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Insights Special Edition r u c h e l m a n INSIGHTS OUTBOUND ACQUISITIONS: EUROPEAN HOLDING COMPANY STRUCTURES Insights Special Editon TABLE OF EDITORS’ NOTE CONTENTS This special edition of Insights addresses the use of holding companies in Europe. Editors’ Note The emphasis is on the tax benefits that may be obtained outside the U.S. for revenue generated by a holding company in a way that does not run afoul of the Introduction ................................ 3 anti-deferral rules of U.S. tax law. B.E.P.S. and Holding For many years, it was sufficient for tax advisers to understand the scope of bene- Companies .............................. 10 fits that were available to holding companies in a particular country and the steps that were required to achieve the desired goals. Often, the benefits reflected fa- State Aid, Transparency vorable rulings, special tax regimes, and lack of congruence in the way entities or Measures, and Reporting transactions were viewed under the tax laws of two or more countries. All planning Standards in the E.U. ............... 21 contained a residual element, viz., the use of structures that allowed foreign profits Luxembourg ............................. 32 to be permanently invested outside the U.S. for financial accounting purposes and that did not result in the loss of deferral for U.S. income tax purposes. United Kingdom ....................... 45 The landscape has changed over the past 18 months: tax benefits derived from Switzerland .............................. 69 these arrangements have been vilified in the media, in parliamentary hearings, by the G-20 countries, and by the O.E.C.D., through its B.E.P.S. project. Countries The Netherlands ...................... 76 around the world are changing their laws in a frenzy to eliminate tax planning that was universally deemed to be acceptable in past years. As a result, the use of hold- Ireland ...................................... 87 ing companies as a tool for global planning now requires both a knowledge of local tax laws and a sensitivity to the use of planning tools that are not viewed as abusive Spain ....................................... 95 under current standards. Belgium .................................. 105 This edition of Insights examines the benefits that are obtainable in 15 European jurisdictions. It also addresses the new reality that results from the B.E.P.S. project Sweden .................................. 123 of the O.E.C.D. and several initiatives of the European Commission that are intend- ed to eliminate cross-border tax planning arrangements. The authors are leading Denmark ................................ 131 tax lawyers in their respective countries and recognized experts on B.E.P.S. and the European Commission initiatives. Austria ................................... 147 We hope you enjoy this issue. France ................................... 158 – The Editors Italy ........................................ 176 Germany ................................ 191 Cyprus ................................... 201 Malta ...................................... 211 About Us This edition of Insights is based on material written by the same authors and published in different format as “Chapter 274” of the Corporate Tax Practice Series: Strategies for Corporate Acquisitions, Dispositions, Spin-Offs, Joint Ventures, Reorganizations & Restructurings 2015, edited by Louis S. Freeman, available at 1-800-260-4754; www.pli.edu. The copyright is held by the Practising Law Institute, and the material is reproduced with its permission. Insights Volume Special Edition | Table of Contents | Visit www.ruchelaw.com for further information. 2 INTRODUCTION Author IN GENERAL Stanley C. Ruchelman When a U.S. company acquires foreign targets, the use of a holding company struc- Ruchelman P.L.L.C. ture abroad may provide certain global tax benefits. The emphasis is on “global” New York, U.S. because standard U.S. benefits such as deferral of income while funds remain off- shore may not be available without further planning once a holding company derives dividends and capital gains. If we assume the income of each foreign target consists of manufacturing and sales activities that take place in a single foreign country, no U.S. tax will be imposed until the profits of the target are distributed in the form of a dividend or the shares of the target are sold. This is known as “deferral” of tax. Once dividends are distributed, U.S. tax may be due whether the profits are distributed directly to the U.S. parent company or to a holding company located in another foreign jurisdiction. Without advance planning to take advantage of the entity characterization rules known as “check-the-box,” the dividends paid by the manufacturing company will be taxable in the U.S. whether paid directly to the parent or paid to a holding company located in a third country.1 In the latter case, and assuming the holding company is a controlled foreign corporation (“C.F.C.”) for U.S. income tax purposes, the dividend income in the hands of the holding company will be viewed to be an item of Foreign Personal Holding Company Income, which generally will be taxed to the U.S. parent company or any other person that is treated as a “U.S. Shareholder” under Subpart F of the Internal Revenue Code.2 BENEFITS OF HOLDING COMPANIES The authors acknowledge Jennifer Nonetheless, the use of a holding company can provide valuable tax-saving oppor- Lapper, the Events and Marketing tunities when profits of the target company are distributed. Historically, the use of Director of Ruchelman P.L.L.C., and Francesca York, a Paralegal at 1 Section 301.7701-3(a) of the Income Tax Regulations. If an election is made Ruchelman P.L.L.C., for converting for a wholly-owned subsidiary, the subsidiary is viewed to be a branch of its 17 separate submissions prepared parent corporation. Intra-company distributions of cash are not characterized by persons having a multitude of as Foreign Personal Holding Company Income, discussed later in the text. birth languages into a cohesive 2 and accurate monograph. There are exceptions to the general characterization of a dividend as an item of Foreign Personal Holding Company Income that might apply. One relates to dividends received from a related person which (i) is a corporation created or organized under the laws of the same foreign country as the recipient C.F.C. and (ii) has a substantial part of its assets used in its trade or business located in that foreign country. See Code §954(c)(3)(A)(i). For a temporary period of time, a look-through rule is provided in Code §954(c)(6), under which divi- dends received by a C.F.C. from a related C.F.C. are treated as active income rather than Foreign Personal Holding Company Income to the extent that the earnings of the entity making the payment are attributable to active income. This provision is regularly adopted for two-year periods, after which it must be re-enacted. The latest version was terminated at the conclusion of 2014. Insights Volume Special Edition | Table of Contents | Visit www.ruchelaw.com for further information. 3 a holding company could reduce foreign withholding taxes claimed as foreign tax credits by the U.S. parent. This could be achieved through an income tax treaty, or in the case of operations in the E.U., through the Parent-Subsidiary Directive. This can result in substantial savings if the operating and tax costs of maintaining the holding company are significantly less than the withholding taxes being saved. However, as will be described below, the E.U. has taken steps to modify the Par- ent-Subsidiary Directive so that it does not apply when the parent is in turn owned by a company based outside the E.U. and the structure is viewed to be abusive. Although the foreign tax credit is often described as a “dollar-for-dollar reduction “The use of a holding of U.S. tax” when foreign taxes are paid or deemed to be paid by a U.S. parent company can provide company, the reality is quite different. Only taxes that are imposed on items of “for- valuable tax-saving eign-source taxable income” may be claimed as a credit.3 This rule, known as “the opportunities foreign tax credit limitation,” is intended to prevent foreign income taxes from being when profits of the claimed as a credit against U.S. tax on U.S. taxable income. target company are The U.S., as with most countries that eliminate double taxation through a credit distributed.” system, maintains that it has primary tax jurisdiction over domestic taxable income. It also prevents so-called “cross crediting” under which high taxes on operating in- come may be used to offset U.S. tax on lightly-taxed investment income. For many years, the limitation was applied separately with regard to eight different categories of “baskets of income” designed to prevent the absorption of excess foreign tax credits by low-tax, foreign-source income. In substance, this eviscerated the benefit of the foreign tax credit when looked at on an overall basis. The problem has eased now because the number of foreign tax credit baskets has been reduced from eight to two: passive and general. On the other hand, the Administration’s tax proposals would impair the ability of U.S.-based multinational groups to choose whether to receive dividends from high- ly-taxed or lightly-taxed foreign corporations by putting all earnings and all taxes of foreign subsidiaries into common pools, so that only a blended rate of foreign tax may be claimed as a foreign tax credit. The benefit of the foreign tax credit is reduced for dividends received from foreign corporations that, in the hands of the recipient, benefit from reduced rates of tax in the U.S. A portion of foreign dividends received by U.S. individuals that qualify for the 0%, 15%, or 20% tax rate under Code §1(h)(11)(B)(i) are removed from the nu- merator and denominator of the foreign tax credit limitation to reflect the reduced tax rate.4 This treatment reduces the foreign tax credit limitation when a U.S.-resident individual receives both qualifying dividends from a foreign corporation and other items of foreign-source income within the same basket that are subject to ordinary tax rates.
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