Holding Regimes New EU Countries 2013

Comparison of Selected Countries

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This publication does not constitute tax or legal advice and the contents thereof may not be relied upon. Each person should seek advice based on his or her particular circumstances. Although this publication was composed with the greatest possible diligence, Loyens & Loeff N.V., the contributing firms and any individuals involved cannot accept liability or responsibility for the results of any actions taken on the basis of this publication without their cooperation, including any errors or omissions. The contributions to this book contain personal views of the authors and therefore do not reflect the opinion of Loyens & Loeff N.V. Introduction

Loyens & Loeff A comparison of new countries in the European Union Loyens & Loeff is an independent full service law firm with integrated corporate law and tax The CEE team has developed and maintained a concise and practical tool for our tax practices. The firm has a strong international and EU focus with around 900 lawyers working practitioners to compare the main features of the tax regimes in the new countries in the across its 6 home offices in the Netherlands, Belgium and Luxembourg and 1 offices in the European Union. We hope that this publication will find its permanent place on the desk of world’s major financial centers. Loyens & Loeff is a firm where tax lawyers on the one hand practitioners involved in international tax planning in relation to new EU countries. and lawyers and civil law notaries on the other hand are equally divided. The collaboration between the various specialists within one office works to the client’s advantage. This publication is intended as a tool for an initial comparison of the most relevant tax aspects of the tax regimes in the new EU countries where it relates to holding companies which may Loyens & Loeff’s expertise stretches across borders. In order to satisfy the international also engage in financing and/or licensing activities, and should never be used as a substitute demand for advisory services, Loyens & Loeff maintains intensive relationships with prominent for obtaining local tax advice. With respect to the various jurisdictions, we obtained the law and tax firms in Europe, the United States, Russia and many other countries. In this way, information from the firms listed below. We gratefully acknowledge the contributions of each of the firm offers its clients top-level advice worldwide and is capable of effectively structuring and those firms. Additional information regarding the regimes in the selected jurisdictions may be supervising both domestic and foreign matters. As such, the firm is the logical choice for large obtained by contacting the undersigned or the contributing firms via their website shown below. and medium-size enterprises, banks and other financial institutions, operating internationally. Loyens & Loeff scored the highest for tax advice in the 2012 editions of Legal 500, Chambers Bulgaria Djingov, Gouginski, Kyutchukov & Velichkov www.dgkv.com Europe and World Tax. Cyprus Andreas Neocleous & Co LLC www.neocleous.com Czech Republic White & Case LLP www.whitecase.com Loyens & Loeff’s primary expertise covers both the tax and legal aspects, amongst others, Estonia Sorainen www.sorainen.ee of mergers & acquisitions, restructurings, IPOs, structured and project financing, real estate Hungary Wolf Theiss www.wolftheiss.com investments, leasing transactions and intellectual property rights. Latvia Sorainen www.sorainen.lv Lithuania Sorainen www.sorainen.lt Our CEE team Malta Francis J. Vassallo & Associates Limited www.fjvassallo.com Since the accession of many new countries to the European Union, we have seen an Poland Salans www.salans.com increased flow of inbound and outbound investments in these countries. In order to have Romania Nestor Nestor Diculescu Kingston Petersen www.nndkp.com a better focus on the developments in the CEE region, Loyens & Loeff established a Slovakia PRK Partners s.r.o. www.prkpartners.sk dedicated CEE team in 2002. It is a team of enthusiastic attorneys and tax advisers with Slovenia LeitnerLeitner www.leitnerleitner.com extensive experience in advising clients on transactions relating to the CEE market. As both the Netherlands and Luxembourg often provide for an ideal location for, among others, The information contained in this publication is based on the applicable laws in effect as per intermediary holdings or financing companies, the team is involved in many investment January 1, 2013. structures in the new EU countries. We do not avail of offices in these countries, but we work together with the leading law firms in each of them and frequently travel to the region to Yours sincerely, maintain close contact with these law firms and with our clients. Bartjan Zoetmulder Wouter Vosse Tim Dopmeijer Partner & Head of the Senior associate & Member Junior associate & Member CEE team of the CEE team of the CEE team [email protected] [email protected] [email protected]

loyens & loeff Holding Regimes New EU Countries 2013 Table of contents

Part I Bulgaria, Czech Republic, Hungary, Poland, Part II Cyprus, Estonia, Latvia, Lithuania, Malta, Slovenia Romania, Slovakia

1. Capital tax / stamp duty / real estate transfer tax / 1. Capital tax / stamp duty / real estate transfer tax / real real estate tax 6 estate tax 47 2. Corporate income tax (“CIT”) 10 2. Corporate income tax (“CIT”) 51 2.1. CIT and wealth taxes 10 2.1. CIT and wealth taxes 51 2.2. Dividend regime (participation exemption) 12 2.2. Dividend regime (participation exemption) 53 2.3. Gains on shares (participation exemption) 15 2.3. Gains on shares (participation exemption) 57 2.4. Losses on shares 17 2.4. Losses on shares 59 2.5. Costs relating to the participation 18 2.5. Costs relating to the participation 60 2.6. Currency exchange results 19 2.6. Currency exchange results 61 2.7. Tax rulings 20 2.7. Tax rulings 62 2.8. Loss carry over rules 23 2.8. Loss carry over rules 64 2.9. Group taxation for CIT purposes 25 2.9. Group taxation for CIT purposes 65 3. Withholding taxes payable by the holding company 28 3. Withholding taxes payable by the holding company 68 3.1. Withholding tax on dividends paid by the holding company 28 3.1. Withholding tax on dividends paid by the holding company 68 3.2. Withholding tax on interest paid by the holding company 30 3.2. Withholding tax on interest paid by the holding company 71 3.3. Withholding tax on royalties paid by the holding company 33 3.3. Withholding tax on royalties paid by the holding company 73 4. Non-resident capital gains taxation - domestic 4. Non-resident capital gains taxation - domestic legislation and tax treaties 37 legislation and tax treaties 74 5. Anti-abuse provisions / CFC rules 39 5. Anti-abuse provisions / CFC rules 76 6. Tax and investment incentives 43 6. Tax and investment incentives 79

loyens & loeff Holding Regimes New EU Countries 2013 Holding Regimes New EU Countries

Part I Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovakia 1. Capital tax / stamp duty / real estate transfer tax / real estate tax

Bulgaria Czech Republic Hungary Poland Romania Slovakia

Capital tax Capital tax Capital tax Capital tax Capital tax Capital tax There is no capital There is no capital There is no capital In general, a capital There is no capital There is no capital contribution tax in Bulgaria. contribution tax in the Czech (contribution) tax Hungary. contribution to a Polish contribution tax in Romania. contribution tax in Slovakia. Republic. company is subject to Stamp duty Stamp duty tax at the effective rate Stamp duty Stamp duty An insignificant amount of Stamp duty Stamp duty is levied on the of 0.5%. The tax base is The incorporation of a new The incorporation of a new state fees is due upon the The registration of a new registration of a company in the value of share capital company is subject to a company is subject to a registration in the commercial company in the commercial the Company Register and increase resulting from registration fee amounting to registration fee depending register of (i) a newly register and subsequent on any changes made to the the contribution; the share RON 600. The registration on the form of the company incorporated company, (ii) a changes, including the data so registered. premium is not subject to tax. of new elements during the (€ 829.50 for a joint stock new shareholder in a limited change of a shareholder existence of a company company and € 331.50 liability company, or (iii) the or increase/decrease of Stamp duty is, for instance, Increase of a company’s triggers minor registration for any other form) and increase of the capital of any registered capital, trigger a levied in an amount of: share capital is not subject fees (approximately RON a duty payable upon the commercial company. minor stamp duty (CZK 2,000 • HUF 100,000 in the case to tax if: 400 -1,000). registration of the change – 12,000). of the registration of a • as a result of the in the registered capital of a Real estate transfer tax private stock company contribution the company Real estate transfer tax company (€ 66). Transfer of a real estate If a notarial deed is required or a limited liability acquires a majority of Real estate transfer has or establishment of limited (e.g. for establishment of a company; a reduced fee voting rights in another to be done pursuant to Non-monetary contribution rights in rem over real estate company, increase/decrease of HUF 50,000 may apply, company (or the acquiring agreements authenticated to the registered capital of a is subject to municipal of registered capital etc.), if the conditions for a company that prior to the by public notary. There company has to be evaluated transfer tax of between 0.1% notarial fees are calculated simplified incorporation contribution already holds is no real estate transfer by the expert opinion or by to 3.0%, chargeable on the based on certain criteria (e.g. procedure are fulfilled; majority voting rights in tax; however, real estate audited financial statements. higher between: registered capital) and may • HUF 600,000 in the case the acquired company transfers are subject to • the agreed purchase vary significantly. of registration of a public receives additional voting notary fees decreasing from Real estate transfer tax price; and stock company or a rights), or 2.2% to 0.44% depending Real estate transfer tax • the tax evaluation of the Real estate transfer tax European Company; • the object of the on the (i) purchase price or has been abolished as per asset, determined by the Transfer of real estate assets • HUF 100,000 in the case contribution is an (ii) the evaluation of the asset 1 January 2005. municipality. is, generally, subject to the of the registration of any enterprise or an organized determined by the public However, this is not relevant real estate transfer tax of other entity with legal division of the company. notary authority (whichever Real estate tax upon capital contributions, 4%. Transfer of shares in personality; is the greater). Furthermore, Real estate located on because if transferred real estate companies is not • HUF 50,000 in the case Mergers of companies and a 0.5% registration fee of the territory of the Slovak as in-kind contribution to subject to the tax. In-kind of the registration of a transformation of a limited the real estate with the Land Republic is subject to real the capital of a Bulgarian contribution of real estate branch office; and liability company into a joint Book is to be paid by the estate tax, which is levied company, such a transfer into the registered capital of • HUF 50,000 in the stock company (and vice buyer. on buildings, land and will be exempt from such a company is, exempt from case of registering a versa) are not subject to apartments. In general, the municipal tax. Transfer of the tax provided that the representative office; transfer tax. Conversion of a Real estate tax owner of a real property is going concern is also not contributor continues as a • Fixed registration duty of company into partnerships A local tax on buildings is obliged to submit a tax return subject to such tax. shareholder for more than 5 HUF 15,000 applies for may be in some cases payable by the owner. for the calendar year in which years after the contribution. subject to tax.

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 6 Bulgaria Czech Republic Hungary Poland Romania Slovakia

Real estate tax Real estate tax further amendments of the Stamp duty The tax is levied on the the real estate was A local tax on real estate The real estate tax is payable AoA. The sale of shares and building’s book value, at purchased. The tax is is payable by the owner, by the owner based on the partnership interests in rates varying between 0.25% payable on the basis of chargeable on the tax area of land or the size of a If the registered capital of the Polish entities is subject to and 1.50%, depending on the the tax assessment issued evaluation of the real estate. building taking into account company is amended, the 1% tax. Sale of shares in building’s location. and distributed by the tax The real estate tax of real the attractiveness of their stamp duty is levied at 40% joint stock companies may authorities. estate assets owned by location. The tax rate is, of the amount due upon the be exempt from the 1% tax If the building has not been legal entities is calculated generally, defined as a fixed incorporation of the company under certain conditions, revalued during the last 3 The real estate tax base is on the higher value between amount per square meter. (see above). e.g. if a brokerage house years, the rates vary from calculated according to the their book value and their acts as intermediary in the 10% to 20%. For buildings area in square meters on tax evaluation. The rate of The real estate tax Real estate transfer tax transaction. not revalued during the last buildings and apartments the tax is determined by compliance is somewhat The transfer of property for 5 years, the rates vary from or the value of land. The the respective Municipal burdensome but the tax itself consideration is subject to In general, the granting 30% to 40%. basic tax rates for buildings, Council and may vary in the does not usually represent a transfer tax payable by the of loans is subject to 2% land, and apartments are range between 0.01% and material cost. purchaser, calculated on the transfer tax. A local tax on land is payable stipulated in the Act on 0.45%. In case right of use is market value of the property by the owners of land. The Municipal Taxes (0.25% of granted over the real estate CZK 1 = € 0.03964 transferred. There are exemptions for: maximum rate is of RON the total value of the land or asset, tax obligor for the real (2 January 2013) • loans granted by foreign 1.0353 per square meter for up to € 0,33 for each square estate tax is the acquirer of The real estate transfer tax is entities that carry on land located in urban areas, meter of building and/or the limited right in rem. Tax 4% up to HUF 1 billion, while activities in the area of while for land located outside apartment). However, the obligor for real estates, owed the rate on the excess is only granting bank loans and urban areas, the rate per rates can be changed by the by the State or a municipality, 2%. These are altogether regular loans; square meter is up to RON respective municipality. is the person that manages capped at HUF 200 million • loans recognized as 0.01456. the real estate. per real estate. financial services exempt On 1 January 2009, the from VAT; RON 1 = € 0.2250 (2 January euro became legal tender BGN 1 = € 0.511292 (fixed Real estate traders, • shareholder loans (no 2013) in Slovakia. It replaced the rate) funds, REITS and leasing minimum shareholding is Slovak koruna (SKK) at the companies may be subject required). irrevocably fixed exchange to a flat-rate 2% transfer tax rate of €1 = SKK 30.1260. under certain conditions. Nevertheless, loans granted to a partnership by its The acquisition of a building partners are always subject site may be exempt from to 0.5% tax (such loans transfer tax if the purchaser cannot benefit from the builds a residential building exemption). on the real property within 4 years. Real estate transfer tax Sale of real estate is subject Transfer tax is not only to 2% transfer tax only if the levied on the acquisition of transaction is outside the real estate but also on the scope of VAT or is exempt acquisition of a quota in a from VAT.

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 7 Bulgaria Czech Republic Hungary Poland Romania Slovakia

real estate company, if: Real estate tax • the real estate company’s The real estate tax generally principal activity, as applies to the owners, indicated in the Company perpetual usufructuaries and Registry, is the sale freeholders of properties. and purchase, or lease The tax applies to (i) land, of real estate owned, (ii) buildings or parts thereof or real estate project and (iii) constructions or management; and parts thereof connected with • the quota obtained business activities. RET is reaches 75% either by payable to local authorities, the acquirer alone or which set RET rates within altogether with e.g. close the statutory maximum rates. relatives or its related The maximum RET rates in companies, as the case 2013: may be. • on land – PLN 0.88 per square meter (i.e. A real estate company PLN 8,400 per ha); comprises a business • on buildings or parts association that: thereof used for business • owns real estate located activities – PLN 22.82 per in Hungary; or square meter of usable • has a direct or indirect surface; quota of at least 75% in a • on constructions or business association that parts thereof used for owns real estate located business activities – 2% in Hungary. tax on the initial value of a construction, adopted for The transfer tax is levied on tax depreciation purposes. the market value of the real estate, prorated to the quota PLN 1 = € 0.24472 being acquired. (2 January 2013)

On certain conditions, the transfer of real estate or quota in real estate companies between related parties may be exempt from transfer tax.

Building tax It may be imposed by local municipalities. It is an annual levy on the persons

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registered as the owners as of 1 January of the given tax year. The legislation fixes the upper limit of the rate at HUF 1100/m2 or at 3.6% of the adjusted market value (= 50% of the market value) of the building.

Tax on land The owner of land situated in the territory of an urban area may be taxed by the relevant local municipalities. The upper limit of the tax is fixed at HUF 200/m2 or at 3% of the adjusted market value (= 50% of the market value) of the land.

HUF 1 = € 0.00341 (2 January 2013)

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 9 2. Corporate income tax (“CIT”) 2.1 CIT and wealth taxes

Bulgaria Czech Republic Hungary Poland Romania Slovakia

The general CIT rate in 2013 The general CIT rate is 19% The general CIT rate is 10% The general CIT rate is 19%. The general CIT rate is 16%. The general CIT rate is 23%. is 10%. for tax periods beginning in up to a HUF 500 million A company is regarded a The taxable base for CIT Legal entities seated in 2010 and onwards. tax base, and 19% on the Polish tax resident if it either purposes is determined by Slovakia are taxed on their Resident companies are excess amount. has its registered office or adjusting accounting profits worldwide income. taxed on their worldwide A special rate of 5% place of management in for non-deductible expenses income. The taxable base applies to taxable profits Licensing incentive Poland. A Polish resident and non-taxable income. Wealth taxes is computed on the basis of of investment, mutual and 50% of royalty revenues are company is subject to CIT on There is no wealth tax in accounting profit by adjusting pension funds. Domestic exempt from CIT regardless its worldwide income. Wealth taxes Slovakia. it for tax purposes. source income subject to a of whether received from a There is no wealth tax in final withholding tax of 15% related or unrelated party. Non-resident companies Romania. Collective investment is not included in the CIT are subject to CIT only on schemes, which have base. Minimum tax base income from Polish sources been admitted to public If both the pre-tax profit and (i.e. earned in Poland), offering in the Republic of Resident companies (i.e. the tax base of an entity are unless a double tax treaty Bulgaria, licensed investment legal entities seated or less than the “minimum tax provides otherwise. companies of the closed-end having a place of effective base”, i.e. 2% of the entity’s type, and special purpose management in the Czech total revenues reduced by Income of Polish investment investment companies shall Republic) are taxed on their the cost of goods sold, the and pension funds as well be exempt from CIT. worldwide income. The tax cost of intermediary services as Polish-sourced income base is computed based on are adjusted by certain items of foreign investment and Alternative final corporate the accounting profit based (e.g. income attributable to pension funds fulfilling certain taxes are levied on some on the Czech accounting a permanent establishment conditions may be exempt categories of expenses and standards. The accounting abroad, certain percentage from CIT in Poland. are deductible for profit tax profit is then adjusted for tax of shareholder loans), the purposes, when properly purposes. minimum tax base will Wealth taxes documented. apply, unless the taxpayer There is no wealth tax in Wealth taxes chooses to provide a special Poland. Out-of-pocket expenses, There is no wealth tax in the declaration detailing its cost related to business activity, Czech Republic. and income structure to the social expenses, rendered tax authority proving that its in-kind (including expenses general tax base is accurate. for contributions for voluntary This rule does not apply in health and social security, the pre-company period and “Life” insurance and in the first tax year. certain expenses for food vouchers) and expenses on Local business tax maintenance and operation Hungarian companies are of automobiles, when used subject to local business tax,

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for management activities at a maximum rate of are subject to 10% final CIT. 2%. The tax base is fundamentally the turnover Wealth taxes (excluding royalties) less There is no wealth tax in costs of materials, costs of Bulgaria. goods sold and mediated service fees. Deduction of the above costs from the tax base can be subject to limitations. Interest and royalty income are not subject to local business tax.

Wealth taxes There is no wealth tax in Hungary.

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 11 2.2 Dividend regime (participation exemption)

Bulgaria Czech Republic Hungary Poland Romania Slovakia

National National National and international National and international National National and international Dividends received from A domestic distribution of Dividends received by Dividends received by a Inbound dividends derived Although there is no full other resident companies dividends can be exempt Hungarian companies resident company from: by a Romanian resident participation exemption in are exempt from income from taxation if the recipient either from Hungarian or • a resident company is: are incorporated in the Slovakia, certain types of tax, except for dividends – beneficial owner – holds at from foreign (both EU and - CIT exempt provided taxable base of the receiving income are exempt from CIT, distributed by REITs, as well least 10% of the registered non-EU) subsidiaries are that certain conditions company and taxed at the i.e. dividends received paid as cases qualifying as hidden capital of the distributing exempt from CIT (except are met (i.e. at least standard CIT rate (except out of profits derived by the distribution of profit. company for an uninterrupted for dividends received from 10% shareholding inbound dividends covered distributing company on or period of 12 months (this CFCs). (as an owner), by the EU Parent-Subsidiary after 1 January 2004. International holding period can be holding shares for an Directive which are exempt Inbound dividends derived by fulfilled subsequently). Both Foreign tax credit uninterrupted period in the hands of the receiver Dividends from profits a Bulgarian resident are part companies have to be either In the absence of a treaty, of two years (the two provided that a shareholding generated before 1 January of the taxable base of the joint stock company (a.s.) unilateral relief is provided years holding period of minimum 10% is 2004 and distributed receiving company and taxed or limited liability company by way of a credit for does not have to be maintained for at least 2 according to a resolution at the normal CIT rate. (s.r.o.) or cooperative income taxes paid abroad. met upfront); or years). of general meeting of a (družstvo). Unilateral credit relief will be - subject to 19% company (cooperative) Dividends distributed by determined separately for withholding CIT if International adopted after 31 December foreign entities, which are tax International each item of foreign-source these conditions are Dividends received by a 2012 are subject to 15% tax residents of an EU-member Inbound dividends derived by income. The credit will be not met; Romanian company from rate. state, or a country, which a Czech resident company limited to 90% of the foreign • a non-resident a non-resident company is a party to the Agreement constitute a separate tax tax and cannot exceed the “privileged” (e.g. EU, are included in the ordinary No tax would however for the European Economic base that is subject to a 15% Hungarian tax burden on the EEA, Swiss) company is: income of the recipient apply on abovementioned Area, are also exempt from CIT. relevant income. - CIT exempt provided company and taxed at the dividends distributed by an CIT. that certain conditions general tax rate. entity with a seat in an EU Moreover, dividends received CFC rules are met (i.e. at least Member State to a Slovak With regard to withholding and beneficially owned by Please see paragraph 5 with 10% (for Swiss However, under the domestic resident, who has a direct tax on inbound dividends, a Czech resident company respect to the CFC rules. company - at least law implementing the EU shareholding of at least 10% local entities are entitled to from an EU resident 25%) shareholding Parent-Subsidiary Directive, of the registered capital of a tax credit for any tax paid subsidiary are exempt in CFC’s undistributed profits (as an owner), foreign-source dividends paid this entity. abroad, even if no treaty the Czech Republic if the In certain cases, the holding shares for an by an EU subsidiary to its exists. recipient holds at least 10% undistributed profit of a CFC uninterrupted period of Romanian parent company of the registered capital of due to a direct Hungarian two years (the 2 years are exempt from tax in Thus resident persons are the distributing company corporate shareholder of holding period does Romania if the Romanian granted a unilateral relief for an uninterrupted period at least 25% or having a not have to be met recipient company meets the under Bulgarian law, i.e. of 12 months (this holding ‘dominant’ quota becomes up front); the above following conditions: they are entitled to a direct period can be fulfilled taxable in the shareholder’s exemption does not • It holds at least 10% ordinary tax credit for all subsequently). hands, pro-rated to his quota apply if dividend is of the EU distributing identical and similar foreign held on the last day of the received as a result of company’s shares. taxes levied by respective Both companies have to tax year. liquidation of the legal • The holding has lasted for competent tax authorities have a specified legal form, entity making the an uninterrupted period

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 12 Bulgaria Czech Republic Hungary Poland Romania Slovakia

abroad on any passive be EU residents and be This rule does not apply payments; or of 2 years prior to the income, including dividends. subject to tax. – i.e. the undistributed - CIT exempt in Poland distribution date. profit triggers no CIT – if on the basis of a tax Dividends received by a a Hungarian tax resident treaty or subject to Czech resident company private individual shareholder 19% CIT in Poland from its subsidiary resident holds an interest (voting (with possibility to in Norway or Iceland are tax rights) of at least 10% or has apply foreign tax exempt under the similar a ‘dominant’ quota in the credit) - if the above conditions. The exemption above Hungarian corporate conditions are not does not apply to dividends shareholder of the CFC. met; distributed from a Czech • a non-resident subsidiary in liquidation. Naturally, when actually “unprivileged” company distributed later on, the is: The exemption can also be previously taxed CFC income - CIT exempt in Poland applied, if a Czech resident will not be taxed for a second on the basis of a tax company receives dividends time. In addition, upon the treaty; or from a company, which: subsequent alienation of - subject to 19% • is a tax resident of a state such shares due to the CIT in Poland (with that has concluded a tax reduction of the CFC’s possibility to apply treaty with the Czech capital or the termination of foreign tax credit). Republic; the CFC without succession, • has a legal form similar the earlier tax on the Foreign tax credit to a Czech joint stock undistributed profits will Tax credit (both direct and company or a limited become recoverable. underlying) in respect of liability company or foreign tax withheld on cooperative; dividends may also be • the parent-subsidiary applicable, depending on relationship is fulfilled a number of requirements (10% for at least 12 under both domestic rules months); and and treaties. • the subsidiary is subject Based on domestic rules: to CIT of 12% or more. • Direct, proportional ordinary tax credit may The exemption does not be used when income apply to dividends received of a Polish tax resident by a Czech parent company is taxed abroad and that from its subsidiary in income is not tax exempt liquidation (irrespective in Poland. of the place of seat of the • Additional underlying, subsidiary). proportional tax credit is applicable whenever a company which is a Polish tax resident holds

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 13 Bulgaria Czech Republic Hungary Poland Romania Slovakia

a minimum of 75% shares in an entity taxed on its worldwide income in any treaty country outside the EU/EEA/Switzerland for an uninterrupted period of 2 years and there is a tax treaty in place. In any case, the foreign tax credit cannot exceed the Polish CIT amount on the foreign dividends.

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 14 2.3 Gains on shares (participation exemption)

Bulgaria Czech Republic Hungary Poland Romania Slovakia

Capital gains on the sale of Capital gains are part of Gains realized on a Capital gains from the Capital gains are generally Capital gains from the shares are included in the the general tax base and shareholding in another disposal of shares are treated as ordinary disposal of shares are taxable base of resident subject to CIT at the ordinary (Hungarian or foreign) subject to 19% CIT and business income and taxed subject to CIT at the ordinary companies and taxed at the rate. Certain participations company are in principle aggregated with other accordingly. rate (23%). normal CIT rate. (especially investments held subject to CIT (10%/19%). income. for trade) are also subject to fair market revaluation However, capital gains accounting. Revaluation on the sale of qualifying gains on such participations participations are exempt are subject to tax unless the from CIT, unless held in a below exemption applies. CFC.

Capital gains realized on To qualify for the exemption, sale of shares in domestic the participation should be or foreign companies can be a so-called “registered” or exempt from taxation if the “reported” participation: seller is a beneficial owner of • the participation is at least such income and has held at 30%; and least 10% of the registered • has been held for at least capital of the subsidiary for one year; and an uninterrupted period of 12 • has been reported to the months (this holding period tax authority within 60 can be fulfilled subsequently). days of acquisition.

In respect of the sale of Foreign companies holding a Czech subsidiary, both shares in a Hungarian companies have to be either company could also a joint stock company or a avail of the participation limited liability company or a exemption on capital gains, cooperative. if they transfer their place of effective management In respect of the sale of to Hungary and acquire an EU subsidiary, both Hungarian tax residence. In companies have to have a such case, the shares should specified legal form, be EU be reported to the Hungarian residents and be subject to tax authority within 60 days tax. from the date of transfer.

In respect of the sale of A deduction from pretax companies from other profits will be available for countries, the exemption capital gains on shares

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applies as long as, the reported to the Tax Authority subsidiary (notified shares), as well as • is a tax resident of a state for gains recognized on the that has concluded a tax retirement of notified shares treaty with the Czech as in-kind contributions. Republic; • has a legal form similar Other than the above, there to a Czech joint stock is a CIT exemption for gains company or a limited on shares realized due to a liability company or • reduction of capital, or cooperative; • a termination without • the parent-subsidiary legal succession, relationship is fulfilled excluding all CFC (10% for at least 12 subsidiaries. months); and • the subsidiary is subject This exemption is also to CIT of at least 12%. available for qualifying participations even within The exemption does not one year. apply to the gains on the sale of a Czech subsidiary in A deferral of CIT can also liquidation. be sought on gains in the case of a preferential Furthermore, the exemption transformation or preferential does not apply to the gains exchange of shares under on sale of shares that were certain conditions, largely in purchased as a part of line with the EC Merger Tax business enterprise. Directive.

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 16 2.4 Losses on shares

Bulgaria Czech Republic Hungary Poland Romania Slovakia

Capital losses are deductible Capital losses are generally Capital losses on shares are There are no special rules as Capital losses on shares A capital loss incurred for tax purposes except not deductible. However, generally deductible. to deduction of a capital loss. resulted further to their from the sale of shares is for losses from transfer of losses arising from the evaluation according to generally tax non-deductible. financial instruments. sale of shares held for However, the impairment, Therefore, losses incurred accounting regulations are However, this would not trade (except for shares and losses and even on the sale of shares are deductible for CIT purposes. apply, if the shares are representing controlling or currency exchange losses generally tax deductible and traded on the listed securities significant influence = holding realized on participations may be deducted from other market and their purchase of at least 20%) and losses in a CFC or on so-called revenues. price is not higher and resulting from revaluation “registered” or “reported” certain specific requirements of such investments to fair participations are not are met. market value are deductible. deductible for CIT purposes. For registered security dealers a capital loss incurred from the sale of shares is always deductible.

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 17 2.5 Costs relating to the participation

Bulgaria Czech Republic Hungary Poland Romania Slovakia

In principle, all expenses Generally, costs related Costs relating to the Polish tax law does not The legislation does not The precondition for treating related to the business to the holding of any participation are generally provide for rules pertaining contain specific provisions costs as tax deductible is that operations of the taxable participation/share deductible, but thin to costs relating to the on the deductibility of these were duly accounted persons and supported by (e.g. interest on a loan, capitalization rules apply to participation. Thus, costs related to holding for in the P/L account and sufficient documentation are shareholder costs) are tax interest expenses (please deductibility of such costs participation/shareholding. were incurred to generate, tax deductible. non-deductible. see Section 5). should be analyzed on a Such deductibility is currently maintain, and ensure a case-by-case basis. debatable and open to taxable income. The Slovak Interest on loans received In addition, payments to a various interpretations. Income Tax Act treats as far as 6 months before an CFC may not be deductible Expenses incurred on the those expenses incurred acquisition of a subsidiary if the business nature of the disposal of a capital asset to generate income which are tax non-deductible, expenses cannot be proven. are deductible for the seller. are not included in the tax unless it is proved and base (e.g., dividends) as specifically documented Generally Polish tax non-deductible. Therefore, by a taxpayer that such authorities accept the as the holding of shares in a loan is unrelated to the approach that interest on company generates primarily shareholding. loans taken to acquire shares dividend income that is not in the Target should be tax included in the tax base, it Non-deductible indirect costs deductible when interest may lead to a conclusion that related to the participation is paid or compounded. In the interest on loans used by are deemed equal to 5% practice it is advisable to the parent company for the of the actually received secure this approach by acquisition of a subsidiary dividends; unless it is proved obtaining a tax ruling. may be considered non- that the actually incurred deductible. On the other indirect costs are lower. Please see Section 5 hand, it may be argued that However, these provisions with respect to the thin- the entity may potentially apply only in respect to capitalization rules. realize a taxable capital gain participations in companies on the sale of the shares. that fulfill Parent-Subsidiary Thus, the tax deductibility conditions, i.e. EU, Iceland must be considered on the and Norway companies, individual basis. and companies residing in countries with which the Czech Republic concluded a valid tax treaty (10% ownership for 12 months etc.; please see Section 2.2.).

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 18 2.6 Currency exchange results

Bulgaria Czech Republic Hungary Poland Romania Slovakia

Currency exchange losses/ Both realized and unrealized It is possible to defer the Positive currency exchange Currency exchange results Subject to a prior gains from the valuation currency exchange results CIT effects of unrealized differences constitute registered in accounts are announcement to the of monetary assets are are generally accounted for currency exchange results taxable revenues and treated as ordinary revenues/ relevant tax authorities, considered deductible in the profit-loss account and of fixed financial assets and negative currency exchange expenses. taxpayers may decide losses/taxable income for the are taxable or tax deductible. long-term liabilities until the differences constitute tax that “unrealized” currency purpose of adjustment of the currency exchange result is deductible costs. In case of long-term loans exchange differences will be financial result. The above general principle actually realized, provided from other than financing included in the tax base in was recently questioned that the transactions are not Taxpayers are allowed entities, the net foreign the tax period in which the by the case law; however, hedged. The deferral of the to choose the method of exchange losses are treated receivable is collected or the court’s approach (non- tax effects is the taxpayer’s settlement of currency as interest, being subject to payment is performed. taxation and non-deductibility choice. exchange differences for thin capitalization rules. of unrealized currency CIT purposes. They can opt The taxation of “realized” exchange results) is pending Currency exchange losses for settlement according to currency exchange losses/ for further confirmation. realized on participations either the rules provided in gains are driven by in a CFC or on so-called accountancy regulations or accounting. “registered” or “reported” separate rules provided in participations are not the CIT Act. deductible for CIT purposes.

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 19 2.7 Tax rulings

Bulgaria Czech Republic Hungary Poland Romania Slovakia

There is no regime for There is no general advance Binding tax rulings may be The tax authorities may issue Advance tax rulings and The Slovak tax authorities binding advance rulings. ruling system in the Czech requested by taxpayers and a ruling at the request of a transfer pricing rulings may will issue a binding advance However, it is common Republic. The tax authorities foreign entities in relation taxpayer. The request sets be issued by tax authorities. ruling on transfer pricing practice to direct written may issue a binding ruling to any type of tax provided out the facts, the question The rulings are binding on method if requested by a inquiries to the revenue on a taxpayer’s request the ruling relates to the tax and the taxpayer’s opinion on the tax authorities. taxpayer. The ruling could authorities to solve an open regarding the possibility to consequences of a future the case. be issued for at most five question or get confirmation utilize the tax loss after the contract, transaction, a Under the law, advance tax periods; however, if on a certain taxation practice substantial change in the specific type of contract or A positive tax ruling issued tax rulings are to be issued requested, eventually could or duty. structure of shareholders contract package, or a so- by the Minister of Finance within 3 months and are be extended by five more tax (see Section 2.8). called ongoing continuous contains confirmation of the subject to a fee of € 1,000. periods. The rulings of the Executive transaction, and a detailed taxpayer’s position via either Transfer pricing rulings are Director of the National Moreover, a taxpayer may description is provided. The the Minister of Finance’s to be issued in 12 months The taxpayer may also Revenues Agency are not request the tax authority Ministry of Finance must opinion on the applicable (18 months if it refers to a ask for advance ruling on binding on persons outside for a binding assessment generally issue a ruling tax treatment together with bi/multilateral ruling) and permanent establishment tax the revenue administration. on whether prices agreed within 60 days, which can supporting argumentation, are subject to fees up to base determination method. If, however, a taxpayer acts upon with related parties are be extended with further 60 or just a pure confirmation € 20,000. Such ruling should be in accordance with a ruling at arm’s length. The whole days. The fee for the ruling is of the applicant’s standpoint. effective at least 1 year and and the ruling is later decided group structure must be 1% of the transaction value If a ruling is negative, it In practice, the above- cannot be changed during to be inconsistent with the disclosed. or minimum HUF 1 million, is possible to appeal and mentioned terms are usually the respective tax period. law, no penalties (including and is capped at HUF 8 challenge it before tax courts. prolonged. Although possible interest) can be applied to Additional areas where million (capped at HUF 10 A tax ruling should generally under the law, tax rulings the taxpayer. binding tax rulings can million if the ruling is issued be issued by the Minister have been rather seldom be issued are technical for contract type or contract of Finance within 3 months obtained in practice so far, appreciation of assets, R&D package type). The ruling of filing the application. In being a time consuming deduction and two other issued is effective for an more complicated cases, the and administratively burden areas relating to individuals unlimited period of time, until Ministry is entitled to extend process. and non-profit organizations. the legislation or the content the deadline. However, the In addition, the binding ruling of the transaction changes. 3-month deadline is generally can be issued on whether kept by the tax authorities. a taxable supply, in terms Further to the ‘ordinary’ The tax regulations give the of a correct classification, binding ruling described applicant strong protection is subject to general or above, a so called ‘long- if it follows the tax treatment reduced tax rate for the VAT term binding ruling’ is also presented in the tax ruling purposes. available for larger taxpayers issued by the Minister of fulfilling certain conditions. Finance. This protection A fee of CZK 10,000 will be The ‘long-term’ ruling would results from the fact that charged for the filling of a be referred to corporate acting in line with the tax request. income tax issues only. ruling cannot be held against None of those are frequently the applicant. This implies used because of practical The ‘long-term’ ruling would that as long as the applicant problems. remain in force for 3 acts in line with the tax ruling:

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There is also a possibility to financial years (including the • no tax penal proceedings apply for an opinion of the year of request), even if the will be initiated against General Finance Directorate underlying tax laws change. persons responsible for on interpretative issues, but tax matters; such opinions are not legally The fee for the ‘long-term’ • no penalty interest will be binding. ruling is generally two times charged if any tax is due; of the fee for the ‘ordinary’ • applicant will not have to binding ruling, and would be pay any tax arrears that capped at HUF 15 million. have arisen as a result of acting in line with the tax As of 1 January 2013, ruling. This tax exemption binding tax rulings may be is only applicable if the obtained also for transactions transaction or other event not qualifying as future has been performed after transactions; this ruling would the receipt of the ruling; be available in connection that is why receiving with corporate income tax, the ruling before the local business tax and transaction is so crucial. personal income tax issues. Generally speaking the Taxpayers may apply for protection lasts until the an accelerated procedure tax ruling is changed and obtain the ruling within or dismissed by the tax 30 days. In this latter case, authorities (e.g. if they find it the fees above would be incorrect or the law changes) increased to the double. - detailed rules are provided in this respect. An appeal For a 50% decreased procedure is available. procedural fee, it is possible to extend the scope of The fee for tax rulings is already existing binding PLN 40, chargeable in rulings, if proven necessary practice on each question in due to future legislative or the application. factual changes. There is also an advance Related parties may request ruling system applicable to the Ministry of Finance to transfer pricing arrangements issue an advance ruling (APA). (APA) on the transfer pricing aspects of a future transaction.

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The Ministry of Finance must issue a ruling within 120 days. This period can be extended twice, each time for a further 60 days. The advance ruling is binding for all tax authorities, unless relevant circumstances change. The advance ruling on transfer pricing is valid for a pre-determined period of 3 to 5 years. Upon request, this period can be extended once for a further 3 years.

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 22 2.8 Loss carry over rules

Bulgaria Czech Republic Hungary Poland Romania Slovakia

Carry back Carry back Carry back Carry back Carry back Carry back Loss carry back is not Loss carry back is not In general, no carry back Loss carry back is not Loss carry back is not Loss carry back is not permitted in Bulgaria. permitted in the Czech is permitted in Hungary. permitted in Poland. permitted in Romania. permitted in Slovakia. Republic. However, taxpayers Carry forward operating in the agricultural Carry forward Carry forward Carry forward The ordinary losses may Carry forward sector may account deferred Losses may be carried Losses incurred starting Tax losses can be carried be carried forward to offset Losses may be carried losses by self-revision or forward for a maximum of 5 2009 may be carried forward forward for a maximum of 7 taxable profit earned in the 5 forward for 5 tax periods. by correcting the amount years, and in each year up to for 7 years. Losses incurred years. If the company started succeeding calendar years. However, special limitations of tax paid in the previous 50% of the total loss may be before 2009 can be carried to deduct the tax losses and apply in the case of a two tax years by reducing set off. forward for 5 years. is dissolved without being substantial change in a the pre-tax profit of the liquidated, its tax losses shareholding structure (a preceding two tax years by can be deducted by its legal substantial change is any the amount of the deferred successor, unless the sole change which affects more loss; losses carried back per purpose of such dissolution than 25% of the registered year cannot exceed the 30% is avoiding taxation. share capital or voting rights of the relevant tax year’s or results in a substantial pretax profit, however if the influence of a shareholder), taxpayer fails to exercise this de/mergers and transfers option, or transfers only part of enterprises. Losses can of the loss to the debit of the be transferred in mergers previous two tax years, the and transfers of enterprises general loss carry forward if EU Merger Directive rules may be applied to the conditions are fulfilled. remainder. Losses generated prior to EU accession are generally not Carry forward transferable. From 2004, Hungary has allowed the carry forward of tax losses indefinitely. When accrued losses are deducted, losses carried forward from earlier years must be written off first. Carried forward losses are deductible up to the 50% of the relevant year’s corporate income tax base (as calculated without the losses carried forward) per year. In the case of corporate restructuring and preferential transfer of

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assets, losses can be carried forward by the successor company only if certain conditions are fulfilled. Without going into details, related-party relationship and generating income from the previous business activity would be generally required.

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 24 2.9 Group taxation for CIT purposes

Bulgaria Czech Republic Hungary Poland Romania Slovakia

There is no group taxation There is no group taxation There is no group taxation A “tax capital group” (tax There is no group taxation There is no group taxation regime for CIT purposes. regime for CIT purposes regime for CIT purposes. consolidated group) may be regime for CIT purposes. regime for CIT purposes. formed for CIT purposes in Poland. Taxable income for the group is calculated by combining the income and losses of all the companies. A tax consolidated group formed and registered with the relevant tax authorities is treated as a separate taxpayer for CIT purposes.

The basic requirements for obtaining the status of a tax capital group are the following: • A tax capital group may be formed only by limited liability or joint- stock companies based in Poland, provided that average share capital is not lower than PLN 1,000,000. • The holding company should hold at least 95% of the shares in the other group companies. • Subsidiary companies cannot be shareholders in the holding company or other subsidiary companies in the group. • None of the members of the group can have tax liabilities towards the Treasury (e.g. VAT, CIT). • The holding company and the subsidiaries have agreed to establish the

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capital group for at least three years by means of a notarial deed. The agreement must be filed with the tax office.

After the creation of the tax consolidated group, the companies forming this group should additionally satisfy the following requirements: • None of the companies included in the group can singularly benefit from tax exemptions (excluding VAT exemptions). • The annual level of the group’s profitability cannot be less than 3%. • Companies in the group cannot maintain relationships with companies from outside the group resulting in a breach of transfer pricing restrictions.

If all the above-mentioned restrictions are met the tax capital group may take advantage of the following benefits: • The losses of some of the members of the tax capital group can be set off against the taxable income of its other members. • Transfer pricing restrictions do not apply between companies in the group. • Donations between companies in a tax capital

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group are CIT-neutral, as the donor can treat the value of the donation as a tax cost; donations outside the group are not deductible.

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 27 3. Withholding taxes payable by the holding company 3.1 Withholding tax on dividends paid by the holding company

Bulgaria Czech Republic Hungary Poland Romania Slovakia

Dividends paid to non- Dividend payments from Hungary does not impose Dividends paid by a resident Outbound dividends paid Dividends paid to both resident companies are resident companies to withholding taxes on company to: by Romanian companies Slovak residents and non- subject to final withholding other resident companies dividend distributions (even • non-resident “privileged” are subject to withholding residents by an eligible tax of 5%, unless a lower tax are subject to a 15% final to tax haven countries) if the (e.g. EU, EEA, Swiss) of 16% unless the EU Slovak entity (e.g. joint stock treaty rate applies. withholding tax. Double recipient is a corporate entity. parent company are: Parent-Subsidiary Directive company, limited liability taxation is avoided by - withholding tax exempt (see below) or a different company, cooperative) or A special exemption from not including dividends, Dividend distributions to provided that certain treaty rate applies (as from a similar foreign company withholding taxation is which were subject to a individuals are subject to conditions are met (i.e. 1 February 2013, a 50% tax out of profits generated on provided for dividends 15% withholding tax in the 16% dividend withholding at least 10% (for Swiss rate applies to dividends or after 1 January 2004 are distributed to companies general tax base of receiving tax, unless limited by e.g. a company - at least paid to a resident of a state not subject to taxation in tax residents of an EU companies. tax treaty to a lower rate. 25%) shareholding with which Romania has not Slovakia. Member State, or a country (as an owner), concluded a legal instrument which is a party to the A domestic distribution of holding shares for an under which the exchange Dividends from profits of Agreement for the European dividends can be exempt uninterrupted period of information can be an eligible Slovak entity Economic Area. No from taxation if the recipient of two years – this performed). generated before 1 January additional conditions apply. – beneficial owner – holds at condition does not have 2004 and distributed As of 1 January 2010, this least 10% of the registered to be met upfront); Dividends distributed to according to a resolution of exemption does not cover capital of the distributing - taxed according to companies resident in EU, general meeting of that entity hidden distributions. company for an uninterrupted relevant tax treaty - if Iceland, Liechtenstein or adopted after 31 December period of 12 months (this these conditions are not Norway are exempt of 2012 are subject to Also, tax on dividends is not holding period can be met; tax providing that at the withholding tax at a rate payable when the dividends fulfilled subsequently). Both • non-resident distribution moment the 15%; notwithstanding they are distributed in favour of a companies have to be either “unprivileged” parent recipient holds a participation are paid to Slovak residents foreign contractual fund. joint stock company (a.s.) company are taxed of at least 10% in the share or non-residents (subject or limited liability company according to relevant tax capital of the distributing to exemption referred to in Liquidation/Share (s.r.o.) or cooperative treaty or 19% withholding company for at least 2 section 2.2). repurchase (družstvo). tax if no tax treaty can be continuous years (the EU Liquidation quotas are applied. Parent-Subsidiary Directive). Liquidation/ subject to withholding tax at Dividends paid to a non- Until the 2-year period is met, Share repurchase EU or non-EEA country To benefit from the lower dividends are subject to tax Distribution of liquidation with whom the Czech withholding rate (or (at 16%) which can be further surplus of an eligible Slovak republic does not have a tax exemption), a certificate on claimed back from the entity (e.g. joint stock treaty in place (double tax of tax residency has to be state. company, limited liability treaty or TIEA (bilateral or provided by the company company, cooperative), multilateral)) are subject to a receiving the dividends. Liquidation/Share and also of a similar foreign withholding tax of 35%. Additionally, in order to apply repurchase company is not subject to the exemption resulting from In case the liquidation share taxation in Slovakia. Dividends paid to other non- EU Parent-Subsidiary regime of a Romanian company is resident companies a written confirmation is lower than the paid-in However, dividends/

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the rate of 5% chargeable are subject to a withholding required from the company capital, there is no liquidation surplus paid on the balance between tax of 15%, which may be receiving the dividends withholding on the paid-out out of profits generated the market value of the reduced by the virtue of tax stating that it fulfills amount. In the opposite case, after 1 January 2011 by an quotas and the documented treaties or Parent-Subsidiary requirements for exemption. the amount of the liquidation eligible Slovak entity to an acquisition price of the exemptions (under same share exceeding the paid-in individual insured in Slovak respective shares. This rule conditions as mentioned Liquidation/Share capital would be subject to health insurance system are applies unless a tax treaty above). repurchase withholding if remitted to non- to a certain amount subject relief applies. Proceeds from the liquidation residents. to Slovak health insurance Liquidation/Share of a Polish company are (currently 10%, but 14% A special exemption from repurchase considered as dividends, Redemption of shares is rate will apply to dividends withholding taxation is Liquidation share proceeds subject to dividend not taxable if the structure distributed out of profits provided for liquidation exceeding the paid-in capital withholding tax (see point of the shareholding after generated in the tax period quotas distributed to (or the acquisition costs of above). If repayment of redemption remains the starting after 1 January companies tax residents the share) is subject to a capital results from automatic same. 2013). of a EU Member State, or withholding tax of 15%. This or compulsory redemption a country which is a party rate can be reduced by the of shares and the amount to the Agreement for the virtue of most tax treaties. repaid on a share exceeds its European Economic Area. cost of acquisition in Poland Redemption/repurchase such income is subject to Income from liquidation of shares is generally tax under the same rules as quotas obtained by a not considered a partial dividends (see comments foreign contractual fund is liquidation. above). The income of a not subject to withholding Polish tax resident company taxation. from disposal of shares for the purpose of redemption Upon redemption/repurchase (voluntarily redemption) is of shares, the company shall subject to 19% CIT under form a reserve in the amount general rules and aggregated of the nominal value of all with other income. Income the repurchased shares. This of a foreign tax resident from reserve may be distributed disposal of shares in a Polish among the shareholders only company for the purpose of in case of reduction of the redemption of the shares capital by the amount of the may be exempt from taxation repurchased shares, or may in Poland under a tax treaty. be used for increase of the capital.

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 29 3.2 Withholding tax on interest paid by the holding company

Bulgaria Czech Republic Hungary Poland Romania Slovakia

In general, interests paid to Interest paid to a resident In general there is no There is a 20% withholding In general, interest and There is a 19% withholding non-residents are subject to of a non-EU or non-EEA withholding tax on interest tax on interest paid to foreign royalties paid to non- tax on loan interest paid a final withholding tax at a country with whom the Czech paid to a corporate entity. lenders that may be reduced residents are subject to a to foreign resident entities, rate of 10%, unless a lower republic does not have a tax by virtue of tax treaties. The final withholding tax of 16%, provided they have no treaty rate applies. In order treaty in place (double tax reduced withholding tax rate unless a lower treaty rate permanent establishment to benefit from treaty benefits treaty or TIEA (bilateral or is applicable provided that a applies (as from 1 February deemed to be created in (i.e. lower withholding tax multilateral)) is subject to a certificate of tax residency of 2013, a 50% tax rate Slovakia. rates), the recipient of the withholding tax of 35%. the foreign beneficial owner applies to interest paid to income must acquire an is provided. a resident of a state with However, the majority of advance approval (tax Withholding tax of 15% which Romania has not tax treaties signed by the clearance) from the Bulgarian applies to interest paid to Poland implemented the concluded a legal instrument Slovak Republic decreases revenue authorities. other foreign lenders. This Interest and Royalties under which the exchange or eliminates the withholding rate can be reduced by the Directive. Therefore, interest of information can be tax on interest. As a result As of 1 January 2010, a virtue of most tax treaties. payments between parent performed). of the fact that the Slovak foreign resident of an EU- and subsidiary, subsidiary Republic joined the EU, the country or a country that is The EU Interest and and parent and between Interest and royalties EU Interest and Royalties a party to the Agreement Royalties Directive is direct sister companies (in obtained from Romania by Directive was implemented for the European Economic implemented into the Czech all cases a minimum 25 % companies resident in EU, into the Slovak law. Based Area, that is liable for law. Effective from 1 May interest and two year holding Iceland, Liechtenstein or on these provisions, the payment of Bulgarian 2004, the interest payments period is required) should Norway are exempt from loan interest payments withholding tax on interest, to EU, Swiss, Norwegian be free from withholding tax withholding tax provided to a related party seated royalties, capital gains, etc. is or Iceland recipients are starting from July 1, 2013 that the beneficial owner of in another EU member entitled to re-calculate the tax exempt from withholding tax (under the transitional period interest/royalty has held at state (or other state which due. The tax which would be if the Interest and Royalties for the full implementation least 25% in the share capital implemented measures due after the re-calculation is Directive criteria are met. of the Directive, Polish of the payer for at least 2 similar to this directive, e.g. equal to the tax which a local withholding tax imposed on continuous years ending as Switzerland) are exempt Bulgarian entity would be The exemption can be interest paid to qualifying EU of the date of interest/royalty from withholding tax if the liable to pay (i.e. the foreign applied provided that the lenders may not exceed 5%). payment. shareholding in the Slovak resident shall be entitled to recipient (beneficial owner If the interest rate on a subsidiary of at least 25% in deduct expenses related of interest payment) and the loan is not at arm’s length, the share capital is held for a to the generated income, interest payer are directly the excess payment may holding period of no shorter etc.) This right is exercised related (direct shareholding potentially be challenged than 2 years. through filing a form annual or voting power of at least as not deductible under declaration. 25%; if a person meets the general rules. However, criteria in respect to more such payment may not be The above rule shall not entities, all these entities are automatically reclassified as apply to residents of non-EU considered directly related) a dividend payment. countries, which are parties for an uninterrupted period to the Agreement for the of at least 24 months (can be Under Polish CIT regulations European Economic Area fulfilled subsequently) and transposing the EU Interest which have not executed a only if the interest payment and Royalties Directive

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tax treaty with Bulgaria in (income) is not attributable regime and under most effect, or the treaty executed to a Czech or non-EU treaties the interest that is does not contain provisions permanent establishment of paid to a related party which for exchange of information the recipient. exceeds the arm’s length or cooperation upon level may not benefit from collection of taxes. Prior decision of the tax the lower withholding tax authorities is necessary to rates (applicable under the Bulgaria has a transitional apply the exemption. EU Interest and Royalties period with regard to the Directive regime or relevant EU Interest and Royalties Furthermore, the exemption treaties) for the part Directive up and until cannot be applied in respect exceeding the market level. 31 December 2014. This to interest arising on profit period applies with regard to sharing loans. withholding for both interest and royalty payments. Until 31 December 2014 the withholding tax can be no more than 5%. With reference to the implementation of the EU Interest and Royalties Directive, as of the beginning of 2011, the applicable tax rate is 5%, if the respective qualifying requirements have been met.

For purposes of application of the reduced rate, the law provides that one entity is considered associated with another entity should one of the following conditions has been fulfilled as of accrual of the income for a preceding uninterrupted period of at least 2 years: • Entity (A) holds at least 25% in the capital of entity (B). • Entity (B) holds at least 25% in the capital of entity (A).

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• A third entity (C), which is either a local company or a company tax resident of another Member State, holds at least 25% in the capital both of entity (A) and entity (B).

The relevant companies must have a legal form listed in the EU Interest and Royalties Directive and be subject to a corporate income tax without the option for exemption.

Whenever the beneficiary of the income is a permanent establishment of a foreign entity, the reduced rate shall be applied in case • such permanent establishment is established in another EU Member State; and • the local payer of the income is associated with the foreign entity to which permanent establishment the income is paid.

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 32 3.3 Withholding tax on royalties paid by the holding company

Bulgaria Czech Republic Hungary Poland Romania Slovakia

Royalties paid to non- Payments for the use or the In general, no withholding tax There is a 20% withholding Royalties paid to non- There is a 19% withholding residents are subject to a right to use, of industrial applies to royalty payments tax on royalties paid to resident companies are tax on payments for final withholding tax at a rate rights, software, know-how made to corporate entities. foreign recipients that may subject to a 16% final intellectual property rights of 10%, unless a lower treaty and copyrights paid to a be reduced by virtue of tax withholding tax, unless a (industrial rights, software, rate applies. resident of a non-EU or treaties. In order to obtain a lower treaty rate applies copyrights) to non-residents non-EEA state with whom reduction of the withholding (as from 1 February 2013, unless the respective tax As of 1 January 2010, a the Czech republic does not rate, a certificate of tax a 50% tax rate applies to treaty stipulates otherwise. foreign resident of an EU- have a tax treaty in place residence is required. royalties paid to a resident of country or a country that is (double tax treaty or TIEA a state with which Romania Based on the provisions a party to the Agreement (bilateral or multilateral)) are See information Section has not concluded a legal implementing the EU Interest for the European Economic subject to a withholding tax 3.2. for the transposition of instrument under which the and Royalties Directive, the Area, that is liable for of 35%. the Interest and Royalties exchange of information can royalty payments to a related payment of Bulgarian Directive. The rules set out be performed). party seated in another EU withholding tax on interest, Withholding tax of 15% in Section 3.2 apply to the Member State (or other royalties, capital gains, etc. is applies to the above types payment of royalties. See information in Section state which implemented entitled to re-calculate the tax of income paid to other non- 3.2 for the implementation of measures similar to this due. The tax which would be resident recipients. This tax If the foreign company is the EU Interest and Royalties directive, e.g. Switzerland) due after the re-calculation is rate can be reduced by virtue not covered by a tax treaty Directive. The same are exempt from withholding equal to the tax which a local of the relevant tax treaty. and it provides certain conditions apply. tax if the shareholding in the Bulgarian entity would be intangible services, e.g. Slovak subsidiary of at least liable to pay (i.e. the foreign The EU Interest and advisory, accounting, legal, 25% in the share capital is resident shall be entitled to Royalties Directive is marketing, management of held for a holding period of deduct expenses related implemented into the Czech data processing, HR (other no shorter than 2 years. to the generated income, law: Effective from 1 January than qualified as royalties) to etc.) This right is exercised 2011, the royalty payments a Polish resident company, through filing a form annual to EU, Swiss, Norwegian or a 20% domestic withholding declaration. Iceland recipients are exempt tax rate is applicable as from withholding tax if the well. In the case of treaty The above rule shall not EU Interest and Royalties protected service providers apply to residents of non- Directive criteria are met. income from the provision EU-countries that are parties of such services falls under to the Agreement for the The exemption can be business profits and thus European Economic Area applied provided that the may not be taxed in Poland which have not executed a recipient (beneficial owner unless the service provider tax treaty with Bulgaria in of royalty payment) and the generates its income effect, or the treaty executed payer are directly related through a Polish permanent does not contain provisions (direct shareholding or voting establishment. Nevertheless, for exchange of information power of at least 25%; if a the Polish service recipient or cooperation upon person meets the criteria in should be provided with a tax collection of taxes. respect to more entities, all certificate of the foreign

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With reference to the these entities are considered service provider in order not implementation of the EU directly related) for an to withhold 20% withholding Interest and Royalties uninterrupted period of at tax under the tax treaty Directive, as of 1 January least 24 months (can be regime. 2011 the withholding tax on fulfilled subsequently) and royalties is reduced to 5%, only if the royalty payment if the respective qualifying (income) is not attributable requirements have been met. to a Czech or non-EU permanent establishment of The qualifying requirements the recipient. provided for in the Bulgarian Law on Corporate Taxation, Prior decision of the tax reiterate those provided for authorities is necessary to in the Directive. In brief, the apply the exemption. main local requirements are: • The beneficial owner of the income should be a tax resident of another EU Member State. • The local legal entity - payer of the income should be an associated company to the beneficiary of the income.

Whenever the beneficiary of the income is a permanent establishment of a foreign entity, the reduced rate shall be applied in case • such permanent establishment is established in another EU Member State; and • the local payer of the income is associated with the foreign entity to which permanent establishment the income is paid.

Further, an entity is considered associated to another entity should one of

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the following conditions has been fulfilled as of accrual of the income for a preceding uninterrupted period of at least 2 years: • Entity (A) holds at least 25% in the capital of entity (B). • Entity (B) holds at least 25% in the capital of entity (A). • A third entity (C), which is either a local company or a company tax resident of another Member State, holds at least 25% in the capital both of entity (A) and entity (B).

In addition to the exceptions provided for in Article 4 of the Directive, Bulgarian law sets forth 3 additional exceptions to the application of the reduced 5% rate on interest and royalties and the entitlement to tax refund, namely when the income: • represents expenses of a permanent establishment in Bulgaria not recognized for tax purposes, save for expenses for interests which are regulated by the thin cap rule; • is accrued by a foreign entity from a country which is not a Member State, through a Bulgarian permanent establishment of such foreign entity;

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• is from transactions where the main motive or one of the main motives for execution of the transaction is deviation or evasion from taxation.

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 36 4. Non-resident capital gains taxation - domestic legislation and tax treaties

Bulgaria Czech Republic Hungary Poland Romania Slovakia

Capital gains from any Capital gains arising from Capital gains realized by Capital gains from the Capital gains derived by For foreign legal entities, transaction on shares and the sale of a shareholding non-residents on the transfer alienation of shares in a non-resident company capital gains realized on a other securities issued by interest in a Czech company of shares in a Hungarian resident company held by without a Romanian participation in a domestic Bulgarian companies are by a Czech non-resident resident company are, in non-residents are taxed in permanent establishment company, which was sold included in the company’s company are treated as principle, not taxable in accordance with respective from the sale of immovable to a Slovak tax resident ordinary tax base (except for Czech-source income and Hungary. provisions of the tax treaty, property located in Romania, or Slovak permanent gains from sales of financial subject to the ordinary CIT i.e. either: or of shares in Romanian establishment of a foreign instruments which are rate in the Czech Republic, However, if non-residents • CIT exempt in Poland and companies, are taxable at entity, is treated as Slovak exempt). unless a tax treaty provides have a shareholding in taxed in the country of the general CIT rate. Tax sourced income of a foreign otherwise, which is, however, ‘real estate companies’, non-resident; or compliance obligations would entity. Such capital gain Most tax treaties to which mostly the case. they qualify as Hungarian • subject to 19% CIT in arise for the seller if the should be taxed at the Bulgaria is a party give the taxpayers and are generally Poland if the assets of purchaser is not a Romanian standard tax rate and the right to charge gains from Gains on the sale of shares subject to CIT (10%/19%) in resident company consist legal entity or a Romanian buyer of the shares would be the sale of a shareholding in a non-Czech company Hungary on the capital gain wholly or principally of permanent establishment. obliged to withhold securing interest to the state of realized by a Czech non- realized upon the alienation immovable property tax of 19% from the payment residency of the receiver of resident would be regarded of the participation (i.e. sale, situated in Poland. Starting 2009, the following for the shares to the non-EU this income. as Czech source income in-kind contribution, transfer types of income are not resident sellers unless a tax provided that the buyer of the without consideration and In general where a tax treaty subject to Romanian treaty provides otherwise. Foreign beneficiaries are shares is a Czech resident withdrawal of share through is applicable, taxation will withholding tax: subject to a 10% withholding or a Czech permanent a capital decrease). in principle be attributed • income derived by Under the majority of tax tax rate, unless a treaty relief establishment of a Czech to the country where the non-resident collective treaties, such capital gain applies. non-resident and the shares A taxpayer qualifies as a ‘real non-resident shareholder placement bodies without would be taxed only in the are considered as tradable estate company’ if: is resident by virtue of the legal personality from the country where the foreign securities according to Czech • the value of Hungarian applicable tax treaty. transfer of securities or entity is residing. tax law. In such case the real estate exceeds 75% shares held directly or capital gain would be subject of the aggregate market indirectly in a Romanian to the ordinary CIT rate in the value of the total assets legal entity; Czech Republic, unless a tax shown in its financial • income derived by non- treaty provides otherwise, statement on a group residents on foreign which is, however, mostly the level (including the capital markets from the case. taxpayer, its Hungarian transfer of shares held tax resident related in Romanian companies companies and the or securities issued by foreign related companies Romanian residents. having a Hungarian permanent establishment Most tax treaties of Romania either with or without allocate the right to tax Hungarian real estate); gains from the sale of a and shareholding interest to the • any of the shareholders of state of residency of the the taxpayer or of a group receiver of this income.

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member is resident on Nevertheless, several tax at least one day of the treaties allocate the right to tax year in a non-treaty tax gains from the sale of a foreign country or in a shareholding interest in a real treaty country where estate company to the state the tax treaty allows where the said real estate is Hungarian taxation on located (i.e. Romania). such capital gains.

These rules do not apply if the real estate company is listed on a recognized stock exchange.

The Hungarian domestic rules could be overruled by an applicable tax treaty, if taxation is attributed to the country where the non-resident shareholder is resident by virtue of the applicable tax treaty.

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 38 5. Anti-abuse provisions / CFC rules

Bulgaria Czech Republic Hungary Poland Romania Slovakia

CFC rules CFC rules CFC rules CFC rules CFC rules CFC rules There is no CFC legislation. There is no CFC legislation. A foreign company will There are no special There is no CFC legislation. There is no CFC legislation. constitute a CFC if: provisions in Polish law Thin capitalization rules Thin capitalization rules • either (a) it has a regarding CFC’s. Thin capitalization rules Thin capitalization rules The deduction of interest Under the Czech Income shareholder who is a Interest expenses related to The thin capitalization rules paid on loans taken from Taxes Act, financial expenses Hungarian tax resident Thin capitalization rules loans from entities other than were abolished as of shareholders or third parties (interest on loans and other private individual holding Interest paid is not deductible authorized credit institutions 1 January 2004. (minus the total amount of related financial expenses an interest (voting rights) to the extent a 3:1 debt to are primarily limited to: interest income received) is (bank fees etc.)) are not of at least 10% or a equity ratio is exceeded and • the central bank Transfer pricing rules limited to 75% of the positive deductible, if they (i) relate ‘dominant’ quota during the loan is granted: reference interest rate Transfer pricing rules solely financial result (without to profit sharing loans or (ii) the majority of the days • by a shareholder owning for loans denominated in apply to cross-border taking into account interest exceed the 4:1 debt to equity of the tax year, or (b) the a minimum of 25% of Romanian lei; and transactions. In practice the income and expenses) of ratio (6:1 ratio for banks majority of its revenues the share capital or by • the announced annual tax authorities also challenge the tax obligor. However, and insurance companies) during the tax year are a group of shareholders interest rate for loans the transfer prices based on the rules only apply if the in respect of related party derived from Hungarian owning in aggregate a denominated in a foreign other general provisions of borrowed capital of the loans. Profit sharing loans sources; and minimum of 25% of the currency (currently 6%). the tax law (abuse of law, company exceeds a 3 to 1 provided by related parties • either (a) the ratio of share capital; or substance over form). debt-to-equity ratio. Interest are included in calculation of the CIT paid (payable) • between companies in In addition, interest and net on bank loans and interest debt to equity ratio, however, by the foreign company which another company foreign exchange losses The principles of Slovak paid under financial lease the ratio is not applied to (decreased by any tax owns a minimum of 25% related to long-term loans transfer pricing rules comply agreements is only subject to financial expenses from refunded) and the tax of the share capital. from entities other than with OECD rules. thin capitalization rules where these profit sharing loans base is less than 10%, or authorized credit institutions the arrangement is between as they are already fully (b) no CIT is due as the Transfer pricing rules are deductible to the extent related parties. The thin cap non-deductible. Back-to-back foreign company’s tax The Polish CIT Law contains the debt to equity ratio does rules do not apply to credit loans (i.e. loans provided by base is zero or negative transfer pricing regulations. not exceed 3:1. Interest may institutions. an unrelated party A to an despite its positive profits. Such regulations authorize be carried forward until full unrelated party B that are the tax authorities to deductibility is realized. Transfer pricing rules provided under the condition As an exception, a foreign assess the income on the The revenue authorities that a directly corresponding company meeting the above transaction between related Transfer pricing rules may make an adjustment loan or deposit is provided to conditions will not constitute parties if the authorities Related persons for transfer to the profit arising from a party A by party C while party a CFC if: consider it as being not on pricing rules are: transaction between related C and party B are related • it is seated or resident an at arm’s length basis. In • parties who have a direct persons if such persons have for Czech tax purposes) are in an EU member state, addition, Polish taxpayers or indirect (including concluded the transaction subject to thin capitalization an OECD member state must prepare transfer the participation of an under conditions that are not rules as related party loans or a treaty country, and pricing documentation associated person) share at arm’s length. subject to a 4:1 or 6:1 debt to has a ‘real economic regarding transactions with of at least 25% of the equity ratio. presence’ there (meaning related parties as well as value/number of shares Related companies are that at least 50% of the with entities from low-tax or voting rights in the defined as follows: If a Czech resident company company’s group-level jurisdictions listed in the other party or controls it; • the entities, one of which is financed by a non-EU or revenues derives from Regulations of the Minister of or participates in the non-EEA (European manufacturing, Finance. If a taxpayer fails to • parties in which a third

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 39 Bulgaria Czech Republic Hungary Poland Romania Slovakia

management of the other Economic Area) company, processing or e.g. submit the statutory transfer party holds directly or or of its subsidiary, as the non-deductible interest commercial services pricing documentation indirectly (including the well as the entities, in the under thin capitalization performed by using within 7 days from the tax participation of associated management or controlling rules may be reclassified its own assets and authorities’ request and persons) at least 25% of the body of which participates and treated as a dividend for employees); or the tax authorities assess value / number of shares or the same person; withholding tax purposes (the • at least 25% of the additional taxable income voting rights. • a company or person reclassification must be also foreign company’s resulting from a transaction, holding more than 5% allowed by the respective shares are held on each the difference between the Related parties transactions of the voting shares in a tax treaty). Consequently, day of the tax year by a income declared by the should be performed at arm’s company; the non-deductible interest company or its affiliate taxpayer and the income length. • a person exercising for the Czech borrowing that has been listed assessed by the tax control over the other; company may then on a recognized stock authorities is subject to a During a fiscal audit, • persons directly or be subject to dividend exchange for at least five 50% penalty tax rate. Romanian taxpayers may be indirectly controlled withholding tax. years on the first day of required to provide the tax by a third party or its the tax year. authorities with a transfer subsidiary; Transfer pricing rules pricing documentation file. • the persons exercising Related parties for the The taxpayer would be liable common control over purposes of the transfer to prove appropriately that it Failure to do within the a third party or its pricing rules are broadly does not qualify as a CFC, established deadline is subsidiary; defined in relation to 25% except from the beneficiary subject to a fine of RON • persons, one of whom is share in the capital or voting ownership status due to an 14,000, the tax authorities a trade representative of rights of the other party. indirect holding. being also entitled to the other; Generally, all related party estimate the applied transfer • persons, one of whom transactions should be Also, the taxpayer would be prices and to assess the has made a donation to carried on at arm’s length liable to keep an appropriate additional tax liabilities the other; and prices. Otherwise, the tax register on all transactions accordingly, if any. • persons, participating authorities could adjust the falling within the scope of directly or indirectly in tax base of a company by the CFC rules. The register Substance over form the management, control an ascertained difference should include, among In determining the amount or capital of a third party between actual and arm’s others, the main elements of any tax or fee, the tax or parties, and therefore length price. of the transaction, the authorities may disregard they could agree on terms contracting parties involved a transaction that does not differing from the usual. OECD and EU transfer (name, trade registry have an economic purpose pricing rules were translated number, tax ID, etc.) the or may reclassify the form In addition, where a taxable and published officially by the terms and conditions of the of a transaction to reflect its person is engaged in Ministry of Finance but they agreement (scope, starting proper economic substance. transactions with a person are not incorporated in law date, etc.) The lack of the Also, in case of transactions who is resident in a country and, therefore, they are not documentation would incur qualified as artificial (i.e. outside the EU of which the legally binding. As a result, penalty payment obligations. transactions which do not tax rate is at least 60% lower there are no contemporary have economic substance than the relevant individual documentation requirements. Thin capitalization rules and cannot be used within or CIT rate in Bulgaria or Please see Section 2.7 for Thin capitalization rules apply the frame of usual economic which does not exchange tax ruling policy on transfer to both related and third party activities, performed with the information, it is presumed pricing issues. debts. Interest paid on main purpose to avoid taxes

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by operation of law that the debts is non-deductible to the or to obtain tax advantages) foreign person is a related extent that a debt-to-equity the provisions of the relevant person. ratio of 3:1 is exceeded. Debt double tax treaties are not to financial institutions is applicable. Transfer pricing rules excluded for the purpose of also apply to branches or this calculation. permanent establishments of non-resident companies in General anti-abuse Bulgaria. There is a general anti- avoidance rule which allows the tax authorities to ignore the legal form of an arrangement between entities and to look at the actual substance or genuine purpose of a contract or transaction (“substance over form principle”).

Under an additional general anti-avoidance provision, costs, expenditures and losses related to a contract or a transaction are not deductible for CIT purposes if the purpose of the contract or transaction is merely to achieve tax advantages. An “abuse of law” doctrine applies in Hungary to contracts and transactions entered into or performed. This means that rights and transactions must be exercised and carried out properly and lawfully, in line with their specific purpose. The doctrine allows the tax authorities to assess, on the basis of all relevant facts and circumstances, tax liabilities stemming from contracts, transactions or other

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arrangements which are considered to have the sole purpose of circumventing tax provisions and avoiding taxes.

Transfer pricing rules The transfer pricing rules are generally based on the OECD guidelines and state that transactions between related parties must be at arm’s length for taxation purposes. Transfer prices must be documented.

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 42 6. Tax and investment incentives

Bulgaria Czech Republic Hungary Poland Romania Slovakia

Bulgaria has tax and Certain limited costs for Large number of incentives There are very attractive No significant tax incentives The new tax relief rules apply investment incentives for research and development, are available e.g. relating CIT incentives for investors are currently provided to the Government / EU both resident and non- which have already been to material investments, in special economic zones under Romanian law. Commission decisions on resident investors for included in the accounting investments in intangible (SEZ) in Poland. A SEZ is a The Romanian legislation regional investment aid taken investments in municipalities profit and considered tax assets (e.g. IP rights), demarcated, greenfield area contains a general from January 1, 2008. with unemployment, which is deductible, may be deducted investment in certain where business activities may framework for stimulating higher than the average, as from the tax base for the underdeveloped regions, be conducted under special investments in certain fields Tax relief may be obtained qualified by the Minister of second time as a special tax environmental investments, conditions. Currently, there of activity and provides for for a period of 10 years Finance. allowance. employment enhancing are 14 SEZs in Poland. The certain regional state aid if certain conditions are investments, etc. main benefit of operating schemes. satisfied according to the A generally available Other tax incentives are in a SEZ is the possibility new Investment Aid Act and incentive not restricted by provided in a form of up Similarly to capital gains of obtaining an exemption The Romanian legislation EU State Aid regulation, the type of the investment to 10 year tax holiday (tax from the alienation of shares, from the 19% Polish CIT provides for the following subject to the approval of activity performed is related relief) based on the approved (hidden) capital gains Depending on the given SEZ main incentives: the Slovak Government and to hiring of unemployed investment project in derived by a Hungarian location, the CIT exemption • A supplementary European Commission. individuals. A legal entity manufacturing industry. company on the disposal of cannot exceed the maximum deduction may be is entitled to decrease its certain qualifying valuable intensity of public aid, i.e. up claimed, for profits tax Only proportional tax relief financial result with certain rights (e.g. IP rights) could to 50% of the higher amount purposes, amounting may be claimed. The amounts provided it has be exempt from corporate of: to 50% of research and maximum limit represents the hired a person under an income tax, if the following • the eligible investment development expenses. tax corresponding to the part employment relationship for conditions fulfill: cost; or • The accelerated of the tax base calculated as not less than twelve • the rights are held for at • the two-year labor costs depreciation method • a ratio of the eligible successive months who, at least one year; and of new staff employed may also be applied for costs (up to the already the time of hiring, was: • the acquisition of the for the purposes of the machinery and equipment incurred costs) and the • registered as unemployed rights is duly reported investment. used for research and sum of own equity at the for more than one year; or to the Hungarian Tax development activities. time of the application • a registered unemployed Authority within 60 days The value calculated as • Reinvested dividends are for state aid and those person over the age of 50 from the acquisition / mentioned above indicates exempt from dividend tax, eligible costs, or years; or transfer of the place of the amount of CIT that may under certain conditions. • the tax base multiplied by • an unemployed person effective management to not be paid by an investor. • The local tax applicable 0.8. with reduced working Hungary. The amount of CIT exemption on buildings and related capacity. may be used until the end land, located at the Black Specific rules effective as of of SEZs, i.e. currently the Sea, held by legal entities 2010 apply to the calculation The authorized by law end of 2020 (however, there and used for providing of proportional tax credit one-time deduction from are plans to extend SEZ tourism services during granted for research and the financial result of the exemption until 2026). a minimum period of 6 development. company refers to the months per calendar year amounts paid for labor An investor may benefit is reduced by 50%. remuneration and the from the CIT exemption • Taxpayers have the contributions remitted on the by obtaining a permit for possibility to reschedule account of the employer business activities within a the payment of tax

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 43 Bulgaria Czech Republic Hungary Poland Romania Slovakia

to the public social security SEZ. Consequently, the liabilities for a maximum funds and the National above tax benefits are period of 7 years, under Health Insurance Fund limited to several locations certain conditions. during the first twelve months in Poland. Several types of after the employment of activity do not qualify for a specified employees. permit, e.g. manufacturing explosives, tobacco products, Investors may enjoy a tax alcoholic products, etc. preference of 100% deferral of the CIT due for the There are certain conditions manufacturing activity upon for eligibility for the CIT meeting a number of criteria exemption: provided for by the law. Briefly, said requirements As a rule, the SEZ permit are: is granted for business • the investor should activities to be performed perform manufacturing on a plot of land already activity only in located within the SEZ. municipalities having Alternatively, the territory of a a 35% or higher SEZ may be extended. The unemployment rate; and SEZ tax exemption is treated • certain requirements for as allowable state aid for granting of a tax incentive investments under EU representing de minimis rules. aid or the requirements for granting of a tax incentive The total amount of public aid representing state aid for for investments from various regional development are sources, including SEZs and fulfilled. grants, cannot exceed the above limits of the maximum Incentives regarding intensity of public aid. donations are also available. Research and development incentive A significant benefit has been provided for entrepreneurs who are granted research and development centre (R&DC) status in Poland. The most important benefit is the possibility to accelerate the tax deductibility of costs through innovation fund write-offs. The innovation fund is a special fund created loyens & loeff Holding Regimes New EU Countries 2013 - Part I 44 Bulgaria Czech Republic Hungary Poland Romania Slovakia

by the R&D aimed at financing R&D work (therefore, there is a condition of reinvesting funds from the innovation fund). The amount of write-offs allocated to the innovation fund cannot exceed 20% of revenues raised by the R&DC in a given year.

Costs of abandoned investments are recognized as tax-deductible costs. Those costs are deductible on the date of sale of abandoned investments or their liquidation.

loyens & loeff Holding Regimes New EU Countries 2013 - Part I 45 Holding Regimes New EU Countries

Part II Cyprus, Estonia, Latvia, Lithuania, Malta, Slovenia 1. Capital tax / stamp duty / real estate transfer tax / real estate tax

Cyprus Estonia Latvia Lithuania Malta Slovenia

Capital tax Capital tax Capital tax Capital tax Capital tax Capital tax Registration of a limited There is no capital There is no capital There is no capital There is no capital There is no capital tax or company is subject to a contribution tax in Estonia. contribution tax in Latvia. contribution tax in Lithuania. contribution tax in Malta. stamp duty in Slovenia. registration fee of EUR 102 plus capital duty of 0.6% of Stamp duty Stamp duty Stamp duty There is, however, a Real estate transfer tax the authorized capital and of The registration of the Stamp duty in case of the Stamp duty in case of company registration fee of There is a real estate transfer any subsequent increases in company or changes in the registration of a company or registration of the company € 245 – € 2,250, depending tax of 2% of the market value authorized capital. share capital are subject to changes in the share capital or changes in the share on the amount of the (if the VAT has been paid, a stamp duty. Stamp duty is not substantial (up to LVL capital is not substantial (up authorized share capital. no real estate transfer tax is Exemptions for registration is € 140.60 30; EUR 43). to LTL 200). imposed). All contributions with regard (or € 185.34 for a speed- Stamp duty to a merger or reorganization up procedure). Changes to A 2% stamp duty applies Noteworthy that registration No stamp duty is chargeable Tax on profit from land use are exempt. This also applies share capital etc. are subject upon registration of the of the company or changes upon the incorporation of change where non-EU member to stamp duty of € 17.89. ownership of real estate with in the share capital is subject a company or a change of It is levied on the profit states are involved. Dormant the Land book. The stamp to notarization requirement. share capital. from the sale of land whose companies and certain Real estate transfer tax duty is normally levied based Currently, notaries’ fees may use, since the time of the others are exempt from the No special real estate on the transaction’s price and amount to LTL 1,000. Real estate transfer tax acquisition, has been altered company maintenance fee. transfer taxes are levied. LVL 30,000 (EUR 43,000) is Stamp duty is payable by the into building use. However, a notary fee and a the maximum duty payable. Real estate transfer tax buyer of immovable property Stamp duty state fee are due upon the 1% duty applies in case of There is no real estate situated in Malta, generally at The person liable for the tax Stamp duty is payable on transfer of real estate. The contributing the property into transfer tax in Lithuania. the rate of 5% of the higher is the person (individual or contracts relating to property rate depends on the value of capital, capped at LVL 1,000 However, one should take between the consideration company) selling the land. or business in Cyprus. On the transaction and could be (EUR 1,430). No material into account stamp duty and the market value, subject The taxable amount is the the first € 170,860, the up to 0.5% of the transaction notary fees are applicable. related to the registration to exemptions and reductions difference between the value revenue stamp is € 0.02 value. of the ownership to the as may be applicable. of the land at the disposal per € 17.09 or part thereof, Real estate tax real estate and costs of the and the value of the land at and on any excess above Real estate tax Real estate tax is currently notarization of the real estate A transfer tax is payable the acquisition (taking into € 170,860, the revenue There is no real estate tax applied at a rate of 1.5% and transfer. by the seller of immovable account certain expenses stamp is € 0.03 per € 17.09 but there is a land tax which is levied on an annual basis. property situated in Malta at incurred upon acquisition/ or part thereof. Stamp duty varies from 0.1% to 2.5% of Unused agricultural land is The state duties for the the flat rate of 12% on the disposal). If the land was is capped at € 17,086 per the cadastral value of land subject to a 3% rate. Real registration of title to real higher of the market value acquired before June 1st document. In general, where excluding buildings. Rate is estate tax is calculated based estate are calculated of the property and the 2012, the acquisition value no amount is specified in the set by municipalities by 31st on the cadastral value of the separately for each real consideration paid for the will be determined as of June contract the stamp duty is January each year. real estate. Real estate tax estate object and vary transfer (net of brokerage 1st 2012 based on the mass € 34. is also applied to residential depending on the market fees). Certain exemptions valuation of real estate data. On 1 January 2011, the buildings and apartments value of the property and are applicable say in the Tax rates depend on duration With effect from 1 March euro became legal tender with the following progressive the acquirer (whether the case of sale of one’s ordinary from change of use until sale: 2013 the rates of stamp duty in Estonia. The irrevocably rates. owner is a natural or a legal residence. The transfer tax is • 25% - less than 1 year will be as follows: fixed exchange rate is € 1 = • 0.2% – for cadastral person). a final tax. • 15% - from 1 to less than EEK 15.6466. value not exceeding 3 years • For transactions with a LVL 40,000; Registration duties for legal In certain prescribed • 5% - from 3 to incl.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 47 Cyprus Estonia Latvia Lithuania Malta Slovenia

consideration up to • 0.4% – for cadastral value persons are capped by circumstances, the seller 10 years € 5,000 no stamp duty is from LVL 40,000 to LVL LTL 5,000 per object and for is entitled to opt out of the • 0% - more than 10 years. payable; 75,000; natural persons LTL 1,000 transfer tax system and is • For transactions with a • 0.6% – for cadastral value per object. entitled to opt to be charged Taxable persons are obliged consideration in excess of exceeding LVL 75,000. to tax on the capital gains to submit a tax return to the € 5,000 but not exceeding A 5 LVL minimum is payable. The notary fee for made on the sale. In such tax authorities within 15 days € 170,000, stamp duty of certification of real estate case, the capital gain derived after concluding the sales € 1.50 for every € 1,000 As of 1 January 2013 local transfer amounts to 0.45% of from the transfer is computed contract. or part thereof is payable; municipalities are entitled to the value of the transaction, by deducting allowable • For transactions with a impose property tax ranging however not more than expenses from consideration Real estate tax consideration in excess of from 0.2 to 3.0 per cent in LTL 20,000 for transactions received and is charged The tax is levied on real €170,000 stamp duty of accordance with regulations that involve one real estate to tax at the rate of tax estate situated in Slovenia € 2.00 for every € 1,000 that must be issued by the object and not more than applicable to the seller. which belongs to the same or part thereof is payable. municipality no later than LTL 50,000 for transactions owner and if the total • The maximum stamp duty on 1 October of the prior tax involving two or more real Real estate tax value amounts to at least payable on a contract will year. If this is not done the estate objects. Malta does not levy real EUR 500,000. Immovable be capped at € 20,000. default rates of tax will be estate tax. property intended for • Where no amount of applicable. Real estate tax business or industrial use, consideration is specified Annual real estate tax agricultural land, water land, in the contract the stamp LVL 1 = € 1.42708 (2 January (applicable on the real estate forest land and public good duty is € 34. 2013) other than land) rate varies are exempt from taxation. from 0.3% to 1% of taxable The wording of the law value of the real estate, Annual tax rates are indicates that the rate of depending on the decision 0.5% when the tax base stamp duty is determined by of the particular municipality is between EUR 500,000 the aggregate value of the which has to determine the and EUR 2,000,000 (for contract and applies to the exact rate(s) of the tax within residential property 0.25%) entire consideration, whereas its territory. Taxable value of and 1.0% when the tax base previously the appropriate the real estate is determined is above EUR 2,000,000 (for rate was applied to each based on the market value. residential property 0.5%). tranche of the consideration. Our discussions with the As of 1 January 2012 relevant authorities indicate individuals owning residential that they intend to continue real estate, value of which in to apply the old method of total exceeds LTL 1,000,000, calculation in practice. In any are taxed with 1% real estate event, the difference is less tax on the exceeding value. than € 300. As of 1 January 2013, the For a transaction which annual land tax rate varies is evidenced by several from 0.01% to 4% of taxable documents stamp duty is value of the land, depending payable on the main contract on the decision of the

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 48 Cyprus Estonia Latvia Lithuania Malta Slovenia

and ancillary documents are particular municipality which charged at a flat rate of € 2. has to determine the exact rate(s) of the tax within its A number of categories territory. Taxable value of the of documents are exempt land is determined based on from stamp duty, including the market value. documents relating to corporate reorganizations LTL 1 = € 0,2984 (2 January (which are exempt from all 2013) forms of taxation) and ship mortgage deeds or other security documents.

Real estate transfer tax Transfers of real estate are subject to real estate transfer tax (transfer fees) according to the purchase price or the current market value of the property (“the consideration”) as follows: • For the part of the consideration up to € 85,430 the transfer fees are 3% of the consideration. • For the part of the consideration from € 85,431 to € 170,860 the transfer fees are 5% of the consideration. • For the part of the consideration exceeding € 170,861 the transfer fees are 8% of the consideration.

Real estate tax (Immovable property tax) is currently levied according to the 1 August 1980 market value of the immovable property owned by a

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 49 Cyprus Estonia Latvia Lithuania Malta Slovenia

taxpayer as at the rates set out below on each respective tranche of 1980 market value:

• Up to € 120,000 – nil; • €120,000 to € 170,000 - 0.4%; • €170,000 to € 300,000 - 0.5%; • €300,000 to € 500,000 - 0.6%; • €500,000 to € 800,000 - 0.7%; • Above € 800,000 - 0.8%.

The rates and tax base are likely to change in 2013.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 50 2. Corporate income tax (“CIT”) 2.1 CIT and wealth taxes

Cyprus Estonia Latvia Lithuania Malta Slovenia

The general CIT rate is Estonia provides a unique The general CIT rate is 15% The general CIT rate is The general CIT rate is The general CIT rate is 17% 10%. Interest received in, CIT system as resident and is an annual tax. The 15%. Resident companies 35%, but the combined and will be reduced gradually or closely related to, the companies (and permanent standard taxation year is the are taxed on their worldwide overall effective rate may be to 15% till 2015. ordinary course of business establishments of non- calendar year. income (income generated reduced to between 0% and is subject to CIT at 10% on resident companies) do not through a foreign permanent 10% by application of Malta’s Slovenian resident the amount received, less pay income tax for retained Resident companies are establishment and taxed full imputation system and companies (corporations and any costs (including interest or reinvested earnings. The taxed on their worldwide in the foreign jurisdiction refund mechanism. partnerships) are subject paid) incurred in earning the CIT obligation is deferred to income, under the law on is exempt from CIT in to tax on their worldwide interest. the moment of distributing CIT. Lithuania). The CIT Act Malta operates a full income. In general, tax the profits. Therefore, stipulates that gross revenue imputation system such that follows accounting books Tax paid or withheld on as far as profits are not The taxable income (total of sales and non- dividends distributed carry a with adjustment for tax foreign income can be distributed, there is no is computed from the operating revenue) is the credit in favor of a recipient purposes, e.g. generous credited against Cyprus tax. CIT obligation for resident company’s annual basis for computing the shareholder (resident or depreciation periods, non- However, if income received companies. The CIT is levied accounting profit by adjusting amount of taxable profit. non-resident) equivalent to deductible costs. is exempt in Cyprus (e.g. on the profit distributions it for prescribed items. the amount of underlying dividends) foreign tax paid (dividends and gifts, fringe Adjustments are made The tax is applicable on an CIT paid by the distributing Foreign tax credit cannot be credited. benefits, other non-business for exempt income, non- annual basis. company on the profits out Unilateral relief in the form of expenditures and excessive deductible expenses and of which the dividend was ordinary tax credit for foreign- Special Defense capital reductions) made by depreciation. A reduced rate of 5% applies distributed. sourced income is available. Contribution Tax (“SDC companies at the gross rate to smaller taxable units with The excess tax credit may tax”) of 21%. Rate will decrease to Reduced rate of 9% on maximum 10 employees and Additionally, part of that not be carried forward. Interest received other than 20% by 2015. turnover applies to registered a maximum income during underlying CIT paid may in, or closely related to, the micro-enterprises (income the taxable year of LTL be refunded to the recipient Wealth taxes ordinary course of business Thanks to Estonian unique below LVL 70,000 (approx 1,000,000. shareholder (resident or There are no wealth taxes in is subject to a 15% special CIT system there is no EUR 100,000), less than 5 non-resident), depending place at the moment. defense contribution tax need for depreciation employees, shareholders – Wealth taxes on the nature and source of (‘SDC Tax’) on the amount / amortization rules. individuals). There are no wealth taxes in the profits out of which the received, without any However, the outcome is Lithuania. dividend was distributed. deduction for costs of earning the same as there was Wealth taxes the interest. The deduction unlimited depreciation for There are no wealth taxes in Foreign tax credit is made at source if received tax purposes. For the same Latvia. Foreign tax actually paid or from Cyprus, otherwise by reason there are no limits on deemed to have been paid assessment on the basis of carry forward of losses. may be credited against returns. Malta tax due on the foreign The taxable period is the income. The tax credit calendar month. cannot be higher than the Malta tax on that income. Wealth taxes There are no wealth taxes in The claim of relief for foreign Estonia. tax paid/deemed to be paid, loyens & loeff Holding Regimes New EU Countries 2013 - Part II 51 Cyprus Estonia Latvia Lithuania Malta Slovenia

Interest received in, or affects the level of refund closely related to, the that may be claimed by ordinary course of business the shareholder upon a is not subject to SDC Tax, but distribution of profits. is subject to CIT as described above. Wealth taxes There are no wealth taxes in Wealth taxes Malta. There are no wealth taxes in Cyprus.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 52 2.2 Dividend regime (participation exemption)

Cyprus Estonia Latvia Lithuania Malta Slovenia

In principle all dividends An Estonian company is Dividends received by a Dividends received by the In general all dividends Domestic exemption derived from a foreign exempt from Estonian CIT resident company from any resident company from received are subject to 35% Under the domestic participation are fully exempt on a distribution of dividends non-resident company are Lithuanian companies and CIT. participation exemption from tax, with no minimum that are received from a tax exempt. from non-resident companies regime, dividends and holding period requirement, qualifying legal person and: are taxed in Lithuania with However, in case of a income similar to dividends unless the “passive dividend” • the payer is a resident of The exemption, however, is 15% CIT. company receiving dividends derived by a resident provisions are triggered, EU or Switzerland and not applicable to dividends from a “participating holding” corporation from participation namely if more than 50% subject to CIT; or received from a tax haven However, dividends will not in companies resident in another Slovenian of the paying company’s • the dividend received jurisdiction. be taxed in Lithuania, outside Malta, (provided corporation (except hidden activities result directly or was taxed or subject to if the recipient company or certain anti-abuse provisions reserves) are exempt from indirectly in investment withholding. permanent establishment are also satisfied: see below) corporate income tax, income and the foreign tax has held at least 10% there are two options: regardless of the capital is significantly lower than the A qualifying legal person is a of the voting shares in • benefiting from the ownership percentage and tax rate payable in Cyprus. resident or non-resident, in the distributing company participation exemption, in the holding period. Both these conditions must which the Estonian company continuously for at least which case no tax is paid be met for the provisions to holds at least 10% of the 12 months. Commentaries on such dividends; or International exemption be triggered; otherwise the shares or votes. prepared by the Lithuanian • paying tax at the rate of When calculating the tax exemption is available. If the tax authorities interpret this 35%,in which case, upon base, the taxpayer may exemption does not apply, 12 months rule broadly and a distribution of dividends exempt received dividends the dividend will be subject to also applies it in case where by the Malta company and other similar income, 20% SDC tax. the shares are held for the from the dividends derived except hidden reserves, if the period shorter than from a ‘participating dividend payer is: EU Subsidiaries 12 months but the recipient holding’, the shareholder • a resident of an EU Dividends derived from company plans to hold can claim a 100% Member State for tax an EU passive investment shares for such or longer refund of the tax paid by purposes under the law subsidiary may be caught period. This participation the company on such of that Member State and within the ambit of the exemption satisfies the dividends. is not deemed to be a passive dividend provisions. requirements of the EU resident outside the EU However, a tax credit is Parent-Subsidiary Directive. Therefore, Malta tax on due to a tax treaty with a available in Cyprus for the The exemption also applies dividends received from a non-Member State; underlying CIT suffered by an to dividends paid by non-EU “participating holding” is, in and indirect subsidiary operation foreign companies, except both scenarios, effectively nil. • liable to pay tax at a tier lower than the direct those registered or organized comparable to the EU subsidiary of a Cyprus in a listed tax haven. Dividends that are not Slovenian CIT and not parent company. derived from a ‘participating resident in a country or holding’ are taxed at the in the case of a business Finance subsidiaries rate of 35% and upon a unit not situated in a Financing activities fulfilling distribution of dividend by country in which the the conditions set out in the Malta company, the general, average nominal Section 2.1, i.e. interest shareholder may claim a 6/7 corporate tax rate is less received in, or closely or 2/3 refund of the than 12.5%.

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related to, the ordinary Malta tax paid (as The above provisions also course of business, are applicable). apply to a non-resident treated as trading activities. recipient if the recipient’s Consequently, dividends A ‘participating holding’ participation in the equity derived from a group is held if the equity capital or management of financing company which shareholding in the the person distributing profits fulfills the conditions set out company satisfies any one is connected with business above are exempt from SDC of six conditions, the most activities performed by the tax. commonly used being: non-resident in or through a • a direct holding of at least permanent establishment in 10% of the equity shares Slovenia. or capital which confers an entitlement of at least Anti-abuse rules 10% of any two of: The anti-abuse rule provides - right to vote; that under certain conditions - profits available for dividends received or other distribution; and shares in profit are not - assets available excluded from the tax base for distribution on a of the recipient. winding up; • the company is an equity The anti-abuse rule applies shareholder which in case the dividend payer holds an investment is resident or the permanent representing at least EUR establishment is located in 1,164,000 and is held for a state where the general or an uninterrupted period of average nominal corporate at least 183 days. tax rate is lower than 12.5% and if the state is mentioned In all the above cases, an on a list published by ‘equity shareholding’ is a the Slovenian Ministry of participation in the share Finance. Not applicable to an capital of a company (other EU member. than a property company) which entitles the holder to at least two of: • right to vote; • right to profits available for distribution; and • right to assets available for distribution on a winding up.

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Other considerations: • The income of the company in which the “participating holding” is held does not need to be subject to tax in any foreign jurisdiction (subject to the anti-abuse provisions mentioned hereunder). • There is no minimum holding period (with the exception of a “participating holding” which qualifies as such on the basis of the minimum investment of €1,164,000). • The Malta company is not required to become involved in the management of the company.

The participation exemption and the full refund are applicable if certain anti- abuse provisions are satisfied namely the company in which the participation is held must satisfy any one of the following conditions: • the company is resident or incorporated in country or territory that forms part of the EU; or • the company is subject to tax at a rate of at least 15%; or • the company does not derive more than 50% of its income from passive interest or royalties.

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Alternatively, if none of the above three conditions are met, two other conditions must be met cumulatively.

Dividends from a participating holding that does not satisfy the anti- abuse provisions are not entitled to benefit from the participation exemption or the full refund and are taxed at the rate of 35%. Upon the distribution of dividend by the Malta company, the shareholder may claim a 5/7 or a 2/3 refund of the Malta tax paid (as applicable).

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 56 2.3 Gains on shares (participation exemption)

Cyprus Estonia Latvia Lithuania Malta Slovenia

In principle any profits from Gains on shares are not Capital gains are, in general, As a general rule gains on The same rules apply to Generally capital gains on the disposal of securities subject to Estonian CIT taxable as ordinary income. shares are included in the capital gains as to dividends, shares are included in the are exempt from taxation. unless profit is distributed taxable base and taxed as except that the anti-abuse taxable basis as ordinary “Securities” are very widely (see above Section 2.1). However, the gains from the ordinary income. provisions referred to under income. There is no defined and include shares, alienation of securities are Section 2.2 above do not exemption for capital gains bonds, debentures, founder’s tax exempt, except if they Capital gains from alienation apply in the context of capital realized on participations shares and other company are derived from shares of securities in entities gains. The latter would either in domestic or foreign securities or instruments in a company registered registered or otherwise also apply to capital gains companies. such as preference shares, in a black-listed offshore organized in EEA states or derived by a Malta resident options on titles, short jurisdiction. other states with which a tax company from a participating From 1 January 2007 the positions on titles, futures treaty is concluded and which holding in another Malta CIT Act provides for an / forwards on titles, swaps is a payer of the corporate resident company other than exemption based on which on titles, depositary receipts profit or similar tax, in which a ‘property company’ as 50% of realized capital gains on titles such as ADR / transferring party has more defined by law. may be exempt from taxation GDR, index participations than 25% of shares for more if the recipient company or where these result in titles, than 2 years before the sale permanent establishment repurchase agreements or are exempt from CIT. has held more than 8% of the repos on titles, participations shares or voting rights in a in companies and units company continuously for at in collective investment least 6 months and at least schemes of all types. one person was employed at this company for full-time. Gains from the sale of shares of unlisted companies In case the capital gains owning immovable property were realized from a in Cyprus are subject to company resident in a low capital gains tax at 20% to tax jurisdiction (see criteria the extent that the gains are above) this exemption is not derived from such property. granted.

If the company uses this exemption it should not be liquidated for ten years after the company was established.

Legislation also provides for an exemption in the case, where the company realizes capital gains with the exchange of shares

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of a bank in Slovenia for shares in another Slovenian company (taxable is only the part received in cash).

There is also an exemption on taxation of capital gains realized with the disposal of shares, acquired on the basis of venture capital investments in a venture capital company, established by law which regulates venture capital companies. Such a profit is exempt from the tax base of the taxable person, if this company had the status of a venture capital company throughout the whole tax period. The loss from the disposal of equity from this paragraph is not recognized.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 58 2.4 Losses on shares

Cyprus Estonia Latvia Lithuania Malta Slovenia

Capital losses on disposal of Capital losses from the sale Losses from the alienation Capital losses occurred Deductible capital losses Capital losses on the sale shares are not tax deductible of shares do not attract of securities are not tax as the result of transfer may only be offset against or transfer of shares are unless the shares are in an Estonian CIT. The overall deductible. of securities may be chargeable capital gains deductible. Please note that unlisted company holding outcome is the same as in carried forward only for 5 realized in the current and as in case of capital gains real estate in Cyprus. A a conventional tax system consecutive years. Those following years. in certain cases (see criteria capital loss on the shares where the losses are losses are accounted above) only 50% of tax of such a company is deductible for an unlimited separately and may be losses is recognized as tax deductible from current year period of time. covered only from profits deductible cost. capital gains deriving from gained from transfer of the disposal of: securities. Tax losses may be carried • Cyprus real estate; or forward for unlimited number • shares of an unlisted Capital losses occurred of years (subject to certain company which holds as the result of transfer conditions). Cyprus real estate. of securities in entities registered or otherwise For special provisions with organized in EEA state regard to capital losses, see or other state with which Section 2.8. a tax treaty is concluded and which is a payer of the corporate profit or similar tax, in which transferring party has more than 25% of shares for more than 2 years (or more than 25% of shares for more than 3 years in case of reorganization and transfer of the companies) may be accounted against profits gained from transfer of securities during that tax period and not covered losses cannot be carried forward to the next tax year.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 59 2.5 Costs relating to the participation

Cyprus Estonia Latvia Lithuania Malta Slovenia

The general position is Costs related to acquisition Latvian legislation does The legislation does not The general rule is that an Expenses in relation to that all outgoings and of a participation are taxed not provide for any specific provide for a specific expense is deductible if it the tax exempt dividend or expenses wholly and with Estonian CIT only if: regulation. regulation. is wholly and exclusively capital gains income are exclusively incurred by a • such acquisition does not incurred in the production of not tax deductible (e.g. company in the production relate to a business; or Please see Section 5 with Please see Section 5 the company’s income and management costs, interest of its taxable income and • relates to the acquisition respect to thin capitalization with respect to the thin it is not on a list of expenses on loans for financing the evidenced by adequate of securities issued by a rules. capitalization rules. that are specifically participation). supporting documentation low-tax territory company. disallowed in terms of Malta will be allowed as deductible, law. Not more than 5% of the tax and there are no specific The outcome in these exempt income should be limitations for the deduction situations is the same as in Interest expenses are treated as not tax deductible of expenses related to the a conventional tax system generally deductible if the expenses. acquisition of a participation. where those costs would not Revenue Authorities are be tax deductible. satisfied that the interest was Please see Section 5 The tax authorities normally payable on capital employed with respect to the thin argue that, since the in acquiring the income. capitalization rules. holding of shares by a If in any year, the interest holding company produces expense exceeds the income no taxable income, since derived from the investment, dividends are exempt from the excess interest expense tax, the expenses relating to may not be carried forward the acquisition and holding to subsequent years to of the shares are not tax- deduct income generated in deductible. Anomalously, subsequent years. however, they treat interest incurred in acquiring a 100% Please see Section 5 subsidiary as tax-deductible. with respect to the thin capitalization rules. Please see Section 5 with respect to the thin capitalization rules.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 60 2.6 Currency exchange results

Cyprus Estonia Latvia Lithuania Malta Slovenia

The general principle is that Gains and losses realized Currency exchange Currency exchange results Currency exchange Currency exchange results currency exchange gains from currency exchange are differences (both realized are included into the differences are included are fully included in taxable are taxable, and currency not subject to Estonian CIT and unrealized) usually taxable income (or may be in the computation of income. exchange losses wholly and unless profit is distributed have taxable/tax deductible deducted). chargeable income (as exclusively incurred by a (see above Section 2.1). consequences. taxable profits or deductible company in the production expenses), provided of its taxable income will that such differences are be allowed as deductible. realized and are ancillary to Taxpayers are required to chargeable income or gains. opt for one of two methods of taxation of currency exchange gains and losses of a revenue nature. The method chosen must then be followed consistently for all future transactions and accounting periods. • Currency exchange results, whether realized or unrealized, are chargeable to tax in case of a profit or deductible in case of a loss; or • Only realized currency exchange results, whether profit or loss, are taken into account in computing taxable income.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 61 2.7 Tax rulings

Cyprus Estonia Latvia Lithuania Malta Slovenia

Although there is no general Estonian Tax and Customs It is possible to request the As of 1 January 2012 binding It is possible to seek an Opinions issued by the advance tax ruling system, Board must issue a binding tax authority for an advance rulings and advance pricing advance revenue ruling from Ministry of Finance or tax the tax authorities may issue preliminary ruling within 60 ruling that is binding on the agreements are introduced in the Revenue Authorities authorities - signed by the binding advance clearance at days (can be extended by tax authority. However, such Lithuania. on, inter alia, the following minister or director of the tax the taxpayer’s request. 30 days in more complex a request should be based issues: authorities - are binding for cases) from a qualifying on a specific and identified Under the newly established • confirmation that certain the tax authorities. request. Applicants must pay transaction/facts. No state system the taxpayers domestic general anti- a state fee of EUR 766.93. fee is payable and the ruling have to provide details avoidance provisions Binding information issued The preliminary ruling must ordinarily be given of the future transaction do not apply to a given by the tax authorities may cannot be appealed. within 30 days, but can be as well as description transaction; be requested in a concrete extended in more complex of Lithuanian legislation • confirmation that an and identified transaction (in cases. provisions or transfer pricing equity shareholding advance) and are payable by principles applicable to the qualifies as a participating the tax payer. Taxpayers may request future transaction, which, holding on the basis that the tax administration to if approved by the tax it is or will be held for conclude an advance pricing authorities, is binding for the the furtherance of the agreement (APA) if the value tax authorities for up to 5 business of the Malta of the respective transaction calendar years after the year company; or a transaction type exceeds in which the ruling is issued. • the tax treatment of a LVL 1m (approximately Only Lithuanian taxpayers transaction concerning EUR 1,4m). The fee for can apply for binding rulings a particular financial an APA is LVL 5,000 and/or advance pricing instrument or other (approximately EUR 7,145). agreements. security; • the tax treatment of Binding rulings and advance any transaction which pricing agreements are free involves international of charge. business.

These rulings guarantee the tax position for a period of five years and may be renewed for a further five- year period. They will also survive any changes of legislation for a period of two years after the entry into force of a new law.

Additionally, an informal ruling procedure has been

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developed in practice whereunder a taxpayer may obtain written guidance from the local tax authorities in respect of one or more specific transactions.

Any such guidance obtained, would, in practice, be considered binding by the local tax authorities but would not survive a change of laws.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 63 2.8 Loss carry over rules

Cyprus Estonia Latvia Lithuania Malta Slovenia

Carry back and carry Carry back and carry Carry back Carry back Carry back Carry back forward forward There is no carry back There is no carry back There is no carry back There is no carry back Losses may be transferred Thanks to the unique possibility in Latvia. possibility in Lithuania. possibility in Malta. possibility in Slovenia. between companies under Estonian CIT system there group relief provisions (one is no need for special Carry forward Carry forward Carry forward Carry forward company must be the 75% loss carry forwards for Taxation losses which arose Losses may be carried All trading losses incurred Losses may be carried subsidiary (direct or indirect) tax purposes. However, prior to and including the forward for an unlimited by companies wholly and forward for an unlimited of the other for the whole the outcome is the same 2007 tax year can be used period of time. Losses exclusively in the production period. Since 1st January of the tax year concerned) as if losses could be for the following 8 years. sustained from the transfer of of the income may be carried 2013 a reduction of the or carried forward against carried forward for an Tax losses arising in 2008 securities and the derivative forward indefinitely and offset tax base with tax losses future profits. The carry- unlimited period of time in a and later tax years may be financial instruments may against future income. from previous tax periods forward period for losses of conventional CIT system. carried forward indefinitely. be carried forward only for is allowed to the maximum a revenue nature is limited to 5 consecutive tax years Capital losses may be amount of 50% of the tax five years. In the case of a change (please also see answer to carried forward and offset base for the current tax in the control of company, Section 2.4). against future capital gains. period. Unused capital losses the loss carry forward is may be carried forward to not deductible, unless the Excess interest expenses Moreover, losses from the subsequent years for offset company continues to carry cannot be carried forward. current and previous years against future taxable capital on the same basic type of cannot be carried forward if a gains. business during a period of direct or indirect ownership of 5 years after the change of capital or voting power of the control that it operated during taxpayer changes for at least the two years prior to the 50% during the tax period change in control. and taxable person entitled to loss carry forward: • does not carry on a business for at least two years before the change of ownership; or • substantially changes it business two years before or after change of ownership.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 64 2.9 Group taxation for CIT purposes

Cyprus Estonia Latvia Lithuania Malta Slovenia

The only particular reference There is no group taxation A tax consolidation regime As of January 1, 2010 a Malta does not operate There is no group taxation to groups relates to tax regime. exists in Latvia for tax loss- provision is introduced a group taxation system. regime for CIT purposes. losses being carried forward, transfers within a group. establishing an opportunity However, a Malta company that is, the current year loss to transfer losses between may surrender its tax of one company can be set The intra-group transfer of several entities of the same losses to a group company off against profit of another, losses is available subject group. The intra-group where both companies provided the companies are to the following general transfer of losses is available are members of the same Cyprus resident companies requirements: subject to the following group throughout the year of a group. • A group of companies requirements: preceding the year of consists of a principal • the parent company of assessment in which relief is For the purpose of this group undertaking and all the group has to hold claimed. Two companies are relief two companies are subordinate undertakings directly or indirectly at deemed to form part of the considered to be members of of the principal least 2/3 of the shares in same group where they are a group if one company is a undertaking. both entities participating both resident in Malta and 75% subsidiary of the other • A subordinate undertaking in the loss transfer (or not resident for tax purposes or a third holding company of a qualifying principal loss may be transferred to in any other country and one has a 75% holding in each of undertaking is an entity of the parent company); and is at last the fifty-one per the two companies. which at least 90 per cent • both entities participating cent subsidiary of the other is owned by: in the loss transfer are or both are at last fifty-one A company is a 75% - the principal required to comply with per cent subsidiary of a third subsidiary of another if undertaking; this requirement for at company resident in Malta. and so long as the holding - one subordinate least two years. company holds directly or undertaking of the Losses of the surrendering indirectly at least 75% of the principal undertaking Alternatively, entities company may be set off ordinary shares with voting or several such participating in a loss transfer against the total income rights and has a right to 75% subordinate transaction need to be within of the claimant company of: undertakings; or the group from its’ formation for the corresponding year • the profits available for - the principal and have to remain in the of assessment and for distribution; undertaking and one group for at least two years subsequent periods, where • any assets of the of its subordinate in order to be eligible for applicable, provided in the subsidiary which undertakings or intra-group loss transfer. year in which surrendering would be available for by several such company has incurred distribution in the case subordinate losses both companies have of winding up of the undertakings together accounting periods which subsidiary. in any combination. begin and end on the same date. There are exceptions The following cannot be Group members can in respect of new companies taken into consideration in be Latvian resident and companies which are computing the 75% holding undertakings, residents of being wound up.

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for group relief: countries with which Latvia Companies may only • any ordinary shares held has a tax treaty or a EEA surrender losses incurred in that have no voting rights; resident that under a tax the year preceding a year of • any share capital held treaty is not recognized as assessment to other group directly or indirectly for resident of a country that is companies – losses brought trading purposes; and not a EEA country. forward cannot be used • any share capital held either within a newly formed directly or indirectly in The losses of a taxation tax group or within an already a company that is not period of a group member existing tax group. resident in Cyprus. may be transferred to another group member only By virtue of an anti- if all the first 5 and one of the abuse provision, if a 6th or 7th of the following company is a member of provisions are complied with: a group of companies, • Both undertakings are and arrangements are in group entities during the existence the sole or main whole tax year in which purpose of which is to the losses arose. reduce any company’s tax • Taxation periods of both liability, and were it not for undertakings end on one the said arrangements that and the same date. company would not qualify to • Neither of the be a member of that group undertakings in of companies, then that accordance with any company shall be treated as law of Latvia is exempt not being a member of that from CIT or is entitled to group for any year preceding reduced rates of tax. a year of assessment in • Neither of the which the said arrangements undertakings is a tax are in existence. debtor in respect of any taxes payable in Latvia, except in cases where terms for payment of taxes are extended in accordance with the Law On Taxes and Fees; and • Both undertakings, together with an income tax declaration, submit annual accounts in their respective countries audited by a certified auditor.

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• Both undertakings are capital companies that are Latvian residents and at the same time are not residents of another state. • One of the undertakings is a capital company that is a Latvian resident and at the same time not a resident of another state and the other is the Latvian permanent establishment of a group member.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 67 3. Withholding taxes payable by the holding company 3.1 Withholding tax on dividends paid by the holding company

Cyprus Estonia Latvia Lithuania Malta Slovenia

No withholding tax is levied Dividends paid by resident No withholding tax is levied Dividends paid by resident No withholding tax is Paid to tax residents or to in Cyprus on overseas companies to non-resident on dividend payments to non- companies to residents and levied in Malta on dividend permanent establishments: distributions to non-residents. persons are not (in addition resident companies, save non-residents are subject to distributions to a non- dividends paid to domestic to the CIT payable at for companies established withholding tax at a rate of residents shareholder, recipients (resident or Estonian company level) in black-listed offshore 15%. provided that such permanent establishment of subject to withholding tax. jurisdictions. shareholder is not directly a non resident company) are An exemption of dividend or indirectly owned and subject to a 15% withholding Liquidation/ Liquidation/ withholding tax applies if the controlled by, and does not tax, but may be exempt from Share repurchase Share repurchase shareholder holds at least act on behalf of, an individual withholding tax if the recipient Payments (liquidation A liquidation quota is not 10% of the voting shares who is ordinarily resident and provides his tax number. payments, payments made qualified as dividends. In in the distributing company domiciled in Malta. upon reduction of share the process of liquidating for an uninterrupted period Paid abroad: dividends paid capital and payments made a company, a company of 12 months, unless the to foreign recipients are upon share repurchase) are normally is required to shareholder is registered in subject to a 15% withholding subject to income tax at the revalue its assets. However, territory included in the Black tax. level of the company making advance rulings indicate List (tax haven). The Black the payments (taxable that such re-valuation does List includes most of the Under the EU Parent- proceeds), to the extent not trigger CIT on the gains typical offshore jurisdictions Subsidiary Directive, that they exceed the earlier realized. (approx. 60 jurisdictions are dividends will be exempt contributions. listed). from the withholding tax Latvian law does not provide if the participation/share for a specific treatment in According to the official of a parent company in cases of the redemption of commentaries prepared by a subsidiary accounts shares. the Lithuanian tax authorities, for at least 10% for an the dividends may enjoy uninterrupted period of 24 the above “participation months. If dividends are exemption” even if the paid before the expiration shares are held for the period of the 24 months term, the shorter than 12 months, but exemption is granted if a the shareholder intends to bank guarantee for the hold them for such or longer withholding tax is provided. period. The EU Parent-Subsidiary This participation exemption Directive is applicable also satisfies the requirements to limited partnerships of the EU Parent-Subsidiary (k.d.), since they are treated Directive. as corporations for tax purposes.

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The above rules apply The exemption also applies irrespective of whether the to profit reserves that stem dividends are distributed from the period before from the profits accumulated accession to the EU. in periods prior to accession to the EU. In Slovenia the CIT law has changed in the summer of Liquidation/ 2008, allowing the Slovenian Share repurchase companies to pay out Liquidation proceeds dividends to a company exceeding the amount of resident in other EU contribution to the share countries without charging capital of the entity is withholding tax on dividends regarded as dividends and even if the criteria defined are taxable accordingly. in the EU Parent-Subsidiary Directive (in Slovenia – at Non monetary distribution least 15%, at least 24 upon liquidation for the months) are not met, if the company under liquidation is dividends received by the treated as a sale and capital foreign company are subject gains received from such to exemption from taxation in transfer will increase the the country of residence. taxable base of the company under liquidation. The criteria that should be met in such a case by the Slovenian company paying the dividends are that it receives a statement by the recipient company that it is able to exempt the dividends paid from Slovenia from its taxable basis (e.g. it will not be able to deduct the withholding tax paid in Slovenia from the tax liability in the resident country) and that the certificate of the recipient tax residency in another EU member state is attached.

Treaty rates may be used if the payer of dividends receives a decision of tax

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office that the recipient is entitled to treaty benefits before the payment is made. Otherwise the refund must be requested by the recipient of the dividends.

Liquidation/ Share repurchase Liquidation proceeds may be treated as dividend and are subject to dividend withholding tax upon distribution.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 70 3.2 Withholding tax on interest paid by the holding company

Cyprus Estonia Latvia Lithuania Malta Slovenia

No withholding tax is levied Interest paid to a non- Only interest paid to a related As of 1 January 2010, No withholding tax is levied Interest paid to non-residents on interest paid by a Cyprus resident company is non-resident is subject to a interest paid to companies on interest payments by a is subject to a withholding tax company to a non-resident generally exempt from withholding tax of 10% (5% if resident in an EU or EEA Malta company to a non- of 15%. recipient. taxation. To the extent paid by a bank). Member State or in a country, resident unless: interest is considered with which Lithuania has an • the said non-resident Under the EU Interest and substantially excessive (in The EU Interest and effective tax treaty, is not is engaged in trade Royalties Directive the comparison to an arm’s Royalties Directive has been subject to withholding tax. In or business in Malta interest payments may be length interest), a 21% implemented with a transition other cases, withholding tax through a permanent exempt from withholding tax withholding tax is levied. As period (withholding rate for at the rate of 10% applies. establishment situated provided that at least 25% of 2014, the above described EU residents currently is 5% No other requirements have in Malta and the interest participation is held for a withholding tax on interests and as of 1 July 2013 is 0%). to be fulfilled. is effectively connected period of at least 24-months. is planned to be abolished therewith; or and taxation of interests To apply this Directive, the • the said non-resident is will be subject to transfer payer of the interest has a owned and controlled pricing rules. The EU Interest notification in its possession by, directly or indirectly, and Royalties Directive is from the tax authorities of or acts on behalf of an implemented in Estonia in the relevant country that the individual or individuals May 2004. recipient company complies who are ordinarily Estonia has not granted any with the conditions for EU resident and domiciled in transitional period in order to associated companies, Malta. adopt the directive. as defined by law. Such notification (or substituting Please note that: documentation) is valid for 5 • Estonia has not applied years from its date of issue. the relief under the Directive to interest or Two companies are royalties falling within the “associated companies” if: categories of payments • one of them holds directly listed in Article 4 (1) of the at least 25% of the capital Directive; of the other; or • Estonia has used the • a third EU company holds transfer pricing rule to directly at least 25% of deny the relief to the the capital of the two excess amounts of companies. interest or royalties; • for the purpose of Both the distributing and the application of the recipient company have exemption under the to be listed in the Annex Directive, Estonia to the Directive and those covered the requirement companies have to be liable

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 71 Cyprus Estonia Latvia Lithuania Malta Slovenia

of a 25% direct holding to CIT without the option of in the capital of the being exempt therefrom. company (not the voting right requirement); These reduced rates do not • Estonia has not adopted apply if the interest is not the beneficial owner subject to corporate income concept in the Directive. tax or a similar tax in the country of residence of the recipient.

From 1 January 2014, no withholding tax will be levied on any outgoing interest payments with the exception of interest paid to entities established in black-listed offshore jurisdictions.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 72 3.3 Withholding tax on royalties paid by the holding company

Cyprus Estonia Latvia Lithuania Malta Slovenia

No withholding tax is levied Royalties paid to non- Royalties are subject to a Royalties are subject to a No withholding tax is levied Royalties paid to non- on royalties paid by the resident companies are withholding tax of 5% or 15% withholding tax of 10%. on royalty payments by a residents are subject to Cyprus company unless the subject to a withholding tax (artistic or similar royalties). Malta company to a non- 15% withholding tax, unless rights are used in Cyprus, in of 10% unless paid to EU or Royalties paid to the resident unless: reduced by virtue of tax which case there is a 10% Swiss resident legal persons The 15% rate is currently associated enterprises • the said non-resident treaties. withholding tax (5% on film provided that: reduced to 5% and will as of covered by the Interest and is engaged in trade royalties). • the recipient (or payer) 1 July 2013 be reduced to Royalties Directive (EU or business in Malta Under the EU Interest and has held at least 25% of 0% if the royalty is paid to a companies) are exempt through a permanent Royalties Directive the the shares in the payer qualifying company resident from withholding tax as of establishment situated in royalty payments may be (or recipient) during at in another EU Member 1 July 2011 provided that Malta and the royalties exempt from withholding least a 2 year period; or State or to a permanent the recipient of the interest are effectively connected tax provided that a 25% • at least 25% of the shares establishment of such a payment is an associated therewith; or participation is held for a in the recipient and the company. company of the paying • the said non-resident is period of at least 24-months. payer have been held company and is resident owned and controlled during at least a 2 year With respect to the conditions in another EU Member by, directly or indirectly, period by the same EU to apply the EU Interest and State. Two companies are or acts on behalf of an or Swiss resident legal Royalties Directive, reference “associated companies” if (a) individual or individuals person. is made to Section 3.2 (both one of them holds directly who are ordinarily resident conditions are same for at least 25% of the capital and domiciled in Malta. The tax exemption is not interest and royalties). of the other or (b) a third applied to the part of EU company holds directly royalties which exceeds the From 1 January 2014, at least 25% of the capital value of similar transactions no withholding tax will be of the two companies. A conducted between non- imposed on any royalty minimum holding period of 2 associated persons. outgoing payment with the years is required. exception of royalties paid to The EU Interest and entities established in black- Royalties Directive is listed offshore jurisdictions. implemented in Estonia. With regard to the implementation of the this Directive, reference is made to section 3.2.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 73 4. Non-resident capital gains taxation - domestic legislation and tax treaties

Cyprus Estonia Latvia Lithuania Malta Slovenia

In principle, capital gains Non-residents are subject to Capital gains derived by The business profits of Capital gains realized by a Non-resident companies realized on the transfer of tax only on their Estonian- corporate non-residents foreign entities will be taxable non-resident on the transfer are subject to income tax in shares by non-residents are source income. are not taxable except for only in their home countries, of chargeable shares respect of Slovenian sourced fully exempt from taxation in capital gains which are unless foreign entities carry or securities in a Malta income. Cyprus. Only if the Cyprus Permanent establishments, derived from the alienation on business in Lithuania company would be exempt company in which the shares on the other hand, are of real estate or the shares through a permanent from Malta income tax on Permanent establishments are held owns immovable generally treated similarly in a qualifying real estate establishment situated in capital gains unless: of foreign corporations property situated in Cyprus, to resident legal persons, company. In cases where Lithuania (in which case the • it is a ‘property company’ are taxed on their income capital gains tax will be due whereby they pay tax on real estate or shares in a taxation rules are similar as defined by law; or having source in Slovenia on the transfer of the shares. the profit distributed through private “real estate” company to the ones attributable to • the said non-resident is (costs attributable to the them. are sold by a non-resident resident entities), or receives owned and controlled permanent establishment Most of Cyprus’s double to a Latvian resident, a 2% income via means of cross- by, directly or indirectly, are also recognized). Capital tax agreements provide Income tax is charged withholding tax applies to border transfers that is or acts on behalf of an gains from the sale of a that the country in which only on gains derived by the full transaction value. subject to withholding taxes individual or individuals participation in a company the seller is resident has a non-resident from a sale However, if the purchaser is (including income received who are ordinarily resident in Slovenia are taxing rights over gains on of shares in a real estate not a resident of Latvia, then from lease or transfer of real resident and domiciled in considered as Slovenian disposal of shares. Some, company if non-resident’s such withholding tax would estate, interest, dividends, Malta. sourced income. However, but by no means all, of the holding in that real estate not apply to this sale, as only royalties or annual bonuses to the extent the capital agreements, provide that company exceeds 10% residents and permanents for members of a supervisory In general (with the exception gains are not attributable to for disposals of shares in and more than 50% of the establishments are required board). of real estate companies), a permanent establishment, “property-rich” companies, latter’s property is directly to withhold tax. taxation will be attributed the capital gain is effectively the country in which the or indirectly made up of real Therefore, a non-resident to the country where the not taxed, since there are no property is situated has estate located in Estonia in Gains from the alienation company is subject to income non-resident shareholder is procedural rules on how the taxing rights. any preceding two years. of shares derived by non- tax in respect of income tax resident by virtue of the tax should be levied. There is no income tax resident individuals are and capital gains that are applicable tax treaty. charged on a share deal if not subject to Latvian attributable to a permanent Under most tax treaties tax treaty allows taxation taxation if they are financial establishment. concluded by Slovenia the of capital gains in seller’s instruments governed by the right to tax the capital gains country only. Latvian Financial instrument Capital gains on the sale from the alienation of the Market Law. A non-resident of securities in a resident shares is allocated to the individual selling Latvian company are not taxable for resident state. real estate or shares in non-residents. a qualifying real estate company will be subject to Under the general rule, 2% withholding tax. capital gains of non-resident company should be taxable Alternatively, the non- only in its home country, resident may file an annual except transfer of real estate declaration where the 2% and transfer of the assets applied to the total sale price attributable to permanent exceeds the 15% capital establishment in Lithuania.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 74 Cyprus Estonia Latvia Lithuania Malta Slovenia

gains tax that would be applied to the actual taxable capital gain.

A sale to a non-resident will require the resident seller to file an annual declaration declaring the actual capital gain and pay 15% tax on the capital gain unless a tax treaty provides otherwise.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 75 5. Anti-abuse provisions / CFC rules

Cyprus Estonia Latvia Lithuania Malta Slovenia

CFC rules General General CFC rules CFC rules CFC rules There are no CFC rules and There is a general anti- There are no general anti- The CFC regulations apply In general, there are no CFC There are no specific CFC in principle all dividends avoidance rule enacting avoidance rules. However, to the Lithuanian companies rules or thin capitalization rules. derived from a foreign the principle of economic in order to avoid the erosion that directly or indirectly hold rules. participation are fully exempt substance. Specific of the taxable base any more than 50% of shares Transfer pricing rules from tax, with no minimum measures to combat the payments to companies or in the foreign company, Anti-abuse provisions Transactions between holding period requirement, erosion of the taxable base other persons established provided that a foreign However, the Malta Income associated entities must be unless the “passive dividend” through payments to low- in black-listed offshore subsidiary is registered in: Tax Act provides for a arm’s length. The transfer provisions are triggered, tax countries include the jurisdictions are subject • an offshore territory or number of anti-avoidance pricing rules basically follow namely if more than 50% following: to 15% corporate income zone, i.e. included into measures (such as in articles the OECD Transfer Pricing of the paying company’s • Fees paid to companies tax or 24% personal the Black List; 51, 42 and 46). Probably Guidelines. Nevertheless, the activities result directly or resident in low-tax income tax, respectively. • a territory included in the the most encompassing is Tax administration followed indirectly in investment territories for services Limited exceptions apply White List, but enjoying article 51, which is of general the OECD Transfer Pricing income and the foreign tax rendered to Estonian to payments for goods special privileged income application and states that Guidelines also before the is significantly lower than the residents are subject originating in the offshore tax regime in its home artificial or fictitious schemes new rules were adopted. tax rate payable in Cyprus. to a 21% (20% as of jurisdictions. country; or can be disregarded. It is Both of the above conditions 2015) withholding tax • in its home country is possible, however, to obtain Thin capitalization rules must apply for the provisions irrespective of where the CFC rules taxed at an income tax advance certainty on whether Thin capitalization rules are to be triggered; otherwise the services were provided or There are no CFC rules for rate constituting less than article 51 will be invoked introduced as of 1 January exemption is available. used; and corporate taxpayers. 3/4 of the Lithuanian CIT, by the Revenue. Article 42 2005. The debt-equity rates • Various payments made, i.e. less than 11,25%. contains an “abuse of law” are set as follows: The 50% test requires a or benefits provided, Thin capitalization rules concept in the limited context • 2007: 8:1, quantitative assessment to recipients resident Two tests are applied. Lithuanian CFC rules are of domestic investment • 2008 - 2010: 6:1, of the foreign subsidiary’s in low-tax territories Firstly, allowable interest is applicable both to active income provisions. Article • 2011: 5:1, activities: are regarded as non- calculated on a maximum income and income gained 46 provides, inter alia, for • from 2012 and following • The 50% test is applied business expenses for debt/equity ratio of 4:1. from financial activity (loan the re-characterization years: 4:1. on a company to CIT purposes. Secondly, allowable interest interest, financial lease, into dividends of amounts company level with is calculated using the year copyright remuneration etc.). advanced by a company reference to direct and CIT liability incurs for the end short term interest rate However, active income of to shareholders or paid by indirect activities. payer, acquiring securities of as calculated by the Latvian a foreign subsidiary is not the company in settlement • Where no tax is payable shares of or claims against or Statistics Authorities. attributed to income of the of amounts due by by the foreign subsidiary issuing loans to a company Lithuanian parent company shareholders to third parties. because of a local tax in a low-tax country. Any excess interest provided that it satisfies the exemption, the tax burden calculated under either established requirements. Anti-abuse provisions as of the foreign subsidiary CFC rules method is not deductible, set out under 2.2. above for the purposes of the CFC legislation does not and if both methods result Thin capitalization rules apply for the purpose of tax burden aspect of the apply to Estonian corporate in non-deductible interest, Interest and currency determining the eligibility for test is zero. taxpayers. the highest amount is non- exchange losses on the participation exemption or full • SDC tax is payable on deductible. debt in excess of the debt/ refund of tax. the full dividend if the Thin capitalization rules equity ratio of 4:1 are non- provisions are triggered. There are no traditional Financial and Insurance deductible for CIT purposes.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 76 Cyprus Estonia Latvia Lithuania Malta Slovenia

The Assessment and thin capitalization rules. institutions are not subject to This is applicable in respect Collection of Taxes Law the thin capitalization rules. of the debt capital provided contains general anti- by a creditor, who: avoidance provisions Nor do the rules apply • directly or indirectly holds including the disregarding to interest paid on loans more than 50% of shares of artificial or fictitious received from a credit or rights (options) to transactions. institution which is a resident dividends; or of Latvia or another EU • together with related or EEA Member State, or parties, holds more than a resident of a country, 50% of shares or rights with which Latvia has an (options) to dividends, effective tax treaty, as well and the holding of that as loans from the Treasury creditor is not less than of the Republic of Latvia, 10%. the Nordic Investment Bank, the European Bank This rule is not applicable for Reconstruction and if a taxpayer proves that Development, the European the same loan could exist Investment Bank, the Council between unrelated parties. of Europe Development Financial institutions Bank or from the World Bank providing financial leasing group. services are not affected by this rule.

Notably, thin capitalization also applies to interest variable depending on the profits or turnover of the company and costs of currency exchange results.

Furthermore, it should be noted that under Lithuanian company law, the interest rate on shareholders’ loans may not exceed the average bank interest rate valid in the location of the lender’s business.

Transfer pricing rules Transactions between associated entities must be arm’s length.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 77 Cyprus Estonia Latvia Lithuania Malta Slovenia

The regulations have been prepared following the OECD Transfer Pricing Guidelines.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 78 6. Tax and investment incentives

Cyprus Estonia Latvia Lithuania Malta Slovenia

The following categories of The undistributed profits are Gains derived from the Exemption from corporate A number of investment Investment incentive of income are tax exempt: not subject to CIT. sale of fixed assets can be income tax for first 6 years incentives are available 40% for the investments in • profit from the sale of deducted from the taxable and reduction of corporate to enterprises carrying on equipment or immovable securities; Debt financing at market income if the fixed asset is income tax by 50% for certain prescribed qualifying assets (CIT act amended in • dividends; rate interest does not replaced by new functionally the next 10 years may be business activities such April 2012). • income of any company trigger withholding tax, as similar fixed asset. enjoyed by companies as the manufacturing or formed exclusively for the there are no traditional thin established and operating processing of goods in Malta 100% investments or costs purpose of promoting art, capitalization rules. A deemed interest amount in Lithuanian free economic or the production of feature in R&D are recognized as science or sport, and of can be calculated from zones. or television films, advertising incentive and lower the certain educational and undistributed profit and programs, commercials, taxable base. charitable companies; deducted from the taxable The taxable profit of legal and/or documentaries. • profits earned or income. entities running investment For the unused part of the dividends paid by a projects, i.e. investing in Malta Enterprise Corporation incentives in the tax period Cyprus shipping company There are free port and free the fixed assets intended also offers the following concerned, the taxpayer may which owns ships under economic zone areas in for the production of new, incentives: reduce the tax base in the the Cyprus flag and Latvia which are aimed at additional products or the • an incentive for foreign subsequent five tax periods. operates in international facilitating manufacturing provision of new, additional investors already waters; companies oriented towards services or for the increase operating in Malta to • income of any approved export of goods. The tax of production (or service increase the scope of pension or provident fund; reliefs may reach 100% for provision) capacities, or their existing operations • profits from a permanent property tax, 80% for CIT, for the introduction of a to such areas as legal, establishment situated extended loss-carry-forward new production (or service financial, back office, entirely outside Cyprus, period, 0% VAT. provision) process, or for logistical, research and unless the permanent the substantial change of an development, marketing establishment directly or A specific tonnage tax existing process (or its part), and sales and prototyping indirectly engages more applies for vessels registered as well as for the introduction services; than 50% in activities in Latvia, and PIT relief – to of technologies protected • an incentive to attract which lead to investment sailors’ salaries. by international invention new foreign companies income and the foreign patents, may be reduced by to set up shared tax burden is substantially An increased depreciation up to 50%. services centres in areas lower than the tax burden co-efficient applies for such as call centres, in Cyprus. investments into new software development, production technology digital gaming, human In 2012 Cyprus introduced equipment. resources, accounts and an “intellectual property finance management, box” regime which provides market research and an effective tax rate of less internet publication; than 2% on income from • There is also an intellectual property assets. exemption in the case of

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 79 Cyprus Estonia Latvia Lithuania Malta Slovenia

Gains on disposal are Under the Large Project royalty or similar income effectively tax-exempt. Investments Incentive, derived from patents in investments in specified respect of inventions. The Merchant Shipping industries between 3 Million (Fees and Taxing Provisions) LVL (EUR 4.268 Million) and There are also tax incentives Law of 2010, generally 35 Million LVL (EUR 49.800 aimed at particular sectors referred to as “the Tonnage Million) will receive a such as the shipping and Tax Law”, extends the reduction in corporate tax aviation sectors. In the case benefits of the favorable payable equal to 25% of the of the shipping industry, tonnage tax regime and amount invested. Qualifying Malta operates the tonnage exemptions from income investments over 35 Million tax regime by virtue of which tax previously enjoyed by LVL will receive a reduction income derived from shipping owners, operators and in tax payable equal to 15% activities is exempt from tax. managers of Cyprus- of the amount invested. The In the case of the aviation flag ships to owners and incentive must be applied sector, specific legislation charterers of non-Cyprus flag for by 1 October 2013, the caters for allowances, vessels. It widens the range investment must be made exemptions and investment of exempt gains to include within 5 years as of approval tax credits that are specific to profits on the disposal of of the project and tax relief the aviation industry. vessels, interest earned on must be claimed within a 16 funds and dividends paid year period. directly or indirectly from shipping-related profits, in addition to profits from shipping operations.

loyens & loeff Holding Regimes New EU Countries 2013 - Part II 80 Our offices

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