable profits of a local branch be 5.1 Is there a special set of rules for taxing capital gains determined in its jurisdiction? and losses?

The branch of a non-resident company is treated for taxation Capital gains and losses in Nigeria are governed by the Capital Gains purposes as a duly incorporated company in Nigeria and taxed to Tax Act. The Act provides that tax be imposed at a rate of 10% on the extent that its income or profits accrue in, are derived from, are all capital gains arising from a sale, exchange or other disposition of brought into or are received in Nigeria. properties, known as chargeable assets, in each year of assessment, but excluding capital gains on the disposal of government securities, stocks and shares. 6.4 Would a branch benefit from double tax relief in its jurisdiction?

5.2 Is there a participation exemption for capital gains? A Nigerian branch of a non-resident company would be deemed to be resident in Nigeria and, as such, cannot claim treaty relief. Yes, there is. Section 32 of the Capital Gains Tax Act provides However, non-resident entities (with Nigerian branches) in treaty for exemption on gains arising from acquisition of the shares of a countries may benefit from double tax relief in instances where company either taken over, absorbed or merged by another company, such non-resident entities derive profits attributable to a permanent as a result of which the acquired company loses its identity as a establishment in Nigeria. limited company, provided that no cash payment is made in respect of the shares acquired. 6.5 Would any withholding tax or other similar tax be Other exemptions include gains made upon a disposal of business imposed as the result of a remittance of profits by the assets where the proceeds are spent in acquiring new business branch? assets. Another important relief is one granted to businessmen or trade, where old business assets are sold and the proceeds are used Dividends repatriated are subject to withholding tax. to procure new and similar business assets.

5.3 Is there any special relief for reinvestment? 7 Overseas Profits

Yes, there is. Gains accruing to unitholders of a trust in respect of 7.1 Does your jurisdiction tax profits earned in overseas disposal of all securities are not chargeable to tax, provided that the branches? proceeds are reinvested. Profits earned in branches overseas are only taxable to the extent 5.4 Does your jurisdiction impose withholding tax on the that such income is derived from Nigeria. proceeds of selling a direct or indirect interest in local assets/shares? 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? Capital gains on disposal of stocks and shares are tax-exempt, therefore WHT is not applicable. WHT would be applicable on Yes, dividends received by Nigerian companies from non-resident proceeds from the sale of assets, except where such gains meet the companies are taxable, except if brought into Nigeria through exemption criteria provided in question 5.3 above. government-approved channels (any financial institution authorised by the Central Bank of Nigeria to deal in foreign currency transactions).

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7.3 Does your jurisdiction have “controlled foreign 9.3 Does your jurisdiction have rules which target not company” rules and, if so, when do these apply? only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax Nigeria currently does not have controlled foreign corporation avoidance? (CFC) rules, but it is expected that such rules may be implemented soon. Yes. Sections 95 and 96 of the Personal Income Tax Act and section 94 of the Companies Income Tax Act contain provisions which target anyone who promotes or facilitates tax avoidance. 8 Taxation of Commercial Real Estate Nigeria 9.4 Does your jurisdiction encourage “co-operative 8.1 Are non-residents taxed on the disposal of compliance” and, if so, does this provide procedural commercial real estate in your jurisdiction? benefits only or result in a reduction of tax?

Yes, capital gains tax is payable upon disposal of real estate by Nigeria encourages co-operative compliance. However, this does residents and non-residents in Nigeria, except where such gains are not result in a significant reduction of tax. derived from the main or only private residence of the individual, and provided that the real estate does not exceed one acre in size. 10 BEPS and Tax Competition

8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your 10.1 Has your jurisdiction introduced any legislation jurisdiction? in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? No, it does not. Nigeria has not introduced any legislation in response to the OECD’s BEPS action plan. Suffice it to say that the BEPS 8.3 Does your jurisdiction have a special tax regime recommendations will require ratification into Nigerian law before for Real Estate Investment Trusts (REITs) or their they can be implemented. However, see the additional discussion equivalent? on this subject in question 10.2 below.

There is no special tax regime for REITs in Nigeria. 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is 9 Anti-avoidance and Compliance recommended in the OECD’s BEPS reports?

The BEPS recommendations for changes to the TP Regulations 9.1 Does your jurisdiction have a general anti-avoidance immediately became effective in Nigeria, as the Nigerian TP or anti-abuse rule? regulations incorporated the OECD TP Guidelines. The FIRS, in this regard, has already begun to adopt some of the regulations while Yes, as provided under the TP Regulations. Note that, prior to the carrying out the audits. establishment of the TP Regulations, general anti-avoidance rules (GAAR) have been in existence in Nigeria via specific statutory provisions. Specifically, section 17 of the Personal Income Tax 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? Act (2004), section 22 of the Companies Income Tax Act (2004, amended 2007), section 15 of the Petroleum Profits Tax Act (2004) and the Capital Gains Tax Act (1967, last amended in 1999) all The FIRS has started to request that multinational entities in Nigeria provide for the FIRS to adjust any artificial transaction in Nigeria. submit country-by-country reports, and this has been incorporated into the audit process.

9.2 Is there a requirement to make special disclosure of avoidance schemes? 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box? Under the TP Regulations, connected taxable persons are required to disclose any transaction which affects its income or expense. Subject to the approval of the National Office for Technology Companies are required to file statutory transfer pricing forms Acquisition and Promotion (NOTAP), Nigerian companies are (Declaration and Disclosure Forms) along with their annual income allowed to remit royalties, management/technical service fees and tax returns. payments under Technology Transfer Agreements to their non- resident technical partners. Such remittances are treated as allowable deductions and are not liable to tax, provided that the FIRS is satisfied that such payments are at arm’s length.

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Kelechi Ugbeva Blackwood & Stone LP 22A Rasheed Alaba Williams Street Lekki Phase 1 Lagos Nigeria

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

Blackwood & Stone LP is a tax law firm based in Lagos, Nigeria, dedicated to providing clients with specialised tax and corporate & commercial law services. The firm successfully represents and advises multinational companies, foreign investors, public companies, closely held businesses including those that are family-owned and owner-managed, start-ups and individuals throughout Nigeria and around the world. Our partners are experienced tax and commercial lawyers who are experts in Nigerian and international tax and business law, each having developed a successful career at a leading law firm or organisation.

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Poland Joanna Wierzejska

Domański Zakrzewski Palinka Tomasz Leszczewski

1 Tax Treaties and Residence 1.6 What is the test in domestic law for determining the residence of a company?

1.1 How many income tax treaties are currently in force in your jurisdiction? A company is considered to be a Polish tax resident if its registered office or place of management is located in Poland. Therefore, Polish subsidiaries of foreign companies are considered Polish tax To date, Poland has concluded 93 Double Taxation Treaties residents. The entire income of Polish tax residents is subject to (“DTTs”), five of which are not yet in force. On 7 June 2017, the taxation, irrespective of where the income is earned. In the case of Multilateral Instrument to Modify Bilateral Tax Treaties (“MLI”) entities which do not have their registered office or management in was signed by Poland. The MLI allows concluded DTTs to be Poland, only income earned by them in Poland is subject to taxation. automatically amended. Poland has declared 78 DTTs for the MLI’s purposes (11 DTTs remain unchanged). 2 Transaction Taxes 1.2 Do they generally follow the OECD Model Convention or another model? 2.1 Are there any documentary taxes in your jurisdiction? The tax treaties which have been signed by Poland follow the OECD Model Convention most of the time, except for certain Stamp duty is imposed on certain activities undertaken by the specifications and reservations. The majority of the tax treaties have public administration such as granting approval, issuing certificates, been renegotiated in the last 10 years, e.g. introducing a real estate permissions, powers of attorney and other documents. clause or introducing the anti-avoidance rules. Apart from stamp duty, certain civil law activities are subject to civil transaction tax (“CTT”). CTT is described in greater detail in question 2.6 below. 1.3 Do treaties have to be incorporated into domestic law before they take effect? 2.2 Do you have Value Added Tax (or a similar tax)? If so, All ratified DTTs become a part of the internal legal system after at what rate or rates? being published in the Journal of Laws. The general principle is that a DTT takes precedence over domestic tax law. Yes. The Polish system of Value Added Tax is based on European Union legislation (primarily on the provisions of Directive 2006/112/ EC on the common system of value added tax implemented into 1.4 Do they generally incorporate anti-treaty shopping domestic law by the Act on Tax on Goods and Services). rules (or “limitation on benefits” articles)? The standard rate is currently 23%. A reduced rate of 8% applies to In general, DTTs concluded by Poland do not include anti-treaty certain goods like food products and beverages not covered by other shopping rules. However, there is a trend to introduce such rules rates, new housing structures and housing construction services upon the renegotiation of DTTs, or into new DTTs. covered by the social housing programme, passenger transport and restaurant services. A super-reduced 5% rate is applied to supplies of certain food items, such as bread, dairy products, meats, and 1.5 Are treaties overridden by any rules of domestic selected publications. Exportation of goods, intra-Community law (whether existing when the treaty takes effect or supply of goods and international transport services are subject to a introduced subsequently)? 0% rate, under certain conditions. There are also VAT exemptions for the supply of certain goods and services. No. According to Polish constitutional law, DTTs, as ratified international agreements, will always prevail over domestic law. Moreover, the priority of DTTs over domestic tax law is envisaged 2.3 Is VAT (or any similar tax) charged on all transactions by the Polish income tax laws. or are there any relevant exclusions?

VAT is imposed on: (i) the supply of goods and services in Poland;

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(ii) imports and exports to and from Poland; and (iii) intra- The tax is not charged on civil law transactions other than the community supply of goods. company deed and its amendments to the extent in which they are The following activities are not subject to VAT: (i) sale of an taxed VAT, or if at least one of the parties is exempt from VAT (with enterprise or an organised part of an enterprise; and (ii) activities some exceptions; inter alia, the sale of shares and the sale of real that cannot be the subject of a legally effective contract. estate exempt from VAT are subject to CTT). The VAT Act introduces a list of activities that are exempt from VAT. Such list includes (with no optional taxation of these services): 2.7 Are there any other indirect taxes of which we should ■ financial services (loans, maintaining bank accounts, currency be aware? exchange) other than leasing, factoring and consulting;

■ insurance and reinsurance services; Yes, excise duty is levied on certain actions related to the following Poland ■ certain medical services; goods: energy products; electricity; alcoholic beverages; tobacco products; raw tobacco; and motor cars. The taxable base and rates ■ some educational services; of excise duty differ depending on the subject of taxation. ■ welfare services; ■ social security services; ■ some culture and sports-related services; and 3 Cross-border Payments ■ real estate (under certain conditions) with an option to forego the exemption (not always applicable). 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? Dividends paid by a Polish resident to a non-resident company are taxed at a rate of 19%. Taxpayers may deduct the amount of input VAT from the amount The 19% withholding tax rate applies unless a DTT provides of output VAT. Input VAT accounted for on purchased goods and for a reduced tax rate or exemption or the dividends qualify for services is deductible, provided that the purchases are related to a an exemption under the EU Parent-Subsidiary Directive (“PS sale that is eligible for a VAT deduction (so, as a rule, a sale subject Directive”), provided the dividend is not related to a transaction to VAT). (or a set of transactions) that is undertaken to benefit from a tax If purchased goods and services are not used for business purposes exemption and that does not reflect economic reality. (for example, goods acquired for private use by the entrepreneur), In general, dividends also include income from the liquidation input tax may not be recovered. Moreover, input tax is not a subject of a company, redemption of shares (other than buyback, income to reimbursement for some items of business expenditure (inter alia, derived from which is treated as capital gains) and increase of share restaurant meals, personal expenses and hotel accommodation). capital from retained earnings. Input tax is not recoverable if it is connected to the supply of goods In order to benefit from a DTT or the PS Directive, a non-resident or services exempt from VAT. company must provide the dividend payer with a certificate of its If a VAT payer supplies both goods and services subject to VAT tax residence. and exempt from it, and it cannot be determined if input VAT is connected with taxable or exempt supplies, then the proportional VAT recovery applies. 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident?

2.5 Does your jurisdiction permit “establishment only” Royalties paid by a Polish resident to a non-resident company are VAT grouping, such as that applied by Sweden in the Skandia case? taxed at a rate of 20%. The 20% withholding tax rate applies unless the rate is reduced under The Polish VAT Act does not permit “establishment only” VAT a DTT or the EU Interest and Royalties Directive (the exemption grouping. based on the Directive may be applied only if the recipient is the beneficial owner of the royalties). In order to benefit from a DTT or the Directive, a non-resident 2.6 Are there any other transaction taxes payable by companies? company must provide the payer of the royalties with a certificate of its tax residence. Yes, CTT is levied on certain contracts and amendments to such contracts, inter alia: 3.3 Would there be any withholding tax on interest paid ■ sales agreements and agreements for the exchange of property by a local company to a non-resident? rights; ■ money loan agreements; and Interest paid by a Polish resident to a non-resident company is taxed ■ foundation deeds of a partnership or company. at a rate of 20%. The CTT rate depends on the type of the civil law activities, i.e. the The 20% withholding tax rate applies unless the rate is reduced under acquisition of shares is subject to CTT at a 1% rate, the acquisition a DTT or the EU Interest and Royalties Directive (the exemption of tangible items 2%, loans 2%, and the increase in a company’s based on the Directive may be available only if the recipient is the share capital 0.5%. beneficial owner of the interest). The tax obligation arises at the moment of executing a civil law It must be added that in accordance with the Polish Corporate action (or amending it). Income Tax Act (“CIT Act”), the 20% withholding tax rate also applies to fees paid for specified intangible services (i.e. advisory

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services, accounting services, market research services, legal ■ a loan is granted by another company, and in both companies services, advertising services, management and control, data the same entity holds not less than 25% of the shares, directly processing, personnel recruitment services, guarantees and sureties or indirectly. and similar services), unless the DTT provides otherwise. As described above (see question 3.4), it is planned that from 2018, In order to benefit from a DTT or the Directive, a non-resident new thin capitalisation rules will also apply to non-related debt from company must provide the interest payer with a certificate of its tax third parties. residence. 3.7 Are there any other restrictions on tax relief for 3.4 Would relief for interest so paid be restricted by interest payments by a local company to a non-

Poland reference to “thin capitalisation” rules? resident?

Interest on loans constitutes a tax-deductible cost at the time of the The Polish CIT Act does not specify any such restrictions. payment or capitalisation of accrued interest to the principal amount. Currently, the Polish CIT Act provides for two possible thin 3.8 Is there any withholding tax on property rental capitalisation models. The basic model relies on comparing the payments made to non-residents? value of the taxpayer’s equity to its liabilities towards related parties (i.e. entities holding directly or indirectly at least 25% of the shares Poland does not levy withholding tax on property rental payments in the company receiving the loan) and restricts deductibility of made to non-residents. interest corresponding to the excess of liabilities (decreased by loans granted by the entity) over its equity. The alternative model 3.9 Does your jurisdiction have transfer pricing rules? is based on calculating the maximum value of interest that may be tax-deductible by reference to the percentage of the tax value of the assets (based on the interest rate of the National Bank of Poland). Yes. In general, the Polish transfer pricing rules follow the OECD Tax-deductible interest in this model is also limited by 50% of the guidelines and if prices in related party transactions are not in company’s earnings before interest and tax (“EBIT”) (both criteria accordance with the “arm’s length” principle, the tax authorities need to be met jointly). In the alternative model, the non-deductible may make an adjustment. Transfer pricing rules apply to taxpayers interest could be carried forward for five consecutive years. whose annual revenues or expenses exceed EUR 2 million or make payments or enter into agreements with entities from territories or Currently there are legislative works in progress completely countries whose tax arrangements are harmful to competition (“tax amending thin capitalisation rules (to be effective from 2018). In havens”). accordance with the proposed changes to the CIT Act (currently in the legislation process), new thin capitalisation rules provide Transfer pricing rules in Poland also apply to deeds of partnership, for a limitation of tax deductibility of interest (being a surplus of reorganisation and exit transactions. financial costs over the financial revenues) on all debt financing From 2017, a three-level concept of the transfer pricing (from related and third parties) to 30% of earnings before interest, documentation is in force: taxes, depreciation and amortisation (“EBITDA”). The proposed ■ Local documentation (local file) – in which the local related regulations shall not apply to: (i) interest not exceeding PLN 3 parties present details of transactions with other group million in a tax year; or (ii) financial companies (listed in the components. CIT Act). Non-deductible costs could be carried forward for five ■ Group documentation (master file) – containing information consecutive years. In contrast to the current rules, the new limitation about the group. will also apply to financing provided by non-related entities. ■ Country-by-Country Reporting – a CbC report will provide aggregate information about income and the tax paid, as well 3.5 If so, is there a “safe harbour” by reference to which as business locations of the associated enterprises and foreign tax relief is assured? plants which belong to the group, in a tax year. Taxpayers with revenues or expenses between EUR 2 million and Under the rules currently in force, there is no safe harbour for 10 million will only have to prepare a local file. financing costs. Taxpayers with more than EUR 10 million in revenues or expenses However, the proposed changes to the CIT Act (currently in will also have to prepare a benchmarking study and file a summary legislative works, but to be effective from 2018) provide a safe report on transactions and dealings with associated enterprises, harbour for excess of financing costs over financing proceeds up to along with a tax return. PLN 3 million annually. Taxpayers with revenues or expenses exceeding EUR 20 million will additionally have to prepare a master file. 3.6 Would any such rules extend to debt advanced by a Those taxpayers who earn consolidated revenues of more than EUR third party but guaranteed by a parent company? 750 million will have to prepare, in addition to the local file and the master file, a CbC report. Under the rules currently in force, the thin capitalisation rules do not Taxpayers are also required to file statements (under threat of penal apply to debt advanced by a third party but guaranteed by a parent liability) to the effect that they have prepared the necessary transfer company. pricing documentation. These statements are to be filed annually, Currently, thin capitalisation applies to the following situations: not later than the deadline for submitting annual tax returns. ■ a loan is granted by entity holding directly or indirectly at If the taxpayer does not keep the transfer pricing documentation as least 25% of the shares in the company receiving the loans; required by the law and the tax authorities assess additional taxable income from transactions carried out by related parties, this income ■ a loan is granted jointly by entities holding directly or indirectly at least 25% of the shares in the company; or will be subject to the penalty 50% income tax rate (not the standard 19% rate).

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sources of income) and will disallow decreasing the tax base from 4 Tax on Business Operations: General one source of income by tax losses from the other (effective for tax losses sustained starting from 2018). The current wording of 4.1 What is the headline rate of tax on corporate profits? the projected amendments allows, however, the tax base from any source of income to be decreased by the tax losses from 2017 and The rate of corporate income tax is 19% of the tax base. A reduced previous years (pursuant to regulations currently in force). tax rate of 15% of the taxable base applies for: (i) small taxpayers (those with a turnover under EUR 1.2 million in the previous year); 4.6 Is tax imposed at a different rate upon distributed, as and (ii) taxpayers who have recently started their business activity – opposed to retained, profits?

this rate is applicable in the year they started. Poland No. There is no difference in tax rate. 4.2 Is the tax base accounting profit subject to adjustments, or something else? 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the The tax base is calculated as a taxable profit minus tax-deductible occupation of property? costs. The Polish CIT Act provides for premises that need to be fulfilled in order to recognise taxable revenue or tax-deductible cost. Real property tax is paid by owners of: (i) land; (ii) buildings or Nevertheless, in practice, the tax base is determined on the basis of parts thereof; and (iii) non-building structures or parts thereof used the accounting profit subject to adjustment. to conduct economic activity. The tax base depends on the type of assets concerned: (i) land – surface area; (ii) buildings – the usable floor area; and (iii) structures – 2% of their value. Tax on a building/ 4.3 If the tax base is accounting profit subject to plot of land is calculated separately for each area. The payers of this adjustments, what are the main adjustments? tax are, for example, owners, perpetual usufructuaries of land or so- called autonomous possessors. Real property tax is imposed by the Adjustments can be divided into permanent and temporary ones. local tax authorities. Permanent differences refer to such costs and revenues that are It is proposed that, from the beginning of 2018, a new type of tax either included into accounting profit, but excluded from the tax will be levied on the owners of shopping malls, large shops, office base, or vice versa. They include, for example: buildings (worth more than PLN 10 million), at the level of 0.035% ■ provisions (with some exceptions); per month of the initial tax value of the building. The amount of tax ■ goodwill depreciation (with some exceptions); and paid shall be deducted from the CIT. ■ penalties and penalty interest. Temporary differences are derived from a different moment of the 5 Capital Gains recognition of cost or revenue for accounting and tax purposes. Such differences include, for example: 5.1 Is there a special set of rules for taxing capital gains ■ interest; and losses? ■ lease rent; and ■ foreign exchange. Currently, in the Polish CIT Act there are no special rules for the taxation of capital gains. Capital gains and losses are amalgamated into a compound tax base of a business entity together with ordinary 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas business profits and taxed at a standard 19% rate. subsidiaries? Proposed changes to the CIT Act (currently in legislation, projected to be effective from 2018) provide for a new and separate source The Polish CIT Act includes provisions on group taxation, i.e. of revenue for capital gains. The new rules disallow the offsetting groups of at least two limited liability companies or joint stock of capital gains or losses against other sources of revenue (such companies with their registered office in the territory of Poland as ordinary business activity) and introduce a separate tax base bound by ties on the capital level and meeting the requirements calculated on the basis of capital gains and losses taxed at a rate of provided for in the CIT Act. If all of these conditions are met, a 19% separately from business revenues and costs. tax capital group shall be treated as a single taxpayer. However, the required conditions are extremely demanding, therefore tax capital 5.2 Is there a participation exemption for capital gains? groups are rather unpopular. The Polish CIT Act does not provide for relief for losses incurred by No, there is no participation exemption for capital gains. foreign subsidiaries.

5.3 Is there any special relief for reinvestment? 4.5 Do tax losses survive a change of ownership? No, there is no relief for reinvestment. Yes, tax losses survive a change of ownership. In such cases, in accordance with the general principle, tax losses can be carried 5.4 Does your jurisdiction impose withholding tax on the forward for a maximum of five years. proceeds of selling a direct or indirect interest in local The proposed changes to the CIT Act do not affect this. assets/shares? Nevertheless, the amended CIT Act will introduce (from 2018) the separate taxation of capital gains and other business profits (separate No, there is no such withholding tax. Non-resident companies are

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taxed at a standard CIT rate (19%) on income and capital gains earned in Poland, unless a specific DTT provides for any exemptions 7 Overseas Profits or other specific rules. 7.1 Does your jurisdiction tax profits earned in overseas branches? 6 Local Branch or Subsidiary? In accordance with the general rule, the entire income of a Polish 6.1 What taxes (e.g. capital duty) would be imposed upon tax resident is subject to taxation in Poland, irrespective of where the formation of a subsidiary? the income is earned. Therefore, income from the overseas

Poland representative office or permanent establishment of the Polish- The formation of a subsidiary will involve the obligation to pay CTT resident company is included in the entities’ total taxable income. levied on deeds of association or its amendments. The tax base will The tax paid abroad may be deducted from the tax to be paid in be the value of contributions to a partnership or the value of share Poland on the income of overseas branches unless the applicable capital of a company. The rate is 0.5% of the tax base. DTT states otherwise.

6.2 Is there a difference between the taxation of a local 7.2 Is tax imposed on the receipt of dividends by a local subsidiary and a local branch of a non-resident company from a non-resident company? company (for example, a branch profits tax)? As a rule, the dividends received by a Polish company from a non- The entire income of a local subsidiary (being legally a separate resident company constitute the income of the company. Under entity domiciled in Poland) is subject to taxation in Poland, the relevant DTT or the PS Directive, dividend income from a irrespective of where the income is earned. non-resident company may be exempt from tax in Poland. If there In the case of a branch of a non-resident company (being legally a is no exemption applicable, the amount equivalent to the tax paid part of its parent company), the non-resident company running such on dividends in a foreign state is deducted from the tax due on a branch is subject to taxation in Poland in regard to the income the aggregate income (proportionally to dividends). If a higher achieved in Poland, allocated to the branch in accordance with participation requirement is met (75%) apart from the tax paid on the “arm’s length” principles. dividend abroad, the tax paid on income from which the dividend is paid is also deductible in Poland.

6.3 How would the taxable profits of a local branch be determined in its jurisdiction? 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? The taxable profit of a local branch of a non-resident company is determined by its status (i.e. whether it has a permanent establishment In accordance with the controlled foreign company (“CFC”) (“PE”) status in Poland – if this is the case then it is determined regulations, Polish taxpayers are taxed at a rate of 19% on the pursuant to the Polish CIT Act and/or the relevant DTT) and taxable income earned by legal persons considered to be CFCs. The CFC revenues and costs in the territory of Poland which are allocated regulations apply to any type of legal person which would fall into to it. The taxable revenues and costs (and as a result the tax base) one of the following categories, among others: (i) the registered are determined in accordance with “arm’s length” principles on the office or place of management of such entity is located inone same basis as in the case of domiciled companies; however, there of the so-called tax havens; (ii) the registered office or place of might be some specific rules for their allocation to the branch or the management of such entity is not in a so-called tax haven, but there mother company. The applicable tax rate is 19%. is no legal basis for the exchange of taxation information with such jurisdiction based on the agreement concluded by Poland If, in accordance with the Polish CIT Act, the local branch is or European Union; or (iii) the Polish company holds, for an considered a PE, then transfer pricing regulations shall apply. uninterrupted period of at least 30 days, at least 25% of a foreign In order to apply the transfer pricing regulations, both the non- company that derives mainly passive income that is taxed at a rate resident company and its PE should accept the fictitiousness of the lower than 14.25%. autonomy and independence of the PE in the mutual settlements of the transactions. Pricing methods between related parties will apply Proposed changes to the CIT Act introduce: (i) an effective tax in such a situation to the hypothetical “price” of the company–PE rate instead of the nominal one as a CFC assessment criterion; relationship. (ii) an obligation to include in a CFC register a controlled foreign company, even if it conducts a factual economic activity in another EU/EEA state; and (iii) a new catalogue of earnings considered to 6.4 Would a branch benefit from double tax relief in its be subject to taxation. jurisdiction?

If the branch is deemed to be a PE, it shall benefit from the provisions 8 Taxation of Commercial Real Estate of a DTT.

8.1 Are non-residents taxed on the disposal of 6.5 Would any withholding tax or other similar tax be commercial real estate in your jurisdiction? imposed as the result of a remittance of profits by the branch? In accordance with the general principles, earnings from the sale of commercial real estate are subject to a 19% CIT rate. No, there is no such withholding tax.

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not been executed due to informed economic reasons, it shall be 8.2 Does your jurisdiction impose tax on the transfer of assumed that the main purpose or one of the main purposes of these an indirect interest in commercial real estate in your activities is tax avoidance or evasion. jurisdiction?

There are no special rules on the transfer of an indirect interest 9.2 Is there a requirement to make special disclosure of in commercial real estate located in Poland. Capital gains on the avoidance schemes? transfer of indirect interest in commercial real estate (namely, shares of a company owning the real estate) are taxed similarly to capital There is no special disclosure rule for avoidance schemes. gains on the sale of shares of any other company (with planned Poland changes from 2018; see question 5.1 for further reference). 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax 8.3 Does your jurisdiction have a special tax regime avoidance? for Real Estate Investment Trusts (REITs) or their equivalent? There are not any special rules. Currently there is no special tax regime for REITs. However, legislative work on this matter has already been started. In light 9.4 Does your jurisdiction encourage “co-operative of the new legislation, income achieved directly or indirectly from compliance” and, if so, does this provide procedural a REIT’s leasing of real properties will be exempt from CIT until benefits only or result in a reduction of tax? its distribution as a dividend, at which point it will then be subject to CIT taxation. In such case, a special tax rate of 8.5% will apply. Poland does not encourage co-operative compliance. That would, however, apply only to listed entities (developers of residential properties). 10 BEPS and Tax Competition

9 Anti-avoidance and Compliance 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base 9.1 Does your jurisdiction have a general anti-avoidance Erosion and Profit Shifting (BEPS)? or anti-abuse rule? Poland supports all 15 action points declared in the OECD’s Action In July 2016, a general anti-avoidance rule (“GAAR”) was Plan, and most of them (inter alia, the CFC rules, anti-avoidance introduced into the Polish tax law. GAAR allows the tax rule, exchange of tax information, disclosure of aggressive tax authorities to eliminate the effects of tax optimisation in cases of planning, transfer pricing documentation, and Country-by-Country “tax avoidance”. Tax avoidance is defined as occurring where a Reporting) have already been implemented. transaction/action is performed notably in order to acquire a tax benefit, while the commercial or economic aims of the transaction/ 10.2 Does your jurisdiction intend to adopt any legislation action, if any, are immaterial. The tax authorities can compare to tackle BEPS which goes beyond what is concluded arrangements to those that could be concluded by a recommended in the OECD’s BEPS reports? reasonable taxpayer following fair market goals. Such allowed activities form the basis of assessing the tax consequences for Currently there is no available information as to whether Poland a taxpayer. GAAR will be applicable to tax savings achieved has any intention of introducing such legislation. after its effective date, regardless of the actual moment of the transaction. Therefore, GAAR may be used retroactively with regard to undertakings or arrangements that were made before its 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? introduction, but the effects of which extend to the present day. It is important to note that tax-saving arrangements (if deemed artificial) may no longer be protected by ordinary tax rulings. Together with Yes; in accordance with the Polish CIT Act, CBCR is to be provided GAAR, a new type of tax ruling protecting from GAAR has been by the ultimate parent company in the group (if it has its registered introduced. So far, no such positive rulings (granting protection) office or seat of management in Poland). have been issued. The obligation to file CBCR applies to entities operating in groups A specific VAT anti-avoidance rule also entered into force in July which: (i) prepare consolidated financial statements; (ii) conduct 2016. Under the rule, in case of an abuse of law, VAT-able activities cross-border operations; or (iii) earned consolidated net turnover for will lead to only those tax results that would have occurred in the the previous financial year exceeding EUR 750 million. absence of transactions/actions constituting the abuse of law. An The Polish parent company shall provide the tax administration abuse of law is defined as carrying out an activity subject to VAT with information on the group within 12 months of the end of the as part of a transaction/action that, despite meeting the formal reporting year. requirements specified in the provisions of the VAT Act, basically was aimed at deriving tax benefits that are contrary to the intention 10.4 Does your jurisdiction maintain any preferential tax of the provisions of the VAT Act. regimes such as a patent box? Moreover, Polish domestic law provides other specific anti- avoidance rules; for example, in accordance with the Polish CIT Poland does not maintain any preferential tax regimes. Act, if the merger, division of companies or exchange of shares have

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Joanna Wierzejska Tomasz Leszczewski Domański Zakrzewski Palinka Domański Zakrzewski Palinka Rondo ONZ 1 Rondo ONZ 1 00-124 Warsaw 00-124 Warsaw Poland Poland

Tel: +48 22 557 94 97 Tel: +48 22 557 86 38 Email: [email protected] Email: [email protected] URL: www.dzp.pl URL: www.dzp.pl Poland Joanna is a Tax Partner and Head of the Tax Practice at Domański Tomasz is a Senior Tax Consultant at Domański Zakrzewski Palinka. Zakrzewski Palinka. As a tax adviser, she has a great deal of He has several years of experience in providing tax advice in the field of experience in providing comprehensive tax advice to clients in various direct and indirect taxes for companies from various sectors including sectors in Poland, in matters related to mergers and acquisitions, energy, banking and finance, and the chemical and pharmaceutical the selection of effective tax structures, wealth management and the industries. He specialises in tax aspects of restructuring and M&A protection of private and family property, establishing family and charity transactions, fiscal criminal proceedings and providing day-to-day foundations, and tax issues related to investments and transactions. tax and legal advisory services. Tomasz has also participated in projects aimed at the recovery of overpaid taxes and exposing the Joanna is highly experienced in advising many private investors, non-compliance of national tax law with EU regulations, as well as entrepreneurs and their families, as well as professional investors, on regulatory advisory projects in the field of tax law for the tobacco and the reorganisation and development of their businesses, succession spirit beverages sectors. processes, private property protection, reporting on foreign assets, and conversion of tax residence. She has advised on various restructuring processes, privatisation and mergers. Joanna is a licensed tax adviser with 20 years of experience gained at PricewaterhouseCoopers and Domański Zakrzewski Palinka. She has been managing the Domański Zakrzewski Palinka Tax Practice since 2010.

Domański Zakrzewski Palinka is the largest of the Polish law firms. For almost 25 years our experts have advised both Polish and foreign clients from all business sectors. We currently have over 150 experts in various areas of specialisation working in our offices in Warsaw, Poznań and Wrocław. Despite our numbers and diversity of practice areas, what distinguishes us is our engagement, availability and full understanding of our clients’ needs. Working within 30 inter-disciplinary groups of specialists, we take a holistic approach to problems. We believe that close relations bring better solutions. Our efficiency is down to our close co-operation with our clients. We maintain our good reputation and professional prestige thanks to years of experience in advising on large complex projects, introducing innovative solutions and working with very demanding clients. This is why we have for years taken first place in rankings drawn up by Rzeczpospolita and DGP, as well as international specialist directories such as Chambers & Partners.

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Portugal Samuel Almeida

VdA Vieira de Almeida Bárbara Miragaia

1 Tax Treaties and Residence 2 Transaction Taxes

1.1 How many income tax treaties are currently in force in 2.1 Are there any documentary taxes in your jurisdiction? your jurisdiction? Yes. Stamp Duty (“SD”) is a tax levied on acts, contracts, Portugal has concluded 79 double tax treaties (“DTTs”), 74 of which agreements, financing operations, guarantees, leases, documents are currently in force. and other taxable events foreseen in the SD Table, signed or entered into in Portugal or submitted herein for any legal purpose. 1.2 Do they generally follow the OECD Model Convention Loans and guarantees will always be subject to SD in Portugal, or another model? regardless of the place where the contract is signed or entered into, provided that the borrower or the beneficiary of the guarantee is a The OECD Model is broadly followed by the Portuguese Tax resident entity in Portugal. System. However, some DTTs – the older ones – have provisions that depart from such model, following the features of other models 2.2 Do you have Value Added Tax (or a similar tax)? If so, such as the UN Model or US Model. at what rate or rates?

1.3 Do treaties have to be incorporated into domestic law Yes. VAT rates may vary from the 23% standard rate, or the 6% before they take effect? reduced rate applicable to some essential goods. On the islands of Azores and Madeira, the rates are lower and vary, respectively, from No, international treaties prevail over domestic legislation. 4% to 18%, and from 5% to 22%. Nonetheless, DTTs require formal approval by the Parliament and ratification by the President of the Republic before entering into 2.3 Is VAT (or any similar tax) charged on all transactions force. or are there any relevant exclusions?

1.4 Do they generally incorporate anti-treaty shopping VAT is generally levied on the supply of goods, provision of rules (or “limitation on benefits” articles)? services, intra-community acquisitions and imports. However, there are transactions specifically excluded from VAT and some Although not all treaties signed by Portugal include limitation of other relevant exemptions, such as financial and insurance services, benefits clauses (“LOBs”), some of the latest treaties entered into leases and some non-profitable activities. by Portugal are particularly focused on preventing treaty shopping. 2.4 Is it always fully recoverable by all businesses? If not, 1.5 Are treaties overridden by any rules of domestic what are the relevant restrictions? law (whether existing when the treaty takes effect or introduced subsequently)? VAT is generally fully recoverable provided that it is borne in connection with a fully taxable activity. If the company carries No. From a constitutional perspective, DTTs cannot be overridden out both taxable and non-taxable operations, VAT will be partially by domestic law. recoverable either through a direct allocation method or according to a pro rata formula. There are some limitations on certain expenses, and as such, VAT cannot be recovered on entertainment, 1.6 What is the test in domestic law for determining the residence of a company? accommodation, food, drinks and travel expenses.

A company is deemed to be resident for tax purposes if the head office or the effective place of management is located in Portugal.

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According to the DTTs entered into by Portugal, the withholding tax 2.5 Does your jurisdiction permit “establishment only” rate may also be reduced. VAT grouping, such as that applied by Sweden in the Skandia case? 3.3 Would there be any withholding tax on interest paid No, this is not permitted in Portugal. by a local company to a non-resident?

The statutory withholding tax rate in Portugal on interest payments 2.6 Are there any other transaction taxes payable by to non-resident companies is 25%. No withholding tax is due companies? provided that the requirements set forth in the EU Interest and Royalties Directive are met, as described in question 3.2 above. Portugal Transfer of real estate in Portugal is subject to Property Transfer The withholding tax rate may also be reduced under a DTT. Tax (“IMT”). Rates vary between 5% and 6.5%, calculated over the declared value of the sale, or the property’s tax value, whichever is higher. 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules?

2.7 Are there any other indirect taxes of which we should be aware? No. However, there is an overall limitation on deduction of net interest exceeding the greatest of the following limits: (i) €1 million; or (ii) 30% of EBITDA, as defined for tax purposes. Interest not Yes. Excise Duties are applicable, such as tax on alcohol and deducted for the reason of having exceeded one of the above alcoholic beverages, oil and energy products (“ISP”), tobacco thresholds may be carried forward for the following five years, products and vehicle taxes. provided that the aforementioned limits are respected.

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

3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? Please refer to question 3.4 above.

The statutory withholding tax rate on dividends paid to non-resident 3.6 Would any such rules extend to debt advanced by a shareholders is 25%. The outbound Participation Exemption Regime third party but guaranteed by a parent company? grants an exemption from withholding tax if the following criteria are met: Limitations on deduction of interest as mentioned in question 3.4 (i) The company: above apply to both related and unrelated party debt. ■ is subject to and not exempt from CIT; and ■ is not considered a transparent corporate entity. 3.7 Are there any other restrictions on tax relief for (ii) The shareholder of the company is resident in (i) an EU or interest payments by a local company to a non- EEA Member State, or (ii) a tax treaty jurisdiction which resident? permits the exchange of information on tax matters. (iii) The shares in the company have been held continuously for at Interest paid in connection with shareholder loans (i.e. the excess) least 12 months. is not deductible if the interest rate exceeds the Euribor 12-month (iv) The shareholder: reference rate, accrued at a 2% spread (or 6% spread if the borrower qualifies as a small or medium-sized company). ■ holds, directly or indirectly, at least 10% of the capital or voting rights of the company; and ■ is subject, and not exempt from, an income tax listed in 3.8 Is there any withholding tax on property rental the EU Parent-Subsidiary Directive or an income tax rate payments made to non-residents? which is not lower than 60% of the Portuguese CIT rate. In case the above requirements are not met, DTTs may also limit the All tenants required to keep organised accounting records (e.g. withholding tax rate. companies resident or with a permanent establishment in Portugal), have to withhold CIT on rent paid to non-resident landlords (25% withholding tax rate). 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? 3.9 Does your jurisdiction have transfer pricing rules? The statutory withholding tax rate in Portugal on royalty payments to non-resident companies is 25%. No withholding tax is due if the Portugal has implemented detailed transfer pricing legislation recipient is eligible for the benefits set forth in the EU Interest and applicable to commercial transactions concluded between Royalties Directive. To this end, the following conditions should specially related entities (the general criterion is the existence of be complied with: a participation threshold of 20%). The Portuguese transfer pricing (i) either the payor or the recipient hold a direct minimum stake of rules broadly follow the guidelines of the OECD and the country has 25% in each other’s share capital, or a third company has a direct adopted transfer pricing documentation requirements applicable to minimum holding of 25% in the capital of both companies; and any corporate taxpayers with an annual turnover above €3,000,000. (ii) the shareholding is kept for a minimum holding period of two years.

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the capital and more than 50% of the voting rights of the subsidiaries 4 Tax on Business Operations: General (the capital may be held either through Portuguese entities who meet the conditions to be included in the group or through entities 4.1 What is the headline rate of tax on corporate profits? resident in another EU Member State or in the EEA, provided that these non-resident companies are held, directly or indirectly, by the The CIT rate in Portugal is 21%, plus a Municipal Surtax – rates dominant company – having at least 75% of the share capital). vary between municipalities and the maximum rate is 1.5%. A State Surtax may also be applicable: (i) 3% for profits exceeding 4.5 Do tax losses survive a change of ownership? €1,500,000, up to €7,500,000; (ii) 5% for profits exceeding

€7,500,000, up to €35,000,000; and (iii) 7% for profits exceeding Carry-forward is not applicable in case of a change of more than Portugal €35,000,000. 50% of the share capital or the voting rights of a company, except A 17% reduced CIT rate applies to profits up to €15,000 for small when: (i) there is a change from direct to indirect ownership (and and medium companies. vice versa); (ii) the special tax neutrality regime is applicable to the transaction; (iii) the change of ownership occurs upon the death of the previous shareholder; (iv) the acquirer holds directly or 4.2 Is the tax base accounting profit subject to indirectly 20% of the share capital or the majority of voting rights, at adjustments, or something else? least from the beginning of the tax year in which the tax losses were incurred; or (v) the acquirer is an employee or a board member of Yes. Accounting profit or loss is subject to adjustments in the acquired company, provided that such person holds that position, accordance with tax adjustments foreseen in the CIT Code. For at least from the beginning of the tax year in which the tax losses accounting purposes, Portugal has adopted the International were incurred. Financial Reporting Standards.

4.6 Is tax imposed at a different rate upon distributed, as 4.3 If the tax base is accounting profit subject to opposed to retained, profits? adjustments, what are the main adjustments? Small and medium companies are entitled to a CIT deduction of The main adjustments are as follows: 10% of the retained and reinvested earnings (up to a maximum of (i) Transfer pricing. €5,000,000 per year) used in the acquisition of qualifying assets. (ii) Limitation on deduction of interest and financing costs. The reinvestment should be made within two years and the annual (iii) Depreciation of fixed and certain intangible assets. deduction is capped at 25% of the CIT due. (iv) Net worth positive and negative variations. (v) Participation exemption regime applicable to dividends and 4.7 Are companies subject to any significant taxes not capital gains and losses. covered elsewhere in this chapter – e.g. tax on the occupation of property? (vi) Provisions. (vii) Suspended capital gains obtained in prior tax years. Yes. Real estate ownership triggers Municipal Real Estate Tax (viii) Carry forward of tax losses. (“IMI”), charged on an annual basis. The applicable rates vary (ix) Neutrality regime applicable to mergers and de-mergers. from 0.3% up to 0.45% (urban property) and 0.8% (rural property). (x) Adjustments to the declared value of real estate properties. If the owner of the real estate is an entity located in a blacklisted (xi) CFC rules. jurisdiction, the applicable rate is 7.5%. The Budget State Law for (xii) Recognition of bad debt and irrecoverable credits. 2017 introduced a new additional tax on real estate holdings above €600,000, at a 0.4% rate (for legal entities). (xiii) Payments made to low-tax jurisdictions. (xiv) Patent box. Costs specifically listed and unrelated to the company’s business 5 Capital Gains activities are also disallowed, a few examples of which follow:

(i) Improperly documented costs. 5.1 Is there a special set of rules for taxing capital gains (ii) Fines and penalties. and losses? (iii) Corporate tax and certain special contributions charged over certain sectors (pharmaceutical, banking and energy). There is no special set of rules for taxing capital gains and losses (iv) Indemnities for which events are insurable. in Portugal. (v) Certain expenses incurred in connection with travel expenses, diesel and daily allowances above certain thresholds. 5.2 Is there a participation exemption for capital gains? (vi) Capital losses covered by the participation exemption regime and capital losses of certain assets (aircraft and yachts). Yes, provided that the following requirements are met: (i) the parent company holds, directly or indirectly, at least 10% 4.4 Are there any tax grouping rules? Do these allow of the capital or voting rights of the other company; for relief in your jurisdiction for losses of overseas (ii) the shares have been held continuously for at least 12 months; subsidiaries? (iii) the shareholder is not considered a transparent entity; (iv) the entity that distributes dividends is not resident in a Yes. Pursuant to the CIT Code, tax grouping is allowed, provided blacklisted jurisdiction; and that the parent company holds, directly or indirectly, at least 75% of

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(v) it is subject to, and not exempt from, an income tax listed in the EU Parent-Subsidiary Directive or an income tax rate not 6.5 Would any withholding tax or other similar tax be lower than 60% of the Portuguese CIT rate (i.e. 12.6%, given imposed as the result of a remittance of profits by the the standard rate of 21%). branch? The above regime is not applicable to corporations whose assets are comprised of more than 50% of real estate located in Portugal Withholding tax would not be imposed as a result of a remittance of (except if allocated to an agricultural, industrial or commercial profits by a branch in Portugal. activity). 7 Overseas Profits 5.3 Is there any special relief for reinvestment? Portugal

7.1 Does your jurisdiction tax profits earned in overseas Yes. Capital gains arising from the disposal of tangible fixed assets, branches? and intangible and biological assets held for at least one year may benefit from a deduction of CIT of 50% if those capital gains are Yes. Resident companies are taxed on their worldwide income, reinvested in acquisitions, production or construction regarding the so overseas branches profits will be included in the annual profit, same assets within a certain period. subject to CIT. There is an optional regime allowing resident entities to exclude profits obtained by overseas branches, provided 5.4 Does your jurisdiction impose withholding tax on the that some requirements are met. proceeds of selling a direct or indirect interest in local assets/shares? 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? No. However, the State Budget proposal for 2018 included a provision wherein the disposal of shares in a non-resident entity Under the participation exemption regime, inbound dividends may holding more than 50% of its assets in real estate located in Portugal be excluded from CIT, provided that: will become subject to tax. (i) the parent company holds, directly or directly, at least 10% of the capital or voting rights of the other company; 6 Local Branch or Subsidiary? (ii) the shares have been held continuously for at least 12 months; (iii) the shareholder is not a transparent entity; 6.1 What taxes (e.g. capital duty) would be imposed upon (iv) the entity that distributes dividends is not resident in a the formation of a subsidiary? blacklisted jurisdiction; and (v) it is subject, and not exempt from, an income tax listed in No taxes are due on the incorporation of a subsidiary in Portugal. the EU Parent-Subsidiary Directive or an income tax rate not lower than 60% of the Portuguese CIT rate. Dividends from non-qualifying participations will be subject to tax, 6.2 Is there a difference between the taxation of a local but a tax credit may be available. subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? 7.3 Does your jurisdiction have “controlled foreign There are no relevant differences between the taxation of a branch company” rules and, if so, when do these apply? and a subsidiary. Yes. Profits obtained by a non-resident company located in a low- 6.3 How would the taxable profits of a local branch be tax jurisdiction are attributable to the resident shareholder, provided determined in its jurisdiction? that the latter holds, directly or indirectly, a minimum stake of 25%. Such threshold is reduced to 10% if at least 50% of the share A domestic branch’s profits are taxed according to the same taxation capital or voting rights are held by Portuguese resident individuals rules applicable to a company with its head office or place of or corporations. effective management in Portugal. This regime is not applicable if the foreign company is resident in an EU or EEA Member State, as long as that state has in force mutual administrative cooperation procedures and provided that (i) the non- 6.4 Would a branch benefit from double tax relief in its resident company carries out a commercial, industrial or agricultural jurisdiction? activity, and (ii) the Portuguese resident shareholder is able to evidence that the incorporation of the company was grounded on The non-discrimination clauses of the DTTs signed by Portugal solid commercial reasons. foresee that a branch cannot be treated differently from a resident company. Additionally, the participation exemption regime is applicable to Portuguese branches of entities resident in an EU or 8 Taxation of Commercial Real Estate EEA Member State or in a tax treaty jurisdiction which foresees an exchange of information on tax matters. 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction?

Capital gains obtained by a non-resident from the sale of real estate in Portugal are subject to 25% CIT.

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and solicitors) regarding the relevant tax planning schemes. If 8.2 Does your jurisdiction impose tax on the transfer of the promoter is a non-resident entity, such obligation relies on the an indirect interest in commercial real estate in your beneficiary of the tax planning scheme. jurisdiction?

Capital gains obtained by non-resident shareholders upon disposal 9.4 Does your jurisdiction encourage “co-operative of shares in Portuguese companies whose assets comprise more than compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? 50% immovable property located in Portugal are subject to CIT. Such taxation may be eliminated under a DTT if certain formalities are met. Taxation will also include, as from 2018, the disposal of This is not applicable in Portugal.

shares in a non-resident entity that holds more than 50% of its assets Portugal in real estate located in Portugal. 10 BEPS and Tax Competition

8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their 10.1 Has your jurisdiction introduced any legislation equivalent? in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)?

A special regime for Collective Investment Undertakings (“UCIs”) Yes. Portugal has progressively implemented the BEPS was introduced in 2015. Under this regime, a UCI is subject to 21% recommendations (e.g. Action 3 – CFC legislation, Action 4 – rules CIT; being, however, exempted from IMI and State Surtax. Capital to limit interest deductibility based on EBITDA levels and Action income, lease and capital gains shall not be included in the tax base 5 – a revised Patent Box Regime incorporating the nexus approach). for CIT purposes. Further legislative developments are expected to be enacted in the future. 9 Anti-avoidance and Compliance 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is 9.1 Does your jurisdiction have a general anti-avoidance recommended in the OECD’s BEPS reports? or anti-abuse rule?

Yes. For example, Decree-Law No. 47/2016, of 22 August, Yes. The GAAR provision allows for disregarding for taxation introduced the new patent box incentive regime, following the purposes a given operation which was not grounded on valid BEPS Action 5 “modified nexus” approach, which measures ended economic reasons, is abusive in form or substance and whose main up going beyond the Action 5 report’s recommendations. purpose was obtaining a tax advantage that otherwise would not be achieved, totally or partially, without the use of those artificial or fraudulent means. 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)?

9.2 Is there a requirement to make special disclosure of avoidance schemes? Yes. Following the BEPS Action 13 report, the Portuguese Budget Law for 2016 introduced amendments to the CIT Code concerning reporting obligations. As such, after January 2016, entities resident Yes. Decree-Law No. 29/2008, of 25 February, foresees disclosure in Portugal that directly or indirectly hold or control one or more obligations to prevent and combat abusive tax planning, including entities in another jurisdiction, with an annual group turnover larger any schemes, strategies, acts and transactions that are wholly or than €750,000,000, are required to submit a CBC report. mainly aimed at the reduction, elimination or deferral of taxes that would otherwise be due. Such disclosure obligations apply to schemes linked to tax advantages expected to be obtained, by any 10.4 Does your jurisdiction maintain any preferential tax means, regarding corporate and personal income tax, property tax regimes such as a patent box? and real estate transfer tax, Value Added Tax and Stamp Duty. Yes. In 2014, Portugal introduced a Patent Box Regime allowing for a 50% deduction of the gross income derived from the assignment 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also or temporary use of patents and industrial models or designs, and anyone who promotes, enables or facilitates the tax of any indemnities resulting from the infringement of such IP avoidance? rights, provided certain conditions are met. To prevent any abusive planning, income derived from an assignee resident in a blacklisted Yes. Under the disclosure obligations set forth in Decree-Law territory will not benefit from this tax relief. Also, there is a tax No. 29/2008, of 25 February, the Portuguese Tax Authorities may credit for qualifying R&D expenses (designated as a system of tax request clarifications from the promoters (credit and other financial incentives for corporate R&D – or “SIFIDE II”) available from 1 institutions, auditors, accountants, chartered accountants, lawyers January 2014 until 31 December 2020.

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Samuel Almeida Bárbara Miragaia VdA Vieira de Almeida VdA Vieira de Almeida Rua Dom Luis I, 28 Rua Dom Luis I, 28 1200-151 Lisbon 1200-151 Lisbon Portugal Portugal

Tel: +351 21 311 3485 Tel: +351 21 311 3400 Email: [email protected] Email: [email protected] URL: www.vda.pt URL: www.vda.pt Portugal Samuel Almeida joined VdA in 2015, and is a partner in the Tax Bárbara Miragaia joined VdA’s tax practice in 2015 together with the practice. He has extensive experience in tax litigation, representing a team of lawyers coming from Miranda Law Firm. As such, Bárbara significant number of domestic and foreign companies before judicial has been greatly involved in developing the oil & gas area within VdA’s and arbitral tribunals, the Court of Justice of the European Union and tax practice, having actively advised companies within the industry in even the Tax Authority, in both the non-contentious and contentious relation to indirect tax planning and business optimisation in Angola, stages (tax inspections, legal assistance) as well as the judicial stage. Mozambique and other African jurisdictions. In addition, she has been assisting multinational companies with import/export procedures Samuel is a tax arbitrator at the Administrative Arbitration Centre. in Portugal, Angola, Mozambique and Cape Verde. Bárbara has Samuel has also advised relevant Portuguese and international experience in handling litigation involving CIT, VAT and Stamp Duty business groups in terms of restructuring, mergers and acquisitions, disputes with the tax authorities and judicial litigation proceedings, tax audits, transfer pricing, securities and real estate funds, and tax including: technically complex VAT disputes in the telecoms sector, issues related to regulated industries, such as telecommunications such as litigation on the right to VAT deduction on the acquisition of and insurance. Alongside this, Samuel has broad experience in UMTS licences for a major telecoms operator; disputes with the tax tax consulting and international tax planning, particularly in Angola, authorities and judicial litigation within the healthcare sector, regarding Mozambique and Cape Verde, having actively advised oil & gas the reduced VAT rate applicable to medical equipment; representing sector companies, particularly on LNG projects, submission of foreign a major Portuguese insurance group before the Portuguese tax investment projects, multijurisdictional tax structuring investments, courts regarding its income tax with respect to so-called unit-linked elimination of double taxation and structuring remuneration packages insurance plans; and representing Dutch pension funds in tax litigation for expatriates. proceedings for the recovery of tax paid on dividends obtained in Samuel is recommended as a Tax Controversy Leader by the Portugal. International Tax Review and is also ranked in Chambers Europe, Best Bárbara is currently attending the Taxation Postgraduate Course at the Lawyers and Who’s Who Legal as a Tax Expert. Catholic University of Portugal – Lisbon School of Law. He is the author of various books on tax and articles in specialised journals, namely: ■■ ‘Portugal – Law & Practice’, in Chambers and Partners, 2016; ■■ ‘Breves notas introdutórias sobre a reforma do IRC’, in A Reforma do IRC, Vida Económica, October 2014; ■■ ‘Breve Enquadramento do Regime de Preços de Transferência nos Países de Língua Oficial Portuguesa’, in Cadernos Preços de Transferência 2013, Almedina, 2013; ■■ ‘Primeiras Reflexões sobre a Lei de Arbitragem em Matéria Tributária’, in Estudos em Memória do Prof. Doutor J. L. Saldanha Sanches, Vol. V, Coimbra Editora, 2011; ■■ ‘A eliminação da dupla tributação económica dos dividendos e o Imposto Sucessório por avença no Orçamento do Estado para 2002’, in Fiscalidade n. 11, July 2002; and ■■ ‘Portugal: New Transfer Pricing Regime’, co-authored by Paulino Brilhante Santos, in Tax Planning International Transfer Pricing, Volume 3, Number 2, BNA International, February 2002.

Vieira de Almeida (VdA) is a leading independent law firm with more than 40 years of experience in international legal practice and with a strong presence in various sectors. The recognition of VdA’s work is shared with our team and clients, and is reflected in the awards achieved, such as: the “Financial Times 2015 Game Changing Law Firm in Continental Europe”; the “Financial Times Innovative Lawyers in Continental Europe 2013, 2016 and 2017”; the “Most Active Law Firm” awarded to VdA by Euronext for six consecutive years, including 2017; the “Portuguese Law Firm of the Year 2015 and 2016” awarded by the IFLR; the “Portuguese Law Firm of the Year 2016” and “Client Service Law Firm of the Year 2017” awarded by Chambers & Partners; the “Iberian Firm of the Year 2017” awarded by The Lawyer; the “International Firm of the Year 2017” awarded by Legal Business and the “Portuguese Law Firm of the Year in 2017” awarded by Who’s Who Legal. VdA, through its VdA Legal Partners (which designates the network of lawyers and independent law firms associated with Vieira de Almeida for the provision of integrated legal services), is actively present in 11 jurisdictions, including all African members of the Community of Portuguese-Speaking Countries (“CPLP”), as well as Timor-Leste and several francophone African countries. Angola – Cape Verde – Congo – Democratic Republic of the Congo – Equatorial Guinea – Gabon – Guinea-Bissau – Mozambique – Portugal São Tomé and Príncipe – Timor-Leste

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Romania

Dobrinescu Dobrev SCA Luisiana Dobrinescu

1 Tax Treaties and Residence 2 Transaction Taxes

1.1 How many income tax treaties are currently in force in 2.1 Are there any documentary taxes in your jurisdiction? your jurisdiction? Yes, there is a 3% tax on the transfer of ownership over real estate, Romania has concluded treaties with 85 countries. for amounts exceeding RON 450,000 (approx. EUR 100,000). Also, there is a 0.5% tax for registration in the Land Book, payable 1.2 Do they generally follow the OECD Model Convention by new owners of real estate. or another model? 2.2 Do you have Value Added Tax (or a similar tax)? If so, They generally follow the OECD model. at what rate or rates?

1.3 Do treaties have to be incorporated into domestic law Yes, VAT is applicable in Romania at the general rate of 19%. before they take effect? Lower rates are also applicable as follows: ■ 9% for: the supply of various prostheses and orthopaedic Treaties are approved and implemented into domestic legislation by products; human and veterinary medicines; accommodation a ratification process through issuance of laws for each treaty signed in hotels; supply of food, including beverages (with the exception of alcoholic drinks), destined for animal and human by Romania. consumption; restaurant and catering services; supply of drinking water and water for irrigation purposes in agriculture; 1.4 Do they generally incorporate anti-treaty shopping and supply of pesticides, seeds, etc.; rules (or “limitation on benefits” articles)? ■ 5% for: the supply of books, newspapers and magazines; and access to castles, museums, historical monuments, cultural Romanian treaties have not been updated in order to contain a events, sports events, cinemas, etc.; and limitation of benefits clause or other anti-treaty shopping rules. ■ 5% for: the supply of buildings as part of social policies, They contain only the general reference to the beneficial owner including land (used as homes for elderly and retired of a payment and transfer pricing, but no other specific rules are persons and as foster homes and centres for children with applicable in this respect. disabilities); the supply of houses with a total floor area of 120 m2 and having a total value of RON 450,000 (including land with a maximum area of 250 m2), acquired by any sole 1.5 Are treaties overridden by any rules of domestic individual; and the supply of buildings to City Halls in order law (whether existing when the treaty takes effect or to be allocated to families in a poor economic situation. introduced subsequently)?

2.3 Is VAT (or any similar tax) charged on all transactions No, the provisions of treaties in force prevail over domestic or are there any relevant exclusions? regulations. VAT is charged on economic activities (supply of goods and 1.6 What is the test in domestic law for determining the provision of services) performed by taxable persons, the place of residence of a company? provision or supply being in Romania. There are no particular exceptions in the Romanian legislation. A resident is defined as any Romanian legal entity, any foreign legal However, the transfer of business is considered an out-of-scope entity having its place of effective management in Romania or any transaction. corporation registered according to European legislation and having its social headquarters in Romania.

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

Usually, input VAT which exceeds the output VAT is recoverable Withholding tax applies on interest payments made to non-residents after a tax inspection is performed. More precisely, further to the at a rate of 16%. reimbursement request, the tax authorities determine the class of risk associated with the activity of the taxpayer and will automatically 3.4 Would relief for interest so paid be restricted by issue the reimbursement decision for low-risk taxpayers. For high- reference to “thin capitalisation” rules? risk taxpayers, a tax inspection should be performed prior to the

Romania reimbursement. In such a situation, the period of a tax audit varies Thin capitalisation rules apply in Romania in relation to deductibility from 45 days to six months. of interest expenses and related foreign exchange differences for There are limitations regarding the deductibility of input VAT corporate income tax purposes. related to: Thin capitalisation rules: expenses and related foreign exchange ■ alcoholic drinks and tobacco; and losses are deductible if the debt-to-equity ratio is lower than three. ■ cars used for both personal and business purposes (50% In case the ratio is higher than this benchmark or an entity is in a limitation). negative equity position, such expenses can be carried forward to Input VAT incurred during the investment period is considered next fiscal periods until the ratio becomes lower/equal to three. deductible. The debt included in the calculation refers to loans with a maturity period exceeding one year. The limitation does not apply to expenses Reimbursement is subject to a limitation period of five years. related to loans granted by international banks, Romanian or foreign credit institutions, or non-banking financial institutions. 2.5 Does your jurisdiction permit “establishment only” Safe harbour rules: for loans granted from entities other than those VAT grouping, such as that applied by Sweden in the listed above, interest is further subject to limited levels of deductibility, Skandia case? as follows: ■ the reference interest rate used for monetary policy set by the There are no specific rules regarding “establishment only” VAT National Bank of Romania corresponding to the last month grouping. in a quarter; and ■ 4% for loans denominated in foreign currency. 2.6 Are there any other transaction taxes payable by Accrued and/or paid interest exceeding such limits is permanently companies? non-deductible for corporate income tax purposes. Such rules apply only for corporate income tax purposes and not for No, there are not. withholding tax relief.

2.7 Are there any other indirect taxes of which we should 3.5 If so, is there a “safe harbour” by reference to which be aware? tax relief is assured?

Customs duties are owed in accordance with the European Union Please refer to our answer above. Common Customs Tariff. Also, excise duties are due in Romania under two categories: 3.6 Would any such rules extend to debt advanced by a ■ harmonised excise duties: tobacco products; alcohol and third party but guaranteed by a parent company? alcoholic beverages; and energy products and electricity; and ■ other specific excise duties: heated tobacco products (NC No such rules are available under Romanian legislation. However, 2403 99 90); and liquids with nicotine for inhaling purposes with the aid of a specific electronic device such as “electronic under general tax provisions, any transaction which is or may cigarettes” (NC 3824 90 96). be considered as artificial, or which does not have an economic purpose, can be subject to scrutiny from the tax authorities.

3 Cross-border Payments 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- resident? 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? No. Generally, Romanian domestic provisions are corroborated Withholding tax applies on dividend payments made to non- with provisions of applicable double tax treaties and EU Directives residents at a rate of 5%. and, further, the most favourable taxation regime is applied. In order for EU legislation to be applicable, the non-resident should present a certificate of fiscal residence and an affidavit attesting the fulfilment 3.2 Would there be any withholding tax on royalties paid of the conditions of the relevant Directives, where applicable. by a local company to a non-resident?

Withholding tax applies on royalties payments made to non- 3.8 Is there any withholding tax on property rental payments made to non-residents? residents at a rate of 16%.

Yes, such gains related to immovable property located in Romania

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are usually taxed in Romania with corporate income tax or individual a jurisdiction with which Romania has not concluded an exchange income tax, as the case may be. of information legal instrument (such expenses are non-deductible provided that they derive from transactions classified as artificial by the tax authorities). 3.9 Does your jurisdiction have transfer pricing rules?

Yes, internal transfer pricing rules are in line with OECD transfer 4.4 Are there any tax grouping rules? Do these allow pricing guidelines and respect the market value principle for for relief in your jurisdiction for losses of overseas determining the correct transaction price to be used between related subsidiaries? parties. No tax grouping rules are available for corporate income tax purposes. Romania 4 Tax on Business Operations: General 4.5 Do tax losses survive a change of ownership? 4.1 What is the headline rate of tax on corporate profits? Yes, tax losses survive a change of ownership. The corporate tax rate is 16%. Also, taxation for entities considered for tax purposes as micro-enterprises is available at the rate of 1% 4.6 Is tax imposed at a different rate upon distributed, as or 3% on the total turnover amount. opposed to retained, profits?

4.2 Is the tax base accounting profit subject to Yes. The corporate income tax rate is 16%, as opposed to dividends adjustments, or something else? tax which is 5% (it can be reduced to 0% provided that the receiver entity holds a minimum participation of 10% for one year). The tax base is the accounting profit subject to adjustments (adding non-deductible expenses and deducting non-taxable revenues). 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the occupation of property? 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? No, there are no other significant taxes. The main non-taxable revenues are: dividends from a Romanian legal entity; dividends of a foreign entity that holds a minimum of 10% 5 Capital Gains from the share capital of the Romanian entity for an uninterrupted period of one year; income from cancellation; recovery of expenses for which no deductibility was granted; income from cancellation 5.1 Is there a special set of rules for taxing capital gains of provisions previously treated as non-deductible; income from and losses? deferred corporate income tax; income from a change in the fair value of real estate investments/biological assets owned by There are no special rules; capital gains are generally taxed as any taxpayers applying IFRS; income expressly provided for as non- other profit of the entity or any other income tax. taxable under agreements and memoranda enforced by regulatory documents; income from evaluation/sale of participation titles held 5.2 Is there a participation exemption for capital gains? in a Romanian entity or in a foreign entity situated in a jurisdiction with which Romania has concluded a double tax treaty provided that, at the date when the transaction occurs, the taxpayer has at least Yes. Income derived from the sale of participation titles in entities 10% of the share capital of the entity in which it holds the titles for an from Romania or from a state with which Romania has concluded a uninterrupted period of at least one year; and indemnities received double tax treaty is exempt from corporate income tax provided that based on judgments of the European Court of Human Rights. the seller holds at least 10% of the share capital of the Romanian entity for an uninterrupted period of one year. The main non-deductible expenses are: corporate income tax; fees and penalties towards Romanian/foreign authorities; missing Also, income from liquidation of an entity is exempt under the same inventory provided that no insurance contract was concluded for conditions as those stated above. them or they are not out of date; expenses with tax not withheld at source in the name of non-residents; sponsorship expenses 5.3 Is there any special relief for reinvestment? (fiscal credit is available); expenses performed in the name of the shareholders other than those made at market price for goods or Various reliefs for investments are available as detailed below: services supplied; expenses related to certain categories of non- 1. Profits invested in technological equipment, electronic taxable income; expenses with insurance premiums that are not computers and peripheral equipment, cash registers, as well related to assets of the taxpayer; expenses with receivables write- as in software produced and/or acquired by the taxpayer and off under various conditions; 50% of the expenses attributable to used for business purposes is exempt from corporate income vehicles having a maximum of nine seats and 3,500 kg that are not tax. The exemption applies within the limit of the corporate used exclusively for business purposes (such expenses are fully income tax due for the respective period. deductible for vehicles used for specific activities, e.g. emergency, 2. Taxpayers that perform exclusively innovation and R&D safety and security, courier services, cars used by sales/acquisitions activities are exempt from corporate income tax in the first 10 agents, taxi activities, driving schools); and expenses with years of their activity. management or consultancy services supplied by a person located in

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3. Companies benefit from an additional deduction of 50% of the eligible expenses incurred for R&D activities. Also, 7 Overseas Profits accelerated depreciation may be applied for equipment used in R&D activity. 7.1 Does your jurisdiction tax profits earned in overseas branches? 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local Yes. However, tax credit is granted for taxes paid overseas. assets/shares?

Income derived by a foreign legal entity from the transfer of 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? Romania immovable property situated in Romania or from any other right related to such property (e.g. rental), as well as income from Dividends are exempt from corporate income tax provided that the exploitation of natural resources from Romania, represents taxable entity receiving the dividends holds at least 10% of the share capital income for corporate income tax purposes (no withholding tax is of the non-resident for an uninterrupted period of one year and that due but instead corporate income tax liabilities arise). a double tax treaty is concluded with the respective state. Also, income from sale of participation titles in Romanian entities is subject to corporate income tax provided that the participation exemption does not apply (question 5.2 above) and that no double 7.3 Does your jurisdiction have “controlled foreign tax treaty is concluded with the state where the seller is a resident/ company” rules and, if so, when do these apply? the treaty gives the right of taxation to Romania. No CFC rules are applicable.

6 Local Branch or Subsidiary? 8 Taxation of Commercial Real Estate

6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? Costs imposed by the Romanian Trade Registry have decreased as of 2017. Certain costs are still applicable (e.g. reservation of the Please observe our answer to question 5.4 above. name of the entity, specimen of signature which can be obtained only from a notary, statement of sole shareholder where applicable, 8.2 Does your jurisdiction impose tax on the transfer of etc.); however, their total value is less than EUR 100. The minimum an indirect interest in commercial real estate in your share capital is EUR 40. jurisdiction?

6.2 Is there a difference between the taxation of a local No, such a tax is not imposed in Romania. subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their A subsidiary is considered a legal entity and is taxed for all the equivalent? income obtained, irrespective of their source. A branch, as a permanent establishment, is taxed only for the income attributed to No, there is no special tax regime for REITs in Romania. the activity performed in Romania by the foreign entity. All other conditions related to computation of the taxable profit are applicable. 9 Anti-avoidance and Compliance

6.3 How would the taxable profits of a local branch be determined in its jurisdiction? 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? Please refer to the answer above. In determining the amount of a tax or contribution, fiscal authorities can disregard a specific transaction that has no economic purpose, 6.4 Would a branch benefit from double tax relief in its jurisdiction? adjusting the effects of such transaction. Also, they can reassess an activity of operation in order to reflect its economic substance. If a branch situated in Romania obtains income from a foreign Cross-border transactions that are qualified by the tax authorities as jurisdiction that was subject to tax therein, then tax credit would be artificial will not be subject to a double tax treaty. applicable in Romania. 9.2 Is there a requirement to make special disclosure of 6.5 Would any withholding tax or other similar tax be avoidance schemes? imposed as the result of a remittance of profits by the branch? There is no such requirement.

No branch remittance tax is applicable in Romania.

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9.3 Does your jurisdiction have rules which target not 10.3 Does your jurisdiction support public Country-by- only taxpayers engaging in tax avoidance but also Country Reporting (CBCR)? anyone who promotes, enables or facilitates the tax avoidance? Romania fully supports CBCR requirements following the recommendations of OECD BEPS Action 13. Specifically, the No. However, specific joint liability rules are applicable for Romanian Government recently issued Emergency Ordinance No. administrators and shareholders who participated, in bad faith, in 42/2017 amending the Tax Procedure Code in order to implement the insolvency of an entity. Also, criminal law rules are applicable the measures in respect of the mandatory automatic exchange of in case of co-authors of a white-collar crime. information on taxation. The new provisions require that Romanian

fiscal resident companies which are ultimate parent entities Romania 9.4 Does your jurisdiction encourage “co-operative controlling a multinational enterprises group (or any other reporting compliance” and, if so, does this provide procedural entity that meets the legal conditions stated), with total consolidated benefits only or result in a reduction of tax? group revenue above the threshold of EUR 750 million in the year preceding the reporting fiscal year, are required to file CBC reports Currently, there is no encouragement for “co-operative compliance”. with the Romanian tax authorities. The CBC report will include fiscal and financial information such as total revenues, profit/loss before income tax, number of employees, 10 BEPS and Tax Competition income tax paid, income tax accrued, stated capital, undistributed profits, tangible assets other than cash and cash equivalents for 10.1 Has your jurisdiction introduced any legislation each jurisdiction in which the group operates, as well as details of in response to the OECD’s project targeting Base all constituent entities of the group, such as the jurisdiction of tax Erosion and Profit Shifting (BEPS)? residence and the main economic activities. The draft of the specific form used for CBCR has been issued by the Romanian Ministry of Romania has started amending and completing the national Finances and is currently under public debate. legislation in order for Romania’s fiscal provisions to be in line with the BEPS Project. As such, Country-by-Country Reporting 10.4 Does your jurisdiction maintain any preferential tax (CBCR) was recently implemented (as detailed in question 10.3 regimes such as a patent box? below) and steps have been made in respect of updating the fiscal regime of hybrid instruments and entities. Additionally, the existing The income obtained by individuals for software programming is national regulations in respect of transfer pricing and permanent tax-exempt (only social contributions apply). establishments were already mostly in line with the OECD provisions (i.e. the OECD TP Guidelines and OECD MC Comments, With respect to corporate taxation, the only preferential taxation respectively). Finally, anti-abuse rules in force provided by the regimes refer to: (i) tax exemption for reinvested profits (i.e. profit domestic fiscal legislation are aligned with the BEPS measures. invested in technological equipment, computers and software is corporate income tax-exempt. In order to benefit from this incentive, the equipment should be used by the taxpayer for business purposes 10.2 Does your jurisdiction intend to adopt any legislation for more than half of its useful life, but up to five years and cannot to tackle BEPS which goes beyond what is be depreciated by using the accelerated depreciation method); and recommended in the OECD’s BEPS reports? (ii) research and development (R&D) incentives (i.e. in respect of the expenses incurred for R&D activities, companies can benefit The Romanian Government has approved the country’s adherence from an additional 50% deduction of the eligible expenses and from as an associate to the BEPS Implementation Forum in 2016, the possibility to apply the accelerated depreciation method for the envisaging the implementation of BEPS measures. Consequently, equipment used). in mid-2017, Romania was among the signatory states of the Paris Multilateral Convention. However, at this point, there are no publicly proposed amendments to the fiscal legislation/legislative drafts under discussion in respect of any of the BEPS measures.

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Luisiana Dobrinescu Dobrinescu Dobrev SCA Intrarea Roma no. 7 Sector 1, Bucharest Romania

Tel: +40 723 000 497 Email: [email protected] URL: www.dobrinescudobrev.ro

Romania Having a double specialisation as an economist and lawyer, Luisiana is one of the few tax experts in Romania able to advise, both from a business and legal perspective, on all aspects of taxation. Since 2007, Luisiana has specialised in European VAT and tax litigation, including assistance throughout fiscal inspections. Luisiana is a member of the Brussels European VAT Forum, and is one of the members of the technical team appointed by the business community for discussing with the Ministry of Finance the legislative changes to the VAT and fiscal procedural law. Luisiana has been involved in four court cases deferred to the judgment of the European Court of Justice, which have already been finalised (C-249/12 Tulică, C-183/14 Salomie și Oltean, C-55/16 EvoBus Gmbh, and C-392/16 Marcu), as well as in two infringement procedures (EU PILOT files) against Romania, all of them regarding VAT issues. Luisiana is a frequent speaker at the most significant tax conferences and workshops, and has authored numerous online press articles.

Dobrinescu Dobrev Law Office was founded in 2012. The team is composed of both tax lawyers and tax advisers, and we are able to offer our clients total coverage in respect of tax law, starting with tax consultancy and going further in assistance with tax inspections, through to defence in courts of law. Dobrinescu Dobrev Law Office has achieved the highest level of recognition within its domain of activity in respect of tax litigation, especially due to our high degree of successful cases. Our predominant industry sectors are: real estate; information technology; wholesale and distribution of food & beverages; agriculture; and the automotive industry. Our tax department has been involved in complex transactions such as: mergers and spin-offs; tax reviews prior to inspection; assistance in several of the most significant tax inspection cases; tax disputes which have created important court precedents; and representation in several European Court cases (preliminary rulings).

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Serbia

MIM Law Tanja Unguran

1 Tax Treaties and Residence 2 Transaction Taxes

1.1 How many income tax treaties are currently in force in 2.1 Are there any documentary taxes in your jurisdiction? your jurisdiction? There are no documentary (stamp) taxes in Serbia. There are 58 double tax treaties currently in force in Serbia. Serbia has double tax treaties with most of the EU countries, Russia, China 2.2 Do you have Value Added Tax (or a similar tax)? If so, and some countries in Africa and Asia. at what rate or rates?

1.2 Do they generally follow the OECD Model Convention Yes, Serbia introduced VAT in 2004. The standard VAT rate is 20% or another model? and the reduced rate is 10%.

Yes. The vast majority of Serbian double tax treaties are based on 2.3 Is VAT (or any similar tax) charged on all transactions the OECD Model Convention. or are there any relevant exclusions?

1.3 Do treaties have to be incorporated into domestic law In principle, VAT is charged on all transactions in goods and before they take effect? services, except those listed in the VAT Law. There are two types of exemptions: 0%-rated supplies (with the right to deduction of input No. International treaties ratified by the Parliament apply directly VAT); and exempt supplies (without the right to deduction). and do not have to be incorporated into domestic law.

2.4 Is it always fully recoverable by all businesses? If not, 1.4 Do they generally incorporate anti-treaty shopping what are the relevant restrictions? rules (or “limitation on benefits” articles)? In principle, input VAT is fully recoverable for all businesses, subject Serbian double tax treaties typically do not have anti-treaty shopping only to general limitations on deductibility of input VAT: that the rules. goods/services have been used for the purpose of VAT-able output supplies; and that the taxpayer has in his possession a VAT invoice. 1.5 Are treaties overridden by any rules of domestic Industries involved in exempt supplies, such as financial services, law (whether existing when the treaty takes effect or healthcare services and others, are not allowed to deduct input VAT. introduced subsequently)? Also, for certain types of specific goods and services listed in the VAT Law, deduction is not allowed (for example, passenger cars, No. Under the Serbian Constitution, international treaties take boats and similar). precedence over national laws. 2.5 Does your jurisdiction permit “establishment only” 1.6 What is the test in domestic law for determining the VAT grouping, such as that applied by Sweden in the residence of a company? Skandia case?

Under Serbian national tax laws, the tax residence of legal persons is VAT grouping is not allowed in Serbia. based on the place of incorporation or the place of real management and control. 2.6 Are there any other transaction taxes payable by companies?

The so-called property transfer tax is payable on the sale of specific assets: real estate; intellectual property rights; passenger cars; boats;

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and aircraft. Property transfer tax is levied at a 2.5% rate on the sales price of the asset subject to taxation. The person liable to pay 3.7 Are there any other restrictions on tax relief for tax is the seller, though tax liability may be transferred to the buyer interest payments by a local company to a non- resident? contractually.

There are no restrictions on deductibility of interest paid by Serbian 2.7 Are there any other indirect taxes of which we should companies to unrelated parties. Deductibility of interest on loans be aware? from related parties is restricted under both thin capitalisation rules and transfer pricing rules. No, there are not. Serbia 3.8 Is there any withholding tax on property rental 3 Cross-border Payments payments made to non-residents?

Yes. Income from rent on moveable and immoveable assets located 3.1 Is any withholding tax imposed on dividends paid by in Serbia is subject to 20% withholding tax, if paid by a resident a locally resident company to a non-resident? legal person to a non-resident person. If this type of income is paid to a resident of a country classified as a tax haven (“jurisdiction with Yes, dividends paid by a resident legal person to a non-resident are preferential tax regime” in the terminology of Serbian Corporate subject to 20% withholding tax. Income Tax Law), such income will be subject to the higher 25% withholding tax rate. 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? 3.9 Does your jurisdiction have transfer pricing rules?

Yes. Royalties paid by a resident legal person to a non-resident are Yes. Serbian transfer pricing rules are modelled largely on the subject to 20% withholding tax. Royalties paid to a resident of a OECD Transfer Pricing Guidelines. All Serbian companies which country classified as a tax haven (“jurisdiction with preferential tax have transactions with related parties (whether foreign or domestic) regime” in the terminology of Serbian Corporate Income Tax Law) are required to submit transfer pricing documentation to the Serbian are subject to the higher 25% withholding tax rate. Tax Administration, together with their annual corporate income tax return. If the value of related-party transactions does not exceed 3.3 Would there be any withholding tax on interest paid RSD 8 million (approx. EUR 66,000), the taxpayer may submit a by a local company to a non-resident? simplified transfer pricing report.

Yes. Interest paid by a resident legal person to a non-resident is subject to 20% withholding tax. Interest paid to a resident of a 4 Tax on Business Operations: General country classified as a tax haven (“jurisdiction with preferential tax regime” in the terminology of Serbian Corporate Income Tax Law) 4.1 What is the headline rate of tax on corporate profits? is subject to the higher 25% withholding tax rate. The corporate income tax rate in Serbia is a flat 15%. 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? 4.2 Is the tax base accounting profit subject to adjustments, or something else? Serbia has thin capitalisation rules which limit deductibility of interest expenses for corporate income tax purposes. Taxable profit is established on the basis of accounting profit, provided that expenses and revenues declared in the taxpayer’s 3.5 If so, is there a “safe harbour” by reference to which financial reports have to be adjusted in accordance with the rules tax relief is assured? prescribed by the Corporate Income Tax Law.

Under the law, interest on related-party loans is deductible if it 4.3 If the tax base is accounting profit subject to does not exceed four times the taxpayer’s share capital. For banks adjustments, what are the main adjustments? and financial leasing companies, the threshold for deductibility of interest is 10 times the taxpayer’s share capital. If interest expenses Adjustments concern primarily the deductibility of expenses. do not exceed this threshold, they are fully deductible for corporate Adjustments of expenses prescribed by tax regulations may tax purposes. generally be divided into four groups: a) Expenses which are not deductible at all. This includes: 3.6 Would any such rules extend to debt advanced by a undocumented expenses; non-business expenses; gifts third party but guaranteed by a parent company? made to political parties; expenses generated in transactions with related parties (provisions for receivables towards No. Thin capitalisation rules do not apply to interest paid on loans related parties, default interest paid to related parties); costs given to the taxpayer by unrelated parties, even if such loans are generated in relation to unpaid taxes; and other. This group guaranteed by the taxpayer’s parent company. also includes impairment costs (recognised only when the impaired asset was sold). b) Expenses which are deductible up to thresholds prescribed by the law (usually up to a prescribed percentage of the taxpayer’s

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revenues): marketing expenses; business entertainment; losses may be carried forward to following tax years, but not for expenses incurred for various social purposes (culture, sport, more than five years. Capital gains are taxed at a flat 15% rate, humanitarian, environment and similar); membership fees to which is the same for business profits. various organisations; and other. c) Expenses which are recognised only subject to the fulfilment of certain specific conditions: costs from write- 5.2 Is there a participation exemption for capital gains? off of receivables can, in principle, be recognised only if the taxpayer sued the debtor. Provisions for receivables can be No. Serbian tax laws do not allow a participation exemption for recognised if the provision is made at least 60 days after the capital gains. receivable became due. d) Expenses for which tax regulations prescribe different methods Serbia 5.3 Is there any special relief for reinvestment? of calculation: tax depreciation is calculated under special rules prescribed by tax regulations. For tax purposes, all assets are classified into one of five tax depreciation groups and No. Serbian tax laws do not allow any relief for reinvestment of are depreciated under different depreciation methods, and at profits as such. The only incentive available under the Serbian different depreciation rates. Immoveable assets are depreciated Law on Corporate Income Tax is a tax holiday for investment in under the proportional method, while all other assets are fixed assets and employment of new employees. The incentive depreciated under the declining method. Depreciation rates is available to companies which invest more than 1 billion dinars range from 2.5% (for immoveable assets) to 30% (moveable (approx. EUR 8.3 million) and employ more than 100 new assets classed in the fifth depreciation group). employees. The incentive is available to all companies which meet these thresholds, irrespectively of whether investment was financed 4.4 Are there any tax grouping rules? Do these allow from the company’s own profits of from external sources (such as a for relief in your jurisdiction for losses of overseas loan or similar). subsidiaries?

5.4 Does your jurisdiction impose withholding tax on the Serbian tax regulations allow tax consolidation, but only for resident proceeds of selling a direct or indirect interest in local companies. Tax consolidation is allowed for companies which assets/shares? are directly or indirectly controlled by the same parent company, provided that only companies where the same parent holds (directly No, it does not. or indirectly) at least a 75% share are members of the consolidated group. Serbian companies cannot use any relief for losses generated by their foreign subsidiaries. 6 Local Branch or Subsidiary?

4.5 Do tax losses survive a change of ownership? 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? Yes. Serbian companies can carry forward their accumulated tax losses in accordance with general rules, if the ownership over such There are no taxes payable on the formation of a company in Serbia. companies changes. Accumulated tax-loss carry-forwards may be used in the case of mergers or divisions of companies, provided that, in such case, tax losses are proportionally divided between entities 6.2 Is there a difference between the taxation of a local emerging from a division. subsidiary and a local branch of a non-resident company (for example, a branch profits tax)?

4.6 Is tax imposed at a different rate upon distributed, as There is very little difference between the taxation of branches and opposed to retained, profits? subsidiaries. With some minor exceptions, for tax purposes, a branch is treated in much the same way as a fully incorporated subsidiary of No. Profits of Serbian companies are taxed at the same 15% tax a non-resident company. Serbia does not impose branch profit tax rate, irrespectively of whether they are retained or distributed to (or any similar tax) on branches of foreign companies. shareholders.

6.3 How would the taxable profits of a local branch be 4.7 Are companies subject to any significant taxes not determined in its jurisdiction? covered elsewhere in this chapter – e.g. tax on the occupation of property? With certain minor exceptions, the taxable profits of a branch are established under the same rules governing tax adjustments of No. Except for corporate income tax, there are no other taxes accounting expenses and revenues which apply to fully incorporated imposed on or in relation to companies’ profits. companies. Even though under the law, a branch has to be treated as a permanent establishment of a non-resident taxpayer, so that taxable 5 Capital Gains profits of such non-resident should be established by attribution of profits attributable to the operations of the branch, in the practice, branches are treated as independent resident companies and taxed 5.1 Is there a special set of rules for taxing capital gains accordingly. and losses?

Yes. Capital gains generated by Serbian companies can be offset only by capital losses, and not by other expenses. Unused capital

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6.4 Would a branch benefit from double tax relief in its 8.3 Does your jurisdiction have a special tax regime jurisdiction? for Real Estate Investment Trusts (REITs) or their equivalent? Serbian branches of foreign companies are not allowed any relief for tax paid on the branch’s profit abroad. No, it does not.

6.5 Would any withholding tax or other similar tax be 9 Anti-avoidance and Compliance imposed as the result of a remittance of profits by the

Serbia branch? 9.1 Does your jurisdiction have a general anti-avoidance For withholding tax purposes, branches are perceived as a part or anti-abuse rule? of their non-resident founders. Consequently, branches are not required to pay withholding tax on the profits which they distribute Yes. The Serbian Law on Tax Procedure and Tax Administration to their founder. This treatment is not explicitly prescribed by prescribes a general substance-over-form principle, whereby the Serbian tax laws, but rather in the official opinions of the Serbian Tax Administration is given the right to disregard the legal form Ministry of Finance (generally in charge of the interpretation, and in of any given transaction and assess tax in accordance with the control of the application, of Serbian tax laws). economic substance of such transaction. The Tax Administration may use this power if it establishes that the parties used a specific legal form (“simulated transaction”) to hide their “real” transaction 7 Overseas Profits (“dissimulated transaction”). The Serbian substance-over-form rule is phrased in a very general manner, and is applied very inconsistently by the Serbian Tax Administration. 7.1 Does your jurisdiction tax profits earned in overseas branches? 9.2 Is there a requirement to make special disclosure of Yes. Profits generated by foreign branches of Serbian companies avoidance schemes? are treated as taxable revenues and taxed accordingly, provided that the Serbian company has the right to a tax credit for taxes paid by No. Serbian tax regulations do not impose an obligation to disclose the branch on such profits abroad. tax avoidance schemes.

7.2 Is tax imposed on the receipt of dividends by a local 9.3 Does your jurisdiction have rules which target not company from a non-resident company? only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax Yes. Dividends received by Serbian companies from their foreign avoidance? subsidiaries are treated as taxable revenue of the Serbian parent company. The Serbian parent has the right to a tax credit for tax No. Except for the general substance-over-form rule explained which its foreign subsidiary paid abroad on such dividend (including in question 9.1. Serbian tax laws do not prescribe any other anti- both corporate profit tax and withholding tax). Foreign tax credit is avoidance rule or procedure aimed at the prevention of tax evasion. available only to Serbian companies which have held at least a 10% share in their foreign subsidiary for a period of at least a year. 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? No. The Serbian tax authorities have not made any attempts towards No. There are no CFC rules in Serbia. implementing the concept of “co-operative compliance”, nor does it seem that they will make any such attempts in the near future.

8 Taxation of Commercial Real Estate 10 BEPS and Tax Competition

8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? Yes. The sale of commercial assets by non-resident legal persons is subject to capital gains tax, at a 20% rate. No. Serbia has not yet adopted any laws or regulations aimed at the implementation of the BEPS principles. 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your jurisdiction? 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports? No. Only direct transfer of ownership against consideration is subject to capital gains tax. At this point, there are no indications that Serbia will adopt any BEPS-related legislation in the near future.

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10.3 Does your jurisdiction support public Country-by- Tanja Unguran Country Reporting (CBCR)? MIM Law Čika Ljubina 12 No, it does not. 11 000 Belgrade Serbia

Tel: +381 63 633 614 10.4 Does your jurisdiction maintain any preferential tax Email: [email protected] regimes such as a patent box? URL: www.mim-law.com

No, it does not. Serbia Tanja Unguran is a Partner at MIM Law, and is in charge of the firm’s Tax Department. In addition to Tax, Ms. Unguran specialises in M&A, Corporate, Commercial and Energy Law. Ms. Unguran has more than 15 years of experience in tax advisory services. Prior to joining MIM, Ms. Unguran worked as a Partner in charge of the Corporate & Tax department at Karanovic & Nikolic Law Firm, and has led the tax practices of several other law firms in Serbia. Ms. Unguran was the president of AmCham Finance and Tax Committee and is also a national reporter for the Serbian VAT system for IBFD International VAT Monitor. Ms. Unguran advises clients in all areas of tax, not only in Serbia, but also in Montenegro, Bosnia and Herzegovina and Macedonia.

MIM Law is a full-service law firm, servicing clients in Serbia and Montenegro, with a special focus on dispute resolution. The firm is led by four partners, and has a team of 11 lawyers. MIM Law is ranked as a top-tier law firm for Dispute Resolution by both Chambers and Partners and The Legal 500. The firm is also famous for its expertise in Tax Disputes. In addition to Dispute Resolution, the firm services its clients in all other areas of law, including Corporate & Commercial, Employment, Real Estate & Construction, Competition, Banking & Finance and Regulatory & Compliance matters. MIM Law is one of the few law firms in the region that has a truly experienced tax team which advises clients in all areas of tax, not only in Serbia, but also in Montenegro and Bosnia and Herzegovina.

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Spain Ernesto Lacambra

Cases & Lacambra Marc Montserrat

accordance with the provisions of the tax treaty, Spain and the other 1 Tax Treaties and Residence contracting state have the right to terminate such treaties.

1.1 How many income tax treaties are currently in force in 1.6 What is the test in domestic law for determining the your jurisdiction? residence of a company?

Spain currently has approximately 93 tax treaties with several Spanish corporate tax law sets out three different standards for a countries in force. In addition, Spain currently has, in different company to be considered tax-resident in Spain. It must: (i) be procedural phases, tax treaties with Azerbaijan, Bahrain, Belarus, incorporated under Spanish law; (ii) have its registered office in Cape Verde, Montenegro, Namibia, Peru, Qatar and Syria. Finally, Spain; and (iii) have its place of effective management in Spain. Spain has recently renegotiated tax treaties with Austria, Belgium, Canada, Finland, India, Mexico, Romania, the United Kingdom and the United States. 2 Transaction Taxes

1.2 Do they generally follow the OECD Model Convention 2.1 Are there any documentary taxes in your jurisdiction? or another model? Spain provides for stamp duty on public deeds before a Public Spain usually follows the OECD Model standards. However, Spain Notary. However, stamp duty tax rates depend on the autonomous has also signed tax treaties with different countries following the region where the document is signed (approximately 1% tax rate on UN Model (e.g. the United States). average, but which could range from 0.5% to 2.5%).

1.3 Do treaties have to be incorporated into domestic law 2.2 Do you have Value Added Tax (or a similar tax)? If so, before they take effect? at what rate or rates?

No. Spain does not have any specific domestic law incorporating Yes. Value Added Tax is charged at a 21% rate on most goods and tax treaties into its domestic legislation. Tax treaties enter into force services provided in Spain. However, depending on the service or in Spain once they are published in the Spanish Public Official goods being acquired, the applicable tax rate will be 10% (reduced Gazette. (Although some of them may foresee later entry into force tax rate) or 4% (super-reduced tax rate). As an example, the sale of in accordance with their own provisions.) a new apartment or dwelling will be subject to VAT at 10%, whereas a plot of land or new premises will be subject to VAT at 21%. 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? Spain has included in most of its tax treaties different anti-treaty shopping rules such as “limitation on benefits” clauses (objective As a general rule, VAT is charged on most goods and services clauses) or “principal purpose test” clauses (subjective clauses). provided in Spain. Nevertheless, certain goods or services related The main purpose is to allow qualified persons to benefit from to the educational, medical and food sectors enjoy VAT exemptions tax benefits and to avoid the incorporation of companies with no or tax rate reductions. economic substance for the mere purpose of benefiting from the tax The rental of dwellings or apartments is exempt from VAT. treaty provisions. Conversely, the rental of premises or offices is subject to VAT.

1.5 Are treaties overridden by any rules of domestic 2.4 Is it always fully recoverable by all businesses? If not, law (whether existing when the treaty takes effect or what are the relevant restrictions? introduced subsequently)? No. VAT borne by companies will be fully recoverable if the No. Tax treaties always prevail over domestic law. However, in company only carries out business activities subject to VAT. If the

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company carries out exempt and non-exempt business activities, such as the rental of dwellings and offices, VAT would be recoverable 3.4 Would relief for interest so paid be restricted by on a pro rata basis. reference to “thin capitalisation” rules?

Thin capitalisation rules no longer apply in Spain. Instead, the 2.5 Does your jurisdiction permit “establishment only” amount of net deductible financial expenses is reduced to 30% of VAT grouping, such as that applied by Sweden in the operating profit (EBITDA). Skandia case? If an entity has not been able to deduct all financial expenses in a Yes. The concept of a permanent establishment for VAT purposes fiscal year, these net expenses could be offset during the following differs from that for Corporate Tax purposes. fiscal years under no time limit. Spain

2.6 Are there any other transaction taxes payable by 3.5 If so, is there a “safe harbour” by reference to which companies? tax relief is assured?

Yes. Transfer Tax may arise on transactions involving real estate. Spanish companies are entitled to deduct financial expenses up to Rates could range from 6% to 11% (each autonomous region in EUR 1m per fiscal year. Spain has the right to decide the applicable tax rate). Capital tax at 1% on reductions of share capital may arise. 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company?

2.7 Are there any other indirect taxes of which we should The same limitations on net financial expenses would apply as those be aware? described in questions 3.4 and 3.5. If a resident or non-resident entity directly owns a property in Spain and decides to sell such property, Urban Land-Value Increase Tax 3.7 Are there any other restrictions on tax relief for may apply. This local tax is levied based on the cadastral value of interest payments by a local company to a non- the property and the period of ownership. resident?

Financial expenses deriving from a loan granted by a company 3 Cross-border Payments which is part of the same group of companies in order to acquire shares or subscribe a capital increase in another company of the same group of companies could be considered non-tax-deductible. 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 3.8 Is there any withholding tax on property rental Spain would apply the corresponding withholding tax in accordance payments made to non-residents? with the tax treaty signed with the country of residence of the non- resident entity or individual. If Spain has not signed any tax treaty Provisions set out in the tax treaty between Spain and the country of with the country of residence of the non-resident entity, a flat 19% residence of the owner of the real estate would apply. withholding tax rate will apply. EU countries may benefit from tax On the negotiation of tax treaties, Spain usually includes shared exemption. taxation on income derived, directly or indirectly, from real estate located in Spanish territory. 3.2 Would there be any withholding tax on royalties paid Consequently, Spain will be entitled to apply 24% (19% in EU by a local company to a non-resident? jurisdictions) withholding tax on rental income if the lessee is a subject obliged to withholding regulations. For example, non- Spain would apply the corresponding withholding tax in accordance resident entities leasing properties to individuals not engaged in with the tax treaty signed with the country of residence of the non- business activities will not be subject to withholding tax. On the resident entity or individual. If Spain has not signed any tax treaty contrary, if the lessee is an entity engaged in business activities, a with the country of residence of the non-resident entity, a flat 19% 24% (19% in EU jurisdictions) withholding tax will apply. withholding tax rate will apply. EU countries may benefit from tax exemption. 3.9 Does your jurisdiction have transfer pricing rules?

3.3 Would there be any withholding tax on interest paid Yes. The Spanish transfer pricing rules are based on the OECD by a local company to a non-resident? transfer pricing guidelines. The Spanish Corporate Tax Law foresees extensive rules to define Spain would apply the corresponding withholding tax in accordance the nature of related parties, and it also provides for different with the tax treaty signed with the country of residence of the non- methods to assess the market value of transactions between related resident entity or individual. If Spain has not signed any tax treaty parties. with the country of residence of the non-resident entity, a flat 19% In August 2017, the Spanish Tax Authorities approved a new withholding tax rate will apply. EU countries may benefit from tax form to report related-party transactions exceeding EUR 250,000, exemption. which will have to be submitted between 1 November 2017 and 30 November 2017.

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(ii) Anticipation of negative tax bases: Spanish companies are 4 Tax on Business Operations: General entitled to apply for a 10% tax reduction on the taxable base, limited to EUR 1m, through the anticipation of future tax losses. These companies will have to include an accounting 4.1 What is the headline rate of tax on corporate profits? reserve in this regard for the following five years. The main purpose of both tax incentives is to strengthen and increase The general corporate income tax rate is 25% over worldwide the equity of the company. profits. However, under several requirements, newly incorporated Spanish companies may apply for a 15% tax rate for the first two fiscal years with a positive tax base. 4.7 Are companies subject to any significant taxes not

Spain covered elsewhere in this chapter – e.g. tax on the occupation of property? 4.2 Is the tax base accounting profit subject to adjustments, or something else? There are no relevant taxes for companies other than those included elsewhere in this chapter. Spanish companies calculate their tax due from the accounting profit subject to various tax adjustments. 5 Capital Gains 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? 5.1 Is there a special set of rules for taxing capital gains and losses? The main adjustments on the account profit are as follows: participation exemptions on dividends and capital gains; patent box; As a general rule, Spanish companies will be taxed on capital gains amortisation tax rates; non-deductible expenses or provisions, etc. for the difference between the market value of the asset being transferred, and its acquisition cost. 4.4 Are there any tax grouping rules? Do these allow The same applies to capital losses with limitations on the for relief in your jurisdiction for losses of overseas deductibility of tax losses deriving from the transfer of qualified subsidiaries? entities (5%). The applicable tax rate will be 25%. Spain has a special regime of tax consolidation for groups of companies. In order to apply for this tax consolidation regime, it is necessary to meet the following requirements: (i) the parent company 5.2 Is there a participation exemption for capital gains? holds directly or indirectly 75% of the capital of another company or its voting rights (70% if listed); (ii) companies must be subject to, With effect from 1 January, Spain foresees a participation exemption and not exempt from, Corporate Tax; (iii) the parent company must regime for dividends and capital gains deriving from resident and hold its participation or voting rights during the whole fiscal year; non-resident entities. and (iv) the parent company must not be controlled by any other In order to qualify for the participation exemption regime, the qualified parent company. following requirements should be met: (i) the shareholding in the If any company of the group is not tax-resident in Spain, exempt subsidiary must be of at least 5% or, alternatively, it must have a from Corporate Tax or has been declared bankrupt or included in minimum value of at least EUR 20m (participation requirement); an insolvency procedure, this company will be excluded from the and (ii) it has to be held uninterruptedly for at least one year (holding tax group. requirement). In this sense, the holding requirement might be met at the company group level. 4.5 Do tax losses survive a change of ownership? In addition, if more than 70% of the subsidiary’s income consists of dividends or capital gains deriving from other subsidiaries, it The Spanish Corporate Income Tax Act sets out that it is not possible would be required that the holding meets the abovementioned to offset tax losses in case of a change of ownership if the following participation and holding requirements in the indirectly controlled requirements are met: (i) the majority of the share capital or the subsidiary. Nevertheless, the precedent rule would not be applicable right to participate in its profits has been acquired by a related party if dividends have been included in the tax base of the directly or after the generation of such losses; (ii) the related party mentioned indirectly owned entity, where the entity is not allowed to apply for in the previous requirement held less than 25% of the share capital an exemption scheme or a double taxation tax credit scheme. of such company; and (iii) the company does not carry out business This exemption also applies to foreign-source dividends and capital activities. gains if the abovementioned participation and holding requirements are met and the subsidiary has been subject to (and not exempt from) a tax equivalent to Spanish Corporate Income Tax at a nominal rate 4.6 Is tax imposed at a different rate upon distributed, as of at least 10%. opposed to retained, profits? In this regard, the “equivalent tax” requirement will be met when the Spain provides for the possibility to reduce the effective tax rate by subsidiary is resident in a jurisdiction that has concluded a tax treaty applying the following tax incentives: with Spain which includes an exchange of information provision. Besides, the indirect shareholding requirement would also apply to (i) Capitalisation reserve: if the equity of the company has foreign-source dividends and capital gains. increased from one year to the next, Spanish companies will be entitled to apply for a 10% tax allowance of the increase Lastly, the exemption does not apply to dividends or capital gains over the taxable base of the company. These companies will deriving from the transfer of shares in entities with tax residence have to include an accounting reserve in this regard. in a tax haven jurisdiction, in accordance with Spanish legislation.

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will not apply to payments made by the branch to a parent company 5.3 Is there any special relief for reinvestment? which is tax-resident in the EU or in a jurisdiction which has a tax treaty with Spain in place. No. With effect from 1 January 2015, Spain abolished the existing deduction for reinvestment of extraordinary profits. 7 Overseas Profits

5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local 7.1 Does your jurisdiction tax profits earned in overseas assets/shares? branches? Spain

Resident taxpayers will have to withhold 3% on the acquisition of Profits earned overseas by local branches of Spanish-resident real estate located in Spain by non-resident entities. companies are subject to Corporate Income Tax. However, they are entitled to apply for the participation exemption regime as long as the local branch has been subject to similar or identical Corporate 6 Local Branch or Subsidiary? Tax. This requirement, among others, will be met if the Corporate Tax paid abroad has a nominal value of at least 10%. 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? Spain does not impose any tax on the incorporation of companies; neither is the capital increase in Spanish companies subject to any If the participation exemption regime applies, dividends received tax. from a qualified non-resident subsidiary will be tax-exempt. If the requirements to apply the participation exemption are not met, 6.2 Is there a difference between the taxation of a local dividends will be taxed at a 25% rate. subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? No. Both the local subsidiary and the branch of a non-resident entity will be taxed in accordance with the provisions set out in the The main purpose of the Spanish controlled foreign company (CFC) Spanish Corporate Income Tax Act. However, the Spanish Non- regime is to avoid the effects produced when Spanish tax-resident Resident Income Tax Act foresees different limitations such as the companies place their capital in low-tax jurisdictions to avoid deductibility of management fees or non-deductibility of certain including passive investment in their taxable base in Spain. payments made from the branch to the parent company. Under this regime, Spanish tax-resident companies will be subject to Corporate Income Tax on income obtained by a non-resident 6.3 How would the taxable profits of a local branch be subsidiary if certain requirements are met, such as: (i) holding more determined in its jurisdiction? than 50% of the capital of a foreign subsidiary or the majority of its voting rights; and (ii) the foreign entity being subject to a Corporate Local branches will be taxed following the general Corporate Tax which amounts to less than 75% of the taxes that should be paid Income Tax regulations in line with Spanish companies. However, in Spain. the Spanish Non-Resident Income Tax contains certain specificities: The Spanish Corporate Income Tax Act establishes two types of limitation of the deductible expenses with transactions between the CFC rules: local branch and the parent company; or branch profit tax under 1) A general CFC regime applies if the non-resident entity does certain requirements. not have at its disposal an adequate structure of material and human resources unless it can justify that its operations are 6.4 Would a branch benefit from double tax relief in its performed using material and human resources existing in a jurisdiction? non-resident company of the same corporate group, or that there are valid economic reasons for its incorporation. Under this regulation, all income obtained by the non-resident Local branches will be entitled to apply for the participation entity should be included in the Spanish company’s tax base. exemption regime in line with Spanish companies, as set out in Nevertheless, dividends, stakes in profits, or income arising question 5.2, with certain extra requirements. from the transfer of an interest should not be included when: Additionally, local branches will be entitled to apply for the (i) the participation exceeds 5%; (ii) the minimum ownership deduction to avoid double taxation on income subject to tax in a period is one year; and (iii) the participation is held for the different jurisdiction. Nevertheless, taxes paid abroad by the local purpose of directing and managing the subsidiary as long as branch will be limited to the taxes that should have in paid in Spain. it has an adequate structure of material and human resources. 2) When the requirements for applying CFC rules are met and the requirements for the application of the general CFC rules 6.5 Would any withholding tax or other similar tax be set out in the previous paragraph are not met, the following imposed as the result of a remittance of profits by the income obtained by a non-resident entity should be included branch? in the Spanish company’s tax base: (i) income generated from real estate assets not assigned to a business activity; The Spanish Non-Resident Income Tax Act foresees a branch profit (ii) income generated from an interest held in the equity of tax consisting of applying a 19% withholding tax on payments made any type of company and from the assignment of own capital by the branch to the parent company. However, branch profit tax to third parties; (iii) capitalisation and insurance operations in which the beneficiary is the company itself; (iv) income

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generated from industrial and intellectual property, technical assistance, real estate, image rights, and the leasing or sub- 9.2 Is there a requirement to make special disclosure of leasing of businesses and mines; (v) income generated from avoidance schemes? transfers of the aforementioned assets and rights; (vi) income generated from lending, financial and insurance activities and Spanish companies will submit a form to the Spanish Tax Authorities the provision of services if they generate a taxable expense disclosing transactions with related entities exceeding EUR 250,000, in the Spanish-resident company (the positive income or exceeding EUR 100,000 if there has been more than one transaction. obtained in this case will not be included if over 50% of the Taxpayers will inform the Tax Authorities of these transactions and gross income obtained by the non-resident company due to these services comes from services provided to non-related will keep all necessary documentation in case of an audit.

Spain companies); and (vii) income generated from derivative financial instruments. 9.3 Does your jurisdiction have rules which target not only Under this regime, where the positive amount of passive income taxpayers engaging in tax avoidance but also anyone attributable to the Spanish-resident company is at least 15% of the who promotes, enables or facilitates the tax avoidance? total net profits or 4% of the total turnover of the CFC, the Spanish company must include in its taxable base that positive amount in The Spanish jurisdiction sets out a liability regime which targets proportion to its total interest (directly or through other foreign entities or individuals who promote or facilitate tax avoidance. subsidiaries) in the results or, in the absence of results, the capital, According to certain requirements, this would constitute a criminal equity or voting rights in the CFC. offence. Finally, CFC rules are not applicable to EU-resident companies if they are incorporated for economic reasons and carry on a business 9.4 Does your jurisdiction encourage “co-operative activity. compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax?

8 Taxation of Commercial Real Estate The Spanish tax system foresees a general duty to collaborate with the Tax Authorities. However, taxpayers are entitled to apply for 8.1 Are non-residents taxed on the disposal of certain reductions on penalties imposed by the Tax Authorities if commercial real estate in your jurisdiction? they accept the tax assessment and they are paid in due time.

Non-resident entities or individuals will be subject to Non-Resident 10 BEPS and Tax Competition Income Tax at a 19% rate if no tax treaty is in place. If Spain has signed a tax treaty with the country of residence of the non-resident making the disposal, provisions set out in the tax treaty will apply. 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your jurisdiction? With effect from 2015, Spain has passed important legislation in line with the BEPS recommendations: (i) Spanish companies are not Yes. The Spanish legislator has included clauses in its internal entitled to deduct payments made to a related party if that income legislation and in almost all tax treaties to prevent the indirect sale is tax-exempt in its jurisdiction (i.e. interest payments deductible by of real estate through the sale of shares. the debtor, and tax-exempt by the creditor); (ii) a limitation is placed on deductible financial expenses linked to EBITDA of the company; (iii) related parties must hold 25% of the share capital or voting rights 8.3 Does your jurisdiction have a special tax regime and meet strict documentation obligations (Country-by-Country for Real Estate Investment Trusts (REITs) or their Reporting); and (iv) CFC rules will not apply if the taxpayers are equivalent? able to prove that the non-resident entity holds sufficient material and human resources and responds to valid economic reasons. Spain provides for an equivalent tax regime to REITS, which are known as Sociedades Cotizadas Anónimas de Inversión en el Mercado Inmobiliario (SOCIMIs). These companies are listed in 10.2 Does your jurisdiction intend to adopt any legislation a secondary market and subject to 0% Corporate Tax as long as to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports? at least 80% of their rental income is distributed to shareholders, among other requirements. Spain follows the OECD recommendations on tackling BEPS in its SOCIMIs are subject to strict corporate regulations in terms of domestic legislation. The Spanish Tax Authorities are promoting investments, assets, income or shareholders. the filing of previous agreements (acuerdos previos de valoración) with taxpayers to ensure fair tax treatment in transactions between 9 Anti-avoidance and Compliance related parties. These previous agreements with the Tax Authorities provide taxpayers with tax certainty.

9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)?

Yes. Spain has a general anti-abuse rule which enables the Tax Yes. In 2015, Spain published its Country-by-Country Reporting in Authorities to qualify transactions in order to avoid simulation and the Spanish Public Official Gazette. tax fraud.

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Multinational companies (those with a turnover exceeding EUR Spain also offers the possibility of forming an Entidad de Tenencia de 750m) must file a CBCR form in order to disclose to theTax Valores Extranjeros (ETVE) (Foreign Securities Holding Company) Authorities their transactions with related parties, broken down as long as certain requirements are met. Under this regime, ETVE country by country. This form must include gross income, detailed companies are entitled to apply for a full exemption on dividends information on related parties, taxes paid abroad, turnover, equity, and capital gains from foreign subsidiaries, and no withholding tax etc. would apply on the distribution of dividends from an ETVE to its shareholders.

10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box? Spain

Yes. Spain maintains a patent box regime which allows Spanish companies, under certain requirements, to apply for a 60% tax allowance and net income deriving from the assignment of an intangible asset.

Ernesto Lacambra Marc Montserrat Cases & Lacambra Cases & Lacambra Avenida Pau Casals 22 Avenida Pau Casals 22 Barcelona 08021 Barcelona 08021 Spain Spain

Tel: +34 93 611 92 32 Tel: +34 93 611 92 32 Email: [email protected] Email: [email protected] URL: www.caseslacambra.com URL: www.caseslacambra.com

Ernesto Lacambra is the managing partner of Cases & Lacambra. He Marc Montserrat is specialised in national and international company leads the Tax practice. restructurings and in advising high-net-worth individuals. He has experience advising foreign clients with investments in Spain. He He is specialised in advising multinational groups, private equity firms also advises high-net-worth individuals on investment processes, tax and foreign and national investment funds, and in the international tax audits and donation or succession procedures. planning of cross-border investments. He has extensive experience on mergers & acquisitions and reorganisations of multinational Marc was previously seconded to the Andorran office of Cases & groups. In particular, he has focused on the reorganisation of Spanish Lacambra, where he gained experience in financial taxation, banking holding companies for Latin American groups, as well as investments regulation and estate planning. in Spain by European, American and Asian investors. Ernesto also has extensive experience advising high-net-worth individuals, family business groups and large national and multinational business groups. He is an expert in tax audit procedures. He also advises on transfer pricing regulations (reorganisation of the value chain, litigation and master file documentation). Ernesto is a regular speaker at international business schools on international taxation matters and on bilateral investments between the Middle East and Spain.

Cases & Lacambra’s Tax practice group focuses on both international and domestic corporate transactions – mainly M&A and intra-group reorganisations – as well as financial transactions, capital markets and structured finance transactions. We also provide tax advice on a regular basis to large Spanish and non-Spanish multinational companies and financial institutions. We advise our clients on complex tax issues and collaborate to determine the most appropriate strategies according to the current international tax standards. Our practice covers all aspects of Spanish tax law, including detailed advice on direct and indirect taxes. We analyse and negotiate tax matters with the Tax Authorities on behalf of clients. In order to provide the most global advice, we have developed strong working relationships with leading foreign firms, and we regularly provide assistance to foreign counsel on Spanish tax aspects with regard to corporate and financial transactions. We have broad expertise in giving advice to high-net-worth individuals and family businesses. We act as local counsel for international clients investing in both Spain and Andorra.

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Switzerland Pascal Hinny

Lenz & Staehelin Jean-Blaise Eckert

the latter). The treaty signed on May 27, 2015 also maintains this 1 Tax Treaties and Residence existing withholding tax exemption for cross-border payments (Article 9). 1.1 How many income tax treaties are currently in force in On June 7, 2017, Switzerland, together with over 70 countries and your jurisdiction? jurisdictions, signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting As of July 28, 2017, there are 90 income tax treaties in force to (“Multilateral Instrument” or “MLI”). Its aim is to eliminate double which Switzerland is a party. New treaties have been signed with non-taxation and treaty abuse, by introducing, inter alia, a “principal Kosovo and Pakistan. In addition, there are eight tax treaties on purpose test” (see question 1.4 below). The MLI will enter into force inheritance tax in force, as well as 10 tax treaties on the taxation of three months after the deposit of the fifth instrument of ratification. maritime and/or air navigation companies. While it will not directly change the text of existing tax treaties, it Switzerland had entered into agreements with the United Kingdom will be applied alongside those treaties, modifying their application. and Austria providing, inter alia, for a final withholding tax. According to the agreements, a Swiss paying agent may levy a 1.2 Do they generally follow the OECD Model Convention final withholding tax on capital gains and on certain income items. or another model? The final withholding tax substituted the ordinary income tax due by an individual resident of a contracting State on such gains and Most Swiss treaties follow the OECD model treaty. The treaty with income items. The agreements also included a lump-sum payment the United States of America does not follow the OECD model to regularise assets held within Swiss banks. The agreements exactly, but rather the US model treaty. Switzerland has signed entered into force on January 1, 2013. After the introduction of several treaties with an arbitration clause. the automatic exchange of information between Switzerland and the European Union, the agreements with the United Kingdom and Austria were terminated on January 1, 2017. Please note that 1.3 Do treaties have to be incorporated into domestic law Switzerland has not concluded any tax treaties on gift tax, except an before they take effect? agreement with France concerning tax treatment of gifts made for non-profit-making purposes. Double taxation treaties entered into by Switzerland do not have As of July 28, 2017, 57 tax treaties have been signed (of which 50 to be incorporated into domestic law before they take effect. In have entered into force already) to include a clause of administrative accordance with the monistic system, international treaties form part assistance for the exchange of information with reference to of federal law once they have been ratified and thus immediately Article 26 of the Organisation for Economic Co-operation and become valid sources of law. Treaties in general rank before Development (“OECD”) Model Tax Convention on Income and on domestic law in the Swiss legal system. Capital (the “OECD model treaty”). Switzerland has also signed 10 tax information exchange agreements (of which nine are in force) 1.4 Do they generally incorporate anti-treaty shopping with Andorra, Belize, Brazil, Grenada, Greenland, Guernsey, the rules (or “limitation on benefits” articles)? Isle of Man, Jersey, San Marino and the Seychelles. On May 27, 2015, Switzerland and the European Union (“EU”) Not all double taxation treaties entered into by Switzerland signed an agreement for automatic exchange of information in tax incorporate explicit anti-treaty shopping rules or “limitation on matters. This treaty replaced the taxation of savings agreement benefits” articles. According to prevailing jurisprudence ofthe between Switzerland and the EU that had been in force since 2005. Swiss federal Supreme Court, however, all Swiss treaties are subject It is planned that Switzerland will transmit information according to to an implied anti-abuse provision. In addition, Switzerland enacted the OECD Common Reporting Standard from 2018. unilateral rules to avoid treaty-shopping in 1962 (“Abuse Decree”). As a result of Article 15 of the taxation of savings agreement This Abuse Decree contains a number of tests that must be fulfilled between Switzerland and the EU, Switzerland has been granted the by every Swiss-resident company in order to be eligible for equivalent rules to those laid down in the EU parent/subsidiary and treaty benefits. In 1998, facilitations were introduced for holding interest/royalty directives (i.e. 0% withholding tax). This applies companies, active companies and publicly quoted companies. In in relation to all EU Member States, including Cyprus and Malta August 2010, the criteria to qualify for an active company were (Switzerland only recently concluded a double taxation treaty with relaxed.

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According to the practice of the Swiss tax authorities, a foreign restructuring purposes are exempt from issuance stamp tax, as are company claiming a refund of Swiss withholding tax must fulfil capital increases and additional contributions, provided previously some substance requirements. This is particularly true where the existing losses are eliminated and the aggregated payments by the treaty provides for a full refund of Swiss withholding tax. When shareholders or members do not exceed CHF 10 million. examining the situation, the Swiss tax administration looks into The Securities Transfer Stamp Tax is levied on the transfer of certain the real substance of the structure, and not merely its form. An Swiss and non-Swiss securities – mainly shares, similar participating “economic approach to the facts” is adopted, which gives weight to rights in corporate entities, bonds and shares in investment funds, if the overall business situation. The tax administration is assessing a Swiss stockbroker (“Effektenhändler”) is involved as a party or an whether the structure has been arranged with the sole or the primary intermediary to the transaction. Stockbrokers are mainly banks and intention of securing full relief. other brokers, but also companies holding taxable securities with a The MLI, signed by Switzerland on June 7, 2017, introduced a book value of more than CHF 10 million (holding companies). The Switzerland “principal purpose test”, which provides that a benefit under a tax rates applicable on the purchase price are: treaty shall not be granted if obtaining that benefit was one of the ■ 0.15% in respect of Swiss securities; and principal purposes of an arrangement or transaction. Concomitantly, ■ 0.3% in respect of foreign securities. the Abuse Decree was partially repealed and became an ordinance. The Insurance Premium Tax is levied on certain insurance premiums. The taxable person is the Swiss insurance company or 1.5 Are treaties overridden by any rules of domestic the holder of a policy taken from a foreign insurance company. The law (whether existing when the treaty takes effect or standard rate is 5% of the premium. Life insurance premiums – if introduced subsequently)? taxable – are taxed at 2.5%. Generally speaking, treaties rank before Swiss domestic law in the Swiss legal system. Hence, as a principle, treaties are not overridden 2.2 Do you have Value Added Tax (or a similar tax)? If so, by any domestic law, whether existing when the treaty took effect or at what rate or rates? introduced subsequently. However, some domestic law provisions, such as the Abuse Decree, may limit the application of provisions Switzerland introduced Value Added Tax in 1995. The system of of treaties. tax is similar to VAT in the European Union. The standard rate currently applicable, since 2011, is 8%.

1.6 What is the test in domestic law for determining the residence of a company? 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? Swiss domestic laws define the residence of a company (i.e. the criteria to be subject to corporate taxes) with two alternative criteria, The Swiss VAT system largely follows the 6th VAT Directive of the which are the statutory seat and the effective place of management. European Union (note: Switzerland is not a member of the European The effective place of management is defined through the Supreme Union). Since January 1, 2012, taxpayers have the opportunity to Court’s case law. It is where the company has its effective and ask for a VAT audit by the federal administration. This is especially economic centre of activity. In other words, it is its place of day-to- interesting in cases of purchase and sale of enterprises. day management. Taxable transactions The following transactions are subject to VAT: 2 Transaction Taxes ■ supply of goods and services in Switzerland; and ■ import of goods or services.

2.1 Are there any documentary taxes in your jurisdiction? Taxable persons Taxable persons are all entrepreneurs (regardless of the legal form of The transfer of Swiss-situated real estate is regularly subject to a the business) exercising a gainful business activity in Switzerland. cantonal or communal Real Estate Transfer Tax (see section 8 However, they may request to be exempt from VAT if the turnover hereunder). is less than CHF 100,000 p.a. Furthermore, all persons (including private individuals) receiving services from non-Swiss service Furthermore, based on the Swiss Stamp Duties Act, the following providers for more than CHF 10,000 p.a. must pay VAT (to be stamp duties are levied by the Federation: declared in the so-called “reverse charge procedure”). Finally, any ■ Securities Issuance Stamp Tax; person importing goods for private use for a value in excess of CHF ■ Securities Transfer Stamp Tax; and 300 is subject to VAT at the border. ■ Insurance Premium Tax. A partial VAT reform, aiming to remove competitive disadvantages The Securities Issuance Stamp Tax is a stamp duty levied on the between foreign and domestic companies, will enter into force issue (primary market) of certain Swiss securities – mainly shares on January 1, 2018. Among other changes, entrepreneurs with a and similar participating rights in corporate entities – as well as on global turnover (rather than a Swiss turnover) of over CHF 100,000 equity contributions to such corporate entities. The taxable person p.a. will be subject to VAT in Switzerland. From January 1, 2019, is the company or the person issuing the securities or benefitting foreign mail-order companies will have to charge VAT to their from the equity contribution. customers in Switzerland if their turnover for small, import tax-free The rate is 1% of the capital contribution. However, the capital consignments is over CHF 100,000 p.a. created or increased by a corporation or a limited liability company VAT rates is exempt from the issuance stamp tax, up to the amount of CHF 1 The rates currently applicable (since January 2011) are: million. Furthermore, certain transactions, especially in the case of ■ an 8% standard rate; restructuring, are exempt from tax. Rescue companies created for

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■ a 2.5% reduced rate (e.g. medicine, newspapers, books and food); and 2.7 Are there any other indirect taxes of which we should ■ a 3.8% lodging services rate. be aware? Following the dismissal of the pension reform project Prévoyance The consumption of certain alcoholic beverages, tobacco and 2020 by Swiss voters on September 24, 2017, which involved an mineral oil, as well as emissions of carbon dioxide and heavy traffic, increase in VAT rates to provide additional funding for pensions, are subject to state levies. The taxes are included in the retail price VAT rates will decrease starting from January 1, 2018. The and are not disclosed to the end-user. following rates will apply: ■ a 7.7% standard rate; ■ a 2.5% reduced rate (which remains the same); and 3 Cross-border Payments

Switzerland ■ a 3.7% lodging services rate. VAT exemptions and zero-rated transactions 3.1 Is any withholding tax imposed on dividends paid by Article 21 of the VAT Act provides for certain turnovers to be exempt a locally resident company to a non-resident? from VAT. The most important exceptions are: hospital and medical care; education (school, courses, etc.); cultural activities (theatre, Profit distributions made by Swiss corporations, limited liability museum, libraries, etc.); insurance, reinsurance and social insurance companies and co-operatives are subject to withholding tax (“WHT”). transactions; granting and negotiation of credits; transactions in shares Withholding tax is levied on interest, annuities, profit sharing and all and other securities; real estate transfers; and letting and leasing of other income derived from shares, social participations in limited real estate (in general). Input taxes in respect of exempt transactions liability companies and co-operatives, participation certificates or are not deductible. In order to avoid competitive disadvantages, the profit sharing certificates, issued by a person who is domiciled in enterprise may, however, opt for VAT in certain cases. On the other Switzerland. Distributions made by partnerships are not considered hand, the taxpayer is allowed to deduct input taxes in these cases. as taxable dividend distributions. Profit distributions are defined as any benefit which may be financially quantified and which is Article 23 of the VAT Act provides for a list of “zero-rated” made to the creditor or shareholder in excess of the paid-in nominal transactions. Here, the fact that no VAT is due on the respective capital. They include ordinary dividend distributions, liquidation turnover does not affect the deduction of input taxes. Typical proceeds, stock dividends and constructive dividends (hidden profit examples are the export of goods and services outside Switzerland distributions). and supplies in the field of international air transport. No WHT is levied on dividend payments out of so-called capital contribution reserves created from earlier capital contributions of 2.4 Is it always fully recoverable by all businesses? If not, shareholders. what are the relevant restrictions? The applicable WHT rate is 35%, whether paid to a Swiss-resident The VAT Act in principle grants deductibility for all VAT due or or non-resident recipient. paid in respect of goods and services accumulated for the purpose of Swiss-resident recipients can normally obtain a full refund of entrepreneurial activities (“input taxes”). Where a taxpayer has taxable dividend WHT, provided they have properly reported the gross and tax-exempt turnover (see question 2.3 above), he must reduce the amount of the dividend received as taxable income and claim the input tax recovery proportionally. For smaller businesses, special rules refund within a period of three years. apply. They may opt for a lump-sum method, whereby reduced VAT Non-resident recipients may apply for a full or partial refund of rates for the calculation of tax due take input tax into account. dividend WHT pursuant to the provisions of an applicable treaty. For private goods, it is possible to proceed with a so-called fictitious On most inter-company cross-border dividend payments, Swiss- input tax deduction (with the exception of – starting January 1, 2018 based companies with substantial foreign shareholders may apply – collection pieces, for which a special procedure will apply). Self- for a reduction of the WHT at source and the Swiss company has to consumption of goods or services is calculated as a simple correction pay the non-refundable WHT only. However, before the due date of to the input tax and is not included in the calculation of the turnover. dividend payment, the paying Swiss company has to file a request for the application of the reporting procedure with the Federal Tax 2.5 Does your jurisdiction permit “establishment only” Administration (“FTA”). VAT grouping, such as that applied by Sweden in the The permission to pay dividend without WHT, if applicable, is Skandia case? granted on the basis of form 823B or 823C. This form has to be signed by both companies and has to be stamped by the State of Under Swiss VAT legislation, the head offices and permanent residence of the parent company. The dividend payment must be establishment are treated as separate taxpayers. Accordingly, intra- notified to the Swiss federal tax administration within 30 days from company supplies of services are possibly subject to Swiss VAT. the due date of the dividend. As of February 15, 2017, exceeding In addition, Swiss VAT allows VAT grouping but limited to entities this deadline no longer results in a forfeiture of the right to use the located in Switzerland (including the Swiss permanent establishment notification procedure, but may result in a fine of up to CHF 5,000. of a foreign entity). This new rule applies retroactively to cases that took place before the modification, with the exception of claims that have passed the statute of limitations or that have been finally assessed before 2.6 Are there any other transaction taxes payable by January 1, 2011. Refunds must be claimed before February 15, 2018. companies? In case the reporting procedure does not apply, the 35% WHT due on No, there are no other transaction taxes apart from real estate dividend distributions has to be withheld by the Swiss company and transfer taxes (see question 2.1 and section 8). be paid to the FTA. The foreign (parent) company may reclaim all or part of the WHT, based on the applicable double taxation treaty.

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Non-compliance with the notification or WHT payment requirement used to result in a 5% p.a. late interest charge on the WHT amount and 3.4 Would relief for interest so paid be restricted by a forfeiture of the right to use the notification procedure. The Swiss reference to “thin capitalisation” rules? parliament has adopted an Act reforming this practice developed by the FTA. As of February 15, 2017, the late interest charge was Switzerland has introduced thin capitalisation rules. They are laid replaced with a maximum CHF 5,000 fine in case of non-compliance. down in a circular letter issued by the FTA and are hence based not on law but on administrative practice. Interest paid by a Swiss-resident payer is normally not subject to WHT. However, to the extent 3.2 Would there be any withholding tax on royalties paid that interest is paid on amounts of debt exceeding the maximum by a local company to a non-resident? debt allowed according to the circular letter, it is re-qualified as a hidden dividend, if paid to a shareholder or a related party. As a

Switzerland does not levy WHT on royalties, whether paid to a consequence, such interest is not deductible for the paying company Switzerland resident or non-resident person. However, to the extent that the and is subject to the 35% Swiss WHT like any other dividend. royalties do not follow the “arm’s length” principle, they will be However, the rules set by the FTA are safe harbour rules and allow re-qualified as hidden dividends if paid to a shareholder or a related for the taxpayer to prove that different “arm’s length” debt-to-equity party to the shareholder. As a consequence, such royalties would ratios and interest rates apply. not be deductible for the paying company. In addition, they are subject to the 35% Swiss WHT like any other dividend. 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? According to the circular letter issued by the Federal Tax Authorities for finance companies, the maximum debt allowed is 6/7 of total Withholding Tax assets (fair market value). For other companies, the maximum debt The Swiss WHT is levied on interests from bonds issued by a Swiss allowed is defined for certain types of assets (also valued at their fair resident and on interests paid on Swiss bank deposits. However, market value), as follows: Switzerland does not levy any WHT on private and commercial ■ cash: 100%; loans (including inter-company loans). ■ accounts receivable: 85%; The definition of a bond according to Swiss WHT law is rather ■ inventory: 85%; extensive and includes any bonds emitted by a Swiss resident, offered ■ other current assets: 85%; to more than 10 non-banks under similar conditions or to more than 20 non-banks under different conditions. Further, the definition of a ■ bonds in CHF: 90%; bank according to the WHT law includes anyone who publicly offers ■ bonds in foreign currency: 80%; to receive interest-bearing deposits from more than 100 clients. ■ quoted shares: 60%; In this context, please note that intra-group loan-relationships/ ■ non-quoted shares: 50%; deposits neither qualify as bonds, nor as bank deposits for the above ■ investments in subsidiaries: 70%; calculation purpose. In other words, they do not have to be taken ■ loans: 85%; into account when calculating the 10, 20 and 100 limit respectively unless a bond is issued by a foreign group-company, guaranteed by a ■ furniture and equipment: 50%; Swiss group-company, and the funds are repatriated in Switzerland. ■ property, plant (commercially used): 70%; Tax at Source on Mortgage Secured Loans ■ other real estate: 80%; and Non-resident recipients of interest paid on a loan which is secured by ■ intellectual property rights: 70%. mortgages on Swiss real estate, are subject to federal and cantonal taxes levied at source on gross income. The federal tax is 3%, while 3.6 Would any such rules extend to debt advanced by a the cantonal taxes vary between 13% and 21%. third party but guaranteed by a parent company? System of Tax Retention on Interest Payments According to the agreement between Switzerland and the EU on the As a principle, the thin capitalisation rules are only applicable to taxation of savings income, Switzerland had agreed to introduce a debt advanced by shareholders or related parties. However, if debt special withholding tax (retention tax). Interest payments from non- is advanced by a third party, but guaranteed by related parties, the Swiss sources made by a Swiss paying agent to a beneficial owner thin capitalisation rules could apply nevertheless. who is an individual and resident of an EU Member State, were subject to a retention tax in Switzerland at the rate of 35%. 3.7 Are there any other restrictions on tax relief for interest The EU Member State in which the beneficial owner of the interest payments by a local company to a non-resident? payment is a resident received 75%, and Switzerland retained 25% of the retention tax. The provisions of the Abuse Decree Circular of 1962 with regard In case of express instructions from the beneficial owner, instead of to debt-to-equity ratios, as well as maximum rates allowed for retaining tax, the paying agent reported the interest payments to the remuneration in the form of interest, are generally not applicable Swiss Federal Tax Administration, who exchanged the information since the Abuse Decree Circular of 1999. with the tax authorities of the EU Member State of residence. In addition to the thin capitalisation rules mentioned above, the The agreement on the taxation of savings income was replaced by FTA publishes maximum rates allowing for the interest not to be the agreement for automatic exchange of information in tax matters, considered a hidden profit distribution (deemed dividend). signed on May 27, 2015 and in force since January 1, 2017. The new Otherwise, there could be provisions in the applicable double agreement now provides for the automatic exchange of information taxation treaty regarding beneficial ownership. based on the international OECD standard.

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For 2016, effective corporate profits tax rates are (federal, cantonal 3.8 Is there any withholding tax on property rental and communal tax included): payments made to non-residents? ■ Geneva: 24.16%. ■ Lucerne: 12.32%. Switzerland does not levy any WHT on property rental payments, whether paid to a resident or non-resident person. However, to the ■ Zug: 14.60%. extent that the rental payments do not follow the “arm’s length” ■ Zurich: 21.15%. principle, they will be re-qualified as hidden dividends if paid to a shareholder or a related party. As a consequence, such rental 4.2 Is the tax base accounting profit subject to payments would not be deductible for the paying company, and adjustments, or something else? would be subject to the 35% Swiss WHT like any other dividend. Switzerland The tax base is the annual profit as reported in the commercial 3.9 Does your jurisdiction have transfer pricing rules? accounts. This tax base is subject to few adjustments.

One of the general principles governing Swiss corporate income tax 4.3 If the tax base is accounting profit subject to law is the principle of “dealing at arm’s length”. This is particularly adjustments, what are the main adjustments? important as Switzerland does not know the concept of consolidated taxation for corporate income tax purposes. Another important There are three categories of adjustments. First, tax adjustments aiming principle of Swiss tax law is the concept of tax avoidance. Pursuant at ensuring compliance with Swiss mandatory accounting rules; for to this rule, any transaction which, in itself, does not make economic instance, if there is a registration of private expenses of a shareholder sense and which can only be explained with the goal of saving tax, or a fictitious loss. Second, tax adjustments aiming at ensuring may be disregarded. Transfer pricing issues are normally dealt with compliance with the periodicity principle; for instance, if provisions by the Swiss authorities by applying these principles. without commercial justification are created. Third, tax adjustments In addition, in a letter issued in 1997, the FTA instructed the aiming at preserving the system, because Switzerland loses its taxing cantonal authorities that when taxing multinational enterprises, they rights, particularly in case of transfer abroad (liquidation fiction). have to take into account the OECD Transfer Pricing Guidelines. In 2004, it issued a new circular replacing the previously existing one. 4.4 Are there any tax grouping rules? Do these allow The 2004 circular states that the “arm’s length” principle is also for relief in your jurisdiction for losses of overseas applicable when choosing the method of determination of mark-ups, subsidiaries? and that implies for financial services or management functions that “cost plus” is not an appropriate method (or only in very exceptional There are no tax consolidation rules with regard to corporate profit cases). tax. Thus, each company is taxed as a separate taxpayer. Mergers Hence, although there are no explicit Swiss rules on transfer pricing, and other transactions of two or more companies are disregarded if the principles to be observed in Switzerland are similar to those of the only goal is to combine the tax base of the companies involved other OECD Member States. and to set off taxable profits with losses of other companies. With respect to inter-company loans, the FTA publishes yearly, by With regard to VAT, a VAT group consisting of closely associated way of a circular letter, rules regarding safe-haven interest rates legal entities, partnerships and individuals who have their domicile on loans and advances between related parties. Thus, maximum or corporate seat in Switzerland can be treated as a single tax-liable rates are stipulated regarding loans from the shareholders to the entity. As a consequence, intra-VAT group transactions are not company and minimum rates regarding loans from the company to subject to Swiss VAT (even if accounted by the VAT group leader). the shareholders and related parties.

4.5 Do tax losses survive a change of ownership? 4 Tax on Business Operations: General In Switzerland, losses from seven financial and tax years preceding the current tax period may be deducted to the extent they could not 4.1 What is the headline rate of tax on corporate profits? be included in the computation of taxable net profit of those years. This rule applies regardless of the shareholder; thus, tax losses do Corporate profits are taxed at the federal as well as the cantonal survive a change of ownership. level. In case of restructuration, tax losses should survive in principle. If, Corporate profits tax is itself deductible from the taxable corporate through the merger of a parent company and its subsidiary, losses are profits. Therefore, the statutory rates are higher than the effective transferred to the parent company, they may be taken into account, tax rates. even if the parent company has already made depreciation expenses At the federal level, the statutory corporate profits tax rate is 8.5%, on the participation or provided remediation services. corresponding to an effective tax rate of 7.83%. In case of a financial reorganisation scheme, losses lying further back The cantonal tax rate varies from canton to canton. A corporation can also be credited with rescue contributions aimed at equilibrating is liable to corporate profits tax in each canton where it hasa an adverse balance. permanent establishment or a piece of real estate. Some cantons However, this rule does not apply in cases of abuse. If an foresee a progressive tax rate, others foresee a flat rate. In addition economically sound company transfers, by means of contribution in to this initial tax rate, most of the cantons foresee cantonal and kind, all of its operating assets to an over-indebted company without communal tax multipliers. These multipliers vary from year to year any entrepreneurial reason, the operation is considered abusive and depending on the financial needs of the local authorities. the deduction of the losses is not admitted.

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4.6 Is tax imposed at a different rate upon distributed, as 5 Capital Gains opposed to retained, profits?

5.1 Is there a special set of rules for taxing capital gains Whether profits are retained or distributed, they are subject to and losses? the same annual corporate profit tax. In the canton of Appenzell- Innerrhoden, however, distributed profits are taxed at a lower rate With two exceptions, which will be dealt with hereunder at the cantonal level. (participation reduction and replacement of certain assets), there When the company distributes its profits (other than distributions is no special set of rules for taxing capital gains realised by legal from capital contribution reserves – see question 3.1), it must entities. Hence, as a principle, capital gains form part of taxable withhold a 35% withholding tax, which is fully or partly refundable profit; capital losses are tax-deductible. depending on the country of residence of the beneficiary. Switzerland In certain cantons, special rules apply to capital gains arising from the sale of real estate. Such capital gains may be taxed separately 4.7 Are companies subject to any significant taxes not from other income of the company, i.e. regardless of the profit of covered elsewhere in this chapter – e.g. tax on the the company. occupation of property?

5.2 Is there a participation exemption for capital gains? There may be, at the cantonal level, certain other taxes payable depending on the canton. Thus, certain cantons may levy a tax on real estate situated in such cantons. In the canton of Geneva, there is If a corporation realises a capital gain on the sale of a qualifying a “professional tax” which is calculated as a percentage of turnover, participation, it is entitled to a participation reduction. rent paid and number of employees. a. Capital gains for which relief is available The Swiss cantons also levy a so-called capital tax on an annual basis. To qualify for relief on capital gains, a Swiss company must make This tax is based on the corporation’s net equity (i.e. paid-in capital, a profit on the sale of a participation which represents at least 10% open reserves and retained profits). The amount subject to tax may also of the share capital of another company which it has held for at least be increased by the debt re-characterised as equity in the application of one year. the Swiss thin capitalisation rules (see question 3.4 above). The rate of Losses incurred as a result of the sale of qualifying participations tax varies from one canton to another, but it generally does not exceed remain tax-deductible. 1%. Some cantons foresee a different tax rate for holding companies A capital gain is defined as the difference between the proceeds or other tax-privileged companies. For example, in Geneva the from the sale of a qualifying participation and the acquisition cost maximum rate of tax is 0.2% and for holding companies only 0.03%. of the investment. Hence, any amount of previously tax-deductible Again, cantonal and communal multipliers will apply. depreciation or provision on the participation is not taken into The cantons may opt for crediting corporate income taxes to the consideration to calculate the amount of gain which can benefit from capital taxes levied in their territory. Hence, companies generating the relief. In addition, revaluation gains from participations do not enough profit will not have to pay capital tax additionally. Loss- qualify. making or only low profit-making companies continue to be subject Favourable tax treatment is also available for qualifying particip- to capital tax (to some extent). ations transferred to group companies abroad; the group holding or On January 1, 2011, the “licence box rule” in the canton of sub-holding company must be incorporated in Switzerland. Nidwalden entered into force. It means that the net licensing b. Calculation of tax relief income resulting from the right to use intellectual property (“IP”) Companies with qualifying capital gains may reduce their corporate rights will be taxed separately at an overall effective 8.8% tax income tax by reference to the ratio between net earnings on such rate. The licence box rule only applies for companies having their participations and total net profit. The following formula must be domicile or branch in the canton of Nidwalden, and is only granted applied in each tax period, to determine the amount of the tax relief upon request. available: On June 17, 2016, the Swiss parliament adopted the Corporate Tax relief = A × B / C Tax Reform Act III. The Reform aimed at strengthening the tax competitiveness of Switzerland and resolving the tax dispute with Where: the EU, as well as aligning with the standards resulting from the A = corporate income tax; new OECD principles. For that purpose, the reform included the B = net qualifying capital gain; and abolition of the special tax status of holding, domiciliary, mixed and C = total net profit. principal companies as well as of Swiss finance branches; along with a low taxation of profits generated from assets and goodwill The amount of net qualifying capital gain is determined as follows: that had so far benefitted from the special status treatment, fora = gross qualifying capital gain – (financing costs + administrative limited duration of five years. Concomitantly, various measures costs). had been designed to maintain the attractiveness of the Swiss Tax Financing costs are defined as interest on loans and other costs which System, and many cantons had announced a significant ordinary are economically equivalent thereto. They are generally attributed corporate tax income rate reduction. to qualifying capital gains by reference to the ratio between the book However, the Reform project was submitted to popular vote and value of the qualifying participation and total assets. dismissed by Swiss voters on February 12, 2017. A replacement Administrative costs are usually fixed at 5% of gross dividend project, called Projet fiscal 17, is currently under development. income (unless actual proven administration costs are lower).

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exempted). A Swiss permanent establishment of a non-Swiss 5.3 Is there any special relief for reinvestment? headquarters is taxed in Switzerland on the profit and equity allocated to such permanent establishment, usually following the According to the provisions of the Merger Law, a company can accounts of such permanent establishment. transfer certain business assets and investments to Swiss group The issuance of nominal capital of a resident subsidiary and any companies without realising capital gains. Hence, hidden reserves contribution to the equity of a resident subsidiary is subject available on such assets can be rolled over also for tax purposes. In to issuance stamp tax at 1% (a threshold of CHF 1 million for addition, in some cantons, hidden reserves available on real estate capital increases applies), whereas equity allocated to a permanent can be rolled over to a new piece of real estate replacing the original establishment is not subject to issuance stamp tax. piece sold (i.e. the capital gain is not taxed, but can be deferred for tax purposes in the case of replacement of certain pieces of real A resident subsidiary whose assets, as per the last balance sheet,

Switzerland estate). Finally, in the canton of Geneva, the gain realised on real consist of taxable securities in excess of CHF 10 million, qualifies as estate is subject to the special tax, but the amount is then credited a stockbroker liable to transfer stamp tax on the transfer of securities against the tax on corporate profits. where he acts as an intermediary or party to such transaction (see the Cantons that subject corporations to this special tax foresee the tax answer to question 2.1). Branches do not qualify as stockbrokers deferral on real estate by analogy to the generally applicable set of merely by holding taxable shares. rules. Therefore, the tax deferral is available whether or not the A withholding tax is imposed on dividends paid by a resident capital gain is taxed according to the special tax or the corporate subsidiary, whereas no such withholding tax applies on profit profit tax. repatriations to the non-Swiss head office for branches. A taxation of a capital gain generated by the sale of a non-current In contrast to resident subsidiaries, branches are not entitled to business can be postponed if a replacement asset is acquired that can invoke tax treaties, since branches are not considered to be resident be depreciated accordingly. The same applies for shareholdings of in Switzerland, pursuant to Swiss domestic law (see also the answer at least 10% held for at least one year. In this context, however, the to question 6.5). participation reduction may apply alternatively.

Finally, capital losses are recognised immediately, whether or not 6.3 How would the taxable profits of a local branch be the company acquires similar assets in replacement. determined in its jurisdiction?

5.4 Does your jurisdiction impose withholding tax on the A foreign entity is liable to Swiss corporate profit tax on profits and proceeds of selling a direct or indirect interest in local equity attributable to the Swiss permanent establishment. In general, assets/shares? taxable income of permanent establishments is determined on the basis of its separate financial statements as if it were a corporate Switzerland does not levy WHT on the proceeds of selling a direct entity separate from its head office (direct method). or indirect interest in local assets or shares. In the past, the indirect method was preferred for both the determination of taxable income/capital of domestic permanent 6 Local Branch or Subsidiary? establishments of foreign companies and of taxable income/capital of foreign permanent establishments of Swiss companies. Accordingly, Swiss double taxation treaties normally contain a corresponding 6.1 What taxes (e.g. capital duty) would be imposed upon reservation in favour of the indirect method. the formation of a subsidiary? Special rules apply with respect to the profit allocation of permanent establishments of banks and insurance companies. Securities issuance stamp tax is levied upon the creation or increase A branch is subject to the same profits tax and capital tax as a Swiss of the par value of participation rights (see question 2.1 above). The company, i.e. there is no special branch profits tax. There is no participation right can take the form of shares of Swiss corporations, withholding tax or other special tax on profit repatriations from the limited liability companies (“LLCs”), co-operatives, as well as profit branch to its head office. sharing certificates and participation certificates. A contribution to the reserves of the company (even though the share capital is not increased) made by the shareholders, as well as the transfer of 6.4 Would a branch benefit from double tax relief in its the majority of shares of a Swiss company that is economically jurisdiction? liquidated, are also subject to the tax. The securities issuance stamp tax is levied at a flat rate of 1%. It is only levied to the extent that the A branch would not benefit from any tax provisions of tax treaties share capital of the company exceeds CHF 1 million. Special rules entered into by Switzerland, as it is not a resident of Switzerland apply when shares are newly issued in the course of reorganisations, pursuant to Swiss domestic law. mergers, spin-offs and similar transactions. Such types of transaction are normally exempt from the 1% tax. 6.5 Would any withholding tax or other similar tax be Securities issuance tax is not levied on the capital allocated to a imposed as the result of a remittance of profits by the branch. branch?

The remittance of profits by a Swiss branch to a foreign head office 6.2 Is there a difference between the taxation of a local is not subject to withholding tax or any other tax. subsidiary and a local branch of a non-resident company (for example, a branch profits tax)?

A resident subsidiary is taxed on its profit and equity (income allocated to foreign permanent establishments and real estate are

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period. Both residents and non-residents are subject to this tax on 7 Overseas Profits the disposal of real estate. At the federal level, the capital gain resulting from the disposal of 7.1 Does your jurisdiction tax profits earned in overseas commercial real estate in Switzerland is only subject to the ordinary branches? tax on benefits. A taxable gain at the federal level, however, occurs where the real estate sold has been held by a corporate non- Swiss tax law generally provides for the exemption of profits resident or where the real estate formed part of the Swiss permanent generated in non-Swiss enterprises, permanent establishments and establishment of a non-Swiss-resident individual. related to real estate located abroad.

A Swiss enterprise may compensate losses of a permanent 8.2 Does your jurisdiction impose tax on the transfer of

establishment abroad with profits generated in Switzerland if the an indirect interest in commercial real estate in your Switzerland State in which the establishment is located has not already taken jurisdiction? account of those losses for tax purposes. As soon as assumed losses can be offset in the non-Swiss branch, the Swiss corporate income In most cantons, a formal transfer of real estate, commercial or tax basis is increased accordingly. The provisions of the tax treaties otherwise, is subject not only to the Real Estate Transfer Tax, but remain applicable. also to a so-called “economic change of ownership” which is the case when shares in a real estate company are transferred. 7.2 Is tax imposed on the receipt of dividends by a local An economic change of ownership does also trigger the taxation of company from a non-resident company? the capital gains in the same way as the direct transfer of real estate (with either the special tax or the ordinary tax on benefits). The taxation of dividends received will depend on the importance of In most of the cantons, only the transfer of all or the majority of shares the participation held. in a real estate company triggers taxation. However, some cantons do At the federal and cantonal levels, the participation reduction also tax the transfer of minority holdings (e.g. the canton of Geneva). regime applies, so that the effective tax rate applicable to the dividends received is proportionately reduced as per the ratio of 8.3 Does your jurisdiction have a special tax regime the net dividend income over the total net taxable income, provided for Real Estate Investment Trusts (REITs) or their the local company holds at least 10% of the participation or equivalent? participation rights with a market value of at least CHF 1 million (see also question 5.2 above). Switzerland does not have a special tax regime for REITs. At the cantonal level only, privileged tax status as a holding Special rules, however, exist for Swiss real estate funds with direct company is available in cases where the participation or the income ownership of real estate. In general, collective investment of capital therefrom represents at least two-thirds of the total assets or of the is treated as transparent. Therefore, the income and capital of the income. Such holding companies (without commercial activity in funds are directly attributed to investors. As to real estate funds with Switzerland) do not pay profit tax at the cantonal level. The special direct ownership of real estate, the fund is treated as non-transparent status of holding companies might be abolished sometime in the with respect to income generated from direct ownership of Swiss real future due to Projet fiscal 17 (see question 4.7 above). estate. Income arising from real estate is therefore attributed to the fund as a taxable legal person and taxed under corporate income tax. 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? 9 Anti-avoidance and Compliance Switzerland does not have “controlled foreign company” rules. 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? 8 Taxation of Commercial Real Estate In Switzerland, there are very few written and specific anti-avoidance 8.1 Are non-residents taxed on the disposal of rules, but it is the general principle of abuse of law or tax avoidance commercial real estate in your jurisdiction? that applies. In order to remove the uncertainties regarding the tax consequences of a planned transaction (the abuse of law concept is The transfer of Swiss-situated real estate, commercial or otherwise, very large), the taxpayer may request an advance tax ruling. The is regularly subject to a cantonal or communal Real Estate Transfer tax administrations are prepared to discuss, in advance, specific Tax. The applicable tax rates vary from canton to canton. Normally questions (law or facts) on taxation. While doing this, the tax they range between 1% and 3% of the transfer value of the real consequences of the planned activities can be defined in a binding estate. However, some cantons do not levy this transfer tax (e.g. tax ruling – the principle of protection of good faith applies. the canton of Zurich). Both residents and non-residents are subject to this tax. 9.2 Is there a requirement to make special disclosure of Further, the capital gain resulting from the disposal of real estate in avoidance schemes? Switzerland is subject either to a special tax on real estate capital gains or to the ordinary tax on benefits. The cantons are free to Tax planning is generally admitted by Swiss tax law provided that choose one or the other taxation method for cantonal and communal the taxpayer does not commit an abuse of law or tax avoidance tax purposes. The cantons choosing the special tax on real estate (which is not a criminal offence). According to the tax avoidance capital gains generally set an increasing tax scale relating to the concept, a structure or a transaction may be disregarded and the tax amount of the capital gain, but decreasing relating to the holding treatment assessed according to the economic situation underlying

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the transaction, as long as the following three cumulative conditions are met: i) the form chosen by the taxpayer is unusual; ii) the form 10 BEPS and Tax Competition has been chosen only for tax purposes (tax savings); and iii) the taxpayer would make significant tax savings in the hypothesis in 10.1 Has your jurisdiction introduced any legislation which the structure was recognised by the tax authorities. Provided in response to the OECD’s project targeting Base that these three conditions are met, the tax authorities disregard the Erosion and Profit Shifting (BEPS)? form chosen and used by the taxpayer, and re-qualify the transaction from an economic point of view. This approach is very similar to As outlined above (question 4.7), Switzerland had elaborated the the “substance over form” theory. In addition to that, even though Corporate Tax Reform Act III. The reform aimed to strengthen the the form is not abusive, the tax authorities may disregard it in cases international acceptance of the Swiss tax system by repealing a few where the tax law explicitly refers to economic concepts (e.g. the special tax regimes. However, the Reform project was dismissed by Switzerland concept of fringe benefits). Swiss voters on February 12, 2017. On November 19, 2014, Switzerland signed the Multilateral 9.3 Does your jurisdiction have rules which target not only Competent Authority Agreement (“MCAA”), which is based on taxpayers engaging in tax avoidance but also anyone the idea of uniform implementation of the OECD’s automatic who promotes, enables or facilitates the tax avoidance? exchange of information standard. Pursuant to this, Switzerland has adopted the Federal Act on the International Automatic Exchange It should be noted that tax avoidance, which is described as the of Information in Tax Matters. The first automatic exchange of choice of an unusual, inadequate or abnormal structure or transaction information will take place in 2018. made for the sole purpose of saving taxes, is not a punishable The Ordinance project on the International Automatic Exchange offence under Swiss law. The taxpayer will merely be asked to pay of Information in Tax Matters, applicable as of January 1, 2017, taxes in accordance with the economic substance of the structure or implements BEPS Action 5 and provides that applicable advanced transaction (including possible late interest). tax rulings delivered after January 1, 2010, will be exchanged. On the other hand, tax evasion (the non-disclosure of taxable items) On June 7, 2017, Switzerland signed the MLI (see questions 1.1 and and tax fraud (the use of forged, falsified or inaccurate documents) 1.4 above). are both criminal offences. Tax evasion may result in a fine for the taxpayer. The representative of a taxpayer who instigates, assists, commits or participates in tax evasion may also be fined, 10.2 Does your jurisdiction intend to adopt any legislation irrespective of the fine incurred by the taxpayer, and may be jointly to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports? and severally liable for the unpaid tax. Tax fraud is punishable by fine or imprisonment; anyone who instigates or participates as an accomplice of the taxpayer may also be punished. None of Switzerland’s foreseeable legislative reforms intends to go beyond what is recommended in the OECD’s BEPS reports.

9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural 10.3 Does your jurisdiction support public Country-by- benefits only or result in a reduction of tax? Country Reporting (CBCR)?

While there is no normalised programme for co-operative compliance The Swiss Federal Act on the International Automatic Exchange of in Switzerland, co-operation between taxpayers and tax authorities Country-by-Country Reports of Multinationals was approved by the is excellent. In particular, a taxpayer may request a tax ruling to Swiss parliament on June 16, 2017. The Act provides that the data clarify the tax consequences of a planned structure or transaction. is directed exclusively at tax authorities and will not be published. This possibility derives from the practice of the tax authorities, as If a referendum is not held, the Act could enter into force at the end Swiss law does not refer to tax rulings (with the exception of Article of 2017. Multinationals in Switzerland would have to draw up a 69 of the VAT Act). country-by-country report for the first time for the 2018 tax year, and the exchange of reports could take place starting from 2020. A tax ruling is not intended to result in a reduction of tax, but to provide legal certainty regarding the application of the law. In accordance with the principle of protection of good faith, a tax 10.4 Does your jurisdiction maintain any preferential tax ruling is binding upon the tax authorities if certain criteria are met. regimes such as a patent box?

Currently, Switzerland maintains preferential profit taxation for holding companies, domiciliary companies and mixed companies. However, there are plans to abolish these regimes sometime in the future (see question 4.7 above). Replacement measures could include a patent box, mandatory for all cantons. Currently, only the canton of Nidwalden has included a patent box, a system applicable at a cantonal level only.

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Pascal Hinny Jean-Blaise Eckert Lenz & Staehelin Lenz & Staehelin Brandschenkestrasse 24 Route de Chêne 30 8027 Zurich 1211 Geneva 6 Switzerland Switzerland

Tel: +41 58 450 80 00 Tel: +41 58 450 70 00 Email: [email protected] Email: [email protected] URL: www.lenzstaehelin.com URL: www.lenzstaehelin.com

Prof. Pascal Hinny is a specialist in the field of national and Jean-Blaise Eckert’s practice covers private client, tax, contracts and international tax planning for multinational groups of companies commercial issues. Switzerland (including M&A, restructurings, recapitalisation, financing, relocation Jean-Blaise studied Law at the University of Neuchâtel and was and private equity). He advises regularly on international and domestic admitted to the Bar of Neuchâtel in 1989 and to the Bar of Geneva transactions, including public tender offers and private equity buy-outs. in 1991. He studied Business Administration at Berkeley’s Haas Pascal studied law at the University of St. Gallen, where he also Business School in the US, where he acquired an MBA in 1991. He gained his Ph.D. degree on his thesis: “Tax treatment of trademarks acquired a diploma as a Certified Tax Expert in 1994. He is considered in a multinational group of companies”. He is a lawyer and certified a leading lawyer in Switzerland. tax expert. He holds an LL.M. degree from the London School of Jean-Blaise advises a number of multinational groups of companies Economics. Since 2002 he has been a full professor of tax law at the as well as high-net-worth individuals. He sits on the boards of University of Fribourg and currently chairs the Swiss Association of a number of public and private companies. He was nominated by Tax Law Professors and the D-A-CH (Germany-Austria-Switzerland) Chambers in 2016 as a leading individual in tax. He is a frequent tax expert group, Berlin. He is a member of the International Fiscal speaker at professional conferences on tax matters. He also teaches Association (“IFA”) Permanent Scientific Committee. in the Master’s programmes of the University of Lausanne. He is the Secretary General of the International Fiscal Association (“IFA”). Jean-Blaise speaks English, French and German.

With over 200 lawyers and offices located in Geneva, Zurich and Lausanne, Lenz & Staehelin is the largest law firm in Switzerland. It has a long tradition of international practice and is ranked amongst the leading firms in all areas of business law. Its clients include national and foreign individuals and corporations, based either in Switzerland or abroad. Fully independent, Lenz & Staehelin has developed successful and long- standing relationships with leading foreign law firms; thus it is ideally positioned to assist clients in cross-border transactions. The firm is known for its high professional standards, in particular for its dedication to providing clients with personalised advice and for the degree of excellence required from its people. Lenz & Staehelin provides legal advice in English, French, German, Italian, Russian and Spanish.

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Turkey Murat Bal

K&D Law Firm Ezgi Kumas

which are approved by the Parliament and published in the official 1 Tax Treaties and Residence gazzette have the same power as our local legislation. Technically, the Parliament cannot approve a new code which is against the 1.1 How many income tax treaties are currently in force in international agreements which are approved by the Parliament. your jurisdiction? If there is a conflict between local legislation and an international agreement, the Court applies the provisions of whichever is more Turkey has concluded the treaty on the prevention of double taxation general to the other. with a total of 82 countries (as of 21 January 2016). 1.6 What is the test in domestic law for determining the 1.2 Do they generally follow the OECD Model Convention residence of a company? or another model? In Turkey, the criteria for determining the place of residence of a The tax treaties to which Turkey is a party generally follow person are different to those required for a company. The place the OECD model and framework. The model that Turkey has where a person has resided for more than six months in a year is predominantly used is that of the treaty on the prevention of double accepted as an abode. If a person has resided there for less than six taxation. The double taxation issue is avoided by mutual treaties months, the withholding that is cut back on their personal income between countries. Non-residents that have no treaties on the is the ultimate tax. They also do not have to submit an income tax prevention of double taxation in their own countries are subject to return. The territoriality principle is adopted in Turkey with regard our domestic law. Income such as taxed interest through withholding to companies. Companies in Turkey are established via registration and dividends is deducted from the income in the country where it and publication in the trade registry gazette within the scope of the is obtained. Turkish Commercial Code, and all companies that are registered and declared in Turkey are accepted as Turkish companies. Being a foreign-partner company does not make it a foreign 1.3 Do treaties have to be incorporated into domestic law before they take effect? company. A resident company abroad can open a representative company provided that it is a 100% partner. Companies to be opened in Turkey are subject to Turkish laws and taxation on the After being signed, tax treaties enter into force through ratification income that they earn in Turkey. The withholding that is cut back by the Grand National Assembly of Turkey and through publication on the income that non-resident companies earn is the ultimate tax. in the official gazette. They also do not have to submit an income tax return.

1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? 2 Transaction Taxes

Turkey has no general policy on anti-treaty shopping rules in terms 2.1 Are there any documentary taxes in your jurisdiction? of the treaties on the prevention of double taxation that go beyond the rules in the OECD Model Convention. Although we do not have regulations on this issue, Turkish courts can decide against the With regard to the Turkish Stamp Duty Act, the provisions that actions of the abuse of the right. are subject to stamp duty are detailed by the tables contained therein. As an example, lease agreements, collaterals, assignments, mortgages, and purchase and sale contracts are taxed in terms of 1.5 Are treaties overridden by any rules of domestic the provisions of the Stamp Duty Act. Therewith the taxation rate law (whether existing when the treaty takes effect or varies between 0.5% and 1%. Even though there can be a provision introduced subsequently)? to the contrary in the treaties in Turkey, parties are severally liable for the stamp duty. Accordingly, the state can collect the duty from International agreements are first signed by the Cabinets of Ministers one of the parties. However, parties can retract the stamp duty from and approved by the Turkish Parliament. After the Parliament has one another within the scope of agreement. The tax is paid when approved the international agreement, it is published in the official one of the parties pays its costs. gazzette and enters into force. The international agreements

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2.2 Do you have Value Added Tax (or a similar tax)? If so, 2.6 Are there any other transaction taxes payable by at what rate or rates? companies?

Value Added Tax in Turkey is levied on a deduction basis. It is The cost denoted for the purchase and sale of real estate in Turkey calculated monthly. The stamp duty collected is deducted from the shall be its real price. If the actual transaction price is lower than VAT that has been paid to make collections. If a person paid more, the real estate tax displayed by the municipality, the sale will be it is transferred to the next month. If a person is paid more, this is calculated on the real amount, even if the title deed is based on the paid to the state as from that month. municipal estate tax levy. The general rate of the title deed is 2% per VAT is charged on an accrual basis for delivery of goods and recipient and 2% per seller, giving a total of 4%. Turkey services. Accordingly, even if the remuneration for the delivery of If real estate remains in the company assets for more than two years, goods and services that are submitted to the opposite party is not without considering the purchase price, it is excluded from VAT and paid, the VAT is paid. corporate tax on the sale price. However, real estate which remains The VAT is applied in Turkey. The general rate is 18%. However, the in the company assets for less than two years and subject to the sale, rate for products such as beverages, cigarettes and jewellery is 0%. is evaluated within the scope of general provisions. The rate for products such as bread, the wholesale meat trade, flour, In terms of real estate as company assets and within the scope of the books and magazines is 1%. In addition, the rate for services such as table based on the location and technical properties of the real estate, retail, the food trade, textiles and hotel accommodation is 8%. the real estate tax is levied no matter which kind of building it is, such as land, simple, featured or factory. The tax is levied around the changing rate of 0.001–0.006% over the value of the real estate. 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? 2.7 Are there any other indirect taxes of which we should There are some exceptions for Value Added Tax in Turkey. The be aware? most important of these is the exception applied in the banking and finance sector. Banking and insurance transaction taxes apply nearly The bank insurance transaction tax is levied at 5% on banking, the same tax procedure and VAT base. Technically, the operation finance and insurance activities. It is an indirect tax for all income- system of this tax is the same as that of VAT. However, it is applied generating activities. In addition, excise duty, which has a very high in the banking and finance sector. It is not deducted from the VAT rate compared to other taxes, is levied mostly on fuel and alcohol, applied in other sectors. cigarette products and vehicle sales. In Turkey, there is a reverse-charge VAT regime. This regime is applied to real estate leased from the state or vehicles rented from a 3 Cross-border Payments person. Accordingly, a company pays VAT to the state by “cutting through” withholding during the payment procedure. Aside from real estate that is leased and entered into the assets, there 3.1 Is any withholding tax imposed on dividends paid by is an exception for real estate leased from persons. Excluding only a locally resident company to a non-resident? car rental companies, VAT paid during sales of vehicles is definitely not subject to the deduction. In addition, there is a VAT exception In Turkey, withholding tax is levied at 16.5% on dividends paid for transportation services during importation into Turkey and by a local company to non-residents. Within the scope of double exportation from Turkey. taxation treaties, it can be deducted from the income tax payable in its own state. It is not deducted in countries which do not have any double taxation treaty. In addition, this payment made to non- 2.4 Is it always fully recoverable by all businesses? If not, residents is qualified as an ultimate tax in Turkey. what are the relevant restrictions?

VAT is not paid for purchasing goods and services excluded from 3.2 Would there be any withholding tax on royalties paid the VAT. However, providing that it is in the period of VAT paid via by a local company to a non-resident? withholding, goods and services supplied through withholding are not included in the VAT accounts. The general withholding rate is 20% in Turkey. However, the detention rate of withholding arising from the copyright is 10%. The royalty paid to non-residents is subject to the withholding tax at 2.5 Does your jurisdiction permit “establishment only” 10%. The withholding in return on the payment to non-residents is VAT grouping, such as that applied by Sweden in the Skandia case? evaluated as an ultimate tax.

Without considering the company type as a group, individual or 3.3 Would there be any withholding tax on interest paid holding company, each of them settles accounts within the company by a local company to a non-resident? structure. Being an affiliate or subsidiary partnership does not give a company the right to link between their own and another There is no difference between interest paid by a local company company’s VAT accounts. Moreover, the companies bill one another to non-residents and that which is paid to residents. The interest fictitiously in order to make a monthly VAT balance between group payment in this regard is considered as company income and companies. However, this is a matter to which the administration is subject to the taxation regime paid via the company income. pays close attention. There is an application of tax value for matters The VAT is calculated on the interest income obtained during the of content and pricing of interrupted invoices. The cost of the goods generation of the income. and services cannot be signally lower or higher than the average of the cost of the goods and services paid out of the group.

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charge or price determined against the “arm’s length” principle, the 3.4 Would relief for interest so paid be restricted by income is totally or partially assumed to be distributed privately via reference to “thin capitalisation” rules? transfer pricing. Equal value is determined via methods such as comparable price, “cost plus” and the resale price method. The Corporate Tax Law introduced the principle of equal value for provision between the company partners or authorised signatories and their partner, with the procedure covering descendants and 4 Tax on Business Operations: General third-degree relatives by blood and by marriage. Accordingly, it is not accepted to make provisions to a higher or lower degree than equal value, and equal value shall be applied. The difference is not 4.1 What is the headline rate of tax on corporate profits?

Turkey taken into consideration when a concealed gain or concealed capital is understood to exist. In Turkey, the rate of corporate tax is 20%. The time between 1 January and 31 December is accepted as an annual period, but the three-month period is calculated by each amount within it being 3.5 If so, is there a “safe harbour” by reference to which collected from annual income tax. It is called a temporary corporate tax relief is assured? tax. The periods are 1 January – 31 March, 1 April – 30 June, 1 July – 30 September and 1 October – 31 December. There is no With regard to corporate tax, the non-capital resources that companies exception for the lower or upper limit. use from their partners do not pose any problems. However, the debts of companies to their partners are evaluated within the scope of concealed capital transfer and subject to taxation at the rate of the 4.2 Is the tax base accounting profit subject to withholding applied to the interest income calculated on the money adjustments, or something else? transmitted. Companies are supposed to keep books according to the commercial law rules. In Turkey, the accounting profits within the scope of 3.6 Would any such rules extend to debt advanced by a accepted accounting rules are taken as a basis to determine the third party but guaranteed by a parent company? tax base. The accounting profits are in some cases arranged in accordance with the provisions outlined in question 4.3 below. In terms of Trade Law, the given surety is valid. Without taking into consideration whether a company is a parent or subsidiary company, the surety to be given is obligatory. However, in terms of companies 4.3 If the tax base is accounting profit subject to subject to the Capital Market Law and the tax acts, significantly adjustments, what are the main adjustments? lower or higher interest rates are charged than on their counterparts; but in other companies, at least the imputed rate of interest is taxed Companies’ ordinary revenue, extraordinary revenue and profit over the rate of interest decided between the parties. revenue, and that which is obtained from other activities, are included in the income table in accordance with the international accounting standards. The gross income is figured out by deducting the expenses 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- and losses in the criteria that the international accounting standards resident? have decided, and then the net profit is calculated by making the corporate tax application. Turkish uniform accounting plans and There are no restrictions on tax-deductibility of interest to non- applications generally match up with the international accounting residents. Without considering whether it is taxed abroad or not, standards. the withholding to be cut back on the payment of interest paid to The main arrangements are composed of the following: non-residents is the ultimate tax. ■ Calculation of the revenues and profits obtained from ordinary or extraordinary activities. 3.8 Is there any withholding tax on property rental ■ Tax-free income (dividend income, profit sharing). payments made to non-residents? ■ Those expenses not accepted for determining the tax basis (annual vehicle tax, etc.). This issue depends on whether the leaseholder is a person or a ■ By amortisation application, it is within the bounds of company. In Turkey, withholding on freeholds leased for commercial possibility to write off values below 750 TRY directly activities is cut back by the leaseholder, and is declared and paid by without amortisation, even if it is an economic asset subject the leaseholder. For non-commercial housing leases, if the owner is a to amortisation as well as international standards. person, neither the leaseholder nor the lessees make any withholding payment. However, if the lessor-owner does not have any other 4.4 Are there any tax grouping rules? Do these allow commercial activity, he shall submit a declaration for the income for relief in your jurisdiction for losses of overseas obtained from the real estate twice a year. If the person has any other subsidiaries? commercial or independent business activities, they are included on the income tax return, to be evaluated with his other income. On condition In Turkey, there is no taxation grouping system. Each company is that the leaseholder is a company, it is transmitted to the accounts like subject to taxation by its own calculation in itself. Profit-sharing the company’s other income. It is subject to an 18% VAT rate. and dividend payments that group companies make to one another are evaluated as a tax exception because they are taxed as their own company. 3.9 Does your jurisdiction have transfer pricing rules? As a main principle in the Turkish taxation system, the equal value According to the Corporate Tax Law, on condition that the institutions application is also valid in this case. No provision shall be signally buy and sell goods and services with the related persons over the lower or higher at “arm’s length”.

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Generally, the Turkish tax administration allows the losses of subsidiaries, including subsidiary companies, to be written off. 5.2 Is there a participation exemption for capital gains? However, in recent years, the Turkish jurisdiction has given negative rulings. Legally obligated persons or corporations are taxed on the net profit remaining after revising the variance between the quantity that the shares acquire and the price at which they sell, at the rate of the 4.5 Do tax losses survive a change of ownership? wholesale and consumer price index. The rest of the profit is not covered by the exemption; 11,000.00 TRY of such profit which falls In Turkey, even if the company partnership is changed, the tax debt within the scope of the exemption for 2017 is subject to taxation. is (ne varietur) devolved to the new parties. Only the responsibility However, there is no VAT exemption for companies that exclusively for the amount of tax debt is connected to the company share carry on the business of transferring shares. Turkey proportion. However, the signatory person is responsible with all his patrimony without taking into consideration whether he is a partner or not. The signatory can retract the tax debt from the 5.3 Is there any special relief for reinvestment? company partners after collection. In Turkey, the corporate tax is determined at various rates according to the development level of the region of investment. Accordingly, 4.6 Is tax imposed at a different rate upon distributed, as there is a scale extending from the underdeveloped cities to the opposed to retained, profits? highly developed, larger cities. This exemption may be extended up to five years according to the development level of the region of In the Turkish taxation system, retained earnings are not subject to investment. There is a lack of clarity due to the revision of these any tax. At the moment that the profits are shared, they are subject rates and regions for each year. to withholding at the rate of 16%. However, provided that the commission of the company partnership has made a decision for the retained earnings to be added to the capital, and that this decision is 5.4 Does your jurisdiction impose withholding tax on the then declared and published accordingly in the commercial registry proceeds of selling a direct or indirect interest in local gazette, this provision is not counted as profit sharing in terms of assets/shares? the tax laws, and the withholding at the rate of 16.5% will not be paid. Profits that are placed in the company statement but not shared Income generated from the stock exchange is not subject to any and not added accordingly to the capital, under any circumstances withholding. That which is generated from a legally obligated whatsoever, if they are transferred to any other account, will be person or corporation is exempted from corporate tax, but profit accepted as profit sharing and subject to withholding. sharing made to a legally obligated natural person or limited taxpayer is subject to withholding at the rate of 15% (this deduction is the ultimate tax in terms of limited taxpayer corporations). Half 4.7 Are companies subject to any significant taxes not of the proportion exceeding 30,000 TRY of the dividend income is covered elsewhere in this chapter – e.g. tax on the declared by annual return. In this declaration, the withholding made occupation of property? by the company is deducted from this tax. For immovable properties, provided that the time period of five years has passed, whatever the purchase price is, the whole of the sales 6 Local Branch or Subsidiary? price is tax-exempt. If the immovables are registered in the name of the company, provided that it will remain in the company assets for at least two years, whatever the purchase price is, the whole of 6.1 What taxes (e.g. capital duty) would be imposed upon the sales price is immune from VAT and corporate tax. However, if the formation of a subsidiary? it is subject to sale, the purchase and sales price is subject to the tax evaluated via the cost method, in accordance with the international In Turkey, as regards the formation of a subsidiary partnership, after accounting standards. the decision is made by the authorised bodies of the company, the procedure is the same as if a normal company were being established.

5 Capital Gains 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident 5.1 Is there a special set of rules for taxing capital gains company (for example, a branch profits tax)? and losses? The taxational difference between a subsidiary company established There are special rules for taxing capital gains and losses. There in Turkey and the branch of a company whose main branch is are two methods for using company resources at the rate of profit on abroad, is that the profit generated by the branch is taxed with the partnership shares of the company partners. The first is sharing the withholding, and this is the ultimate tax. advance dividend. The second is profit sharing. However, in this case, sharing the advance dividend is not possible in terms of the 6.3 How would the taxable profits of a local branch be advance tax if the company loses money or makes less profit than in determined in its jurisdiction? the previous term. As regards the profit share, there is no deduction of withholding under the related articles of the Income Tax Law. The tax base is reached after deductions have been made as This makes sharing the advance dividend more advantageous than applicable in the tax legislation to determine the taxable income. normal dividend distribution, but as the corporate tax is calculated The accrual is provided over the tax base attained. Afterwards, in at the end of the year, the withholding of the payment made from the the review to be carried out by the tax administration, if a report advance dividend is deducted altogether. about lowering the tax base by making unfair discounts is drawn up,

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the case of stay of execution and cancellation of the request may be Likewise, there is no difference for residents and non-residents in sued at the Tax Court in order to be able to cancel it. In this case, it terms of the profit and transaction taxes that arise from the savings can be determined by the Court with regards to the determination of on these properties. However, the differences in limited liability the taxable income. The part of tax audit reports sent to the court in for tax relating to foreign earnings, are also valid for combined real Turkey is cancelled at the rate of 90%. property earnings. In terms of the foreign exchange regime, the transfer of profit on 6.4 Would a branch benefit from double tax relief in its sale is not subject to restriction, provided that both the rental income jurisdiction? and taxational charges are carried out.

Turkey The branches of legally obligated corporations are not exclusively 8.2 Does your jurisdiction impose tax on the transfer of taxed. The consolidated balance method is valid. They are subject an indirect interest in commercial real estate in your to taxation through this, by collecting the profits and losses of all jurisdiction? branches. In the tax regime in Turkey, the real property is subject to taxation 6.5 Would any withholding tax or other similar tax be when it is sold. As the real property is in the company assets (not imposed as the result of a remittance of profits by the yet sold), the increases in the value of real property are not subject branch? to tax in any way.

Branches are not subject to taxation on their own. 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent? 7 Overseas Profits Real property investment trusts are exempted from corporate tax, 7.1 Does your jurisdiction tax profits earned in overseas no matter the size of the partnership. In addition, the dividends to branches? be shared among the partners of real property investment trusts are exempted at the rate of 100%. With respect to the agreement on the prevention of double taxation, if the profits generated in branches abroad are subject to taxin 9 Anti-avoidance and Compliance the country in which they are generated, they are exempted from taxation in Turkey. However, if they are subject to tax in Turkey, they are taxed here accordingly. 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? As in every country, tax evasion is considered a crime in Turkey. However, tax avoidance via the exemptions, exceptions or other ways With respect to the agreement on the prevention of double taxation, allowed by the tax legislation, does not constitute a crime. Within if the profits generated in branches abroad are subject to the tax in this scope, any question such as “Where did you find this money?” the country in which they are generated, they are exempted from may be asked in Turkey. If the outlays are not earned via any action taxation in Turkey. However, if they are subject to tax in Turkey, (terrorism, drug trafficking, gambling, etc.) constituting a crime, they are taxed here accordingly. there is no sanction for the possession, transfer or disbursement of money. In particular, the third article titled “The application of Tax Laws and Proof” within our tax procedure law plays an important 7.3 Does your jurisdiction have “controlled foreign role as a rule preventing tax avoidance in cases of special conditions company” rules and, if so, when do these apply? such as treaty shopping and other possible abuses.

There is no such rule in the Turkish judicial system. 9.2 Is there a requirement to make special disclosure of avoidance schemes? 8 Taxation of Commercial Real Estate There is no rule on disclosing the avoidance of tax. Only revealing someone’s taxational secrecy to any third person without consent, 8.1 Are non-residents taxed on the disposal of does not constitute a crime in terms of tax laws. commercial real estate in your jurisdiction?

Foreign natural and legal persons may acquire immovable properties 9.3 Does your jurisdiction have rules which target not within the boundaries of the Turkish Republic on condition that they only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax shall be mutual and that the legal limits are adhered to. According to avoidance? the reciprocity principle, the law enforced for Turkish citizens and companies is also valid for foreigners. Among the types of smuggling, one of the most commonly used Taxes arising during the execution of real property of foreigners methods is tax evasion by means of accounting and account fraud. are the same as the taxes that non-residents in Turkey pay for real The frauds used on accounts related to income and expenses, and property execution. A non-resident company is subject to tax at the assets and equities, are carried out by fraudulent transactions such rate of 0% on the profit calculated within the scope of international as mathematical operation frauds, register and transfer faults. The accounting standards over the cost value in the sale of real property. purpose here is to prevent accurate taxation by preventing the

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emergence of real bases. The first of the actions included in the On the other hand, the countries that constitute the majority have scope of Tax Procedure Law Article 359/b, is the action to destroy not yet taken any steps and the OECD’s approach to this issue is that books, records and documents. where countries make arrangements on their own, this may affect In Turkey, tax auditing transactions are carried out through central cooperation among the countries negatively. and provincial organisation audit units under the Ministry of Finance. Meeting all aims and purposes related to tax auditing 10.2 Does your jurisdiction intend to adopt any legislation for the tax administration primarily necessitates the setting of an to tackle BEPS which goes beyond what is underlying course and making a plan. Besides, tax auditing has recommended in the OECD’s BEPS reports? a detective aspect in terms of tax evasion fraud. As is widely

known, the most significant reason for tax loss and evasion is the No, this is not currently the case. Further changes are expected to be Turkey underground economy. It is an aggravating factor in terms of the made in the law while taking into consideration the BEPS Directive. rate of tax loss and evasion. However, tightening controls and finding solutions to the problems during audit in a short time, will 10.3 Does your jurisdiction support public Country-by- increase taxpayers’ confidence in the tax administration. Country Reporting (CBCR)?

9.4 Does your jurisdiction encourage “co-operative It may be observed that the approach to reporting is not yet clear and compliance” and, if so, does this provide procedural there may be some alterations in Turkey. In addition, because of the benefits only or result in a reduction of tax? accelerating momentum in the country-based reporting studies, it is thought that the studies may be completed by the planned schedule In the Turkish tax system, companies over a certain size have to (September 2014). use e-booking and e-billing. Thus, auditing and controlling are In addition to reporting on a country-by-country basis, the main becoming easier. In addition, companies under this size must documentation and country-specific documentation have become the report purchases and sales over 5,000 TRY via a separate mutual main topic of conversation and the parties have had the chance to report declaration to the tax administration. Thus, the tax administration their views. As can be seen from these views, the main companies’ has a chance to carry out reciprocal cross-examination via the residents in other foreign capitals, in addition to the companies electronic system on a monthly basis. themselves, may be required to prepare a global certification. The companies in Turkey shall continue documenting in accordance 10 BEPS and Tax Competition with the local legislation. In addition, if Turkey adapts the OECD arrangements to its domestic legislation or signs a multilateral agreement about this issue, the necessity of presenting a main 10.1 Has your jurisdiction introduced any legislation documentation prepared by the corporate offices to the financial in response to the OECD’s project targeting Base administration, in addition to local documentation of the companies Erosion and Profit Shifting (BEPS)? in Turkey, may arise. The other pertinent issue is that the Turkish tax administration has shown interest in the meeting held in Paris. The profits of a company are controlled in a similar way to other This indicates that the Revenue Administration attaches more countries’ regulations, and those covering methods such as the importance to the “Action Plan for Base Erosion and Profit Shifting” distribution of concealed gain through transfer pricing and the publicised by the OECD in July 2013 compared to the previous application of concealed capital seem to be applied in Turkey in terms. Therefore, this attendance indicates that Turkey will follow relation to this subject. On the other hand, there is no government the studies at the level of the OECD more closely. bill or bill of law in relation to the suggestions publicised by the OECD in September 2014, and no notification draft has been publicised by the fiscal administration. 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box? Countries are divided into two groups in response to the BEPS Action Plan. The countries in the first group have taken action without having waited for the date of September 2015 in order for the work There is no such application in Turkey. However, similar innovations to be completed, and are resorting to making legal arrangements. in transactions are being encouraged and explored via research and development.

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Murat Bal Ezgi Kumas K&D Law Firm K&D Law Firm Halide Edip Adivar Mah. Halide Edip Adivar Mah. Sultan Sok. No. 20/4 Sultan Sok. No. 20/4 34382 Sisli 34382 Sisli Istanbul Istanbul Turkey Turkey

Tel: +90 212 259 99 63 Tel: +90 212 259 99 63 Email: [email protected] Email: [email protected] URL: www.kdhukuk.com URL: www.kdhukuk.com Turkey CPA Murat Bal is registered with the Chamber of Certified Public Att. Ezgi Kumas is registered with the Istanbul Bar Association and Accountants of Istanbul and has been a certified public accountant provides legal services to her clients in a wide variety of areas, since 2001. He provides services to our foreign clients as a financial especially as an attorney of commercial and corporate, IT, intellectual and management consultant in a wide variety of financial areas property, consumer, criminal and tax law. She is the co-founder and including the establishment of a company, tax and investment one of the partners of K&D Law Firm. management, payroll management, audits, accounting, record- After registering with the Istanbul Bar Association in 2010 and keeping, and investment consulting. completing her legal internship at PwC, she worked as a lawyer for two Mr. Bal provides services, under the structure of our law firm, years. In this period, she concluded legal cases with great success where proceedings require the authorisation of a public accountant, within the scope of legal disputes, particularly civil and criminal matters especially at the stage of establishment of a joint-stock company, relating to information technology, as well as copyright disputes. She limited company, liaison office, branch or representative office. In has developed her technical knowledge in IT law through academic addition, as a certified public accountant, he provides services to our studies, with a particular focus on the litigation process. clients in terms of tax consulting on matters including VAT refunds, among others.

K&D Law Firm is a full-service law firm based in Istanbul, Turkey and its mission is to provide professional, dynamic and trustworthy legal services to its clients, including consultancy and civil litigation. Since K&D Law Firm was founded, it has provided the best-quality service to globally reputed technology, auto service and industrial companies in all areas of law, particularly regarding company formation, real estate transactions, investment consulting, trademarks and patents, information technology and contracts in English, German and Turkish. In addition to these globally known local and foreign clients, we also provide services for small and medium-sized enterprises as well as individuals.

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United Kingdom Zoe Andrews

Slaughter and May William Watson

the Dividends, Interest or Royalties article may provide that the UK 1 Tax Treaties and Residence will not give up its taxing rights if, broadly, the main purpose or one of the main purposes of the creation or assignment of the relevant 1.1 How many income tax treaties are currently in force in shares, loan or right to royalties is to take advantage of the article. your jurisdiction? The BEPS project proposed, as a minimum standard, that countries adopt a “principal purpose test” (“PPT”) that is very similar to the The United Kingdom has one of the most extensive treaty networks anti-avoidance rule already seen in the UK’s treaties, a US-style in the world, with over 130 comprehensive income tax treaties limitation on benefits test, or a combination of both. Like most other currently in force. One of the consequences of an exit from the countries, the UK favours the PPT. European Union (assuming the UK loses the benefit of the Parent- Subsidiary and Interest and Royalties Directives and repeals the UK legislation implementing them) will be greater reliance on the 1.5 Are treaties overridden by any rules of domestic UK’s treaty network to provide exemption from withholding taxes. law (whether existing when the treaty takes effect or introduced subsequently)? In some cases there will still be tax leakage, such as on dividends received in the UK from Germany and Italy and royalties paid from the UK to Luxembourg (see question 3.2 below). The UK’s General Anti-Abuse Rule (the “GAAR”, discussed in question 9.1 below) can in principle apply if there are abusive arrangements seeking to exploit particular provisions in a double 1.2 Do they generally follow the OECD Model Convention tax treaty, or the way in which such provisions interact with other or another model? provisions of UK tax law.

They generally follow the OECD model, with some inevitable variation from one treaty to the next. As part of the OECD’s BEPS 1.6 What is the test in domestic law for determining the project (see question 10.1 below), changes are proposed to the residence of a company? definition of “permanent establishment” (“PE”) in Article 5 of the Model Convention. The UK initially indicated that it would not be There are two tests for corporate residence in the UK. The first applying to its existing treaties the changes extending the definition is the incorporation test. Generally (that is, subject to provisions to “commissionaire” (and similar) arrangements, because of the risk which disapply this test for certain companies incorporated before that this extension could lead to a proliferation of PEs where there is 15 March 1988), a company which is incorporated in the UK will little or no profit to attribute to any of them. At the time of writing, automatically be resident in the UK. though, it appears that this position may be under review. Secondly, a company incorporated outside the UK will be resident in the UK if its central management is in the UK. This test is based 1.3 Do treaties have to be incorporated into domestic law on case law and focuses on board control rather than day-to-day before they take effect? management, though its application will always be a question of fact determined by reference to the particular circumstances of the Yes. A tax treaty must be incorporated into UK law and this is company in question. done by way of a statutory instrument. A treaty will then enter into Both tests are subject to the tie-breaker provision of an applicable force from the date determined by the treaty and will have effect in double tax treaty. If the tax treaty treats a company as resident in relation to the taxes covered from the dates determined by the treaty. another country and not as a UK resident, the company will also The UK’s diverted profits tax (discussed at question 10.1 below) be treated as non-UK resident for domestic UK tax purposes. It is was deliberately engineered as a new tax so as to fall outside the notable that the treaties which the UK has renegotiated in the past legislation which incorporates tax treaties into UK law. few years generally do not contain the standard tie-breaker based on the company’s “place of effective management”. As a result, the tax treaty status of a company which is managed in the UK but 1.4 Do they generally incorporate anti-treaty shopping incorporated, for example, in the Netherlands, will be uncertain rules (or “limitation on benefits” articles)? pending agreement between the two revenue authorities (“competent authority” agreement). The UK Government has said it will propose In general, the UK has avoided wide limitation on benefits articles similar provisions in its bilateral negotiations in the future. and prefers specific provision in particular articles. For example,

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makes both taxable and exempt supplies and incurs expenditure that 2 Transaction Taxes is not directly attributable to either (for example, general overheads), the VAT on the expenditure must be apportioned between the 2.1 Are there any documentary taxes in your jurisdiction? supplies. The basis on which input tax can be recovered continues to be a Stamp duty is a tax on certain documents. The main category vexed topic, generating some important judicial decisions. of charge takes the form of an ad valorem duty, at 0.5% of the consideration, on a transfer on sale of stock or marketable securities 2.5 Does your jurisdiction permit “establishment only” (or of an interest in a partnership which holds such stock or VAT grouping, such as that applied by Sweden in the securities). In practice, stamp duty has little relevance if the issuer Skandia case? of the stock or securities is not a company incorporated in the UK.

United Kingdom The UK’s Office of Tax Simplification (“OTS”) published a report No. Under the UK VAT grouping rules, where a foreign company is in July 2017 on digitising and modernising the stamp duty process. eligible to join a UK VAT group registration and does so, the entirety Some of the changes proposed in the report would be very welcome. of that company’s activities are then subsumed within the UK VAT Inevitably, though, it also suggests making the stamp duty charge group registration, rather than solely the activities of that company’s mandatory, ending the current position under which a purchaser UK branch. (Various aspects of the UK’s VAT grouping rules are, that never needs to rely on the document in question can in some though, the subject of a current consultation.) circumstances ignore the charge. See question 2.6 below for details of the stamp duty land tax (or the 2.6 Are there any other transaction taxes payable by equivalent in Scotland or and Wales) that applies to land transactions companies? in the UK. Stamp duty land tax (“SDLT”) 2.2 Do you have Value Added Tax (or a similar tax)? If so, SDLT is a tax on transactions involving immovable property and at what rate or rates? is payable by the purchaser. The top rate of SDLT on commercial property is 5% and applies where (and to the extent that) the The UK has had VAT since becoming a member of the European consideration exceeds £250,000. (For transactions involving Economic Community in 1973 and the UK VAT legislation gives residential property, the rate can in some cases be as much as 15%.) effect to the relevant EU Directives. There are three rates of VAT: The standard charge on the rental element of a new lease is 1% of the ■ the standard rate of VAT is 20% and applies to any supply of net present value (“NPV”) of the rent, determined in accordance with goods or services which is not exempt, zero-rated or subject a statutory formula, rising to 2% on the portion of NPV above £5m. to the reduced rate of VAT; SDLT is a compulsory, self-assessed transaction tax and is ■ the reduced rate of VAT is 5% (e.g. for domestic fuel); and chargeable whether or not there is a written document. ■ there is a zero rate of VAT which covers, for example, books, From 15 April 2015, SDLT ceased to apply to land and buildings children’s wear and most foodstuffs. in Scotland; in its place is a new Land and Buildings Transaction Whilst the fundamental VAT rules within the UK may not change Tax, which has a similar scope to SDLT. This was provided for in much upon its exit from the EU (not least because VAT has generated the first piece of tax legislation from the Scottish Parliament in 300 over 20% of all UK tax receipts over the last six years), transactions years, the Land and Buildings Transaction Tax (Scotland) Act 2013. in both goods and services between the UK and the other 27 EU From April 2018, a new Land Transaction Tax will replace SDLT countries are likely to be affected significantly. in Wales. Stamp duty reserve tax (“SDRT”) 2.3 Is VAT (or any similar tax) charged on all transactions SDRT is charged on an agreement to transfer chargeable securities or are there any relevant exclusions? for money or money’s worth (whether or not the agreement is in writing). Subject to some exceptions, “chargeable securities” are The exclusions from VAT are as permitted or required by the (principally) stocks or shares issued by a company incorporated in Directive on the Common System of VAT (2006/112/EC) (as the UK, and units under a UK unit trust scheme. SDRT is imposed amended) and some examples of exempt supplies are: at the rate of 0.5% of the amount or value of consideration, though ■ most supplies of land (unless the person making the supply, the rate is 1.5% if UK shares or securities are transferred (rather than or an associate, has “opted to tax” the land); issued) to a depositary receipt issuer or a clearance service and the ■ insurance services; and transfer is not an integral part of the raising of share capital. ■ banking and other financial services. UK legislation still purports to apply the 1.5% charge whenever UK shares or securities are issued or transferred to a depositary or clearance service. However, the charge is not collected by Her 2.4 Is it always fully recoverable by all businesses? If not, Majesty’s Revenue and Customs (“HMRC”) because it has been what are the relevant restrictions? found to be contrary to EU law (the Capital Duties Directive). Although the Capital Duties Directive will cease to apply to the Input tax is only recoverable by a taxable person (a person who is, UK when it leaves the EU, the European Union (Withdrawal) Bill or is required to be, registered for VAT). Input tax is attributed in would, we believe, preserve the effect of the case law of the Court accordance with the nature and tax status of the supplies that the of Justice of the European Union (“CJEU”) which found the season person intends to make. ticket charge to be contrary to EU law. So unless and until new UK Input tax on supplies wholly used to make taxable supplies is legislation is brought in to override the relevant decision, HMRC deductible in full. Input tax wholly used to make exempt or non- should continue not to collect the 1.5% duty notwithstanding Brexit. business supplies is not deductible at all. Where a taxable person

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SDRT liability is imposed on the purchaser and is directly private placements – a form of selective, direct lending by non-bank enforceable. Where a transaction is completed by a duly stamped lenders (such as insurers) to corporate borrowers. In order to make instrument within six years from the date when the SDRT charge the UK wholesale debt markets more competitive, the Government arose, there is provision in many cases for the repayment of any also intends to introduce, from April 2018, a new exemption from SDRT already paid or cancellation of the SDRT charge. withholding tax on interest for debt traded on a multilateral trading facility operated by a recognised stock exchange in an EEA territory.

2.7 Are there any other indirect taxes of which we should be aware? 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? Customs duties are generally payable on goods imported from outside the EU and, depending on the terms of the UK’s exit from The UK has a thin capitalisation regime which applies to domestic as the EU, would start to apply to imports from the EU; we await well as cross-border transactions following the Lankhorst-Hohorst United Kingdom the publication of a Customs Bill which will legislate for customs case (C-324/00). duties on and after Brexit, depending on the outcome of the Brexit A borrower is considered according to its own financial negotiations. Excise duties are levied on particular classes of goods circumstances for the purposes of determining the amount which (e.g. alcohol and tobacco). Insurance premium tax is charged on it would have borrowed from an independent lender. The assets the receipt of a premium by an insurer under a taxable insurance and income of the borrower’s direct and indirect subsidiaries can be contract. Environmental taxes include the following: landfill tax; taken into account to the extent that an unconnected lender would aggregates levy; climate change levy; and a carbon reduction charge. recognise them, but the assets and income of other group companies are disregarded. 3 Cross-border Payments 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? There are no statutory safe harbour rules. Historically, HMRC adopted a rule of thumb that a company would not generally be In most cases, no withholding tax is imposed on dividends paid by regarded as thinly capitalised where the level of debt to equity did a UK resident company. Dividends deriving from the tax-exempt not exceed a ratio of 1:1 and the ratio of income (“EBIT”) to interest business of a UK Real Estate Investment Trust (“REIT”) are, was at least 3:1. HMRC’s current guidance moves away from this to however, subject to withholding tax at the rate of 20% if paid to apply the arm’s length standard on a case-by-case basis and sets out non-resident shareholders (or to certain categories of UK resident broad principles that should be considered; and the ratio cited most shareholder); this may be reduced to 15%, or in a few cases less, by often is debt to EBITDA (earnings before interest, tax, depreciation an applicable double tax treaty. and amortisation).

3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company?

In the absence of a double tax treaty and provided that the UK Yes. A company may be thinly capitalised because of a special legislation implementing the Interest and Royalties Directive relationship between the borrower and the lender or because of (2003/49/EC) does not apply, the rate of withholding tax on most a guarantee given by a person connected with the borrower. A royalties is 20%. There is no withholding tax on film and video “guarantee” for this purpose need not be in writing and includes any royalties. case in which the lender has a reasonable expectation that it will be The UK legislation implementing that Directive provides that there paid by, or out of the assets of, another connected company. is no withholding tax on the payment of royalties (or interest) by a UK company (or a UK PE of an EU company) to an EU company which is a “25% associate”. The exemption does not apply to the 3.7 Are there any other restrictions on tax relief for extent that any royalties (or interest) would not have been paid if interest payments by a local company to a non- resident? the parties had been dealing at arm’s length. An EU company for these purposes is a company resident in a Member State other than the UK. According to draft legislation which is intended to form part of the second Finance Bill of 2017, the UK intends to introduce an There must be a risk that this UK legislation will be repealed in light EBITDA-based cap on net interest expense as recommended in the of Brexit. OECD report on BEPS Action 4. If enacted, this legislation will (remarkably) take effect from 1 April 2017, more than six months 3.3 Would there be any withholding tax on interest paid before the likely date of enactment. by a local company to a non-resident? The proposal is for a fixed ratio rule limiting corporation tax deductions for net interest expense to 30% of a group’s UK “tax In the absence of a double tax treaty and provided that the UK EBITDA” (so excluding, for example, non-taxable dividends); legislation implementing the Interest and Royalties Directive does there will also be a group ratio rule based on the net interest to not apply, the rate of withholding tax on “yearly” interest which has EBITDA ratio for the worldwide group. A consequence of the a UK source and is paid to a non-resident is generally 20%. new 30% EBITDA cap will be the repeal of the UK’s previous There is no withholding tax, however, where interest is paid on interest restriction rule known as the worldwide debt cap, although quoted Eurobonds; nor, since 1 January 2016, on interest paid on a rule with “similar effect” will be integrated into the new interest

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restriction rules to ensure that a group’s net UK interest deductions UK tax legislation has been amended to deal with various issues cannot exceed the global net third-party interest expense of the arising from companies adopting International Accounting group. Standards for their accounts and, in certain circumstances, related adjustments are required for tax purposes. A consultation document on the tax impact of changes in International Financial Reporting 3.8 Is there any withholding tax on property rental payments made to non-residents? Standard 16 (leasing) is expected to appear in autumn 2017. Since autumn 2015, a revised set of rules governing the tax treatment In principle, such payments are subject to withholding tax (by the of corporate debt and derivative contracts has been in place. The tenant or agent) at 20%, being the basic rate of income tax in the revised regime includes a broad anti-avoidance provision which UK. However, the non-resident can register as an overseas landlord may lead to an increase in the circumstances in which the taxation of under the Non-resident Landlord Scheme and then account for such financial instruments deviates from their accounting treatment. income tax itself (again at 20%). Most commercial landlords that United Kingdom are non-resident opt for registration under this scheme. 4.4 Are there any tax grouping rules? Do these allow One notable consequence of the reductions in the rate of corporation for relief in your jurisdiction for losses of overseas tax in recent years (see question 4.1 below) is that a UK corporate subsidiaries? landlord may be paying less tax on UK source rent than a non- resident landlord. Yes. The UK does not permit group companies to be taxed on the basis of consolidated accounts, but the grouping rules achieve a degree of effective consolidation for various tax purposes. A group 3.9 Does your jurisdiction have transfer pricing rules? consists, in most cases, of a parent company and its direct or indirect subsidiaries, but the exact test for whether a group exists depends on Yes. The UK transfer pricing rules apply to both cross-border and the tax in question. domestic transactions between associated companies. Group relief group If HMRC do not accept that pricing is at arm’s length, they will raise an assessment adjusting the profits or losses accordingly. It Losses (other than capital losses) can be surrendered from one UK is possible to make an application for an advance transfer pricing resident group company to another UK resident group company. agreement which has the effect that pricing (or borrowing) in Losses can also be surrendered by or to a UK PE of a non-UK group accordance with its terms is accepted as arm’s length. company. A UK PE of an overseas company can only surrender In cross-border transactions, the double taxation caused by a transfer those losses as group relief if they are not relievable (other than pricing adjustment can be mitigated by the provisions of a tax treaty. against profits within the charge to UK corporation tax) inthe overseas country. Similarly, a UK company can surrender the Transfer pricing is also on the BEPS radar, of course, with changes losses of an overseas PE if those losses are not relievable (other to the OECD Transfer Pricing Guidelines included in the revised than against profits within the charge to UK corporation tax) in the guidelines published in July 2017. overseas country. The UK legislation permits group relief to be given in the UK 4 Tax on Business Operations: General for otherwise unrelievable losses incurred by group members established elsewhere in the EU, even if they are not resident or trading in the UK. However, the applicable conditions are very 4.1 What is the headline rate of tax on corporate profits? restrictive, so in practice UK companies can rarely benefit from this rule. It remains to be seen whether it will be repealed after Brexit in The current Government continues to reduce the headline rate of any event, as it was only introduced to comply with EU law. tax, as part of a package of tax reforms designed to enhance UK See also question 4.5 below as regards a legislative change which competitiveness. From a starting point of 28% in 2010 it had fallen should, in principle, allow the surrender of carry-forward losses. to 19% by 1 April 2017, and the Government has said it will fall further, to 17% in 2020. Banks, however, are an exception; from Capital gains group 2016 they have paid an 8% surcharge on top of the headline rate of There is no consolidation of capital gains and losses, but it is corporation tax. possible to make an election for a gain (or loss) on a disposal made by one capital gains group member to be treated as a gain (or loss) on a disposal by another group member. 4.2 Is the tax base accounting profit subject to adjustments, or something else? Capital assets may be transferred between capital gains group members on a no gain/no loss basis. This has the effect of postponing In general terms, tax follows the commercial accounts subject to liability until the asset is transferred outside the group or until the adjustments. company holding the asset is transferred outside the group. When a company leaves a capital gains group holding an asset which it acquired intra-group in the previous six years, a degrouping charge 4.3 If the tax base is accounting profit subject to may arise. However, in many cases, the degrouping charge will be adjustments, what are the main adjustments? added to the consideration received for the sale of the shares in the transferee company and will then be exempt under the substantial Certain items of expenditure which are shown as reducing the shareholding regime (see question 5.2 below for details of this profits in the commercial accounts are added back for tax purposes, regime). and deductions may then be allowable. For example, in the case of most plant or machinery, capital allowances on a reducing balance Stamp duty and SDLT groups basis (at various rates depending on the type of asset and the level Transfers between group companies are relieved from stamp duty or of expenditure incurred – the rules are not very generous) are from SDLT where certain conditions are met. substituted for accounting depreciation.

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VAT group computing capital gains. This contains more exemptions, but also Transactions between group members are disregarded for VAT has the effect that capital losses can only be used against gains, not purposes (although HMRC have powers to override this in certain against income. circumstances). Broadly, two or more corporate bodies are eligible to be treated as members of a VAT group if each is established or has 5.2 Is there a participation exemption for capital gains? a fixed establishment in the UK and they are under common control. See also question 2.5 above. Yes. A substantial shareholdings exemption (“SSE”) allows trading groups to dispose of trading subsidiaries without a UK tax charge. 4.5 Do tax losses survive a change of ownership? The SSE is narrower and more complex than the participation exemption found in some other countries, though some of the Tax losses may survive a change of ownership but, like many other restrictions will be removed (for disposals made on or after 1

jurisdictions, the UK has rules which can deprive a company of carry- April 2017) by legislation that is to be included in the second 2017 United Kingdom forward losses in certain circumstances following such a change. Finance Bill. The policy objective is to combat loss-buying but the rules can easily Capital gains realised on the disposal of assets by non-residents are apply where there is no tax motivation for the change in ownership. not generally subject to corporation tax unless the assets were used The second 2017 Finance Bill is expected to introduce more general for the purposes of a trade carried on through a UK PE, as noted in changes to the carry-forward loss regime, again with retrospective question 6.3 below. See also question 8.1 for a new capital gains tax effect to 1 April 2017. On the positive side, the changes should charge that can apply in certain very specific circumstances. enable carried-forward losses incurred on or after 1 April 2017 to be carried forward and set off against other income streams and 5.3 Is there any special relief for reinvestment? against profits from other companies within a group; this ismore flexible than the current rules, although the new flexibility will be There is rollover relief for the replacement of certain categories of substantially restricted where there is a change in ownership of the asset used for the purposes of a trade. Rollover is available to the company with losses. The negative aspect of the changes is that extent that the whole or part of the proceeds of disposal of such the amount of taxable profit that can be offset by carried-forward assets is, within one year before or three years after the disposal, losses will be restricted to 50%, though this will only apply to taxable applied in the acquisition of other such assets. profits in excess of £5m (calculated on a group basis). Unlike the first It is a feature of the UK’s rules that the replacement assets have to measure, this will apply to historic losses, not just those incurred on remain within the UK tax net. In 2015, a similar requirement was or after 1 April 2017. There will be different restrictions for banks. held by the CJEU to be a restriction on freedom of establishment (European Commission v Germany (C-591/13)): the Court ruled that 4.6 Is tax imposed at a different rate upon distributed, as the taxpayer should be able to choose between immediate payment opposed to retained, profits? or bearing the administrative burden of deferring the tax. With the UK preparing to exit the EU, however, it seems unlikely that the UK No, it is not. will change its rules to permit a deferral.

4.7 Are companies subject to any significant taxes not 5.4 Does your jurisdiction impose withholding tax on the covered elsewhere in this chapter – e.g. tax on the proceeds of selling a direct or indirect interest in local occupation of property? assets/shares?

Business rates are payable by the occupier of business premises This occurs only in very specific circumstances; one example is based on the annual rental value. The rate depends on the location on the sale of UK patent rights by a non-resident individual who of the business premises and the size of the business. Business rates is subject to UK income tax on the proceeds of the sale (or by a are a deductible expense for corporation tax purposes. non-resident company which is subject to UK corporation tax, if the An annual tax on enveloped dwellings (“ATED”) is payable by buyer is an individual). companies and certain other “non-natural persons” if they own interests in dwellings with a value of more than £500,000. There are reliefs available, including where the dwelling is being or will 6 Local Branch or Subsidiary? be used for genuine commercial activities. There are special regimes for the taxation of certain types of activity 6.1 What taxes (e.g. capital duty) would be imposed upon or company, such as oil exploration (profits from which are subject the formation of a subsidiary? to a “supplementary charge”, the rate of which is currently 10%) and UK REITs (which are not generally taxed on income or gains from There are no taxes imposed on the formation of a subsidiary. investment property). 6.2 Is there a difference between the taxation of a local 5 Capital Gains subsidiary and a local branch of a non-resident company (for example, a branch profits tax)?

5.1 Is there a special set of rules for taxing capital gains Yes: a UK resident subsidiary will pay corporation tax on its and losses? worldwide income and gains unless it makes the election described in question 7.1 below, whereas a UK branch is liable to corporation Corporation tax is chargeable on “profits”, which includes both tax only on the items listed in question 6.3. Subject to the point income and capital gains. There is, however, a separate regime for immediately below, the charge to UK corporation tax imposed on a

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non-resident company only applies where the non-resident company gains) of its overseas branches to be exempt from UK taxation. The is trading in the UK through a PE; this means that a branch set up for downside of such an election is that the UK company cannot then investment purposes only, and not carrying on a trade, is not subject use the losses of the overseas branch. An election is irrevocable and to UK corporation tax, though certain types of income arising in covers all overseas branches of the company making the election. the UK − notably rent and interest − may be subject to income tax through withholding (at 20%). 7.2 Is tax imposed on the receipt of dividends by a local The exception results from a legislative change made in 2016. A company from a non-resident company? non-resident company can now be subject to corporation tax even where it does not have a PE in the UK, if it is nonetheless trading Foreign dividends and UK dividends (other than “property income “in” the UK and the trade consists of “dealing in or developing” dividends” from a UK REIT) are treated in the same way. They UK land. are generally exempt in the hands of a UK company, subject to some complex anti-avoidance rules and an exclusion for dividends United Kingdom 6.3 How would the taxable profits of a local branch be paid by a “small” company which is not resident in the UK or a determined in its jurisdiction? “qualifying territory”.

Assuming that the local branch of a non-resident company is within 7.3 Does your jurisdiction have “controlled foreign the UK statutory definition of “permanent establishment” (which is company” rules and, if so, when do these apply? based on, but not quite the same as, the wording of Article 5 of the OECD Model Convention), it will be treated as though it were a It does, though the UK’s current CFC regime has a more territorial distinct and separate entity dealing wholly independently with the focus than its predecessor. Under the revised rules, profits which non-resident company. It will also be treated as having the equity arise naturally outside the UK are not supposed to be caught. and loan capital which it would have if it were a distinct entity, There are also various exclusions and exemptions. These include which means that the UK’s thin capitalisation rules will apply to it. a finance company partial exemption which (while the main rate of Subject to any treaty provisions to the contrary, the taxable profits corporation tax is 19%) results in an effective UK corporation tax of a PE through which a non-resident company is trading in the UK rate of 4.75% on profits earned by a CFC from providing funding would comprise: to other non-UK members of the relevant group. Indeed, in some instances such profits will not be caught by the CFC charge at all. ■ trading income arising directly or indirectly through, or from, the PE; A change that took effect from 8 July 2015 adds a punitive element ■ income from property and rights used by, or held by or for, to the new regime: a group which has losses can no longer use them the PE (but not including exempt distributions); and against a CFC charge. This reduces the attractiveness of the finance company partial exemption for groups with carried-forward losses. ■ capital gains accruing on the disposal of assets situated in the UK and effectively connected with the operations of the PE. 8 Taxation of Commercial Real Estate 6.4 Would a branch benefit from double tax relief in its jurisdiction? 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? The UK domestic legislation does not give treaty relief against UK tax unless the person claiming credit is resident in the UK for the Non-residents are not generally taxed on the disposal of commercial accounting period in question. This means that the UK branch of a real estate in the UK that is held as an investment. (A company (or non-resident company cannot claim treaty relief. other “non-natural person”) which disposes of a residential property Unilateral tax credit relief may be allowed for tax paid outside the worth more than £500,000 will be liable to capital gains tax if no UK in respect of the income or chargeable gains of a UK branch relief applies; the rate is 28%, to match the highest rate applicable or agency of a non-UK resident person if certain conditions are to individuals.) fulfilled. Tax payable in a country where the overseas company is taxable by reason of its domicile, residence or place of management is excluded from relief. 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your jurisdiction? 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the No, it does not. branch?

No, it would not. 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent? 7 Overseas Profits Yes. Since 2007, the UK’s REIT regime has enabled qualifying companies to elect to be treated as REITs. The conditions for 7.1 Does your jurisdiction tax profits earned in overseas qualification include UK residence, listing (on a main or secondary branches? stock market), diversity of ownership and a requirement that three- quarters of the assets and profits of the company (or group) are As a general rule, and subject to tax treaty provisions, the UK taxes attributable to its property rental business. the profits earned in overseas branches of UK resident companies. The aim of the regime is that there should be no difference from A UK company can, however, elect for the profits (including capital a tax perspective between a direct investment in real estate and

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an investment through a REIT. Accordingly, a REIT is exempt from tax on income and gains from its property rental business 9.3 Does your jurisdiction have rules which target not but distributions of such income/gains are treated as UK property only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax income in the hands of shareholders and, as noted in question 3.1 avoidance? above, are liable to 20% withholding tax (subject to exceptions).

Yes: the Finance Act 2017 brought in new rules under which 9 Anti-avoidance and Compliance advisers and others who “enable” the implementation of “abusive tax arrangements” can be penalised if those arrangements are ineffective. The Government has also co-opted third parties in the fight against 9.1 Does your jurisdiction have a general anti-avoidance tax evasion. From 30 September 2017, the Criminal Finances Act or anti-abuse rule? 2017 introduces two new corporate offences of failure to prevent

the facilitation of UK or foreign tax evasion. This will hold United Kingdom Although a GAAR was enacted in the UK for the first time in organisations to account for the actions of their employees and other 2013, it may be some time before the UK courts are asked to make persons performing services for or on behalf of the organisation (so sense of it. One reason for this is that, before invoking the GAAR, potentially including any contractor or sub-contractor) unless the HMRC must ask an independent advisory panel (the GAAR Panel) organisation can show that it has reasonable procedures in place to for its opinion as to whether the GAAR should apply (though it can prevent these offences being committed. use a GAAR Panel opinion in one case to counteract “equivalent arrangements” used by other taxpayers). 9.4 Does your jurisdiction encourage “co-operative However, the first GAAR Panel opinion (relating to employee compliance” and, if so, does this provide procedural rewards using gold bullion) appeared in August 2017 and was in benefits only or result in a reduction of tax? HMRC’s favour. At the time of writing it was unclear whether the relevant taxpayers would nonetheless defend their position before Yes. HMRC have encouraged co-operative compliance for a number the courts, but HMRC may be emboldened to pursue other GAAR of years; it goes hand in hand with HMRC’s risk assessment strategy challenges. and enables HMRC to concentrate resources on the higher risk, The GAAR contains two tests: are there arrangements which have less co-operative taxpayers. It has generally led to an improved as their main purpose securing a tax advantage; and if so, are they relationship between taxpayers and HMRC and, while it may not arrangements the entering into or carrying out of which cannot result in lower tax liabilities, it does reduce compliance costs and reasonably be regarded as a reasonable course of action (the justly may mean there is less tax litigation. maligned “double reasonableness” test)? This is to be assessed “having regard to all the circumstances”, including consistency with policy objectives, whether there are any contrived or abnormal 10 BEPS and Tax Competition steps and whether the arrangements exploit any shortcomings in the relevant provisions. 10.1 Has your jurisdiction introduced any legislation If the GAAR applies, HMRC can counteract the tax advantage by the in response to the OECD’s project targeting Base making of “just and reasonable” adjustments. Taxpayers who enter Erosion and Profit Shifting (BEPS)? into arrangements that are counteracted by the GAAR are now liable to a penalty of 60% of the counteracted tax unless they “correct” their The UK was the first country to commit formally to implementing tax position before the arrangements are referred to the GAAR Panel. the country-by-country template, and regulations have been in effect since March 2016. As predicted, the GAAR has had little impact on corporate taxpayers, as they had already begun to adopt a more conservative The UK, controversially, pre-empted the BEPS project and approach to tax planning; and the 60% penalty will doubtless prove introduced, with effect from 1 April 2015, an entirely new tax – the a strong incentive for taxpayers to settle future cases before they are “diverted profits tax” (“DPT”) – which is intended to protect the referred to the GAAR Panel. UK tax base. It has two main targets: where there is a substantial UK operation but sales to UK customers are made by an affiliate The EU Anti-Tax Avoidance Directive (“ATAD”) was adopted outside the UK, in such a way that the UK operation is not a PE of by the European Council on 12 July 2016 and includes an anti- the non-UK affiliate; and where the UK operation makes deductible avoidance rule which is broader than the UK’s GAAR. Given the payments (e.g. royalties for intellectual property (“IP”)) to a non-UK Brexit timetable, it seems unlikely that the UK will implement the affiliate, these are taxed at less than 80% of the rate of corporation EU GAAR or indeed any of the other measures in the ATAD. tax and the affiliate has insufficient “economic substance”. Asa deterrent, the rate applicable to the “diverted” profits is 5% higher 9.2 Is there a requirement to make special disclosure of than the rate at which tax would otherwise have been payable. avoidance schemes? The UK has modified its patent box regime in response to Action 5 (Countering Harmful Tax Practices) (see question 10.4 below). The UK has disclosure rules which are designed to provide HMRC Anti-hybrids legislation has been in effect from 1 January 2017 (see with information about potential tax avoidance schemes at an question 10.2 below). earlier stage than would otherwise have been the case. This enables Legislation to implement Action 4 (Deductibility of Interest) (see HMRC to investigate the schemes and introduce legislation (often question 3.7 above) will be included in the second Finance Bill of a new “targeted anti-avoidance rule”) to counteract the avoidance 2017, with retrospective effect from 1 April 2017. where appropriate. The UK has signed the Multilateral Convention and notified most The Government sees these mandatory disclosure rules as the of its treaties to the OECD so that (subject to the relevant treaty answer to Action 12 of the BEPS project (that taxpayers be required partner’s agreement) the modifications to the UK’s treaties required to disclose their aggressive tax planning arrangements). by BEPS can be made.

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it would do more harm than good if only some jurisdictions require 10.2 Does your jurisdiction intend to adopt any legislation public reporting, and there is a lack of consistency in what has to be to tackle BEPS which goes beyond what is reported. The Government has said it is disappointed with the lack recommended in the OECD’s BEPS reports? of progress towards international agreement on public reporting and, while the UK legislation contains a power to switch on public Yes. The first example of a measure not required by the OECD reporting, this is unlikely to be used before a multilateral agreement BEPS reports is the DPT (see question 10.1 above). is reached. The second example is the UK’s extension of royalty withholding tax. In particular, this will now effectively have extra-territorial 10.4 Does your jurisdiction maintain any preferential tax scope in some circumstances: where the way in which sales are made regimes such as a patent box? in the UK creates an actual PE or, in DPT terms, an “avoided” PE, IP royalties paid out of (say) the European hub for sales activities will Until 30 June 2016, the UK had a patent box regime which allowed United Kingdom be treated for the purposes of UK withholding tax as having been an arm’s length return on IP held in the UK to qualify for a reduced paid out of the UK, to the extent it is “just and reasonable” to do so. tax rate of 10% even if all the associated research and development A third example is the anti-hybrids regime. The UK has implemented (“R&D”) activity was done outside the UK. In light of BEPS Action very broad rules which, because of the absence of a motive test or a 5, IP which was already in the patent box on 30 June continues to UK tax benefit test, means that third-party, commercially motivated benefit from the old rules for five years. IP not already in the patent transactions are potentially within scope. box on that date qualifies only to the extent it is generated by R&D A fourth example is the highly complex corporate interest restriction activities of the UK company itself, or by R&D outsourced to third rules, which companies are expected to apply retrospectively from parties; and acquired IP and IP generated by R&D outsourced to 1 April 2017 even though the final form of the rules would only be associates are no longer eligible for the patent box. known months later. The report on BEPS Action 4 recommended Where IP has been generated from a combination of “good” and that reasonable time be given to entities to restructure existing “bad” expenditure, a fraction of the patent income qualifies for the financing arrangements before interest restriction rules come into patent box and, in calculating this, there is a 30% uplift for “good” effect, but the UK does not seem to have taken note of this. expenditure, to soften the impact of these rule changes. Brexit may lead to a further relaxation of the new rules: departure 10.3 Does your jurisdiction support public Country-by- from the EU might enable the UK to treat all R&D outsourcing Country Reporting (CBCR)? within the UK as “good” expenditure, without fear of violating EU Treaty freedoms and State aid rules. The Government has previously spoken out in favour of public CBCR, though the OECD has subsequently expressed concern that

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Zoe Andrews William Watson Slaughter and May Slaughter and May One Bunhill Row One Bunhill Row London, EC1Y 8YY London, EC1Y 8YY United Kingdom United Kingdom

Tel: +44 20 7090 5017 Tel: +44 20 7090 5052 Email: [email protected] Email: [email protected] URL: www.slaughterandmay.com URL: www.slaughterandmay.com

Zoe Andrews is a senior professional support lawyer in the Slaughter William joined Slaughter and May in 1994 and became a partner in and May Tax Department, covering all aspects of UK corporate tax and the Tax Department in 2004. His practice covers all UK taxes relevant

international tax developments affecting the UK. Particular areas of to corporate and financing transactions. Particular areas of interest United Kingdom interest in recent years have included BEPS and the development of include real estate and the oil & gas sector; however, William also FATCA and other automatic exchange of information regimes. has extensive experience more generally of mergers & acquisitions, demergers and other corporate structuring, debt and equity financing and tax litigation. William is listed as a leading individual in the Tax section of Chambers UK, Chambers Europe and Chambers Global, 2017. He is also listed in the International Tax Review’s ‘Tax Controversy Leaders Guide 2016’ and is recommended for corporate tax in The Legal 500, 2016.

Slaughter and May is a leading international law firm with a worldwide corporate, commercial and financing practice. Our highly experienced Tax group deals with the tax aspects of all corporate, commercial and financial transactions. We provide pan-European tax advice via the Best Friends Tax Network.* Alongside a wide range of tax-related services, we advise on: ■■ structuring of the biggest and most complicated mergers & acquisitions and corporate finance transactions; ■■ development of innovative and tax-efficient structures for the full range of financing transactions; ■■ documentation for the implementation of transactions, to ensure that it meets tax objectives; ■■ tax aspects of private equity transactions and investment funds from initial investment to exit; and ■■ tax investigations and disputes from initial queries to litigation or settlement. “Stellar UK practice utilising its broad European ‘best friends’ network of firms to provide cross-border tax advice. Provides sophisticated expertise on high-profile M&A and financing transactions. Growing presence in contentious tax issues. Also offers tax consultancy advice, with particular strength in transfer pricing matters, as well as tax litigation.” – Chambers Europe 2017 “Slaughters has always been exceptional. They consistently produce not only very able but also very commercial people.” – Chambers UK 2017 *The Best Friends Tax Network comprises BonelliErede (Italy), Bredin Prat (France), De Brauw Blackstone Westbroek (the Netherlands), Hengeler Mueller (Germany), Slaughter and May (UK) and Uría Menéndez (Spain and Portugal).

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USA Jodi J. Schwartz

Wachtell, Lipton, Rosen & Katz Swift S.O. Edgar

1 Tax Treaties and Residence 1.3 Do treaties have to be incorporated into domestic law before they take effect?

1.1 How many income tax treaties are currently in force in your jurisdiction? To take effect, treaties must be ratified by a two-thirds vote of the Senate (one house of the U.S. legislature) and must be effective in accordance with the laws of the other contracting state. Although The United States has 58 income tax treaties in force, covering 66 historically tax treaties have not been controversial, recently countries (nine countries succeeded to the treaty with the U.S.S.R.). legislative activity in the United States has been limited, and none The United States’ income tax treaty network covers most of the of the tax treaties or protocols amending tax treaties pending before world’s major economies, including every member of the European the Senate since 2010 has been ratified. Union other than Croatia, and every member of the G-20 other than Argentina, Brazil and Saudi Arabia. There are few treaties with nations in Africa (Egypt, Morocco, South Africa and Tunisia) 1.4 Do they generally incorporate anti-treaty shopping and South America (Venezuela and Trinidad and Tobago). Several rules (or “limitation on benefits” articles)? agreements – replacing existing treaties (Hungary and Poland), entering into a tax treaty for the first time (Chile and Vietnam), Yes. The U.S. model treaty introduced a limitation on benefits article or amending current treaties (Japan, Luxembourg, Spain and in 1981. The content of the article in actual treaties varies, but the Switzerland) – have been signed but not ratified by the U.S. Senate. negotiating position of the United States reflected in the 2016 U.S. The prospects for ratification are uncertain (see question 1.3). model treaty is to include robust limitations on benefits, including: a dedicated article; a “triangular” permanent establishment provision in the general scope article that denies treaty benefits to residents of 1.2 Do they generally follow the OECD Model Convention or another model? one state that earn income generated in the other contracting state through a permanent establishment in a third state if certain other conditions are met; limitations that apply to entities expatriated from The United States has followed its own model convention since the U.S. in order to remove incentives for corporate “inversions”; 1976, revised approximately every 10 years, most recently in and limitations on the availability of treaty benefits for income February 2016. Significant differences between the U.S. and OECD earned by a resident that benefits from a “special tax regime” (a models include the definition of residence for treaty purposes and the jurisdiction that meets certain requirements and has been identified application of the treaty to state and local income taxes. In the U.S. through diplomatic channels as problematic). model, a business organisation that is resident in both contracting states (for example, because it is incorporated in the United States Furthermore, regulations and generally applicable doctrines of tax and managed in another contracting state) is considered a resident law could apply to recharacterise transactions designed to take of neither state and thus ineligible for treaty benefits. In contrast, advantage of favourable treaty rules in accordance with what the the OECD model provides that such an entity’s place of effective U.S. Internal Revenue Service (“IRS”) or a court deems to be the management would determine its residency. The U.S. model treaty appropriate tax result (see question 9.1). also differs from the OECD standard in that the U.S. model only applies to U.S. federal income taxes and does not preempt state and 1.5 Are treaties overridden by any rules of domestic local tax laws. law (whether existing when the treaty takes effect or Despite these differences, the U.S. and OECD models have introduced subsequently)? historically influenced one another. Accordingly they have much in common, and American courts have relied on OECD commentary Yes. Although the main source of U.S. federal tax law, the Internal in interpreting U.S. tax treaties. Notably, the 2016 U.S. model Revenue Code of 1986 (as amended, the “Code”), provides that it treaty is consistent with certain recommendations stemming from must be applied “with due regard to any treaty obligation of the the OECD-G20 BEPS initiative that are not yet in the OECD model, United States”, it also states that neither treaties nor domestic specifically by including limitation on benefits provisions (which legislation have preferential status. In practice, courts, the IRS and have long had a place in U.S. tax treaties) and a statement of intent in practitioners generally interpret the U.S. tax laws to be consistent the preamble that the treaty’s purpose is not to create opportunities with tax treaties; nevertheless, federal (not state or local) law may for tax evasion. supersede previously ratified treaties. For example, notwithstanding

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treaty provisions to the contrary in place before its enactment, a 1996 amendment to the Code provides for taxation of certain 2 Transaction Taxes former citizens and long-term residents for 10 years following their expatriation. One potential conflict that has not been litigated 2.1 Are there any documentary taxes in your jurisdiction? arises in the context of “inversions”: if the requirements of the Code are met, the United States treats corporations that invert to There are generally no U.S. federal documentary taxes. Some non-U.S. jurisdictions as U.S. corporations for all purposes of the state and local jurisdictions have documentary and transfer taxes, Code, which could conflict with tax treaties that look to legal place especially in the real estate context. of residence or place of management to determine tax residency.

Additionally, tax doctrines developed by courts can recharacterise USA transactions to yield different results from what would obtain upon 2.2 Do you have Value Added Tax (or a similar tax)? If so, a literal application of the Code and a tax treaty (see question 9.1). at what rate or rates? Last, it is uncertain whether a tax treaty could violate the U.S. No. A recent proposed framework for new legislation would Constitution, which would control in the event of a conflict regardless create a destination-based cash-flow tax with a border adjustment, of when the treaty entered into force. Although U.S. courts have which would function in most ways like a VAT, but its details and generally taken a broad view of both Congress’s taxing power and prospects for enactment into law remain uncertain. The closest the President’s treaty power, the U.S. Supreme Court has recently existing analog is sales and use tax, which is imposed at the state imposed restrictions on congressional authority and arguably has and local level on retail purchases of goods and some services, and signalled a willingness to limit the treaty power as well. is generally not applicable to business combinations and other major corporate dispositions. There are also federal excise taxes on the 1.6 What is the test in domestic law for determining the purchase of a limited set of goods and services (e.g., gasoline and residence of a company? airplane tickets).

The test for determining what tax laws apply to a company depends 2.3 Is VAT (or any similar tax) charged on all transactions on the form of the company. For U.S. federal income tax purposes, or are there any relevant exclusions? a business organisation generally is classified as a corporation, a partnership, or an entity disregarded as separate from its owner. If There is no VAT in the United States. the company has more than one owner, it will be treated either as a corporation or a partnership; if only one owner, a corporation or a disregarded entity. Many business organisations, formed under 2.4 Is it always fully recoverable by all businesses? If not, U.S. or non-U.S. law, may elect to be classified as a corporation or what are the relevant restrictions? a disregarded entity or a corporation or a partnership (depending on the number of owners). A company treated as a corporation for U.S. There is no VAT in the United States. Sales and use taxes are federal income tax purposes will be a “domestic” corporation and imposed on consumers and are generally not recoverable. hence subject to U.S. federal income tax if it is organised or created under the laws of the United States, one of the 50 states or the District 2.5 Does your jurisdiction permit “establishment only” of Columbia. A corporation that is not domestic is foreign and is VAT grouping, such as that applied by Sweden in the subject to special provisions of the Code that generally provide Skandia case? more limited taxation than that imposed on domestic corporations. With limited exceptions, partnerships are not subject to U.S. federal This is not applicable in the United States. income tax directly; rather, each partner is subject to tax with respect to its allocable share of the income of the partnership (in a manner that depends on the residence of the partner and the activities of the 2.6 Are there any other transaction taxes payable by partnership). Where the partnership is organised for the most part companies? does not matter for purposes of calculating U.S. federal income tax liability. Finally, disregarded entities are not subject to U.S. federal State and local taxes vary extensively by jurisdiction, and companies income tax except in very limited circumstances. that operate throughout the United States often devote significant resources to state and local tax planning. The most significant The residence of individuals and business organisations, to the transaction taxes applicable to companies are often state taxes extent relevant for treaty purposes, is governed by the relevant imposed on the transfer of real property. State and local taxes are treaty and may be based on place of organisation or management. generally deductible for U.S. federal income tax purposes. Political The U.S. model treaty looks to liability for taxation by reason of leaders are currently weighing whether to propose legislation to domicile, residence, citizenship, place of management, place of repeal this deduction, but it is currently unclear whether any such incorporation, or similar criterion to determine residency, and if a legislation will be proposed or enacted. company is a resident of both contracting states, it is treated as a resident of neither. Not all U.S. treaties in force follow the U.S. model treaty in this respect, and some provide tie-breaking rules to 2.7 Are there any other indirect taxes of which we should determine residency or allow the contracting states to reach mutual be aware? agreement with respect to residence. Federal indirect taxes narrowly apply to the purchase of a small range of goods and services. There is a broader assortment of specialised state and local indirect taxes, including, for example, insurance premium taxes, hotel occupancy taxes, and taxes on the sale of tobacco products beyond the federal excise tax on the same products. These taxes vary significantly by jurisdiction.

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In addition, courts have long employed a multi-factor test to 3 Cross-border Payments evaluate whether a purported debt instrument qualifies as such for U.S. federal income tax purposes or should, based on its substance, 3.1 Is any withholding tax imposed on dividends paid by be recharacterised as equity. This test generally considers a variety a locally resident company to a non-resident? of facts and circumstances (e.g., form of the instrument, sum certain payable on a fixed maturity date, creditor’s rights, etc.), buta Yes. A 30% withholding tax applies to fixed, determinable, annual borrower’s capitalisation is one of the most important factors. If or periodic income (“FDAP”) of non-U.S. persons earned from U.S. an instrument is recharacterised as equity, “interest” payments on sources other than income of tax-exempt persons or income that is such instrument are not deductible to the borrower and are treated USA effectively connected with a U.S. trade or business (or, if required by (including for withholding purposes) as distributions to the holder. an applicable income tax treaty, is attributable to a U.S. permanent In October 2016, the IRS adopted regulations that can recast debt establishment). Dividends from a U.S. corporation paid to a non- of U.S. issuers owed to or funded by related parties where the U.S. shareholder are FDAP, as are certain “dividend equivalents” creditor is not a U.S. entity, removing one of the key incentives that are economically similar to dividends but use different legal for expatriating (or “inverting”) U.S. corporations. The rules are forms. Treaties may reduce or eliminate this tax and may reduce or highly complex and require detailed documentation in order to have eliminate the withholding rates applicable to businesses depending intercompany debt respected as such. The documentation rules are on their assets and activities, especially entities that are qualified slated to become effective in January 2019; however, the Treasury as real estate investment trusts (“REITs”) or regulated investment Department has sent a report to the President raising the possibility companies (i.e., mutual funds). that they will be revoked and replaced with more streamlined rules. The report also recommended that other aspects of the regulations remain in place unless Congress passes tax reform legislation 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? that obviates the policy concerns they address (namely, “earnings stripping” by non-U.S. parented multinational corporations). Yes. Royalties are generally FDAP and are accordingly treated similarly to dividends (see question 3.1). Under some treaties, 3.5 If so, is there a “safe harbour” by reference to which royalties vary depending on the industry or type of property tax relief is assured? generating them, with different rates applicable to income from patents, film and television, and copyrights in many countries. This is not applicable in the United States.

3.3 Would there be any withholding tax on interest paid 3.6 Would any such rules extend to debt advanced by a by a local company to a non-resident? third party but guaranteed by a parent company?

Yes. Interest is also FDAP (see question 3.1). Yes. As described above, the “earnings stripping” rules can apply Treaties may reduce or eliminate the withholding tax applicable to to interest payments made to unrelated foreign persons on debt payments of interest, and, unlike dividends and royalties, “portfolio guaranteed by a related foreign person. A guarantee of debt of a interest” is exempt from withholding tax. Portfolio interest is thinly capitalised subsidiary could also implicate the economic interest paid on a registered (as opposed to a bearer) obligation substance doctrine (see question 9.1), with the result that the to a recipient who certifies on an applicable IRS form provided to guarantor is treated as the borrower and payments by the subsidiary the payor of interest that the recipient is a non-U.S. person. The to the lender are treated as dividends to the guarantor or an affiliate portfolio interest exemption is not available to certain significant of the guarantor followed by an interest payment by the guarantor. shareholders, with respect to contingent interest determined by reference to certain items specified in the Code and regulations 3.7 Are there any other restrictions on tax relief for (e.g., receipts, profits or dividends of the debtor or a related person), interest payments by a local company to a non- banks receiving interest on ordinary-course loans, and “controlled resident? foreign corporations” receiving interest from related persons, each as determined under specific and detailed rules enumerated in the This is not applicable in the United States. Code and regulations.

3.8 Is there any withholding tax on property rental 3.4 Would relief for interest so paid be restricted by payments made to non-residents? reference to “thin capitalisation” rules? Yes. Rental income is FDAP and generally treated the same way as The “earnings stripping” provisions in the Code generally operate other forms of FDAP discussed in questions 3.1 and 3.2. to defer interest expense deductions for interest paid or accrued by a corporation to a related foreign person (or an unrelated foreign 3.9 Does the USA have transfer pricing rules? person with a guarantee by a related foreign person) if the borrower’s net interest expense exceeds one half its “adjusted taxable income” (which approximates operating cash flow) for a yearand its debt-to- Yes. Intercompany transactions generally must reflect arm’s-length equity (determined by reference to tax basis) ratio exceeds 1.5 to 1. terms, and there are detailed Treasury regulations specifying available Interest expense deductions disallowed under this rule can be carried methodologies for meeting this standard. Additionally, taxpayers forward indefinitely. Moreover, this rule does not affect holders of must prepare and maintain contemporaneous documentation to debt, who may still benefit from the portfolio interest exemption support their transfer pricing practices. If an intercompany transaction from the U.S. withholding tax with respect to such interest (if the does not appropriately reflect the income of the parties, the IRS has requirements are otherwise met). broad authority to reallocate tax items to achieve appropriate results.

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Particular scrutiny typically applies to transfer pricing arrangements leaves the group, at which point gain or loss from prior intercompany that result in deductions taken in the United States and income earned transactions that was deferred during consolidation generally must offshore. Significant penalties may be levied on taxpayers who fail be recognised. to comply with U.S. transfer pricing rules. Because non-U.S. companies are not (with some very limited exceptions) “includible corporations”, these rules do not allow for 4 Tax on Business Operations: General relief for losses of overseas subsidiaries. Some, but not all, states have similar consolidated return regimes.

4.1 What is the headline rate of tax on corporate profits? 4.5 Do tax losses survive a change of ownership? USA The top marginal U.S. federal corporate income tax rate is 35%. The availability of tax losses following an ownership change is State and local governments tax corporate income at varying rates, limited in order to prevent trafficking in such losses. Generally such that the typical top marginal rate on a corporation doing speaking, following an ownership change, the amount of losses that business in all 50 states is 38.91%, according to the OECD. Political may be utilised per year is limited to the value of the stock of the leaders are considering lowering the top rate as early as next year on corporation with the loss as of the date of the ownership change a temporary or permanent basis. multiplied by the “long-term tax-exempt rate”, which is based on the market rate of interest on long-term federal bonds. As of October, 4.2 Is the tax base accounting profit subject to 2017, the long-term tax-exempt rate is 1.93%. Losses not used in a adjustments, or something else? given year may be carried forward until the loss expires (generally, 20 years after it was generated) and are added to the losses otherwise The tax base for U.S. federal income tax purposes is taxable income, available under the general rule. For corporations with assets that, rather than accounting profit subject to adjustments. Income is taken together, have a basis that is less than their fair market value defined broadly under the Code as “income from whatever source at the time of the ownership change (i.e., corporations with a “net derived”. To calculate taxable income, taxpayers apply several unrealised built-in gain”) at the time of the ownership change, this exclusions and deductions. For example, interest income from limitation is increased to the extent they recognise (or are deemed municipal bonds may be excluded from taxable income, and business to recognise) built-in gains during the five years after an ownership expenses are typically deducted. Not all exclusions from income change. An “ownership change” for these purposes is defined under are relevant to determining accounting profit, and many deductions, a complex statutory and regulatory regime, but very generally notably depreciation and amortisation methods prescribed by the means a change of more than 50% ownership of the stock of a given Code, do not reflect generally accepted accounting principles or corporation measured over a three-year testing period. international financial reporting standards. Generally speaking, accounting principles are meant to result in financial statements that reflect when income is earned, while tax accounting is meant 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits? to comply with the varied purposes of the Code: generating revenue for the government and incentivising certain taxpayer behaviours to Taxation of distributed, as opposed to retained, profits generally support legislative policy goals. Naturally, several differences arise differs in who bears the tax, not necessarily the amount of tax from these varied goals. imposed. Widely held corporations are taxed on income regardless of whether it is retained or distributed, but shareholders are subject 4.3 If the tax base is accounting profit subject to to a second level of income tax on dividends from corporations, and adjustments, what are the main adjustments? corporations are not entitled to deduct amounts paid as dividends (i.e., there is no integration). Partnerships, S Corporations (generally, This is not applicable. corporations with fewer than 100 domestic shareholders and a single class of stock that elect S Corporation status) and entities disregarded 4.4 Are there any tax grouping rules? Do these allow for U.S. federal income tax purposes are not normally subject to for relief in your jurisdiction for losses of overseas federal income tax. Rather, taxable income of such entities is subject subsidiaries? to tax at the owner level regardless of whether the relevant business organisation retains or distributes profit. REITs and regulated Yes. Domestic corporations that are members of an “affiliated group” investment companies are generally subject to tax only on retained may file a consolidated U.S. federal income tax return. An affiliated earnings, and their shareholders are only subject to tax on distributed group consists of one or more chains of “includible corporations” earnings. The applicable rate of tax depends on the identity of the (with limited exceptions, domestic business organisations treated taxpayer and, in the pass-through context, the activity giving rise to as corporations for U.S. federal income tax purposes) connected the income. through stock ownership with a common parent corporation. The “Personal holding companies”, i.e., corporations majority-owned common parent must itself be an includible corporation and own by five individuals or fewer and that earn mostly passive income, at least 80% of the stock (by vote and value) of the includible are subject to an additional 20% tax on their undistributed earnings. corporation(s) at the top of the chain(s), and at least 80% of the stock (by vote and value) of all the includible corporations in the 4.7 Are companies subject to any significant taxes not chain(s) (other than the common parent) must also be owned by covered elsewhere in this chapter – e.g. tax on the one or more of the other includible corporations. The consolidated occupation of property? return regulations are some of the most detailed and complex U.S. tax rules, but, generally speaking, affiliated corporations that file a Companies engaged in certain activities may be subject to federal consolidated return are taxed as one taxpayer until a corporation excise taxes (on, e.g., the sale of alcohol, tobacco or firearms), and

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a 40% excise tax on high-cost employer-sponsored health plans proceeds of sales by foreign financial institutions and non-financial (colloquially known as “Cadillac plans”) is scheduled to come into foreign entities that fail to comply with certain information reporting effect in 2020. Additionally, employers are liable for a 7.65% tax requirements. on wages up to $118,500 per employee; this same amount is levied on employees but is collected from the employer via withholding. There is also a small unemployment tax imposed on employers. 6 Local Branch or Subsidiary? Federal estate and gift taxes are beyond the scope of this chapter. They generally do not concern publicly traded corporations, but 6.1 What taxes (e.g. capital duty) would be imposed upon may be relevant to closely held entities and are important to high- the formation of a subsidiary? USA net-worth individual owners of business organisations. State and local taxes are beyond the scope of this chapter, too, but it should None at the federal level. Some states impose registration or filing be noted that each U.S. state has its own taxing regime, and several fees upon the formation of a subsidiary, but these are generally not municipalities do as well. The types and rates of these taxes vary significant. significantly, and some can be significant depending on the relevant industry, e.g., hotel occupancy or insurance premium taxes. 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident 5 Capital Gains company (for example, a branch profits tax)?

There is no difference for U.S. federal income tax purposes in the 5.1 Is there a special set of rules for taxing capital gains tax treatment of a “branch” – i.e., a segment of a company’s business and losses? that is not held in a legal form separately from the company engaged in that business – and a domestic or non-U.S. business organisation Yes. Long-term capital gains of certain non-corporate taxpayers, that is disregarded for U.S. tax purposes as separate from its owner including individuals, are taxed at a preferential rate. The by virtue of the U.S. “check the box” rules. Disregarded entities deductibility of capital losses is subject to limitations. Capital losses (regardless of their domicile) and branches are both ignored for U.S. may only offset capital gains, and capital losses of corporations may federal income tax purposes. only be carried back three years or forward five years. However, there is a significant difference in the taxation of a branch (or disregarded entity) and a regarded U.S. subsidiary of a non-U.S. 5.2 Is there a participation exemption for capital gains? corporation. A “branch profits tax” of 30% is imposed on foreign corporations’ earnings and profits that are effectively connected No. The sale of stock is generally subject to capital gains tax. Non- with the conduct of a U.S. business or, if required by an applicable U.S. shareholders are generally not subject to capital gains tax on treaty, attributable to a permanent establishment in the United States the gross proceeds of the sale of property (including stock) unless (“ECI”). This tax is imposed on a foreign corporation with ECI, such proceeds are effectively connected with the conduct of a U.S. whether earned directly, through a branch, or through a disregarded trade or business (or, if required by an applicable income tax treaty, subsidiary. The branch profits tax is in addition to the tax imposed at are attributable to a U.S. permanent establishment of the business) the graduated corporate rates on a foreign parent’s net ECI as if the or the property sold is a United States real property interest (see foreign corporation were a U.S. taxpayer. If, instead of a branch or Section 8). disregarded subsidiary, the foreign entity has a domestic corporate subsidiary, the branch profits tax will not be imposed on the foreign parent (assuming it has no ECI from another source); instead, the 5.3 Is there any special relief for reinvestment? subsidiary is taxed directly as a U.S. person and dividends paid by the subsidiary to the non-U.S. parent will be subject to U.S. Generally, taxpayers are required to recognise gain or loss on a withholding tax. sale or other disposition for U.S. federal income tax purposes. The purpose of the branch profits tax is to put on equal footing Exceptions exist for “like kind exchanges”, by which a taxpayer dividends from regarded U.S. subsidiaries and cash flow from can defer recognition of gain or loss by disposing of property – not branches and disregarded subsidiaries that generate ECI. Without including stock – and using the proceeds of such disposition within the branch profits tax, cash flow from branches and disregarded 180 days to acquire property of a like kind, and other transactions subsidiaries would itself be disregarded (and not subject to U.S. that satisfy specific requirements of the Code where Congress has withholding tax), and the foreign parent would pay only one level determined that deferral of gain or loss is appropriate, e.g., corporate of tax on its U.S. ECI, while earnings of a U.S. corporate subsidiary “reorganisations” or contributions by shareholders to controlled would be taxed once at the U.S. corporation level and once at the corporations. parent level when distributed as a dividend (see question 3.1).

5.4 Does your jurisdiction impose withholding tax on the 6.3 How would the taxable profits of a local branch be proceeds of selling a direct or indirect interest in local determined in its jurisdiction? assets/shares?

If a foreign corporation has a local branch that is disregarded Generally, there is no U.S. withholding tax on the gross proceeds of for U.S. federal income tax purposes, no tax is imposed on the sales of capital assets. However, as discussed in Section 8, under branch; rather, the foreign corporation is subject to (a) a tax on the certain circumstances, the Foreign Investment in Real Property Tax foreign corporation’s ECI at the graduated rates applicable to U.S. Act requires withholding on the sale by a non-U.S. person of an taxpayers, and (b) the 30% branch profits tax described above in asset (including shares of certain companies) treated as a United question 6.2. ECI is net income derived from the conduct of a U.S. States real property interest. Additionally, beginning in 2019, the trade or business (or income that a corporation elects to treat as so United States is scheduled to require withholding on the gross

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derived). A treaty may lower the tax rate and/or cause tax to be its stake. However, such deferral comes at a cost, as the deferred imposed only on income attributable to a permanent establishment income will be treated as ordinary income rather than capital gain of a foreign corporation. and interest is charged on the tax imposed on the distribution or gain from sale, as if the shareholder had underpaid tax. This interest regime can only be avoided by electing current taxation of the 6.4 Would a branch benefit from double tax relief in its jurisdiction? PFIC’s ordinary income and net capital gain or marking to market the value of the company’s shares each year. Another important exception applies to “controlled foreign corporations” subject to the A U.S. branch that is disregarded as separate from its owner for rules discussed below at question 7.3. U.S. federal income tax purposes is neither a resident of the United USA States nor subject to U.S. tax, and accordingly is not itself eligible If the non-resident company is disregarded as separate from its owner for treaty benefits. for U.S. federal income tax purposes, its income is taxed currently to its owner and any dividend from it is disregarded. If the entity An entity organised in a jurisdiction that has a treaty with the is treated as a partnership, then generally it also passes through its United States and that has a U.S. branch that results in income to the income to its owners and a distribution in itself is not a taxable event. parent taxable by the United States would be entitled to treaty relief pursuant to the terms of an applicable treaty. 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the branch? Yes. If more than 50% of the voting power or the value of a non- U.S. business organisation taxable as a corporation for U.S. federal No. Generally, income earned through a branch is taxed as described income tax purposes is owned (directly or constructively) by “United States shareholders”, the non-U.S. entity is a controlled in question 6.2, and no additional tax is imposed on the remittance foreign corporation (“CFC”) for U.S. federal income tax purposes. of profits by withholding or otherwise. United States persons who own more than 10% of the voting power of a CFC must include their pro rata share of the CFC’s “Subpart 7 Overseas Profits F income” for a given year. Subpart F income is generally income from passive sources (dividends, interest, royalties, rents, insurance income, capital gains, etc.). Income other than Subpart F income is 7.1 Does your jurisdiction tax profits earned in overseas not subject to current taxation at the U.S. shareholder level; instead branches? it is subject to inclusion when repatriated (or deemed repatriated by virtue of certain investments) to the United States. This inclusion If a non-U.S. branch is either not an entity or is an entity that is is subject to an exception for previously taxed Subpart F income. disregarded as separate from its owner and the applicable owner In 2004, Congress passed legislation allowing for a repatriation is a U.S. corporation, then yes. The U.S. federal income tax is a “holiday” that supporters argued would encourage investment in the worldwide tax and is imposed on income earned by U.S. taxpayers United States, and some policymakers are considering proposing from any source, domestic or not (though some policymakers have another holiday, but the prospects for passage are uncertain. advocated replacing the United States’ current worldwide income tax system with a territorial regime, or at least incorporating territorial aspects into the Code). 8 Taxation of Commercial Real Estate A corporation for which a check-the-box election to be disregarded is not made (or that is not eligible to check the box) and that is not 8.1 Are non-residents taxed on the disposal of organised under the laws of the United States or one of its political commercial real estate in your jurisdiction? subdivisions, is not subject to current U.S. federal income tax, but its shareholders may be, depending on the assets and income of Yes. Under the Foreign Investment in Real Property Tax Act the corporation, particularly if it is a “passive foreign investment (“FIRPTA”), a non-U.S. owner’s disposition of a United States real company” (see question 7.2) or a “controlled foreign corporation” property interest (a “USRPI”) generally is subject to U.S. federal (see question 7.3). income tax at the rates generally applicable to U.S. persons. USRPI is broadly defined and includes real property (including commercial 7.2 Is tax imposed on the receipt of dividends by a local real estate as well as mines, wells and other natural deposits) located company from a non-resident company? in the United States, and any interest (other than solely as a creditor) in an entity that was, at any point during the five-year period ending If the local and non-resident companies are treated as corporations on the disposition, a United States real property holding corporation for U.S. federal income tax purposes, income of the non-resident (“USRPHC”). A USRPHC is a corporation with U.S. real property company is generally not taxed to the U.S. owner unless and until equal to 50% or more of the fair market value of all its real property the income is distributed. At that time, the distribution is includible and other assets used or held in its trade or business, and U.S. in the U.S. owner’s taxable income, though any tax imposed may be corporations are presumed to be USRPHCs unless the taxpayer able to be reduced by a credit for foreign taxes paid. demonstrates otherwise. One important exception to the general rule of deferral arises in the FIRPTA requires withholding by the buyer of 15% of the fair market context of “passive foreign investment companies” (“PFICs”). A value of the USRPI disposed of. Buyers are entitled to require PFIC is, generally speaking, a corporation that earns 75% or more sellers to certify that they are either U.S. persons or not selling a of its income from passive sources or 50% or more of the assets USRPI. Withholding is not, however, required on the acquisition of which, by value, generate passive income. A U.S. owner may of stock of a publicly traded U.S. corporation or partnership (with elect to defer his, her or its share of tax on the PFIC’s earnings until exceptions for the acquisition of substantial interests in publicly distribution or until the shareholder sells part or all of his, her or traded entities).

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In addition, “qualified foreign pension funds” – generally, regulated substance” and “step transaction” doctrines, which police non-U.S. retirement funds to which contributions are deductible or transactions with forms that, if respected, would yield inappropriate the income of which is subject to tax at a reduced rate – are exempt tax results. Courts and the IRS also apply presumptions in from FIRPTA. “Qualified foreign pension fund” is defined in interpreting the tax laws that prevent (arguably) improper or abusive general terms under the statute, and the IRS has sought comment results under the Code and regulations, such as the rule that only in from taxpayers on a more specific definition. the presence of a “clear declaration of intent by Congress” will two tax deductions for one economic loss be sustained.

8.2 Does your jurisdiction impose tax on the transfer of Usually these doctrines apply to deny tax benefits to taxpayers an indirect interest in commercial real estate in your that would result from a literal application of the Code and USA jurisdiction? regulations to the taxpayer’s chosen form of transaction, though in some circumstances a taxpayer may use these doctrines to avoid Yes. As discussed above, the disposition of a share of a USRPHC inappropriately harsh tax consequences notwithstanding the form of is taxable, and the disposition of an interest in a pass-through entity a given transaction. In each case, the form chosen by a taxpayer (e.g., a partnership) will be taxable to a non-resident to the extent the is presumed respected and will usually only be overlooked if the gain is attributable to a USRPI held by the partnership. chosen form does not reflect economic reality, and generally all facts and circumstances are taken into account before recharacterising a transaction. Congress has codified the economic substance doctrine, 8.3 Does your jurisdiction have a special tax regime and now a 20% penalty is imposed on transactions that do not change for Real Estate Investment Trusts (REITs) or their equivalent? a taxpayer’s pre-tax economic position in a meaningful way when the taxpayer has no substantial purpose for the transaction other than federal income tax effects. This penalty is increased to 40% if the Yes. Provided they meet the detailed qualification, income and transaction is not adequately disclosed. asset tests described below, REITs are not subject to the double- taxation regime that characterises the U.S. federal income tax Additionally, there are civil and criminal penalties for failure to applicable to corporations generally. Specifically, taxable income comply with tax laws and a broad range of statutory and regulatory that is distributed by a REIT to its shareholders on a current basis provisions that target specific perceived abuses such as engaging is generally not subject to U.S. federal income tax on the REIT in transactions identified by the IRS as tax avoidance schemes, level. Additionally, dividends from REITs are not deductible by trafficking in tax losses, establishing inappropriate transfer pricing corporations that receive them. As a result of these rules, REITs schemes, abusing the interest deduction for intercompany debt, function in some ways like partnerships or entities disregarded and acquiring a foreign corporation in order to redomicile a U.S. as separate from their owners: they generally pass their income corporation outside the country. through to their owners. A general summary of the most important rules for REIT qualification and operation is provided below; these 9.2 Is there a requirement to make special disclosure of are subject to exceptions, safe harbours and detailed qualifications avoidance schemes? in complex provisions of the Code and Treasury Regulations. To qualify as a REIT, an entity must be a corporation, trust or Yes. Certain categories of transactions have been designated as association that (a) but for the REIT provisions, would be taxable as “reportable transactions”. These include “listed transactions”, a corporation for U.S. federal income tax purposes, (b) is beneficially which are specific arrangements that the IRS has identified as tax owned by at least 100 persons, (c) is not more than 50% (by value) avoidance schemes (or transactions that are substantially similar to owned by five individuals or fewer, and (d) must meet two “gross these), “transactions of interest”, which have the potential for tax income” tests and six “gross asset” tests. avoidance but the IRS lacks sufficient information to determine The gross income tests require that at least (a) 75% of a REIT’s whether they should be listed transactions, deals that require the income must come from real property, and (b) 95% of its income taxpayer to keep the tax treatment confidential, and certain other (towards which the 75% described in clause (a) counts) must transactions. Such transactions must be reported to the IRS, and generally be passive in nature or derive from gains on the sale of the failure to report listed transactions carries more severe penalties passive assets. The gross asset tests generally require that at least than failure to report other reportable transactions. 75% of the value of a REIT’s total assets be represented by real estate assets, cash and government securities, and they limit the 9.3 Does your jurisdiction have rules which target not value of the REIT’s assets attributable to debt instruments and other only taxpayers engaging in tax avoidance but also securities to preclude the ability to use the REIT form for abuse. anyone who promotes, enables or facilitates the tax Finally, a REIT will not be able to take advantage of the favourable avoidance? tax regime the Code otherwise provides unless it distributes to its shareholders 90% of its taxable income (subject to certain Yes. The reportable transactions described in question 9.2 must adjustments) minus certain non-cash income. be reported to the IRS by any “material advisor” with respect to such transactions. A material advisor is a person who provides any material assistance or advice with respect to organising, promoting, 9 Anti-avoidance and Compliance selling, insuring, or carrying out any reportable transaction and who earns $50,000 from such assistance or advice if substantially all the tax benefits from the transaction redound to individuals’ benefit, or 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? who earns $250,000 from such assistance if the beneficiaries are not individuals. Although there is no overarching statutory or regulatory anti-abuse Additionally, federal criminal law generally punishes any rule, courts have developed many generally applicable doctrines, accomplice to a crime as a principal offender. notably the “sham transaction”, “substance over form”, “economic

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at question 1.2, the most recent model income tax treaty includes 9.4 Does your jurisdiction encourage “co-operative limitation on benefits provisions and a statement of intent inthe compliance” and, if so, does this provide procedural preamble that the treaty’s purpose is not to create opportunities for benefits only or result in a reduction of tax? tax evasion. Also, as discussed below at question 10.3, the IRS has promulgated country-by-country regulations consistent with the Yes. Since 2005, the IRS has administered the Compliance BEPS recommendations. Assurance Process (“CAP”), which is available to publicly traded taxpayers (or privately traded ones that provide quarterly audited financial statements to the IRS) with at least $10,000,000 in assets. 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is

The CAP proceeds in three phases: the “Pre-CAP Phase”, when USA recommended in the OECD’s BEPS reports? the IRS and taxpayers close ongoing examinations and the IRS determines whether the taxpayer is eligible for CAP; the “CAP Phase”, when taxpayers transparently cooperate with the IRS and No. In recent years, very little legislation has passed in the United resolve issues before returns are filed (and are assured that the IRS States, and it is unlikely that any laws implementing BEPS will be will not challenge such returns); and the “Compliance Maintenance passed in the near future. To the extent the IRS is empowered to Phase”, when the IRS adjusts its level of review based on its make BEPS-compliant regulations, it is not anticipated that they experience with the taxpayer in the CAP Phase. will go beyond the OECD’s recommendations. Additionally, the IRS administers the Advanced Pricing Agreement (“APA”) programme, which allows the IRS and a taxpayer, and if 10.3 Does your jurisdiction support public Country-by- applicable a treaty jurisdiction’s competent authority, to enter into Country Reporting (CBCR)? an agreement concerning transfer pricing methods. No. Although the IRS has promulgated regulations requiring CAP and the APA programme do not result in the reduction of a country-by-country reporting to the IRS, such reporting will be tax; rather, the purpose of CAP is to identify potential issues early confidential, consistent with the confidential nature of most U.S. and resolve them prior to filing tax returns, decrease the length of taxpayer information. audit cycles, and allow for real-time review of transactions through a transparent dialogue with the IRS, while the APA programme is meant to avoid complex disputes among the interested parties. 10.4 Does your jurisdiction maintain any preferential tax Both programmes share the objective of saving taxpayer and IRS regimes such as a patent box? resources. No. The Code does have certain preferential provisions applicable to specific activities and industries (for example, a research and 10 BEPS and Tax Competition development tax credit, the REIT rules discussed above, accelerated depreciation for certain kinds of property, etc.), but these are more 10.1 Has your jurisdiction introduced any legislation limited in their operation than patent boxes and are not typically in response to the OECD’s project targeting Base described as preferential tax regimes. Erosion and Profit Shifting (BEPS)?

No, but the Treasury Department and the IRS have taken some steps to implement BEPS recommendations. As discussed above

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Jodi J. Schwartz Swift S.O. Edgar Wachtell, Lipton, Rosen & Katz Wachtell, Lipton, Rosen & Katz 51 West 52nd Street 51 West 52nd Street New York, NY 10019 New York, NY 10019 USA USA

Tel: +1 212 403 1212 Tel: +1 212 403 1398 Email: [email protected] Email: [email protected] URL: www.wlrk.com URL: www.wlrk.com USA

Jodi J. Schwartz focuses on the tax aspects of corporate transactions, Swift S.O. Edgar is an associate in Wachtell, Lipton, Rosen & Katz’s including mergers and acquisitions, joint ventures, spin-offs and tax department. financial instruments. Ms. Schwartz has been the principal tax lawyer Mr. Edgar received an A.B. cum laude with high honors in Classics on numerous domestic and cross-border transactions in a wide range from Harvard College in 2007 and a J.D. from Columbia Law School of industries. She was elected partner in 1990. in 2013, where he was a Harlan Fiske Stone Scholar and a James Ms. Schwartz is recognised as one of the world’s leading lawyers in Kent Scholar and an Essays and Reviews Editor for the Columbia Law the field of taxation, including being selected by Chambers Global Review. Guide to the World’s Leading Lawyers, Chambers USA Guide to Before joining Wachtell Lipton, Mr. Edgar clerked for the Honorable America’s Leading Lawyers for Business, International Who’s Who Cynthia M. Rufe of the United States District Court for the Eastern of Business Lawyers and as a tax expert by Euromoney Institutional District of Pennsylvania and for the Honorable Thomas L. Ambro of the Investor Expert Guides. In addition, she is a member of the Executive United States Court of Appeals for the Third Circuit. Committee and past chair of the Tax Section of the New York State Bar Association, and also is a member of the American College of Tax Counsel.

Wachtell, Lipton, Rosen & Katz is one of the most prominent business law firms in the United States. The firm’s pre-eminence in the fields of mergers and acquisitions, takeovers and takeover defence, strategic investments, corporate and securities law, and corporate governance means that it regularly handles some of the largest, most complex and demanding transactions in the United States and around the world. The firm also handles significant white-collar criminal investigations and other sensitive litigation matters, and counsels boards of directors and senior management in the most sensitive situations. It features consistently in the top rank of legal advisors. Its attorneys are also recognised thought leaders, frequently teaching, speaking and writing in their areas of expertise.

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